2016 Thomson Reuters. No Claim to Original U.S

Andover Covered Bridge, LLC, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 240

2016 WL 4035505 Before Feeney, Godoy, and Harwood, United States Bankruptcy United States Bankruptcy Appellate Panel Judges. Appellate Panel of the First Circuit. Opinion Andover Covered Bridge, LLC, Debtor. Per Curiam. Andover Covered Bridge, LLC, Appellant, v. William K. Harrington, *1 Andover Covered Bridge, LLC (the “Debtor”) appeals United States Trustee, Appellee. from the following orders of the bankruptcy court: (1) the BAP NO. EP 16–005 December 14, 2015 Order Granting Motion of the United | States Trustee to Dismiss Chapter 11 Case of Andover Bankruptcy Case No. 15–20489–PGC Covered Bridge, LLC, Pursuant to 11 U.S.C. § 1112(b); | and (2) the January 11, 2016 Order Denying Debtor's July 26, 2016 Motion to Alter or Amend or for a New Trial on Order of Dismissal Pursuant to Bankruptcy Rule 9023 and FRCP Synopsis 59; And Alternatively For Amended Findings and An Background: United States Trustee filed motion to convert or Amended Order Pursuant to Bankruptcy Rule 7052 and dismiss Chapter 11 Case of debtor limited liability company FRCP 52(b).1 For the reasons set forth below, we (LLC). The United States Bankruptcy Court for the District of AFFIRM. Maine, Peter G. Cary, J., granted the motion, and denied debtor's motion to alter or amend or for a new trial on order of dismissal. Debtor appealed. BACKGROUND

I. Pre–Bankruptcy Events Holdings: The Bankruptcy Appellate Panel held that: In August 2009, the Debtor bought real property located in Mechanic Falls, Maine (the “Property”) for more than $4 [1] bankruptcy court did not err in determining that million. To finance the purchase, the Debtor executed a causeexisted to dismiss Chapter 11 case based on debtor's promissory note payable to E–Layne Moulders Corp. and failure to file timely monthly operating reports and other Amity Development Corp. in the original principal amount financial documents, and of $1,172,650.00. To secure the note, the Debtor executed a mortgage in favor of E–Layne Moulders Corp. and [2] bankruptcy court did not err in determining that Amity Development Corp. In addition, Peter Bolduc, Jr. causeexisted to dismiss Chapter 11 case based on continuing and Kathie L. Bolduc, who each hold a 50% interest in the losses to debtor's estate and the absence of a reasonable Debtor, personally guaranteed the note. In 2010, Amity likelihood of rehabilitation. Development Corp. assigned its interest in the note and mortgage to Jaspan Schlesinger.

Affirmed. Various affiliates of the Debtor used the Property as a farm (“Harvest Hills”), farm store, and an amusement center Appeal from the United States Bankruptcy Court, for the known as “Pumpkin Land.” Pumpkin Land was a seasonal District of Maine, (Hon. Peter G. Cary, U.S. Bankruptcy amusement park that included rides, attractions, nature Judge) activities, a corn maze, and the “Haunted Hayride,” a night-time wagon ride through the Property. The bulk of Attorneys and Law Firms Pumpkin Land's cash flow was produced during the fall season, when the Haunted Hayride was in operation. In Jeffrey P. White, Esq., on brief for Appellant. October 2014, a tragic accident occurred in connection with the Haunted Hayride, and a number of people were Eric K. Bradford, Esq., on brief for Appellee. injured, one fatally.2 The Debtor claimed that, in the aftermath of the accident, Harvest Hills' business suffered

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 1 Andover Covered Bridge, LLC, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 240 and there were cash flow problems, resulting in an inability On August 14, 2015, the Debtor filed its first monthly to make mortgage payments. operating report for July 2015 (“July MOR”). The July MOR reflected that the Debtor had no employees, no income, and was receiving no rent from Harvest Hills. The II. The Bankruptcy Case Debtor did not timely file monthly operating reports for The Debtor filed a chapter 11 petition on July 2, 2015, indicating August, September, or October 2015. that the nature of its business is single asset real estate as defined in § 101(51B), and designating itself as a small business debtor On October 21, 2015, the U.S. Trustee filed a motion to 3 as defined in § 101(51D). convert or dismiss the case (“Motion to Dismiss”). The U.S. Trustee asserted that cause existed to dismiss or *2 The Debtor's sole asset is the Property. On Schedule A, the convert the case due to: (1) the Debtor's failure to file the Debtor valued the Property at $1,500,000.00, subject to a required monthly operating reports for August and secured claim in the amount of $1,130,228.04. According to the September 2015, and failure to produce financial Debtor's Schedule D, Jaspan Schlesinger and E[-]Layne information as requested by the U.S. Trustee (§ 1112(b) Moulders Corp. (collectively, the “Secured Party”), hold a joint (4)(F) and (H)); and (2) the Debtor's continuing losses (the mortgage on the Property and are each owed $550,000.00. accrual of unpaid mortgage obligations) and the absence of Schedule D also reflected that the Debtor owed $30,228.04 to a reasonable likelihood of rehabilitation as the Debtor had the Town of Mechanic Falls for real estate taxes on the Property. no income (§ 1112(b)(4)(A)). The U.S. Trustee asserted In its October 27, 2015 proof of claim, the Secured Party that conversion to chapter 7 would be in the best interests claimed it was owed $1,155,921.05, and that the note was of the creditors and the estate because there appeared to be accruing interest at 12.5%. The Debtor did not object to the equity in the Property and there might be claims which proof of claim. could be asserted against the Debtor's affiliates for failure to pay the Debtor for their use of the Property. On July 2, 2015, the Analyst for the U.S. Trustee emailed the Alternatively, the U.S. Trustee requested that the case be Debtor through counsel and provided the Debtor with, among dismissed. other things, Operating Guidelines and Reporting Requirements for Chapter 11 Cases (Region One) (the “Operating The next day, the Debtor filed (late) the monthly operating Guidelines”). reports for August and September 2015, which reflected that the Debtor had no employees, no income, and had not On July 21, 2015, Mr. Bolduc, on behalf of the Debtor, met with received any rent from Harvest Hills. The only difference the Analyst for the U.S. Trustee at an initial debtor conference. from the July MOR was that the August report showed a During this meeting, Mr. Bolduc confirmed that he had received deposit of $25.00 into the debtor-in-possession account, the Operating Guidelines. At the § 341 meeting of creditors held and the September report showed a deposit of $500.00 into on August 6, 2015, Mr. Bolduc testified in his capacity as the debtor-in-possession account. manager of the Debtor regarding matters relating to the Debtor's business operations (or lack thereof) and finances (or lack *3 On November 3, 2015, the Secured Party filed a statement thereof). Specifically, Mr. Bolduc testified that the Debtor had consenting to the Motion to Dismiss. no income and no employees, that Harvest Hills paid the Debtor's mortgage obligations, and that, up to the date of the On November 30, 2015, the Debtor filed (late) its October bankruptcy filing, the Debtor did not maintain a bank account. monthly operating report. On the same date, the Debtor Thereafter, the U.S. Trustee requested the Debtor to produce filed a response to the Motion to Dismiss (“Response”). In Harvest Hills' financial records including, but not limited to, its Response, the Debtor explained it commenced the balance sheets and profit and loss statements. The U.S. Trustee bankruptcy to stay the foreclosure of the Property and also requested the Debtor to produce its last-filed tax return— allow Harvest Hills to continue operations through its peak for fiscal year 2012. According to the U.S. Trustee, a balance fall season to determine whether the Debtor would be able sheet for Harvest Hills as of the end of the first quarter of 2015 to formulate a rehabilitation plan based on rent or other reflected an account payable owed to the Debtor totaling income from Harvest Hills' operations. The Debtor stated $838,948.82. that “the financial performance through the end of October was substantially lower than had been experienced in 2013

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 2 Andover Covered Bridge, LLC, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 240 and 2014,” and, therefore, it was “unlikely that the Debtor Party had not received a mortgage payment since w[ould] have a revenue stream that w[ould] permit a December 2014 because Harvest Hills was unable to bootstrap reorganization th [at] cures or crams down the generate enough money during its peak season; (2) the Secure[d] Party....” It expressed its belief that a “properly Debtor's intent to file a liquidating plan did not satisfy the marketed sale” of the Property would “likely produce a rehabilitation requirement in § 1112(b)(4)(A); and (3) the surplus to the Estate after payment of the allowed claim of Debtor's failure to offer a valid excuse or justification for the Secured Party, the real estate taxes and costs of the late filing of its monthly operating reports. administration,” and it intended to file a liquidating plan to accomplish this outcome. According to the Debtor, The Debtor reiterated that its bankruptcy strategy was to “[l]iquidating plans are a legitimate and viable method of sell the Property, which would benefit the Bolducs and the reorganization under Chapter 11....” Secured Party and would adversely affect no one. It argued that there was no diminution to the estate because there The Debtor also asserted that: (1) all monthly operating reports was “no one in the estate to be ... [a]ffected by diminution had been filed, albeit late because they were “caught in other than the debtor's equity.” It also asserted that it would counsel[']s spam filter and not discovered until after the Motion retain a broker and file a liquidating plan, but offered no to Dismiss was filed”; (2) “[o]ther than the accrual of real estate specifics. According to the Debtor, rehabilitation in the taxes and post-petition interest, the Debtor [wa]s not sustaining context of § 1112(b)(4)(A) can include a liquidating plan. any operating losses or incurring any debts in the ordinary The Debtor also maintained that it had “cured all the course of business”; and (3) it could “formulate and submit a defects” by filing the outstanding monthly operating feasible liquidating plan by the plan filing deadline.” reports and paying the outstanding quarterly fees. Finally, the Debtor argued conversion did not make sense “because The U.S. Trustee filed a reply to the Response, asserting that the it would just be a sale of the property with a three percent Debtor had admitted to the late filing of monthly operating commission to the trustee.” reports and that it lacked the financial resources to rehabilitate itself under chapter 11 and, therefore, it had offered nothing in On December 14, 2015, the bankruptcy court entered an its Response to refute the U.S. Trustee's arguments that cause order (the “Dismissal Order”) granting the Motion to existed to dismiss or convert the case. In addition, the U.S. Dismiss “[f]or the reasons set forth in the opinion dated Trustee noted that the Debtor had failed to pay its quarterly fee December 14, 2015.” The accompanying opinion for the third quarter of 2015 (which was due on October 31, provided, in its entirety, as follows: 2015), and such failure was additional “cause” under § 1112(b)(4)(K). The U.S. Trustee also argued that the Debtor's This matter came before me on the October 21, 2015 intent to file a liquidating plan was inapposite because Motion of the United States Trustee to Convert or rehabilitation is the key inquiry under § 1112(b)(4)(A), and Dismiss the Chapter 11 Case of Andover Covered rehabilitation does not include liquidation. Bridge, LLC (Docket Entry “DE” 35). Based upon the facts established on the record, including the undisputed The Debtor filed its November monthly operating report on facts set forth in the various pleadings, and the December 8, 2015, which indicated the Debtor had received no arguments made by counsel in their pleadings and at the income. hearing on December 8, 2015, I conclude that the United States Trustee has demonstrated that cause exists under On December 8, 2015, the bankruptcy court held a 11 U.S.C. § 1112(b) to dismiss this case. Such cause nonevidentiary hearing on the Motion to Dismiss. At the includes, but is not limited to, the late filing of certain hearing, the parties presented their arguments as set forth in the monthly operating reports, the accrual of post-petition debt without the income or other apparent ability to pay pleadings.4 Counsel for the Secured Party was also present, and such debt, and the absence of a reasonable likelihood of stated on the record that it supported dismissal. rehabilitation.1 I further conclude that dismissal, rather *4 The U.S. Trustee's counsel indicated the U.S. Trustee than conversion of this case, is in the best interests of was pressing for dismissal of the case, rather than the creditors and the estate. conversion, and pointed out the following: (1) the Secured

It is therefore hereby ORDERED, ADJUDGED, and The U.S. Trustee objected to the Motion to Reconsider, DECREED that the chapter 11 case of Andover Covered arguing that the evidence before the court—including the Bridge, LLC is hereby DISMISSED. A separate order shall Debtor's own admissions—supported dismissal of the enter. case, and there was no newly discovered evidence.

In footnote 1, regarding the absence of a reasonable likelihood On January 11, 2016, the bankruptcy court entered an order of rehabilitation, the bankruptcy court stated: denying the Motion to Reconsider (“Order Denying Reconsideration”), stating that the evidence at the hearing Here, the Debtor maintains that it will was sufficient to support dismissal of the case, and there soon submit a liquidating plan. The U.S. was nothing in the Motion to Reconsider to suggest there Trustee argues that a liquidating plan is was any newly discovered evidence that would change its not enough to save the Debtor from ruling. The bankruptcy court also denied the Debtor's dismissal as such a plan would not request for findings of fact. This appeal followed. satisfy the rehabilitation requirement in § 1112(b)(4). In this case, I agree with the U.S. Trustee. “Rehabilitation” as used in § 1112(b)(4)(A) is distinct from JURISDICTION a reorganization; while the latter can encompass liquidation, the former [1] [2] We have jurisdiction to hear appeals from final generally does not. 5 Norton Bankr.L. & judgments, orders, and decrees of the bankruptcy court. See Prac. 3d § 103:7. In addition, a Chapter 28 U.S.C. § 158(a)(1). An order dismissing a chapter 11 case 11 plan to rehabilitate must be grounded is a final, appealable order. In re Colón Martinez, 472 B.R. in something more concrete than a 137, 143 (1st Cir. BAP 2012) (citations omitted). Moreover, speculative intention to liquidate and an order denying reconsideration is a final order if the thus cease operations. In re Costa Bonita underlying order is final, and together the two orders end the [Beach] Resort, Inc.[,] 513 B.R. 184, litigation on the merits. Jeffrey P. White & Assocs., P.C. v. 198 (Bankr.D.P.R.2014). Fessenden (In re Wheaton), 547 B.R. 490, 495 (1st Cir. BAP 2016) (citing Schwartz v. Schwartz (In re Schwartz), 409 B.R. 240, 245 (1st Cir. BAP 2008) (citation omitted)). As the *5 On December 28, 2015, the Debtor filed a motion (the orders on appeal meet these criteria, we have jurisdiction to “Motion to Reconsider”) seeking to alter or amend the hear this appeal. Dismissal Order or for a new trial pursuant to Bankruptcy Rule 9023 and Rule 59, or alternatively, for amended findings and an amended order pursuant to Bankruptcy Rule 7052 and Rule 52(b). The Debtor claimed that “[a] review of the docket and STANDARD OF REVIEW examination of Peter Bolduc, principal of the Debtor,” revealed “material facts and representations that if known by the Court [3] [4] [5] [6] When reviewing a dismissal of a bankruptcy case would reasonably be expected to result in a different under § 1112(b), we review the bankruptcy court's findings of conclusion....” It asserted that a previously undisclosed creditor, fact for clear error and conclusions of law de novo. In re Colón namely, Cynthia Robbins, had “advanced sums of money to Martinez, 472 B.R. at 143 (citing Gilroy v. Ameriquest Mortg. enable the attachment of significant improvements to the Co. (In re Gilroy), BAP No. NH 07–054, 2008 WL 4531982, at [Property] thus enhancing its value,” and it offered to make monthly payments of $4,000 to the Secured Party “to prevent *4 (1st Cir. BAP Aug. 4, 2008)). However, because the the diminution of the secured claimants['] claim while the bankruptcy court “retains broad discretion to determine whether reorganization plays itself out....” Finally, without offering any either conversion or dismissal is in the best interests of creditors details, the Debtor argued that “[a] plan has been formulated, is and the estate after finding cause,” we review the bankruptcy feasible and can be effectuated within a reasonable period of court's decision as to the appropriate relief for an abuse of time.” discretion. In re Gilroy, 2008 WL 4531982, at *4. In addition, an order denying relief under Bankruptcy Rules 9023 and 7052 is also reviewed for an abuse of discretion. Scotiabank de P.R.

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 4 Andover Covered Bridge, LLC, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 240 v. Medina Lorenzo (In re Medina Lorenzo), BAP No. PR 15– [7] “When an interested party files a motion to convert 011, 2015 WL 4537792, at *4 (1st Cir. BAP July 24, 2015), or dismiss a [c]hapter 11 case, the bankruptcy court inquires aff'd, 637 Fed.Appx. 623 (1st Cir.2016). “A court abuses its as follows: Does ‘cause’ exist to convert or dismiss the case; discretion if it does not apply the correct law or if it rests its and, if so, is conversion or dismissal in the best interests of decision on a clearly erroneous finding of material fact.” De creditors and the estate?” Hoover v. Harrington (In re Jounghe v. Lugo Mender (In re De Jounghe), 334 B.R. 760, 765 Hoover), No. 15–2383, ––– F.3d ––––, ––––, 2016 WL (1st Cir. BAP 2005) (citation omitted). 3606918, at *1 (1st Cir. July 5, 2016) (citing 11 U.S.C. § 1112(b)(1)).

[8] [9] [10] The initial burden is on the movant to prove DISCUSSION there is cause for either conversion or dismissal of the chapter I. Dismissal Order 11 case. Efron v. Candelario (In re Efron), 529 B.R. 396, 411 Section 1112(b) governs conversion or dismissal of a chapter 11 (1st Cir. BAP 2015). Once the movant establishes cause, the case. Section 1112(b)(1) and (2) provide, in pertinent part, as burden shifts to the opposing party to demonstrate “unusual follows: circumstances” establishing that conversion or dismissal is not in the best interests of the creditors and the estate, and (1) Except as provided in paragraph (2) and subsection (c), that it meets the other requirements of § 1112(b)(2). Id. If no on request of a party in interest, and after notice and a such unusual circumstances exist and/or the other hearing, the court shall convert a case under this chapter to a requirements are not met, the bankruptcy court must convert case under chapter 7 or dismiss a case under this chapter, or dismiss the case. Id. The bankruptcy court has broad whichever is in the best interests of creditors and the estate, discretion to determine whether unusual circumstances exist for cause unless the court determines that the appointment and whether conversion or dismissal is in the best interest of under section 1104(a) of a trustee or an examiner is in the creditors and the estate. Id. (citing In re Colón Martinez, 472 best interests of creditors and the estate. B.R. at 144; In re Gilroy, 2008 WL 4531982, at *4).

*6 (2) The court may not convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter A. Cause to convert or dismiss if the court finds and specifically identifies unusual [11] Although the Code does not define “cause” as that term circumstances establishing that converting or dismissing the is used in § 1112(b), § 1112(b)(4) provides a nonexclusive case is not in the best interests of creditors and the estate, and list of what constitutes cause including, but not limited to, the debtor or any other party in interest establishes that— “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation,” (A) there is a reasonable likelihood that a plan willbe “unexcused failure to satisfy timely any filing or reporting confirmed within the timeframes established in sections requirement established by this title or by any rule 1121(e) and 1129(e) of this title, or if such sections do applicable to a case under this chapter,” or “failure timely to not apply, within a reasonable period of time; and provide information or attend meetings reasonably requested by the United States trustee.” See 11 U.S.C. § (B) the grounds for converting or dismissing the 1112(b)(4)(A), (F), and (H). In addition, the court may caseinclude an act or omission of the debtor other than convert or dismiss a case “for reasons that are not under paragraph (4)(A)— specifically enumerated in the section, provided that these (i) for which there exists a reasonable justification forthe reasons are sufficient to demonstrate the existence of act or omission; and cause.” In re Colón Martinez, 472 B.R. at 144 (citation omitted). “ ‘One ground, however, is sufficient, standing (ii) that will be cured within a reasonable period oftime alone, to establish cause under the statute.’ ” Id. (quoting fixed by the court. Keven A. McKenna, P.C. v. Official Comm. of Unsecured Creditors, C.A. No. 10–472 ML, 2011 WL 2214763, at *1 11 U.S.C. § 1112(b)(1) and (2). (D.R.I. May 31, 2011) (citations omitted)).

*7 The U.S. Trustee sought dismissal of the Debtor's case a debtor's reorganization efforts.” ABCD Holdings, LLC v. under § 1112(b)(4)(F) and (H) because of the Debtor's failure Hannon (In re Hannon), 512 B.R. 1, 19 to file timely monthly operating reports and other financial (Bankr.D.Mass.2014) (citation omitted) (internal documents, and under § 1112(b)(4)(A) due to the continuing quotations omitted). “Without these reports, the [U.S. losses to the Debtor's estate and the absence of a likelihood of Trustee] and creditors cannot determine when a debtor is rehabilitation. The bankruptcy court granted dismissal on both incurring additional losses, is rendered administratively of these grounds. insolvent, or is transferring assets without authorization.” In re Whetten, 473 B.R. at 383. “The reporting requirements provide the primary means for monitoring the debtor's compliance with the Code's requirements and 1. Failure to file timely monthly operating reports they serve as a litmus test for a debtor's ability to [12] Pursuant to § 1112(b)(4)(F), an “unexcused failure reorganize.” Id. at 384. Consequently, “[r]efusal or to satisfy timely any filing or reporting requirement inability to provide financial disclosure sounds the death established by [the Bankruptcy Code] or by any rule knell of a Chapter 11 case.” In re Costa Bonita Beach applicable to a case under [chapter 11]” is cause for Resort, Inc., 513 B.R. at 199 (citations omitted) (internal conversion or dismissal of a chapter 11 case. 11 U.S.C. § quotations omitted). “The failure to file monthly operating 1112(b)(4)(F). Pursuant to § 1112(b)(4)(H), cause also statements ... ‘whether based on inability to do so or includes “failure to timely provide information ... reasonably otherwise, undermines the Chapter 11 process and requested by the United States trustee....” 11 U.S.C. § constitutes cause for dismissal or conversion of the 1112(b)(4)(H). Chapter 11 proceedings.’ ” Id. (citation omitted).

The Operating Guidelines require chapter 11 debtors to file *8 In its Response to the Motion to Dismiss, the Debtor monthly operating reports fourteen days after the close of the admitted that it failed to file timely its monthly operating month. In a small business case, the U.S. Trustee provides reports. It offered an excuse for the untimely filing, debtors with an interactive copy of the official form Small however, contending that the monthly operating reports Business Monthly Operating Report. Section 308(b) requires were caught in counsel's “spam filter” and this was not a small business debtor to file periodic financial and other discovered until after the Motion to Dismiss was filed reports, and Bankruptcy Rule 2015(a)(6) mandates that the because the U.S. Trustee's office did not notify the Debtor financial reporting should be done on an official form and on or its counsel that the Debtor was not in compliance. a monthly basis. See 11 U.S.C. § 308(b); Fed. R. Despite the proffered excuse, the bankruptcy court held Bankr.P.2015(a)(6). District of Maine Local Bankruptcy Rule that the Debtor's failure to file timely the monthly 2015–1(a) requires debtors in Maine to file monthly operating operating reports constituted cause to dismiss the case. reports completed in accordance with the Operating Guidelines electronically with the Clerk of the bankruptcy On appeal, the Debtor's sole argument with respect to the court. See D. Me. LBR 2015–1. Finally, § 1116(4) requires a monthly operating reports is that it “demonstrated a small business debtor to “file all postpetition financial and reasonable justification for the tardily filed reports,” and other reports required by the Federal Rules of Bankruptcy “the failure to file the reports was cured within a Procedure or by local rule of the district court.” 11 U.S.C. § reasonable period of time.” The Debtor contends it 1116(4). explained to the U.S. Trustee that the financial information regarding the operations of the Debtor's affiliates would [13] “Monthly reports and the financial disclosures not be available until after the seasonal operations contained within them ‘are the life-blood of the Chapter 11 concluded in November. It also asserted it received no process' and are more than ‘mere busy work.’ ” In re Whetten, notification that it was not in compliance with its reporting 473 B.R. 380, 383 obligations, and it immediately filed the outstanding (Bankr.D.Colo.2012) (citing In re Berryhill, 127 B.R. 427, reports as soon as it discovered the deficiency. 433 (Bankr.N.D.Ind.1991)). “Monthly operating reports provide necessary information to the Court, creditors, and The record clearly establishes that the Debtor failed to file other parties in interest about the progress and prospects of timely several monthly operating reports. Although the Debtor blames its late filing on its counsel's email system and the U.S.

Trustee's failure to notify the Debtor that it was not in (citing cases). compliance, the bankruptcy court found these excuses were not sufficient or persuasive. It was the Debtor's obligation to [14] The bankruptcy court determined that cause existed to comply with its reporting requirements and to ensure that its dismiss the case due to the Debtor's “accrual of post-petition counsel timely filed the reports with the U.S. Trustee and the debt without the income or other apparent ability to pay such bankruptcy court. The U.S. Trustee had no obligation to remind debt.” This finding is supported by the record, which either the Debtor or his counsel of any failure to comply. demonstrates the Debtor's estate had virtually no income and Moreover, under § 1112(b)(4)(H), the Debtor's failure timely to was unable to pay its mortgage. In its Statement of Financial provide information reasonably requested by the U.S. Trustee Affairs, the Debtor indicated that it received no income, and does not need to be “unexcused” to constitute cause. at the creditors' meeting, Mr. Bolduc testified the Debtor has no income. In its monthly operating reports, the Debtor In light of the above, the bankruptcy court did not err in finding listed little ($25.00 on one and $500.00 on others) to no cause existed to dismiss the case under § 1112(b) income, and indicated that it was not paying any debt. In its (4)(F) and (H). Response, the Debtor admitted the Property was its sole asset, its “financial performance through the end of October [2015] was substantially lower than had been experienced in 2013 and 2014,” and “the adverse impact of the October 2. Substantial or continuing loss to or diminution of the estate and absence of 2014 accident among other things has been too great to a reasonable likelihood of rehabilitation overcome and it [wa]s unlikely that the Debtor w[ould] have a revenue stream that w[ould] permit a bootstrap Cause under § 1112(b)(4)(A) requires a two-part inquiry: reorganization th[at] cures or crams down the Secure[d] Party....” Also in its Response, the Debtor indicated that as (1) whether after the commencement of a result of the accident, it had cash flow problems, “resulting the case, the debtor has suffered or in an inability to pay the mortgage.” At the hearing, the continued to experience a negative cash Secured Party confirmed that the mortgage had not been flow, or, alternatively, declining asset paid since December 2014. Although Harvest Hills value; and (2) whether there is any historically paid the mortgage, it was ultimately the Debtor's reasonable likelihood that the debtor, or mortgage obligation. Moreover, the Debtor also admitted some other party, will be able to stem the that postpetition interest and costs continued to accrue on debtor's losses and place the debtor's the Secured Party's claim, and real estate taxes continued to business enterprise back on a solid accrue on the Property. In light of this evidence, the financial footing within a reasonable bankruptcy court's finding as to the first prong of § 1112(b) amount of time. (4)(A) was not clearly erroneous.

In re Santos Franco, No. 10–09758, 2012 WL 3071242, at *9 [15] [16] [17] Once the court finds that there is a diminution *3 (Bankr.D.P.R. July 30, 2012) (citing, among other of the bankruptcy estate, it must then consider whether the things, Alan N. Resnick & Henry J. Sommer, 7 Collier on debtor has a reasonable likelihood of rehabilitation. Bankruptcy ¶ 1112.04[6][a] (16th ed.2011)). Both tests “Rehabilitation” in this context means whether the debtor will must be satisfied in order for cause to exist under § 1112(b) be able to reestablish its business. In re Peña, 2016 WL (4)(A). 1043736, at *5. “Rehabilitation contemplates the successful maintenance and reestablishment of the debtors' business To satisfy the first prong, “[a]ll that need be found is that operations and ‘to put back in good condition; re-establish on a the estate is suffering some diminution in value.” Id. firm, sound basis.’ ” Id. (citations omitted). “Rehabilitation” (citations omitted) (internal quotations omitted). Courts does not mean “reorganization.” In re Hoover, ––– F.3d at ––– have held that a debtor's post-petition negative cash flow –, 2016 WL 3606918, at *3 (“[T]he question of rehabilitation and/or an inability to pay current expenses satisfies the under [§] 1112(b)(4) (A) is not synonymous with reorganization elements of § 1112(b)(4)(A). See In re Peña, No. 14– ....”) (citation omitted); In re Santiago, No. 15–06132, 2015 WL 09799, 2016 WL 1043736, at *5 (Bankr.D.P.R. Mar. 15, 5919926, at *6 (Bankr.D.P.R. Oct. 9, 2015) (citing 7 Collier on 2016) Bankruptcy ¶ 1112.04[6] [a] [ii] (16th ed.2015)). “Whereas,

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 7 Andover Covered Bridge, LLC, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 240 confirmation of a plan could include a liquidation plan, more demanding standard than reorganization.” In re rehabilitation does not include liquidation.” In re Santiago, Brutsche, 476 B.R. 298, 301 (Bankr.D.N.M.2012) (citation 2015 WL 5919926, at *6 (citation omitted) (internal quotations omitted) (internal quotations omitted). If “the debtor, or some omitted). other party, will be able to stem the debtor's losses and place the debtor's enterprise back on a solid financial footing within [18] [19] To determine whether the debtor's business a reasonable amount of time,” then the debtor may have a prospects are sufficient to justify a finding of a reasonable reasonable likelihood of rehabilitation. In re Costa Bonita likelihood of rehabilitation, courts analyze if the causes for Beach Resort, Inc., 479 B.R. 14, 42 (Bankr.D.P.R.2012) debtor's continuing losses can be corrected, and if the debtor (citation omitted). or some other party in interest is capable or willing to perform the necessary remediation. This is not a “technical [25] There is nothing in the record that suggests financial [test] of whether the debtor can confirm a plan, but rather, viability for the Debtor was reasonably likely, or it would whether the debtor's business prospects justify continuance suddenly be able to increase its cash flow. Rather, the of the reorganization effort.” Nevertheless, rehabilitation in Debtor admitted it would not be able to generate sufficient a Chapter 11 begins with a confirmable plan. It then cash flow to service its debts, even after Harvest Hill's peak requires, at minimum, the prospect of reestablishment of a season. “ ‘A debtor who is unable to service its debt at the business. outset of the case and remains unable to do so for the foreseeable future does not have a reasonable likelihood of In re Peña, 2016 WL 1043736, at *5 (citations omitted). In rehabilitation.’ ” In re Material Mgmt., Inc., No. 14– 00478, addition, 2014 WL 2468313, at *7 Bankr.D.P.R. May 28, 2014 [20] [21] “A plan for rehabilitation under Chapter 11 must (citations omitted). In addition, the Debtor failed to provide be based on more than speculative data.”... “If it is apparent any specifics as to its plan to sell the Property and therefore, that the debtor has no profitable core around which to offered only “unsubstantiated hopes for a successful structure a plan of reorganization, if the debtor is faced with reorganization.” Thus, the bankruptcy court did not err in continuing losses, and if the debtor's assets are declining in finding an absence of a reasonable likelihood of value, the best interest of creditors may require the court to rehabilitation in light of the Debtor's “speculative intention dismiss or order liquidation of the debtor's estate under to liquidate and thus cease operations.” See In re Hoover, – Chapter –– F.3d at ––––, 2016 WL 3606918, at *3 (giving deference 7.” ... “Courts usually require the debtor do more to bankruptcy court's refusal to credit debtor's speculative than manifest unsubstantiated hopes for a successful testimony about his plans for generating income when reorganization.” determining whether there was a reasonable likelihood of rehabilitation for purposes of § 1112(b)(4)(A)). Id. (citations omitted). *10 In light of the foregoing, the bankruptcy court did not [22] [23] [24] The Debtor argues that the bankruptcy court err in finding that cause existed to dismiss the case under § erred in holding that there was an absence of a likelihood of 1112(b)(4)(A). rehabilitation because the Debtor demonstrated that it intended to propose a liquidating plan, which is permissible in chapter 11. While it is true that a reorganization may include a B. Exception to Dismissal or Conversion liquidating plan, rehabilitation for purposes of § 1112(b) does The Debtor argues that the bankruptcy court erred by not include liquidation. See In re Santiago, 2015 WL 5919926, focusing on cause and the absence of a reasonable likelihood at *6; In re The Ledges Apartments, 58 B.R. 84, 87 of rehabilitation, and failing to “apply the second step which (Bankr.D.Vt.1986) (“Reorganization encompasses is required under [§] 1112(b)(1) and (2).” rehabilitation and may contemplate liquidation. Rehabilitation, on the other hand, may not include liquidation.”); see also In Section 1112(b)(1) requires the bankruptcy court to dismiss re Gonic Realty Trust, 909 F.2d 624, 627 (1st Cir.1990) or convert a case if it finds cause. 11 U.S.C. § 1112(b)(1). (“[W]ith no business left to reorganize, Chapter 11 Section 1112(b)(2) provides, however, that even if the proceedings were not serving the purpose of rehabilitating the bankruptcy court finds cause, it may not dismiss or convert a debtor's business.”). “Rehabilitation is a different and ... much case if it “identifies unusual circumstances establishing that

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 8 Andover Covered Bridge, LLC, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 240 converting or dismissing the case is not in the best interests is a “substantial or continuing loss to or diminution of the of creditors and the estate,” and the debtor establishes: estate” and “absence of a reasonable likelihood of rehabilitation” as set forth in § 1112(b) (4)(A). Because the (A) there is a reasonable likelihood that a plan will bankruptcy court found that cause existed to dismiss under beconfirmed within ... a reasonable period of time; and § 1112(b)(4)(A), the § 1112(b)(2) exception did not apply. See In re Korn, 523 B.R. 453, 465 n. 28 (B) the grounds for converting or dismissing the (Bankr.E.D.Pa.2014); In re Burgess, No. 11– 1257, 2013 caseinclude an act or omission of the debtor other than WL 5874616, at *3 (Bankr.N.D.W.Va. Oct. 30, 2013) under paragraph (4)(A)— (“Put simply, if cause is established by virtue of § (i) for which there exists a reasonable justification forthe 1112(b)(4)(A), then the provisions of § 1112(b)(2) do not act or omission; and apply.”); In re Visicon S'holders Trust, 478 B.R. 292, 316 (Bankr.S.D.Ohio 2012); In re Brutsche, 476 B.R. at 306; (ii) that will be cured within a reasonable period oftime In re Landmark Atl. Hess Farm, LLC, 448 B.R. 707, 717 fixed by the court. (Bankr.D.Md.2011).

[26] 11 U.S.C. § 1112(b)(2)(A) & (B). The debtor has the *11 In any event, the Debtor did not argue before the burden of establishing that all the factual elements of § bankruptcy court that any unusual circumstances existed 1112(b)(2) exist. which established that converting or dismissing the case was not in the best interest of creditors and the estate, and [27] [28] Courts have much discretion in determining the record does not demonstrate that there were any such whether there are unusual circumstances that should prevent unusual circumstances. Although the accident at Pumpkin dismissal or conversion. In re Costa Bonita Beach Resort, Inc., Land was unfortunate, the financial position the Debtor 513 B.R. at 195 (citations omitted). Although a finding of found itself in was not uncommon or unusual. unusual circumstances is within the court's discretion, the phrase “contemplates ‘conditions that are not common in Thus, the Debtor did not establish that the § 1112(b)(2) chapter 11 cases.’ ” In re Whetten, 473 B.R. at 384 (quoting In exception to dismissal applied. re Prods. Int'l Co., 395 B.R. 101, 109 (Bankr.D.Ariz.2008)). Importantly, however, this “unusual circumstances” exception C. Which option is in best interests of creditors and the does not apply if the bankruptcy court finds cause to convert estate based on a “substantial or continuing loss to or diminution of Once the bankruptcy court determines that cause exists to the estate and the absence of a reasonable likelihood of convert or dismiss a chapter 11 case, and that the debtor has not rehabilitation,” as set forth in § 1112(b)(4)(A). See 11 demonstrated any unusual circumstances (or, as occurred here, the unusual circumstances exception did not apply as to the U.S.C. § 1112(b)(2)(B).5 “cause” grounded in § 1112(b)(4)(A)), it must then decide which option is in the best interests of creditors and the estate. [29] The Debtor argues that it met its burden under § This decision is committed to the discretion of the bankruptcy 1112(b)(2)(A) of demonstrating a likelihood that a plan court. In re Hoover, ––– F.3d at ––––, 2016 WL 3606918, at *4 (which would be a liquidating plan) would be confirmed (stating that once bankruptcy court determined there was cause, within a reasonable time. It also argues that under § it had broad discretion to convert (or dismiss) if it concluded 1112(b)(2)(B), it demonstrated a reasonable justification that conversion (or dismissal) was in the best interest of for the tardily filed reports and it cured its failure to timely creditors). file the reports within a reasonable period of time. It fails to acknowledge, however, that it also had the burden of Although the Bankruptcy Code does not define the phrase “best establishing the other prongs of § 1112(b) (2)—unusual interests of the creditors and the estate,” courts have typically circumstances, and that the grounds for conversion or considered the following factors to determine whether dismissal dismissal include an act or omission other than the cause or conversion is in the best interest: set forth in § 1112(b)(4)(A). By its own terms, § 1112(b)(2) provides that the exception to dismissal does (1) whether some creditors received not apply if one of the grounds for dismissal or conversion preferential payments, and whether

equality of distribution would be better *12 Notwithstanding the waiver, we note the record served by conversion rather than reflects that although the bankruptcy court did not dismissal, (2) whether there would be a expressly discuss the above factors, it considered the issue loss of rights granted in the case if it were as it concluded that “dismissal, rather than conversion of dismissed rather than converted, (3) this case, is in the best interests of the creditors and the whether the debtor would simply file a estate.” The record further reflects that there were further case upon dismissal, (4) the sufficient circumstances to warrant this decision. ability of the trustee in a chapter 7 case Accordingly, if the issue were preserved, we would to reach assets for the benefit of conclude the bankruptcy court did not abuse its discretion creditors, (5) in assessing the interest of in dismissing, rather than converting, the case. the estate, whether conversion or dismissal of the estate would maximize the estate's value as an economic II. Order Denying Reconsideration enterprise, (6) whether any remaining In its brief, the Debtor lists in its statement of issues the issues would be better resolved outside following: the bankruptcy forum, (7) whether the Was the Bankruptcy Court's denial estate consists of a “single asset,” (8) of Debtor's Motion to Alter or whether the debtor had engaged in Amend or for a New Trial on Order misconduct and whether creditors are in of Dismissal Pursuant to need of a chapter 7 case to protect their Bankruptcy Rule 9023 and FRCP interests, (9) whether a plan has been 59; and Alternatively for Amended confirmed and whether any property Findings and an Amended Order remains in the estate to be administered, Pursuant to Bankruptcy Rule 7052 and (10), whether the appointment of a and FRCP 52(b) reversible error and an trustee is desirable to supervise the estate abuse of discretion. and address possible environment and safety concerns. The Debtor does not, however, present any argument as to why the denial of the Motion to Reconsider constituted reversible [30] In re Costa Bonita Beach Resort, Inc., 513 B.R. at error and/or an abuse of discretion. Therefore, the issue is 200–01 (quoting Collier on Bankruptcy, at ¶ 1112.04[7] ). waived. See In re Canning, 706 F.3d at 70 n. 7; Nikijuluw v. “In essence, ‘the court should evaluate and choose the Gonzales, 427 F.3d 115, 120 n. 3 (1st Cir.2005) (stating it is alternative that would be most advantageous to the parties “well established that issues adverted to in a perfunctory and the estate as a whole.’ ” Id. at 201 (citations omitted). manner, unaccompanied by some effort at developed argumentation, are deemed waived”) (citations omitted) The record reflects that the Debtor did not address the (internal quotations omitted); Garcia–Ayala v. choice of remedy before the bankruptcy court. Moreover, the Debtor did not address in its brief why the bankruptcy court's election of one remedy over another was an abuse Footnotes of discretion. As such, the issue is waived. See, e.g., Lederle Parenterals, Inc., 212 F.3d 638, 645 (1st Cir.2000) Canning v. Beneficial Me., Inc. (In re Canning), 706 F.3d (holding that failure to brief an argument constitutes 64, 70 n. 7 (1st Cir.2013) (explaining failure to brief issue waiver) (citations omitted). results in waiver) (citation omitted); Mark Bell Furniture Warehouse, Inc. v. D.M. Reid Assoc., Ltd. (In re Mark Bell Furniture Warehouse, Inc.), 992 F.2d 7, 9 (1st Cir.1993) CONCLUSION (explaining issue not preserved due to failure to raise it before bankruptcy court). For the reasons set forth above, we AFFIRM.

All Citations

--- B.R. ----, 2016 WL 4035505, 62 Bankr.Ct.Dec. 240

1 Unless expressly stated otherwise, all references to 4 “When there has been no demand for a full evidentiary “Bankruptcy Code” or to specific statutory sections shall hearing in contested matters, it is not unusual for a be to the Bankruptcy Reform Act of 1978, as amended, bankruptcy court to base its decisions on the 11 U.S.C. §§ 101, et seq. All references to “Bankruptcy representations of counsel.” Gentile v. DeGiacomo (In Rule” shall be to the Federal Rules of Bankruptcy re Gentile), 492 B.R. 580, 583 n. 5 (1st Cir. BAP 2013) Procedure. All references to “Rule” shall be to the (citation omitted). The record shows no demand by any Federal Rules of Civil Procedure. party for an evidentiary hearing on the Motion to Dismiss. 2 It is undisputed that the personal injury claims arising from the accident were covered by insurance, and that, 5 Section 1112(b)(2) is written in the conjunctive, and through a series of orders granting the claimants relief thus requires not only that the court identify unusual from the automatic stay, it was agreed and ordered that circumstances, but also that a debtor establish that: (1) the claimants would exclusively pursue insurance for there is a reasonable likelihood that a plan will be satisfaction of their claims. confirmed within a reasonable time; and (2) the grounds for conversion or dismissal include an act or omission 3 The Debtor's designation as a small business debtor is other than the cause set forth in § 1112(b) (4)(A) for inconsistent with this being a single asset real estate which there exists a reasonable justification and which case. Section 101(51B) defines the term “single asset can be cured within a reasonable time. See 11 U.S.C. real estate” as: § 1112(b)(2). real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates End of Document © 2016 Thomson Reuters. No claim to original substantially all of the gross income of a debtor U.S. Government Works. who is not a family farmer and on which no substantial business is being conducted by a

debtor other than the business of operating the real

property and activities incidental thereto. 11 U.S.C. § 101(51B). Pursuant to § 101(51D), a “small business debtor” is:

a person engaged in commercial or business activities (including any affiliate of such person that is also a debtor under this title and excluding a

person whose primary activity is the business of owning or operating real property or activities incidental thereto) that has aggregate

noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order for relief in an amount not

more than $2,490,925. 11 U.S.C. § 101(51D). The definition of small business debtor specifically excludes debtors in

single asset real estate cases and, therefore, by definition, a single asset real estate case cannot be a small business debtor case. In re PM Cross, LLC,

494 B.R. 607, 616–17 (Bankr.D.N.H.2013). We

need not address the issue further, however, as neither the U.S. Trustee nor the bankruptcy court raised the issue, and it does not impact the outcome

of the appeal.

Attorneys and Law Firms 2016 WL 3606918 United States Court of Appeals, First David G. Baker and Law Offices of David G. Baker, Boston, Circuit. MA, on brief for appellant.

In re: John E. Hoover, III, Debtor, Robert J. Schneider, Jr., Trial Attorney, Executive Office for John E. Hoover, III, Appellant, U.S. Trustees, Department of Justice, Ramona D. Elliott, v. Deputy Director/General Counsel, Executive Office for U.S. William K. Harrington, United Trustees, Department of Justice, P. States Trustee for Region 1, Appellee, Matthew Sutko, Associate General Counsel, Executive Richard King; Johnathan R. Goldsmith, Chapter Office for U.S. Trustees, Department of Justice, Wendy L. 7 Trustee, Interested Parties. Cox, Trial Attorney, Executive Office for U.S. Trustees, Department of Justice, William K. Harrington, United No. 15–2383 States Trustee for Region 1, Richard T. King, Assistant | United States Trustee, Eric K. Bradford, Trial Attorney, July 5, 2016 Office of the United States Trustee, Department of Justice, and Lisa D. Tingue, Trial Attorney, Office of the United Synopsis States Trustee, Department of Justice, on brief for appellee. Background: Debtor appealed an order of the United States Bankruptcy Court for the District of Massachusetts which, on Before Thompson, Selya, and Kayatta, Circuit Judges. motion of the United States Trustee (UST), converted his Chapter 11 case to a case under Chapter 7. The District Court, Opinion Timothy S. Hillman, J., 2015 WL 5074479, affirmed. Debtor KAYATTA, Circuit Judge. appealed. *1 John E. Hoover, III, (“Hoover”) appeals an order of the United States District Court for the District of Massachusetts Holdings: The Court of Appeals, Kayatta, Circuit Judge, held affirming the United States Bankruptcy Court's conversion that: of Hoover's Chapter 11 bankruptcy case to a case under Chapter 7. Hoover v. Harrington, No. 14-40126-TSH, 2015 [1] debtor received reasonable notice and an WL 5074479 (D. Mass. Aug. 27, 2015). For the reasons opportunityfor a hearing; expressed below, we reject this appeal, which probably should not have been brought.1 [2] the bankruptcy court did not abuse its discretionin determining that there did not exist “a reasonable likelihood of rehabilitation”; and I. Background

[3] the bankruptcy court did not abuse its discretion As an individual and doing business as “Halloween Costume indetermining that conversion was in the best interests of World,” Hoover filed a voluntary petition for bankruptcy creditors and the estate. under Chapter 11 of the United States Bankruptcy Code. The United States Trustee (“the Trustee”) filed a motion pursuant to 11 U.S.C. § 1112(b) (“section 1112”) to dismiss Affirmed. or convert the case to a liquidation proceeding under Chapter 7 of the Bankruptcy Code. APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF Hoover was the sole witness at the July 30, 2014, evidentiary MASSACHUSETTS, [Hon. Timothy S. Hillman, U.S. hearing. After direct and cross-examination about his District Judge] business, his finances, and the prospects for rehabilitation and reorganization, the bankruptcy court granted the Trustee's motion, finding that cause existed to convert the

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 12 In re Hoover, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 207 case to Chapter 7 under three separate provisions of section Cause exists under section 1112(b)(4)(A) if there has been a 1112(b)(4): “substantial or continuing loss to or diminution “substantial or continuing loss to or diminution of the estate of the estate and the absence of a reasonable likelihood of and the absence of a reasonable likelihood of rehabilitation.” rehabilitation” under (b)(4)(A); “unauthorized use of cash 11 U.S.C. § 1112(b)(4)(A). The bankruptcy court's finding collateral substantially harmful to 1 or more creditors” under of diminution in this case was simple and straightforward: (b)(4)(D); and “unexcused failure to satisfy timely any Hoover conceded that he was selling inventory without [pertinent] filing or reporting requirement” under (b)(4) (F). replacing it, and his monthly operating reports (“MORs”) The district court affirmed, concluding that cause to convert showed insufficient profit to account for (or replace) the sold existed under (b)(4)(A) and without discussing the inventory. In short, the estate was diminishing. As for the alternative grounds for cause found by the bankruptcy court likelihood of rehabilitation, the court again pointed to the under (b)(4)(D) and (b)(4)(F). Hoover, 2015 WL 5074479, MORs, showing insufficient cash flow to pay costs and at ,*3 & n. 2. debts. The court concluded: “This debtor barely makes it. That's what the numbers tell me and barely makes it only by not paying people ... and that's no recipe for a reorganization.” II. Standard of Review

[1] [2] We review the bankruptcy court's legal [5] Hoover's first response to the foregoing is conclusions de novo, its findings of fact for clear error, and procedural. He argues that he had no adequate notice that the its discretionary rulings for abuse of discretion. In re Gonic trustee would rely on section 1112(b)(4)(A). His premise that Realty Tr., 909 F.2d 624, 626 (1st Cir. 1990). We may also he was entitled to reasonable notice is correct. In contested affirm “on any ground supported by the record even if the matters such as motions to dismiss or convert a case under issue was not pleaded, tried, or otherwise referred to in the section 1112(b), Federal Rule of Bankruptcy Procedure 9014 proceedings below.” Doe v. Anrig, 728 F.2d 30, 32 (1st Cir. applies. See Fed. R. Bankr. P. 9014(a) (“[R]elief shall be 1984) (quoting Brown v. St. Louis Police Dep't, 691 F.2d requested by motion, and reasonable notice and opportunity 393, 396 (8th Cir. 1982)). for hearing shall be afforded the party against whom relief is sought.”); see also id.(f)(1) (“Rule 9014 governs a proceeding to dismiss or suspend a case, or to convert a case to another chapter, except under [certain provisions not relevant III. Discussion here].”). So the question is, did Hoover receive “reasonable [3] When an interested party files a motion to convert or notice and opportunity for [a] hearing”? dismiss a Chapter 11 case, the bankruptcy court inquires as follows: Does “cause” exist to convert or dismiss the case; [6] Clearly, he did. The Trustee's motion expressly and, if so, is conversion or dismissal in the best interests of stated that the Trustee sought conversion based on a showing of cause under section 1112(b)(4)(A). When it then became creditors and the estate? See 11 U.S.C. § 1112(b)(1).2 clear at the hearing begun on May 22, 2014, that the Trustee relied in great part on the MORs, the court continued the *2 Hoover argues that the bankruptcy court erred both in hearing to July 8, 2014, so as to allow Hoover and his counsel finding that “cause” to convert existed and in finding that to present evidence and prepare to address the MORs, which conversion was in the best interests of the creditors. We were central to determining whether Hoover's estate was address each argument in turn. being diminished and whether there was a reasonable likelihood of rehabilitation. Cf. In re Peña, No. 14-09799, A. Cause 2016 WL 1043736, at *6 (Bankr. D.P.R. Mar. 15, 2016) [4] As noted above, the bankruptcy court found at least (MORs demonstrated that a plan of reorganization was three separate causes for conversion. We begin and, because “simply not feasible for the [d]ebtors”). In so doing, the court one cause is enough, see Anrig, 728 F.2d at 32, we end by explicitly stated that “we're talking about a likelihoodof- explaining why the bankruptcy court did not err in finding reorganization question and the Bank is pointing out that on cause under section 1112(b)(4)(A). the debtor's own cash, monthly operating reports it's losing money.” The court later granted Hoover's motion to continue the hearing until July 30, 2014. The court also ordered the

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 13 In re Hoover, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 207 parties to file any MORs and legal memoranda relevant to the [8] Although the question of rehabilitation under Trustee's motion, including materials relevant to Hoover's section 1112(b)(4)(A) is not synonymous with reorganization ability to propose a feasible Chapter 11 plan. All of this was (i.e., the debtor need not have a confirmed reorganization more than reasonable under the circumstances to inform plan in place to avoid conversion), the debtor still must have Hoover that the likelihood of rehabilitation was at issue and “sufficient business prospects,” In [re] Landmark Atl. Hess to provide him with a meaningful opportunity to prepare and Farm, LLC, 448 B.R. 707, 714–15 (Bankr. D. Md. 2011), to be heard on the issue. See Mullane v. Cent. Hanover Bank & “justify continuance of [a] reorganization effort,” In re LG Tr. Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 L.Ed. 865 (1950) Motors, Inc., 422 B.R. 110, 116 (Bankr. N.D. (due process requires that notice be “reasonably calculated, Ill. 2009) (quoting In re Rey, Nos. 04–B–35040, 04–B– under all the circumstances, to apprise interested parties of 22548, 06–B–4487, 2006 WL 2457435, at *6 (Bankr. N.D. the pendency of the action and afford them an opportunity to Ill. Aug. 21, 2006)). Upon review of the evidence and the present their objections”). bankruptcy court's detailed reasoning, we, like the district court, are “not left with a ‘definite and firm conviction that *3 Moving from the question of notice to the merits of the a mistake has been committed.’ ” Hoover, 2015 WL cause determination, Hoover baldly asserts that there was no 5074479 at *2 (quoting In re Watman, 301 F.3d 3, 8 (1st Cir. evidence of diminution “other than possibly the fact that 2002)). Hoover was continuing to conduct business.” But as Hoover's own records unmistakably reveal, he was “conducting *4 Given this conclusion, we have no need to consider business” by selling inventory without replacing it with new Hoover's challenges to the other “causes” for conversion inventory or retaining cash sufficient to offset the diminution. found by the bankruptcy court. As the Trustee points out, and Hoover does not contest, one cause is enough. [7] Hoover next argues that his proposed plan of reorganization was not “patently unconfirmable,” that the state tax authorities would “hopefully” write off much of his B. Best Interests of Creditors debt, and that it was “too early” to tell whether a zero [9] [10] Once the bankruptcy court determined that there was dividend was “ineluctable.” The issue before us, though, is cause to convert the case, it had broad discretion to do so if it whether the bankruptcy court abused its discretion in concluded that conversion was in the best interests of creditors determining that there did not exist “a reasonable likelihood and the estate. 11 U.S.C. § 1112(b)(1). Given the court's of rehabilitation.” 11 U.S.C. § 1112(b)(4)(A). findings on diminution and rehabilitation, its conclusion that conversion was in the interest of creditors and the estate was We see no such abuse. The Profit and Loss Statement hardly surprising. revealed that in 2013, Hoover's business lost over $135,000, and the MORs showed that, since filing for bankruptcy, the [11] Hoover argues to us, nevertheless, that the creditors will business had generated only minimal profits despite selling mostly get nothing on liquidation after both the off its inventory and not paying anything to secured administrative fees and his Massachusetts tax obligation (in part) are paid. Therefore, he reasons, even a long shot at creditors.3 The court described, in detail, its view of the making a go of it under Chapter 11 is worth it for the evidence regarding whether there was a reasonable likelihood creditors. Hoover, though, did not make this argument to the of rehabilitation, noting a lack of sufficient funds and income bankruptcy court; therefore, we can consider the argument to pay monthly expenses under a Chapter 11 plan. The court, waived. See In Re Net–Velázquez, 625 F.3d 34, 40 (1st Cir. in its broad discretion, supportably declined to credit 2010) (“[A]bsent the most extraordinary circumstances, legal Hoover's testimony that he had plans for generating more theories not raised squarely in the lower court cannot be 4 income, finding those plans both speculative and optimistic. broached for the first time on appeal.” (quoting Teamsters, See Palmacci v. Umpierrez, 121 F.3d 781, 785 (1st Cir. 1997) Chauffeurs, Warehousemen & Helpers Union, Local No. 59 (“[p]articular deference” is due to bankruptcy court's findings v. Superline Transp. Co., 953 F.2d 17, 21 (1st Cir. 1992))). that depend on witness credibility); see also In Re Carp, 340 Even if not waived, this argument would fail. Confronted F.3d 15, 19 (1st Cir. 2003) (appellate courts “are not free to with two likely bleak alternative outcomes, the bankruptcy ... make independent judgments about the credibility of court had ample discretion to conclude that a prompt witnesses”). conversion rather than further diminution was in the best

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 14 In re Hoover, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 207 interests of creditors, especially where no creditor opposed IV. Conclusion conversion as hostile to its interests. We therefore find no error of law or abuse of discretion by The judgment of the district court, affirming the order of the 5 the bankruptcy court in converting Hoover's Chapter 11 bankruptcy court, is affirmed. bankruptcy case to Chapter 7.

All Citations thousand dollars of business away from [him].” The court, in its discretion, declined to credit this speculative --- F.3d ----, 2016 WL 3606918, 62 Bankr.Ct.Dec. 207 testimony. 5 We observe that Hoover's brief also criticizes Footnotes 1 Because there is a question of whether the the bankruptcy court's refusal to stay its order. That criticism is rendered moot by our disposition of this Chapter 7 trustee still has approximately $200,000 on hand that appeal. he has not yet liquidated, with which Hoover claims he could resurrect his business, we decide this appeal on the merits rather than accept the Trustee's claim that this appeal should End of Document © 2016 Thomson Reuters. No claim to original U.S. be dismissed as moot. Government Works. 2 11 U.S.C. § 1112(b)(1), residing within

Chapter 11 of the Bankruptcy Code, provides: [O]n request of a party in interest, and after notice and a hearing, the court shall convert a case under

this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless

the court determines that the appointment ... of a

trustee or an examiner is in the best interests of creditors and the estate.

3 Hoover claims that as a retail business, there is nothing “unreasonable” or “wrong about not

replenishing inventory in the slowest season of the year[.]” But selling off inventory while simultaneously not retaining the proceeds with which to buy new inventory

and pay expenses is not a sign of an improving business.

4 Hoover testified that he planned to start a flea

market, but there was no written agreement for the market, there was little foundation for Hoover's claim that the market would result in “very significant weekly

income,” and there was no evidence to support the notion that the market would have the same or similar success as it had when it operated in a different location. Hoover

also claimed that his profits would increase because a competitor, Spirit Stores, had left town. The only basis for this speculation was Hoover's internet search and the fact

that the space was being rented by another business. He could not confirm whether the competitor was moving to another space in the area and could not provide an

accurate accounting of how much his business had dropped in the three years that Spirit competed with his business, only “guessing” that it took “fifty to a hundred

2016 WL 4061144 Before Bailey, Finkle, and Fagone, United States Bankruptcy Only the Westlaw citation is currently available. Appellate Panel Judges. United States Bankruptcy Appellate Panel of the First Circuit. Opinion

Pedro López–Muñoz, Debtor. Finkle, U.S. Bankruptcy Appellate Panel Judge. United Surety & Indemnity Company, Appellant, *1 United Surety & Indemnity Company (“USIC”) v. appeals from the bankruptcy court's January 15, 2016 Pedro López–Muñoz, Appellee. order denying its motion to appoint a chapter 11 trustee 1 BAP NO. PR 16–011 under § 1104. For the reasons set forth below, we | AFFIRM the ruling of the bankruptcy court. Bankruptcy Case No. 13–08171–EAG | July 28, 2016 BACKGROUND

Synopsis I. Pre–Bankruptcy Events Background: Creditor moved for appointment of Chapter 11 Over 30 years ago, Pedro López–Muñoz (the “Debtor”) trustee under “for cause” provision. The United States and his now ex-spouse incorporated Western Petroleum Bankruptcy Court for the District of Puerto Rico, Edward A. Enterprises Inc. (“Western Petroleum”), to engage in the Godoy, J., 544 B.R. 266, denied the motion. Creditor appealed. sale and distribution of petroleum products and derivatives. The Debtor owns 50% of the shares of this corporation. Western Petroleum obtained surety bonds Holdings: The Bankruptcy Appellate Panel, Finkle, J., held that: from USIC to guarantee its obligations to its creditors. As a condition of issuing the bonds, Western Petroleum [1] bankruptcy court did not abuse its discretion executed an indemnity agreement which the Debtor indetermining that creditor failed to establish “cause” for signed both as “principal and indemnitor.” USIC's proof appointment of Chapter 11 trustee, and of claim filed in the Debtor's bankruptcy case arises out of this indemnity. [2] bankruptcy court did not abuse its discretionin determining that creditor failed to establish that appointment of In 1999, the Debtor incorporated Hi Speed Gas Corp. (“Hi Chapter 11 trustee was in the best interests of creditors and the Speed”), of which he is the sole shareholder. Hi Speed estate. owns a gas station located in Hormigueros, Puerto Rico (“Hi Speed Station”). In 2001, the Debtor acquired, in his personal capacity, a gas station located in Balboa Ward, Affirmed. Mayagüez (“Debtor's Station”).

Apparently, hard times befell Western Petroleum and in Appeal from the United States Bankruptcy Court for the District 2013 it was not able to pay its debts and ceased operations. of Puerto Rico (Hon. Edward A. Godoy, U.S. The Debtor and his ex-spouse had also provided personal Bankruptcy Judge) guarantees in excess of $10 million to most of Western Attorneys and Law Firms Petroleum's creditors, and one such creditor commenced aggressive collection actions in the courts of Puerto Rico Héctor Saldaña Egozcue, Esq., Carlos Lugo Fiol, Esq., and Jose against Western Petroleum and the Debtor. A. Sánchez Girona, Esq. on brief for Appellant. On April 1, 2013, the trust denominated La Familia Trust Carmen Conde Torres, Esq. and Luisa S. Valle Castro, Esq., on (“Familia Trust” or “trust”) was created by one of the Debtor's brief for Appellee. sons. We highlight here those provisions of the trust pertinent to this matter and USIC's motion. The “Constitution of Trust”

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 16 Lopez-Munoz, --- B.R. ---- (2016) recites its purpose is to “maintain adequate living standards” for time, included the $125,000 advance payment under the the Debtor and his children. It names the Debtor as its lease of the Debtor's Station. beneficiary and his children as substitute beneficiaries upon the Debtor's death. The trustee is the Debtor's current spouse. The Debtor has the power to designate any successor trustee at any II. Bankruptcy Proceedings time. He has the exclusive right of use of all trust properties. On October 1, 2013, the Debtor filed a chapter 11 petition, Lastly, the trustee is required to follow any instructions from the schedules, and a statement of financial affairs. On his Debtor regarding distributions of trust income and assets, and no schedules the Debtor listed his 50% interest in Western person other than the Debtor can obligate the trustee to make Petroleum valued at zero and his 50% interest in another distributions from the trust. corporation valued at $500,000. He did not list any interests in any trusts. In his statement of financial affairs On April 8, 2013, Hi Speed executed a 20–year lease with Puma he disclosed the pre-petition transfers of the Debtor's Energy Caribe LLC (“Puma”) for the operation of the Hi Speed Station to Hi Speed and his Hi Speed shares to the Familia Station. The lease provided for an initial monthly rental payment Trust, but indicated that the transfers took place in March to Hi Speed of $32,000 and an advance payment of $125,000 to 2013, rather than April 2013. He disclosed the $5,000 Hi Speed. The advance payment was to be repaid to Puma payment he received for the transfer of the Debtor's through monthly rent reductions of $500 during the lease term. Station and indicated he received “no value” for the On the same day, the Debtor executed a 20–year term lease with transfer of the Hi Speed shares. He did not mention the Puma for the operation of the Debtor's Station, with an initial lease agreements with Puma for the operation of the two monthly rental payment to the Debtor of $18,000 and the same gas stations. advance payment of $125,000. Similarly, the advance payment was to be repaid to Puma through a $500 monthly rent reduction The U.S. Trustee conducted a § 341 meeting of creditors during the lease term. Under both lease agreements, Puma (“Creditors' Meeting”) which USIC attended. At that assumed all costs related to the operation of the gas stations, meeting the U.S. Trustee questioned the Debtor about his including utilities and insurance. The leases are triple net leases pre-petition transfers to Hi Speed and the Familia Trust, whereby Puma is responsible for the repair and maintenance of and he answered those questions. In response to a question the gas stations, for obtaining all licenses necessary for their about the trust the Debtor stated that his children were the operation, and for the payment of real and personal property beneficiaries. As to his shares in Hi Speed, he valued them taxes. In short, the rents received by Hi Speed and the Debtor as “worthless,” explaining that he transferred them to the under these leases are free and clear of any expenses relating to trust “[t]o protect [his] sons.” the day-to-day operations of the gas stations and the Subsequently, in April 2014, the Debtor filed his first maintenance of the land and buildings on which the stations are disclosure statement and plan of reorganization. In the located. disclosure statement, he referenced the transfer of his *2 On April 11, 2013, the Debtor sold his interest in the Debtor's interest in Hi Speed to the Familia Trust on April 1, 2013, Station to Hi Speed. According to the terms of the sale, Hi Speed and the sale of the Debtor's Station to Hi Speed on April paid $5,000 to the Debtor and assumed the mortgage obligation 11, 2013. The purpose of these transactions, he stated, was against the Debtor's Station owed to Banco Popular de Puerto “to preserve the property due to Debtor's difficulties to Rico (“BPPR”). Hi Speed also agreed to pay the Debtor a maintain the mortgage payments up to date....” This initial monthly salary of $5,000 and monthly rent of $10,000 for office disclosure statement did not discuss the Puma leases. space it used in another building owned by the Debtor Later that month, USIC conducted a deposition of the personally. On the same date, the Debtor donated his shares in Debtor. USIC asserts it was not until it confronted the Hi Speed to the Familia Trust. Debtor at the deposition with evidence it had gathered as a result of its own investigation, that the Debtor Adding to the Debtor's personal financial woes, on May acknowledged the existence of the Puma leases as well as 17, 2013, BPPR garnished slightly more than $182,000 being the sole beneficiary of the Familia Trust. from the Debtor's personal bank account which, at the After some delays in the proceedings, USIC filed an objection to the disclosure statement and also requested the appointment

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 17 Lopez-Munoz, --- B.R. ---- (2016) of a chapter 11 trustee pursuant to § 1104(a)(1) and (2). Among as of December 31, 2012, indicating a negative book value of other things, USIC maintained that there was cause to appoint a $923,000. trustee, citing to the Debtor's pre-petition transfers of his assets to related parties in order to defraud his creditors and the Additionally, the Debtor filed an opposition to USIC's Debtor's alleged failure to make “crucial” disclosures about such request for the appointment of a chapter 11 trustee. His transfers, such as the Puma leases and his sole interest in the primary contention was that cause did not exist for such trust. In fact, USIC asserted, the Debtor gave inaccurate dates appointment because: (1) he fully disclosed the transfers for such transfers to mislead his creditors. USIC also maintained of his assets from the outset of his case, (2) the transfers that the Debtor had a conflict of interest because the estate has a were made for the benefit of all creditors in order to cause of action against Hi Speed under § 548 for the avoidance protect the income derived from the Puma leases from the and recovery of funds it received by virtue of the fraudulent aggressive collection efforts of just one creditor, an transfers. It argued that the following transactions occurring entirely valid reason for such transfers, and (3) he never within the six month period before the petition date were intended to defraud or deceive his creditors. He disclosed fraudulent: (1) the transfer of the Debtor's Station to his solely that “out of an abundance of caution and to avoid any owned corporation Hi Speed, (2) the “donation” of his shares in additional allegations of bad faith or wrongdoing by Hi Speed to the Familia Trust, of which he was the sole USIC,” he had rescinded these transfers. The Debtor beneficiary, (3) the execution of the two operating lease further maintained that appointment of a trustee was not agreements with Puma, and (4) the payment by Hi Speed to the in the best interest of creditors as it would greatly increase Debtor of a monthly salary of $5,000 and monthly rent of administrative expenses and only delay his reorganization $10,000. to the detriment of his creditors.

*3 Weighing in on the matter, the U.S. Trustee filed his Position USIC filed a reply to the Debtor's opposition, citing as to Motion to Appoint a Chapter 11 Trustee, in which he stated Martin v. Bajgar, 104 F.3d 495 (1st Cir.1997), for the that the facts submitted by USIC in its motion warranted the proposition that the Debtor's re-transfer of fraudulently appointment of a trustee under § 1104(a)(1) and (2), or transferred assets after the petition date did not cure the alternatively, conversion of the case to chapter 7. The U.S. fraudulent transfers. It further argued that the Debtor's Trustee, however, did not join in the motion for appointment of failure to collect from Hi Speed the monies it received a chapter 11 trustee or file a motion to convert the case to chapter from the Puma lease of the Debtor's Station prior to the 7. rescission of the transfer constituted “gross mismanagement.” Finally, it reiterated that the To respond to these challenges to his reorganization efforts, the appointment of a trustee was in the best interests of Debtor executed a deed of rescission on August 29, 2014, creditors because a trustee would likely sell both gas transferring the Debtor's Station from Hi Speed back to himself. stations and pursue the turnover of monies paid to Hi The shares in Hi Speed were also transferred from the Familia Speed under the Puma lease. For these reasons, it posited, Trust back to the Debtor. On that same date, the Debtor filed a the benefits to the estate of having a trustee appointed motion seeking to amend his schedules and statement of outweighed any detriment alleged by the Debtor. financial affairs to reflect such rescissions and include these assets in his bankruptcy estate, and to include the Puma lease On July 14 and 15, 2015, the bankruptcy court held an and associated income it generates along with the expenses evidentiary hearing on USIC's request for appointment of associated with the administration of the lease. He also filed an a chapter 11 trustee and the Debtor's amended disclosure amended disclosure statement and an amended plan to, among statement.2 As USIC bore the burden to establish that other things, correspond with the return of those assets to the grounds existed under § 1104(a)(1) and (2) for the Debtor and reflect the lease income and lease administration appointment of a trustee, it is significant to note that expenses. In the amended disclosure statement and amended because it had failed to list its expert witness, certified Schedule B (personal property), the Debtor ascribed no value to public accountant Rafael Pérez Villarini (“CPA the Hi Speed shares and the Puma lease and attached audited Villarini”), on the parties' joint pre-trial report, USIC was financial statements for Hi Speed as of June 30, 2013, indicating limited to presenting this expert witness for rebuttal a negative book value of $452,000, and for the Debtor's Station purposes only.3 In the end this proved to be a hurdle that

USIC did not adequately overcome. In defending against 2002 was not necessarily representative of their value eight the appointment of a trustee, the Debtor testified, as did years later in 2010, and even less so in 2013 when the transfers his accountant Doris Barroso (“CPA Barroso”) who occurred. appeared as an expert witness, both as a certified public accountant and a certified forensic accountant. The parties The 2013 financial statement of Hi Speed disclosed the also submitted numerous exhibits and post-trial existence of the Puma leases and the two advance lease memoranda. payments of $125,000, and reflected a book value for Hi Speed of negative $452,000. The 2012 financial statement for the Debtor's Station reflected a book value of negative III. The Bankruptcy Court's Opinion and Order $923,000. *4 On January 15, 2016, the bankruptcy court entered an Opinion and Order (the “Order”) denying USIC's request for the appointment of a chapter 11 trustee. See In re López Muñoz, 544 B.R. 266 (Bankr.D.P.R.2016). 2. Facts related to post-petition allegations of fraud After his bankruptcy filing, the Debtor received from Hi A. Findings of Fact Speed a monthly salary of $5,000 and rent of $10,000 for In the Order, the bankruptcy court issued detailed findings of office space leased by Hi Speed from the Debtor. Hi fact regarding the Debtor's transfers of assets and USIC's Speed paid its own operating expenses for the allegations of the Debtor's pre-petition fraudulent transactions administration of the lease of the Hi Speed Station to and post-petition fraud. The bankruptcy court based its factual Puma. After the reversal of the asset transfers on August findings on the joint pre-trial report filed by the parties, the 29, 2014, the monthly rent Hi Speed paid the Debtor was testimony of the witnesses at the evidentiary hearing, and the reduced to $5,000 to take into account that it was exhibits entered into evidence at that hearing. Each of the thereafter administering only one of the Puma leases. bankruptcy court's factual findings is supported by a reference to either the hearing transcripts, the joint exhibits, or the joint As to disclosures about his assets, the Debtor had listed pre-trial report. Many of the undisputed factual findings the pre-petition transfers to Hi Speed and the Familia regarding the Debtor's pre-petition transactions and post-petition Trust in the statement of financial affairs, but reflected the disclosures are set forth in the background section above. Other transfers as taking place in March, 2013 rather than the findings of the bankruptcy court recited in the Order that are actual transfer date of April 11, 2013, shortly after the relevant to this appeal are summarized below. execution of the Puma leases. At the evidentiary hearing, the Debtor explained he had made an “honest mistake” about the date. At his deposition taken by USIC in April, 2014, he produced all requested documents “except a 1. Facts related to pre-petition allegations of fraud document sustaining the transfer of shares to the Trust.” In connection with the general agreement of indemnity, USIC *5 During the Creditors' Meeting, at which USIC's was provided information about the Debtor's financial condition, attorney was present, the Debtor answered numerous including a 2010 financial statement (“Initial 2010 Financial questions of the U.S. Trustee about the pre-petition Statement”). The financial statement listed the purchase price transfers. He incorrectly stated that his four adult children paid by Hi Speed for its gas station as approximately were the beneficiaries of the Familia Trust. At the $2,200,000, the value of the Debtor's shares in Hi Speed at evidentiary hearing, however, he agreed that he was the $3,000,000 based on a 2002 appraisal, and the value of the sole beneficiary of the trust and explained that he Debtor's Station at $1,400,000, also based on a 2002 appraisal. misspoke for two reasons. First he was answering the The bankruptcy court afforded “little or no weight” to these question from memory and did not have the trust values because the Initial 2010 Financial Statement was not document before him. Second, he thought of his children prepared by a certified public accountant and was not even a as the true trust beneficiaries because the “law of life” compilation, the lowest level of financial statement a certified dictates that he will pass away before his children do and public accountant can provide for a client. Further, the they will inherit all of the trust assets. As to the value of bankruptcy court specifically found that the value of assets in

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 19 Lopez-Munoz, --- B.R. ---- (2016) the Hi Speed shares transferred to the trust, at the Article 1249 of the Puerto Rico Civil Code creates a Creditors' Meeting he explained the shares were worthless presumption that the asset transfer was done in fraud of and that the reason he transferred them was to protect his creditors. P.R. Laws Ann. tit. 31, § 3498. But, the debtor children. This statement of value was consistent with the rebutted that presumption at the evidentiary hearing with valuation listed on the statement of financial affairs. At the testimony of CPA Barroso that the transfer of assets the evidentiary hearing, the Debtor testified that he relied had “no material effect” upon the estate. CPA Barroso was on an amended financial statement for the year 2010 a credible and convincing witness and was qualified to (dated July 31, 2013) in order to provide the value of the testify as an expert in accounting and, in particular, as a shares of Hi Speed in the statement of financial affairs and certified financial forensic accountant. Her duties in this at the Creditors' Meeting. case included the review of the monthly operating reports, assistance in the preparation of the payment plan, The disclosure of expenses by the Debtor on Schedule J included reconciliation of claims submitted to the court with the the Debtor's own expenses incurred for the administration of the accounting records, preparation of the liquidation Puma lease for the Debtor's Station, not those for the actual analysis, assistance in the preparation of the financial operation of the gas station assumed by Puma under the lease. projections, and analysis of information regarding the On a monthly basis, the Debtor charges Hi Speed for the cost of cash inflows and outflows of the debtor and Hi Speed. The administering its lease, and for its use of electricity, water, and Court also took into account its observations over many telephone for 1,000 square feet of office space the Debtor rents years in other cases in which CPA Barroso has been to Hi Speed in the office building he owns. The Debtor also employed as a bankruptcy professional in according collects from Hi Speed property taxes (CRIM), “patentes” considerable weight to her testimony. And, when USIC (licenses), and the costs of repair and maintenance for this space, called CPA Pérez Villarini as an expert witness to rebut and charges Hi Speed for services provided by an accountant CPA Barroso's testimony and asked him whether he who also works for the Debtor and another of his corporations. agreed with her statement that there was no “monetary loss to the estate as a result of both the transfers that Mr. Regarding the allegations of diversion of funds, after the August Lopez performed in regarding the shares of Hi Speed and 29, 2014 rescission of the asset transfers, the Debtor himself la familia trust,” CPA Pérez Villarini answered “I can't— commenced making all mortgage payments to BPPR and paid I can't,” and added “I have no basis to—to reach a the operating expenses of administering the lease which were conclusion in that.” previously paid by Hi Speed. Hi Speed did not refund any money it received under the Puma lease, but there were no surplus funds *6 USIC also argues that the debtor's estate has a cause of owed by Hi Speed to the estate for the pre-rescession period. All action for the turnover of $119,500, plus interest, against such funds Hi Speed received were used to pay the BPPR Hi Speed due to the rescission of the asset transfers. But, mortgage on the Debtor's Station, the costs of administering the CPA Barroso's testimony that the asset transfers had no Puma lease, the office rent, and the Debtor's salary. CPA material effect upon the estate remains in the court's view Barroso found no indicia of fraud based on her conclusion that uncontested. Thus, USIC did not meet its burden of proof the Debtor did not divert any funds, did not conceal assets or that such cause of action exists. omit information from his creditors, and did not falsify any The court is, likewise, not persuaded by the several other documents. She did not prepare a fraud analysis of the Debtor's grounds raised by USIC. They either were not material to the financial transactions or operations because it was unnecessary section 1104 analysis or do not rise to the level of misconduct as she found no indicia of fraud. Finally, she determined there requiring the appointment of a chapter 11 trustee. And, in many was no material effect on the bankruptcy estate from the asset instances, the debtor was able to provide an acceptable transfers because all funds were received by the estate and paid explanation for his actions. For example, the debtor was able to the Debtor's secured creditors. USIC's witness CPA Villarini to show that he relied on an amended financial statement for was unable to rebut CPA Barroso's conclusion that no monetary the year 2010 when he indicated that the Hi Speed shares had loss was sustained by the estate as a result of the asset transfers. no value.

544 B.R. at 276–77 (citations to the hearing transcript omitted). B. The Bankruptcy Court's Ruling Having concluded that “USIC did not meet its burden of After issuing its findings of fact, the bankruptcy court ruled that:

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 20 Lopez-Munoz, --- B.R. ---- (2016) proof,” the bankruptcy court denied its request for appointment [2] [3] [4] [5] [6] The Panel reviews of a chapter 11 trustee. Id. at 277. a bankruptcy court's findings of fact for clear error and its conclusions of law de novo. See Lessard v. Wilton–Lyndeborough IV. Subsequent Events Coop. Sch. Dist., 592 F.3d 267, 269 (1st Cir.2010). Thus, After determining that USIC had failed to timely file an the bankruptcy court's factual findings regarding the objection to the Debtor's amended disclosure statement, the appointment of a trustee are reviewed under a clearly bankruptcy court entered an order approving it and scheduling erroneous standard. See Tradex Corp. v. Morse, 339 B.R. a confirmation hearing on the Debtor's amended plan of 823, 832 (D.Mass.2006). The bankruptcy court has reorganization for April 20, 2016. In response USIC filed a discretion, however, in determining whether the evidence motion with the bankruptcy court seeking to stay the is sufficient to establish “cause” for the appointment of a bankruptcy court proceedings pending the resolution of this trustee or such appointment is in the interests of creditors appeal. That motion was denied and USIC filed an emergency and the estate under § 1104(a). See id. “A discretionary motion with the Panel seeking to suspend the proceedings in decision of the bankruptcy court is overturned only when the bankruptcy court, including the scheduled confirmation there has been abuse of that discretion.” Id. at 824 (citation hearing, pending the resolution of this appeal. On April 15, omitted). “ ‘Apart from an error of law, an abuse of 2016, the Panel entered an order granting the stay motion in discretion occurs when the ... court considers improper part, concluding that a suspension of the confirmation criteria, ignores criteria that deserve significant weight, or proceedings was warranted but not suspension of all gauges only the appropriate criteria but makes a clear proceedings in the bankruptcy case. error of judgment in assaying them.’ ” Wiscovitch– Rentas v. Villa Blanca VB Plaza LLC (In re PMC Mktg. Corp.), 543 B.R. 345, 354–55 (1st Cir. BAP 2016) JURISDICTION (quoting Rosario–Urdaz v. Rivera–Hernandez, 350 F.3d 219, 221 (1st Cir.2003) (citation omitted)). [1] The Panel has jurisdiction to hear appeals from final judgments, orders and decrees of the bankruptcy court. See 28 U.S.C. § 158(a)(1). A bankruptcy court's order denying the DISCUSSION appointment of a chapter 11 trustee is a final, appealable order. See Comm. of Dalkon Shield Claimants v. A.H. Robins Co., Inc., I. The Statutory Basis for Appointment of a Chapter 11 828 F.2d 239, 241 (4th Cir.1987) (determining that an order Trustee denying creditors' committee's request for appointment of a *7 Section 1104(a) provides, in relevant part, as follows: chapter 11 trustee was “immediately reviewable as a final decision”); see also Anderson v. Real Estate Partners, Inc. (In (a) At any time after the commencement of the case but before re Real Estate Partners, Inc.), No. 07–1440 ODW, 2009 WL confirmation of a plan, on request of a party in interest or the 3246619, at *1 (C.D.Cal. Oct. 5, 2009) (“Pursuant to 28 U.S.C. United States trustee, and after notice and a hearing, the court § 158(a), the [court] may review any final judgment, order, or shall order the appointment of a trustee– decree of a bankruptcy court, including an order denying the (1) for cause, including fraud, dishonesty, incompetence, appointment of a Chapter 11 trustee.”); Official Comm. of or gross mismanagement of the affairs of the debtor by Asbestos Claimants v. G–I Holdings, Inc. (In re G–I Holdings, current management, either before or after the Inc.), 295 B.R. 502, 504 (D.N.J.2003), aff'd, 385 F.3d 313 (3d commencement of the case, or similar cause ...; or Cir.2004) (holding that order denying appointment of a bankruptcy trustee is a final order and, therefore, the court had (2) if such appointment is in the interests of jurisdiction under 28 U.S.C. § 158(a)). Accordingly, the Panel creditors,any equity security holders, and other interests has jurisdiction to hear this appeal. of the estate....

[7] 11 U.S.C. § 1104(a). “[T]he two different bases for STANDARD OF REVIEW appointing a trustee are disjunctive; a court must find either fraud, incompetence and the like or that such appointment is in

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 21 Lopez-Munoz, --- B.R. ---- (2016) the interests of the creditors and estate.” Petit v. New Eng. abuse of discretion in the court's ruling that USIC failed Mortg. Servs., Inc., 182 B.R. 64, 69 (D.Me.1995) (citation to meet its burden under any applicable burden of proof omitted). standard.

[8] [9] “The appointment of a chapter 11 trustee is considered to be an ‘extraordinary’ act since, in the usual case, II. Applying the Standard the debtor remains a debtor-in-possession throughout A. Cause Under § 1104(a)(1) reorganization.” Id. at 68 (citation omitted). “The presumption *8 Section 1104(a)(1) does not define cause. Instead, it in chapter 11 cases is that ‘current management is generally best references a non-exhaustive list of grounds that may each suited to orchestrate the process of rehabilitation for the benefit establish cause to appoint a trustee: fraud, dishonesty, of creditors and other interests of the estate.’ ” Id. (citation incompetence, or gross mismanagement of the affairs of omitted). “Nevertheless, in the appropriate case, the the debtor by current management. The inquiry into appointment of a trustee is a power which is critical for the court whether cause exists for the appointment of a chapter 11 to exercise in order to preserve the integrity of the bankruptcy trustee is not limited to the enumerated list but extends to process and to insure that the interests of creditors are served.” “similar cause.” See 11 U.S.C. § 1104(a)(1). In In re Nartron Corp., 330 B.R. 573, 591–92 determining whether a particular set of circumstances (Bankr.W.D.Mich.2005); see also Tradex Corp., 339 B.R. at establishes cause under this prong of § 1104(a), courts 823. have considered a variety of factors, including:

[10] The moving party has the burden of proving grounds that (1) Materiality of the misconduct; justify the appointment of a chapter 11 trustee and, in doing so, must overcome a strong presumption that the debtor is to (2) Evenhandedness or lack of such in dealings withinsiders remain in possession. In re LHC, LLC, 497 B.R. 281, 291 or affiliated entities vis-a-vis other creditors or customers; (Bankr.N.D.Ill.2013). The First Circuit has not determined the (3) The existence of pre-petition voidable preferences appropriate burden of proof for the appointment of a trustee orfraudulent transfers; pursuant to § 1104, and courts are split as to the applicable standard. Some courts have held that a movant must establish (4) Unwillingness or inability of management to pursueestate cause by clear and convincing evidence. See, e.g., 7 Collier on causes of action; Bankruptcy, at ¶ 1104.02[4(b) ]; Adams v. Marwil (In re Bayou Group, LLC), 564 F.3d 541, 546 (2d Cir.2009); In re G–I (5) Conflicts of interest on the part of managementinterfering Holdings, Inc., 385 F.3d at 317–18 (explaining that heavy with its ability to fulfill fiduciary duties owed to the “presumption” against appointment of a trustee refers to a debtor; [and] heavy burden of persuasion by clear and convincing evidence that the party moving for appointment must bear). Others hold (6) Self-dealings by management or waste orsquandering of that a preponderance of the evidence standard is more corporate assets. appropriate. See Tradex Corp., 339 B.R. at 832; In re Costa In re Sundale, Ltd., 400 B.R. 890, 900 Bonita Beach Resort, 479 B.R. 14, 44 (Bankr.D.P.R.2012). (Bankr.S.D.Fla.2009) (quoting In re Intercat, Inc., 247 B.R. 911, 921 (Bankr.S.D.Ga.2000)); see also In re Veblen West Dairy Here, although the bankruptcy court stated it “agree[d] LLP, 434 B.R. 550, 553 (Bankr.D.S.D.2010) (considering with the majority view that a debtor's presumptive right to similar factors for a § 1104(a)(1) analysis); In re Nartron Corp., maintain possession over the reorganizing business is an 330 B.R. at 592 (same). important interest justifying the heightened burden of clear and convincing evidence,” it concluded “the debate lease proceeds. It contends these transfers are presumed to [wa]s immaterial” in this case because the appointment of be fraudulent, citing to Article 1249 of the Puerto a trustee was not warranted “under either standard.” In re Rico Civil Code, see P.R. Laws Ann. tit. 31, § 3498,4 and López Muñoz, 544 B.R. at 275. USIC urges us to adopt a that the bankruptcy court's determination that the Debtor preponderance of the evidence standard, but we need not rebutted that presumption is clearly erroneous. It also adopt a particular standard for our review as we find no argues that a trustee is warranted because the Debtor's

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 22 Lopez-Munoz, --- B.R. ---- (2016) false representations and failure to make crucial discretion in concluding there was insufficient evidence to disclosures in his schedules, statement of financial affairs, establish cause for the appointment of a trustee.

[11] [12] [13] [14] [15] In considering these factors,fraud on the part of the debtor-in-possession justified and at the Creditors' Meeting not only underscores his *9 Section 1104(a)(1) does not define fraud nor is the term dishonesty but itself constitutes post-petition fraud. We defined elsewhere in the Bankruptcy Code. There is a must determine whether the bankruptcy court abused its dearth of cases in which courts have found that

“the level of the acts constituting cause, the conduct, failure to misrepresentation). And more recently, the Supreme Court act, or gross mismanagement, or the like, must ‘[rise] to a level concluded that for purposes of determining the sufficient to warrant the appointment of a trustee.’ ” In re nondischargeability of debt under this Code section, “actual Sundale, Ltd., 400 B.R. at 900 (quoting Comm. of Dalkon fraud” includes fraudulent transfers. See Husky Int'l Elecs., Inc. Shield Claimants, 828 F.2d at 242). While any one factor may v. Ritz, ––– U.S. ––––, 136 S.Ct. 1581, 194 L.Ed.2d 655 not warrant appointment of a trustee, the court must consider (2016) (resolving a case law split and determining that “the cumulative or collective impact of the alleged problems “actual fraud” for purposes of § 523(a)(2)(A) applies to or issues in making its decision.” Id. (citing In re Cardinal fraudulent conveyance schemes despite the absence of a Indus., Inc., 109 B.R. 755 (Bankr.S.D.Ohio 1990)). “That is, false representation). As a practical matter, most courts the court must determine whether the totality of the consider the totality of the circumstances to ascertain circumstances warrant appointment of a trustee.” Id. (citing In whether there is sufficient evidence to find that the debtor re Sharon Steel Corp., 871 F.2d 1217, 1228 (3d Cir.1989)). intended to defraud creditors, and whether the debtor's Thus, appointment of a trustee is a fact-intensive actions as a whole rise to the level of fraud, dishonesty, or determination and must be made on a case-by-case basis. In re gross mismanagement justifying a trustee's appointment. LHC, LLC, 497 B.R. at 291 (citation omitted). While appointment of a trustee is mandatory if cause is found, a In the first instance the bankruptcy court adopted USIC's bankruptcy court has wide discretion to determine whether contention that under P.R. Laws Ann. tit. 31, § 3498, there specific conduct sufficiently establishes such cause. See was a presumption that the Debtor's pre-petition transfers of Spenlinhauer v. Harrington (In re Spenlinhauer), No. 15– his assets were undertaken to defraud his creditors.5 But, the 14223–GAO, 2016 WL 526200, at *1 (D.Mass. Feb. 9, 2016) court expressly found that the Debtor had rebutted the (citing Tradex Corp., 339 B.R. at 828–29). presumption, finding credible the testimony of the Debtor in explaining the reasons for the transfers. The court also [16] The crux of USIC's position is that cause for the accepted CPA Barroso's testimony rebutting the allegations appointment of a trustee under this prong of § 1104(a) has been asserted by USIC and her expert opinion that the transfers demonstrated by the Debtor's pre-petition transfers of assets and of assets had “no material effect” upon the bankruptcy repeated post-petition misrepresentations and omissions of estate, all funds having been received by the estate and paid material information, all of which evidences a fraudulent to the Debtor's secured creditors. In re López Muñoz, 544 scheme designed to prevent the Debtor's creditors from B.R. at 276. While the bankruptcy court offered no reaching the valuable Puma the appointment of a trustee. See In explanation for its reference to the Puerto Rican contract re LHC, LLC, 497 B.R. at 305 (citing In re F.A. Potts & Co., 20 rescission provision to define “fraud” under § 1104(a)(1), B.R. 3, 5 (Bankr.E.D.Pa.1981)). Some courts have defined USIC does not challenge its application by the court. fraud under § 1104(a)(1) by reference to state common law Indeed, it is USIC that argued in its post-trial brief that this fraud. See id. (citation omitted); see also In re Paolino, 53 B.R. Puerto Rican statute was controlling and rendered the pre- 399, 401–02 (Bankr.E.D.Pa.1985) (citation omitted); In re F.A. petition transfers of the Debtor's assets presumptively Potts & Co., 20 B.R. at 5. In the context of a determination of fraudulent. And the bankruptcy court adopted USIC's “actual fraud” under § 523(a)(2)(A), the First Circuit has argument. Thus there is no reason to reverse the court on referenced the common law definition applied to this term. See this basis. Sauer Inc. v. Lawson (In re Lawson), 791 F.3d 214 (1st Cir.2015) (holding that “actual fraud” under that provision *10 Still, we are compelled to observe that, to the extent the includes fraud effectuated by means other than by fraudulent bankruptcy court relied exclusively on this Puerto Rican statute

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 23 Lopez-Munoz, --- B.R. ---- (2016) for its analysis, such reliance would be misplaced. Such a its position: (1) the Debtor transferred assets he wholly constrained definition of fraud is at odds with the broader scope owned to Hi Speed and to the Familia Trust, of which he of § 1104(a)(1), as USIC correctly argued in its motion for the was the sole beneficiary, and, thus his (alleged) “scheme” appointment of a trustee and now argues on appeal. was based on insider relationships between the parties; (2) Nonetheless, we conclude the court's application of this statute as the sole beneficiary of the trust, the Debtor had exclusive to find the transfers presumptively fraudulent, thereby shifting right to use and control the two gas stations and the lease to the Debtor the burden to rebut the presumption and prove that proceeds; (3) the Debtor received no consideration when he no fraud had in fact occurred, did not prejudice USIC. To the “donated” the Hi Speed shares to the trust; (4) the Debtor contrary, the use of such presumption was favorable to USIC in admitted he donated his Hi Speed shares to the trust while the presentation of its case (at least initially). Where USIC finds in financial distress and facing pressure from an aggressive fault is in the bankruptcy court's determination that the Debtor creditor seeking to reach the assets in issue; (5) all of these rebutted the presumption. Focusing in this appeal on the broader transactions took place fewer than six months before the meaning of “fraud” encompassed by § 1104(a)(1), USIC Debtor's bankruptcy filing; and (6) the Debtor attempted contends that the facts in this case reveal indicia of fraud that (allegedly) to keep the valuable Puma leases a secret from establish the Debtor's fraudulent intent, citing Marrama v. his creditors. Citizens Bank of Mass. (In re Marrama), 445 F.3d 518, 522 (1st Cir.2006), and Cox v. Villani (In re Villani), 478 B.R. 51, 60 Although the bankruptcy court did not specifically discuss (1st Cir. BAP 2012) (applying the standard set forth in the badges of fraudulent intent set forth in Marrama,6 we Marrama). We find those arguments unavailing. are satisfied from our review of the record, including the trial transcript, that the bankruptcy court fully considered all In Marrama, a case involving a proceeding under § 727 to deny the evidence adduced at the two-day hearing and the totality the debtor a discharge, the First Circuit observed that a debtor of the circumstances in reaching its factual findings and its rarely leaves direct evidence of fraudulent intent and, therefore, legal conclusions. Its decision contains more than fourteen intent to defraud a creditor can be proved by circumstantial pages of factual findings, each supported by a reference to evidence. In re Marrama, 445 F.3d at 522. The First Circuit the hearing transcript, the record, or both. We find no abuse turned to the Supreme Court's guidance that courts should of discretion in the bankruptcy court's determination that consider the following “objective indicia” when weighing USIC failed to refute the Debtor's evidence that he did not evidence of fraudulent intent: intend to defraud his creditors and the estate suffered no loss as a result of the pre-petition transfers. Similarly, we find no (1) insider relationships between the parties; (2) reversible error in the bankruptcy court's acceptance of the the retention of possession, benefit or use of the Debtor's explanations as credible and reasonable, finding property in question; (3) the lack or inadequacy of that the Debtor did not conceal information and any consideration for the transfer; (4) the financial incorrect information provided by the Debtor was condition of the [debtor] both before and after the unintentional and not done with the intent to deceive or transaction at issue; (5) the existence or mislead his creditors. cumulative effect of the pattern or series of transactions or course of conduct after the incurring of the debt, onset of financial *11 To make such findings, the bankruptcy court took into difficulties, or pendency or threat of suits by account the largely unrebutted testimony of CPA Barroso and creditors; (6) the general chronology of the events her expert opinions based on her review of the Debtor's and transactions under inquiry; and (7) an attempt schedules and statement of financial affairs, disclosure by the debtor to keep the transfer a secret. statements, financial statements of both the Debtor and Hi Speed, which included the Puma leases, and her analysis of the Id. (quoting Groman v. Watman (In re Watman), 301 F.3d 3, recent cash flows from the operations of the two gas stations. 8 (1st Cir.2002)). She testified that the Debtor did not falsify or conceal material financial information and disclosed the pre-petition transactions In the present case, USIC maintains that most of the on the statement of financial affairs, properly omitting them objective indicia of fraudulent intent set forth in Marrama from the bankruptcy asset schedules because he did not own are present. It highlights the following events in support of them on the petition filing date. She noted that the Debtor's

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 24 Lopez-Munoz, --- B.R. ---- (2016) amended Schedule A (real property) did not list the Puma lease attached copies of the rescission deed and the Puma leases for the Debtor's Station because that schedule relates only to as exhibits to the latter. USIC did not submit evidence that owned real estate, not the value of leases, and amended would cause us to conclude that the court's credibility Schedule G (executory contracts and leases) included the Puma assessments and factual findings were clearly erroneous. lease. Based on her review, she unequivocally testified that the Debtor had not diverted any assets to the detriment to the estate Finally, USIC takes issue with the bankruptcy court's and all rental income from the Puma leases was traceable and reliance on CPA Barroso's expert opinion that the transfers used to maintain the Debtor's business operations. She also had no material effect upon the bankruptcy estate as the confirmed, as the Debtor testified, that prior to the bankruptcy basis for denying the appointment of a trustee. According to filing he had been unable to maintain his operations and pay his USIC, the loss of value to the estate is not a prerequisite to creditors. finding cause for the appointment of a trustee where there is fraud and dishonesty by a debtor-in-possession. Additionally, the court found credible the Debtor's explanations that his pre-petition actions were taken to protect the rents from While an argument could be made that an action to recover the Puma leases and the gas stations for the benefit of all a fraudulent transfer may be defeated where there is proof creditors in the face of aggressive collection actions by one that the bankruptcy estate was not actually diminished by creditor for a debt relating to the failed operations of Western the transfer, this is not determinative for the § 1104(a)(1) Petroleum. It accepted as uncontroverted and corroborated by analysis (or for that matter the considerations under § CPA Barroso, the Debtor's testimony that after the transfer of 1104(a)(2)). See, e.g., Grayson Consulting, Inc. v. the Debtor's Station to Hi Speed, Hi Speed's monthly payments Wachovia Securities, LLC (In re Derivium Capital, LLC), to him for rent and salary were used to pay his creditors and 716 F.3d 355 (4th Cir.2013). Here the bankruptcy court's living expenses. Although it presses its arguments vigorously, discussion of the lack of a monetary loss to the estate as a USIC simply presented no evidence to support its claims that result of such transfers was by no means the sole factor it those payments were excessive or unnecessary. Unfortunately considered. Nor can its finding of lack of intent by the for USIC, vehemence is no substitute for evidence. Debtor to conceal such transfers or to defraud or deceive his creditors be overlooked. There is no clear error in the court's The court declined to make the inferences USIC argued adoption of CPA Barroso's expert opinion that there was no should be made because of what it maintained was monetary loss to the estate and no assets transferred outside deliberate concealment of material information and the reach of creditors because the rents were used to pay the misleading information by the Debtor from the outset of the mortgages against the two gas stations. USIC submitted no case. The testimony of the Debtor and CPA Barroso testimony or rebuttal evidence to persuade the court to reject adequately support the bankruptcy court's contrary findings her testimony or her conclusions as an experienced certified and conclusions that USIC failed to prove its contentions. public and forensic accountant. Again the court found reasonable the Debtor's explanation for the incorrect listing of the dates of the transfers in the *12 After carefully reviewing the evidence, or lack thereof, statement of financial affairs as an unintentional mistake we find no clear error by the bankruptcy court and no abuse which he corrected in the disclosure statement. It also of discretion in its determination that cause to appoint a accepted as credible the Debtor's testimony that in chapter 11 trustee under § 1104(a)(1) was lacking. completing his schedules and statement of financial affairs and discussing the value of Hi Speed at the Creditors' Meeting he had relied on an amended 2010 financial B. Interest of Creditors and the Estate Under § 1104(a)(2). [17] [18] [19] Our review must now shift to the second prong of statement showing a negative value for Hi Speed. And the § 1104(a) for divesting a debtor-in-possession of control of the Debtor emphasized that immediately after he rescinded the case. A bankruptcy court may appoint a trustee if it finds such transfers, he amended his schedules and the disclosure appointment to be in the interests of the creditors and other statement to include the Debtor's Station, the Puma lease, interests of the estate. See 11 U.S.C. § 1104(a)(2); see also In re the Hi Speed shares, the rental income from the Debtor's Sundale, Ltd., 400 B.R. at 901 (“Unlike § 1104(a)(1), § Station, and the operating expenses associated with the 1104(a)(2) does not require a finding of fault; the court may administration of the Puma and Hi Speed leases, and appoint a trustee even if no ‘cause’ exists.”) (citation omitted)

(internal quotation omitted). A court's review under § rescission period, less the monthly mortgage payments of 1104(a)(2) is materially different from that under the first $10,000 to BPPR, leaving a monthly surplus of $7,500. USIC subsection of 1104(a). Petit, 182 B.R. at 69. Its standards for the acknowledges Hi Speed would be entitled to a $5,000 credit appointment of a trustee are more flexible than those under for the purchase price paid for the Debtor's Station, thereby subsection (a) (1). In re LHC, LLC, 497 B.R. at 293; Tradex, resulting in a net amount due the estate of $119,500. 339 B.R. at 829. This application “entails the exercise of a spectrum of discretionary powers and equitable *13 This challenge fails because there is no clear error in the considerations.” Petit, 182 B.R. at 69 (citation omitted) (internal bankruptcy court's finding that there was no such potential quotation omitted). “[C]ourts must determine on a case-by-case cause of action against Hi Speed. It concluded that “CPA basis whether the circumstances of each bankruptcy requires the Barroso's testimony that the asset transfers had no material appointment of a trustee under subsection (a) effect upon the estate remains in the court's view (2).” Id. (citation omitted). uncontested,” and “USIC did not meet its burden of proof that such cause of action exists.” CPA Barroso testified [20] [21] [22] The considerations require a balancing of unambiguously that in fact there was no “monthly surplus of competing interests. “Determining whether appointment of a $7,500” because Hi Speed expended all of the monthly rental trustee is in the interests of the various constituencies of the income from Puma to meet its monthly business expenses estate is fact-specific and requires the court to balance the consisting of the BPPR mortgage, the cost incurred for the benefits of such an appointment against its anticipated costs.” administration of the Puma lease, and the payments to the In re LHC, LLC, 497 B.R. at 293 (citation omitted). Some Debtor for the rental of the office space and his salary. USIC factors to be considered are: (1) the trustworthiness of the did not offer any evidence to contradict this testimony. And debtor, (2) the past and present performance of the debtor and although it vigorously argued that these expenses, other than the prospects for rehabilitation, (3) the confidence level of the mortgage expense, were inflated, fabricated, or completely creditors and the business community in the debtor, and (4) unnecessary, it failed to submit any evidence to support its whether the benefits of appointing a trustee outweigh the assertions. associated costs. Id. (citation omitted); Taub v. Taub (In re Taub), 427 B.R. 208, 227 (Bankr.E.D.N.Y.2010). In many Lastly, the bankruptcy court did not abuse its discretion in instances the bankruptcy court's considerations relating to cause concluding that USIC's other arguments were insufficient to under § 1104(a)(1) and the best interests of the creditors under meet its burden of proof for the appointment of a trustee. Once § 1104(a)(2) are “intertwined and dependent upon the same again, USIC failed to offer sufficient evidence to establish that facts.” In re Grasso, 490 B.R. 500, 506 (Bankr.E.D.Pa.2013). the costs of a trustee outweighed the benefits to be gained by the estate. And despite its arguments to the court in its opening Circumstances in which courts have appointed trustees statement at the evidentiary hearing, USIC never delivered the under § 1104(a)(2), as well as under (a)(1), in the absence evidence to demonstrate that the value of the assets if sold by a of fraud or dishonesty are when the debtor-in-possession trustee would generate funds sufficient to suffers from conflicts of interest which impact its ability to fulfill its fiduciary duties. See In re Taub, 427 B.R. at 227 Footnotes (citing In re Ridgemour Meyer Props., LLC, 413 B.R. 101, pay the secured creditors in full and leave a balance for other 113 (Bankr.S.D.N.Y.2008)). creditors. Nor did it offer evidence that the Debtor's rehabilitation prospects were in jeopardy, or that the [23] USIC argues that a conflict of interest exists in this case business community and the other creditors lacked justifying the appointment of a trustee in the best interest of confidence in the Debtor and his ability to reorganize his creditors. To support its argument it asserts that the Debtor, financial affairs to fairly address their claims. See In re as the sole owner of Hi Speed, has failed to fulfill its fiduciary LHC, LLC, 497 B.R. at 293. duties by not pursuing Hi Speed after the rescission of the transfers for the turnover of $119,500, plus interest, which it Thus, the bankruptcy court did not abuse its discretion in was obligated to remit to the estate under P.R. Laws Ann. tit. determining that USIC did not meet its burden of 7 31, § 3496. It calculates this sum based on Hi Speed's receipt demonstrating that the appointment of a trustee was in the of monthly rent of $17,500 from Puma during the pre- best interests of creditors and the estate.

CONCLUSION a trustee was not warranted under § 1104(a)(1) or § 1104(a)(2). Consequently, we AFFIRM. In view of the evidence submitted at the two-day hearing and the detailed findings of fact and conclusions of law adequately supported by the record, USIC has not persuaded All Citations us that the bankruptcy court committed reversible error or abused its discretion in determining that the appointment of --- B.R. ----, 2016 WL 4061144

1 Unless expressly stated otherwise, all references to property; (2) the transferor sells his property to another who is “Bankruptcy Code” or to specific statutory sections shall cognizant of the judgment or of the attachment; and (3) a be to the Bankruptcy Reform Act of 1978, as amended, creditor is prejudiced by the conveyance and has no other legal 11 U.S.C. §§ 101, et seq. remedy to obtain reparation for the injury. The two presumptions established by this section “do not 2 Due to prolonged discovery disputes between the exhaust the possible cases of fraud.” Fed. Deposit Ins. Corp. parties and multiple continuances, the evidentiary v. Martinez Almodovar, 671 F.Supp. 851, 879 (D.P.R.1987). hearing did not take place until almost a year after USIC “The trier of the fact exercising judgment free of the legal filed its request for a chapter 11 trustee. presumptions should weigh the most obvious signs of fraud, 3 USIC intended to present CPA Villarini as an expert such as the haste with which the alienation is effected, the witness in its case in chief, but at a prior hearing the insolvency of the debtor, the relations of family, intimacy or bankruptcy court ordered that USIC was precluded confidence with the acquirer, the state of the business affairs from presenting this expert witness in its case in chief of the transferor and judicial claims pending against him.” Id. because of such omission. (citing De Jesús v. Carrero, 112 D.P.R. 631, 636– 37 (1982)); Thus, at the evidentiary hearing, CPA Villarini could only testify see also Union de Periodistas, Artes Graficas y Ramas Anexas as a rebuttal witness. v. Irving Paper Ltd. (In re El Mundo Corp.), 208 B.R. 781, 783 (D.P.R.1997). 4 USIC first referenced this Puerto Rican statute in its post-trial memorandum and relied on it exclusively for 6 Nor are we suggesting it needed to specifically address the proposition that the pre-petition assets transfers each of these badges of fraud. USIC offers no case law were presumptively fraudulent. establishing that a bankruptcy court must specifically address each of the indicia of fraud set forth in Marrama 5 This section, entitled “Contracts presumed in fraud of when determining whether there is sufficient evidence creditors,” provides: to support a finding of cause under § 1104(a)(1). Contracts by virtue of which the debtor alienates property, for [inadequate] consideration, are presumed to be executed in 7 Although USIC did not assert in its motion for the fraud of creditors. appointment of a trustee that the Debtor's estate has a Alienations for valuable considerations, made by persons colorable claim against Hi Speed for monies it collected against whom a condemnatory judgment, in any [court], has after the pre-petition transfers of the Debtor's Station, it been previously rendered, or a writ [for] seizure of property has asserted the argument at the evidentiary hearing and in been issued, shall also be presumed fraudulent. P.R. Laws its post-trial memorandum of law. Ann. tit. 31, § 3498. This section appears under the part of the

Puerto Rico Civil Code that addresses Rescission of Contracts, and establishes that contracts executed in fraud of creditors End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. may be rescinded. The first part of § 3498 addresses transfers for little or no consideration; those based on “duty, moral obligation, affection

[or] generosity.” Santiago v. Sepulveda Figueras (In re Sepulveda Figueras), 193 B.R. 118, 120 n. 1 (Bankr.D.P.R.1996) (citation omitted) (internal quotations omitted). The second part of § 3498 addresses transfers for consideration. The second part provides that transfers for “valuable consideration” are presumed in fraud of creditors if:

(1) a condemnatory judgment has been rendered against the transferor or a writ of attachment has been issued against his

United States Court of Appeals, Second switch creditors would be bound by the judgment against other Circuit. creditors, 531 B.R. 354. Following entry of judgment against all creditors, judgment was certified for direct appeal, and In the Matter of: Motors Liquidation successor, trust, and four groups of creditors appealed. Company, Debtor. Celestine Elliott, Lawrence Elliott, Berenice Summerville, Creditors– Appellants–Cross– Appellees, Holdings: The Court of Appeals, Chin, Circuit Judge, held Sesay and Bledsoe Plaintiffs, Ignition that: Switch Plaintiffs, Ignition Switch Pre– Closing Accident Plaintiffs, Doris Powledge [1] the bankruptcy court had jurisdiction to interpret Phillips, Appellants–Cross–Appellees, andenforce its sale order; Groman Plaintiffs, Appellants, v. [2] addressing an issue of apparent first impression forthe court, a bankruptcy court may approve a sale “free General Motors LLC, Appellee–Cross–Appellant, and clear” of successor liability claims if those claims flow Wilmington Trust Company, from Chapter 11 debtor's ownership of the sold assets, if the Trustee–Appellee–Cross–Appellant, claims arose from a right to payment that arose prepetition Participating Unitholders, Creditors– or resulted from prepetition conduct fairly giving rise to the Appellees–Cross–Appellants.1 claims, and if there was some contact or relationship between debtor and claimant such that claimant is Docket Nos. 15-2844-bk(L), identifiable; 15-2847-bk(XAP), 15-2848-bk(XAP) | [3] here, the sale order covered pre-closing accident August Term 2015 claimsand economic loss claims arising from the ignition | switch defect or other defects, but not independent claims Argued: March 15, 2016 relating only to successor's conduct and used car purchasers' | claims; Decided: July 13, 2016 [4] the bankruptcy court did not clearly err in finding Synopsis thatdebtor knew or reasonably should have known about the Background: Creditors with claims arising from ignition ignition switch defect prior to bankruptcy, and so, as a switch defects in certain models of vehicles manufactured by matter of procedural due process, creditors with ignition Chapter 11 debtor brought adversary proceeding against switch claims were entitled to notice by direct mail or some successor corporation which had purchased debtor's assets at equivalent, not mere publication notice; sale outside the ordinary course of business, asserting economic losses, and successor moved to enforce “free and [5] even assuming that prejudice is an element of clear” language in sale order to enjoin the claims. Creditors aprocedural due process claim when there is inadequate with claims arising from defects other than ignition switch notice of a proposed “free and clear” sale, creditors here filed motion challenging the bankruptcy court's jurisdiction to demonstrated prejudice, and so enforcement of the sale enforce sale order, and creditors with ignition-switch claims order so as to bar ignition switch claims would violate objected to enforcement on due process grounds. The United procedural due process; and States Bankruptcy Court for the Southern District of New York, Robert E. Gerber, J., entered orders denying non- [6] the bankruptcy court's ruling on equitable ignition switch creditors' motion, 514 B.R. 377, enforcing mootnesswas advisory. “free and clear” provision of sale order to enjoin most ignition switch claims against successor and determining that relief for Affirmed in part, reversed in part, vacated in part, and any late claims against debtor's unsecured creditors trust was remanded. equitably moot, 529 B.R. 510, and clarifying that non-ignition

ON APPEAL FROM THE UNITED Ellis LLP, Chicago, Illinois, for Appellee–Cross–Appellant STATES BANKRUPTCY COURT FOR THE General Motors LLC. SOUTHERN DISTRICT OF NEW YORK Appeal from a judgment of the United States Bankruptcy Court Adam H. Offenhartz, Aric H. Wu, Lisa H. Rubin, Gabriel for the Southern District of New York (Gerber, J.), enforcing K. Gillett, Gibson, Dunn & Crutcher LLP, New York, New a “free and clear” provision of a sale order to enjoin claims York, for Trustee–Appellee–Cross–Appellant Wilmington against a debtor's successor corporation and concluding under Trust Company. the equitable mootness doctrine that assets of the debtor's PRATIK A. SHAH, Akin Gump Strauss Hauer & Feld LLP, unsecured creditors' trust would be protected from late-filed Washington, D.C., and Daniel H. Golden, Deborah J. claims. On appeal, plaintiffs challenge the bankruptcy court's Newman, Akin Gump Strauss Hauer & Feld LLP, New rulings that: (1) it had jurisdiction, (2) the sale order covered York, New York, for Creditors–Appellees–Cross– their claims, (3) enforcement of the sale order would not Appellants Participating Unitholders. violate procedural due process, and (4) relief for any late-filed claims would be barred as equitably moot. Before: Straub, Chin, and Carney, Circuit Judges.

Attorneys and Law Firms Opinion

GARY PELLER, Washington, D.C., for Creditors– Chin, Circuit Judge: Appellants–Cross–Appellees Celestine Elliott, Lawrence Elliott, and Berenice Summerville, and Appellants–Cross– *1 On June 1, 2009, General Motors Corporation (“Old Appellees Sesay and Bledsoe Plaintiffs. GM”), the nation's largest manufacturer of automobiles and the creator of such iconic American brands as Chevrolet and STEVEN W. BERMAN (Andrew M. Volk, on the brief), Cadillac, filed for bankruptcy. During the financial crisis of Hagens Berman Sobol Shapiro LLP, Seattle, Washington, and 2007 and 2008, as access to credit tightened and consumer Elizabeth J. Cabraser, Lieff Cabraser Heimann & Bernstein, spending diminished, Old GM posted net losses of $70 LLP, San Francisco, California, and Rachel J. Geman, Lieff billion over the course of a year and a half. The U.S. Cabraser Heimann & Bernstein, LLP, New York, New York, Department of the Treasury (“Treasury”) loaned billions of and Edward S. Weisfelner, David J. Molton, Howard S. Steel, dollars from the Troubled Asset Relief Program (“TARP”) Brown Rudnick LLP, New York, New York, and Sander L. to buy the company time to revamp its business model. Esserman, Stutzman, Bromberg, Esserman & Plifka, P.C., When Old GM's private efforts failed, President Barack Dallas Texas, for Appellants–Cross–Appellees Ignition Obama announced to the nation a solution—“a quick, Switch Plaintiffs. surgical bankruptcy.”2 Old GM petitioned for Chapter 11 WILLIAM P. WEINTRAUB (Gregory W. Fox, on the brief), bankruptcy protection, and only forty days later the new Goodwin Procter LLP, New York, New York, for Appellants– General Motors LLC (“New GM”) emerged. Cross–Appellees Ignition Switch Pre–Closing Accident Plaintiffs. This case involves one of the consequences of the GM bankruptcy. Beginning in February 2014, New GM began Joshua P. Davis, Josh Davis Law Firm, Houston, Texas, for recalling cars due to a defect in their ignition switches. The Appellant–Cross–Appellee Doris Powledge Phillips. defect was potentially lethal: while in motion, a car's ignition could accidentally turn off, shutting down the ALEXANDER H. SCHMIDT, Wolf Haldenstein Adler engine, disabling power steering and braking, and Freeman & Herz LLP, New York, New York, and deactivating the airbags. Jonathan L. Flaxer, Golenbock Eiseman Assor Bell & Peskoe LLP, New York, New York, for Appellants Groman Plaintiffs. Many of the cars in question were built years before the GM bankruptcy, but individuals claiming harm from the ignition ARTHUR J. STEINBERG (Scott Davidson, on the brief), switch defect faced a potential barrier created by the King & Spalding LLP, New York, New York, and Merritt bankruptcy process. In bankruptcy, Old GM had used 11 E. McAlister, King & Spalding LLP, Atlanta, Georgia, and U.S.C. § 363 of the Bankruptcy Code (the “Code”) to sell its Edward L. Ripley, King & Spalding LLP, Houston, Texas, assets to New GM “free and clear.” In plain terms, where and Richard C. Godfrey, Andrew B. Bloomer, Kirkland &

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 29 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 individuals might have had claims against Old GM, a “free and company also purchased parts from over eleven thousand clear” provision in the bankruptcy court's sale order (the “Sale suppliers and marketed through roughly six thousand Order”) barred those same claims from being brought against dealerships. A disorderly collapse of Old GM would have New GM as the successor corporation. far-reaching consequences.

Various individuals nonetheless initiated class action lawsuits After Congress declined to bail out Old GM, President against New GM, asserting “successor liability” claims and George W. Bush announced on December 19, 2008 that the seeking damages for losses and injuries arising from the executive branch would provide emergency loans to help ignition switch defect and other defects. New GM argued that, automakers “stave off bankruptcy while they develop plans because of the “free and clear” provision, claims could only be for viability.”5 In Old GM's case, TARP loaned $13.4 brought against Old GM, and not New GM. billion on the condition that Old GM both submit a business plan for long-term viability to the President no later than On April 15, 2015, the United States Bankruptcy Court for the February 17, 2009 and undergo any necessary revisions no Southern District of New York (Gerber, J.) agreed and later than March 31, 2009. If the President found the enforced the Sale Order to enjoin many of these claims against business plan unsatisfactory, the TARP funds would New GM. Though the bankruptcy court also determined that become due and payable in thirty days, rendering Old GM these plaintiffs did not have notice of the Sale Order as insolvent and effectively forcing it into bankruptcy. required by the Due Process Clause of the Fifth Amendment, the bankruptcy court denied plaintiffs relief from the Sale On March 30, 2009, President Obama told the nation that Order on all but a subset of claims. Finally, the bankruptcy 6 court invoked the doctrine of equitable mootness to bar relief Old GM's business plan was not viable. At the same time, for would-be claims against a trust established in bankruptcy the President provided Old GM with another $6 billion loan court to pay out unsecured claims against Old GM (“GUC and sixty more days to revise its plan along certain Trust”).3 parameters. President Obama also reassured the public:

But just in case there's still nagging *2 The bankruptcy court entered judgment and certified the doubts, let me say it as plainly as I 4 judgment for direct review by this Court. Four groups of can: If you buy a car from Chrysler plaintiffs appealed, as did New GM and GUC Trust. We or General Motors, you will be able affirm, reverse, and vacate in part the bankruptcy court's to get your car serviced and repaired, decision to enforce the Sale Order against plaintiffs and vacate just like always. Your warranty will as advisory its decision on equitable mootness. be safe. In fact, it will be safer than it's ever been, because starting today, the United States Government will BACKGROUND stand behind your warranty.7

I. Bailout As the President stood behind the reliability of GM cars, In the final two quarters of 2007, as the American economy pledging another $600 million to back all warranty suffered a significant downturn, Old GM posted net losses coverage, bankruptcy remained a stark possibility.8 of approximately $39 billion and $722 million. General Motors Corp., Annual Report (Form 10–K) 245 (Mar. 5, 2009). In 2008, it posted quarterly net losses of II. Bankruptcy approximately $3.3 billion, $15.5 billion, $2.5 billion, and *3 The federal aid did not succeed in averting bankruptcy. $9.6 billion. Id. In a year and a half, Old GM had managed Old GM fared no better in the first quarter of 2009—posting to hemorrhage over $70 billion. on May 8, 2009 a $5.9 billion net loss. General Motors Corp., Quarterly Report (Form 10– Q) 57 (May 8, 2009). The possibility of Old GM's collapse alarmed many. Old But entering bankruptcy posed a unique set of problems: Old GM employed roughly 240,000 workers and provided GM sought to restructure and become profitable again, not pensions to another 500,000 retirees. Id. at 19, 262. The to shut down; yet if Old GM lingered in bankruptcy too long,

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 30 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 operating expenses would accumulate and consumer Second, there would be New GM, a company owned confidence in the GM brand could deteriorate, leaving Old predominantly by Treasury (over sixty percent). As GM no alternative but to liquidate and close once and for all. proposed, New GM would acquire from Old GM On June 1, 2009, with these risks in mind, Old GM substantially all of its business—what one might commonly petitioned for Chapter 11 bankruptcy protection in the think of as the automaker “GM.” But New GM would not United States Bankruptcy Court for the Southern District of take on all of Old GM's liabilities. The Code allows a § 363 New York. sale “free and clear of any interest in such property.” 11 U.S.C. § 363(f). The proposed sale order provided that New GM would acquire Old GM assets “free and clear of all A. Mechanics of the § 363 Sale liens, claims, encumbrances, and other interests of any kind The same day, Old GM filed a motion to sell itself to New or nature whatsoever, including rights or claims based on GM (also dubbed “Vehicle Acquisition Holdings LLC” or any successor or transferee liability.” J. App. 276. Other “NGMCO, Inc.”), complete with a 103–page draft sale than a few liabilities that New GM would assume as its own, agreement and 30–page proposed sale order. this “free and clear” provision would act as a liability shield to prevent individuals with claims against Old GM from [1] [2] Through this proposed sale, Old GM was attempting suing New GM. Once the sale closed, the “bankruptcy” not a traditional Chapter 11 reorganization, but a transaction would be done: New GM could immediately begin pursuant to 11 U.S.C. § 363—a less common way of effecting operating the GM business, free of Old GM's debts. a bankruptcy. See, e.g., In re Lionel Corp., 722 F.2d 1063, 1066–70 (2d Cir. 1983) (explaining the history of § 363). The *4 Third, Old GM would remain. The proposed sale would usual Chapter 11 reorganization follows set procedures: the leave Old GM with some assets, including $1.175 billion in company entering bankruptcy (the “debtor”) files a cash, interests in the Saturn brand, and certain real and reorganization plan disclosing to creditors how they will be personal property. Old GM would also receive consideration treated, asks those creditors to vote to accept the plan, and then from New GM, including a promise to repay Treasury and emerges from bankruptcy with its liabilities restructured along Canadian government loans used to finance the business 9 certain parameters. See 11 U.S.C. §§ 1121–1129. through bankruptcy and a tenpercent equity stake in New This jostling can take years.10 In contrast in a § 363 sale of GM. Old GM would retain, however, the bulk of its old liabilities. substantially all assets, the debtor does not truly “reorganize.” Instead, it sells its primary assets to a Fourth, Old GM would liquidate. Though liquidation is not successor corporation, which immediately takes over the formally part of a § 363 sale, the sale would result in two business. See Fla. Dep't of Revenue v. Piccadilly Cafeterias, GM companies. Old GM would disband: it would rename Inc., 554 U.S. 33, 37 n. 2, 128 S.Ct. 2326, 171 L.Ed.2d 203 itself “Motors Liquidation Company” and arrange a plan for (2008). As evidenced by the GM bankruptcy, a § 363 sale liquidation that addressed how its remaining liabilities can close in a matter of weeks. would be paid. See 11 U.S.C. § 1129(a)(11). Thus, while New GM would quickly emerge from bankruptcy to operate [3] The proposed sale was, in effect, a complex transaction the GM business, Old GM would remain in bankruptcy and made possible by bankruptcy law. GM's sale would proceed undergo a traditional, lengthy liquidation process. in several parts. First, Old GM would become a “debtor-in- possession” under the Code. See 11 U.S.C. § 1101. Where a trustee might otherwise be appointed to assert outside control B. Sale Order of the debtor, id. § 1104, a debtor-in-possession continues One day after Old GM filed its motion, on June 2, 2009, the operating its business, id. §§ 1107, 1108. See In re Smart bankruptcy court ordered Old GM to provide notice of the World Techs., LLC, 423 F.3d 166, 174 n. 10 (2d Cir. 2005) proposed sale order. Old GM was required to send direct mail (“In a chapter 11 case, ... the debtor usually remains in control notice of its proposed sale order to numerous interested parties, of the estate as the ‘debtor in possession.’ ”). Still in control, including “all parties who are known to have asserted any lien, Old GM could seek the bankruptcy court's permission to sell claim, encumbrance, or interest in or on [the to-be-sold portions of its business. See 11 U.S.C. § 363(b)(1). assets],” and to post publication notice of the same in major publications, including the Wall Street Journal and New York

Times. J. App. 385– 86. The sale notice specified that against Old GM would be paid: secured claims, other interested parties would have until June 19, 2009 to submit to priority claims, and environmental claims made by the the bankruptcy court responses and objections to the proposed government would be paid in full; unsecured claims (claims sale order. without an assurance of payment, such as in the form of a lien on property) would not. The bankruptcy court proceeded to hear over 850 objections to the proposed sale order over the course of three days, between Instead, under the plan, Old GM would establish GUC June 30 and July 2, 2009. On July 5, 2009, after addressing and Trust, which would be administered by the Wilmington dismissing the objections, the bankruptcy court approved the Trust Company. Once GUC Trust (and other like trusts) was § 363 sale. In re General Motors Corp. (“GM”), 407 B.R. 463 established, Old GM would dissolve. (Bankr. S.D.N.Y. 2009) (Gerber, J.). Among those objections were arguments against the imposition of a “free and clear” GUC Trust would hold certain Old GM assets—including provision to bar claims against New GM as the successor to New GM stock and stock warrants that could be used to Old GM made by consumer organizations, state attorneys purchase shares at fixed prices, along with other financial general, and accident victims. instruments. Creditors with unsecured claims against Old GM would receive these New GM securities and “units” of Next, the bankruptcy court issued the Sale Order, which GUC Trust (the value of which would be pegged to the entered into effect the final sale agreement between Old GM residual value of GUC Trust) on a pro rata basis in and New GM (the “Sale Agreement”). In the Sale Agreement, satisfaction of their claims. The Sale Agreement also New GM assumed fifteen categories of liabilities. As relevant imposed an “accordion feature” to ensure that GUC Trust here, New GM agreed to assume liability for accidents after would remain adequately funded in the event that the the closing date for the § 363 sale and to make repairs pursuant amount of unsecured claims grew too large. The accordion to express warranties issued in connection with the sale of GM feature provided that if “the Bankruptcy Court makes a cars—two liability provisions present in the initial draft sale finding that the estimated aggregate allowed general agreement. The Sale Agreement also provided a new unsecured claims against [Old GM's] estates exceed $35 provision—resulting from negotiations among state attorneys [billion], then [New GM] will ... issue 10,000,000 additional general, the GM parties, and Treasury during the course of the shares of Common Stock ... to [Old GM].” J. App. 1699. sale hearing—that New GM would assume liability for any Lemon Law claims.11 With these exceptions, New GM would On March 29, 2011, the bankruptcy court confirmed this be “free and clear” of any and all liabilities of Old GM. liquidation plan. GUC Trust made quarterly distributions of its assets thereafter. The initial distribution released more than On July 10, 2009, the § 363 sale officially closed, and New seventy-five percent of the New GM securities. GM began operating the automaker business. As a matter of public perception, the GM bankruptcy was over—the On February 8, 2012, the bankruptcy court ordered that no further claims against Old GM and payable by GUC Trust company had exited bankruptcy in forty days.12 would be allowed unless the claim amended a prior claim, was filed with GUC Trust's consent, or was deemed timely filed by C. Liquidation of Old GM the bankruptcy court. As of March 31, 2014, GUC Trust had *5 Meanwhile, Old GM remained in bankruptcy. Over the distributed roughly ninety percent of its New GM securities next several years, the bankruptcy court managed the and nearly 32 million units of GUC Trust; the expected value process of satisfying liabilities that remained with Old GM of unsecured claims against Old GM totaled roughly $32 (i.e., not taken on by New GM). billion, not enough to trigger the accordion feature and involve New GM in the bankruptcy. The GM bankruptcy that began The bankruptcy court set November 30, 2009 as the “bar five years earlier appeared to be approaching its end. date” for any individual or entity to file a proof of claim — that is, to assert a claim as to Old GM's remaining assets. III. Ignition Switch Defect Old GM filed its first Chapter 11 liquidation plan on August On February 7, 2014, New GM first informed the National 31, 2010, and amended it on December 8, 2010 and again Highway Traffic Safety Administration (“NHTSA”) that it on March 29, 2011. The proposed plan provided how claims

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 32 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 would be recalling, among other vehicles, the 2005 Chevrolet braking cut off while the car was in motion, leaving drivers Cobalt. A defect in the ignition switch could prevent airbags to manually maneuver the vehicle, that is, without assistance from deploying. of the car's power steering and braking systems.

A later congressional staff report, which followed four days of Despite customer complaints, and grumblings in the press, testimony by New GM CEO Mary Barra before committees of Old GM classified the moving stall as a “non-safety issue.” the House of Representatives and Senate, described what could Id. at 9711. As Valukas put it, “on a scale of 1 (most severe) happen by referring to an actual tragic accident caused by the to 4 (least severe) ... the problem could have been designated defect:13 In October 2006, three teenagers were riding in a a severity level 1 safety problem, [but] it was not.” Id. 2005 Chevrolet Cobalt when the driver lost control and the car Instead, the moving stall was assigned a severity level of 3. careened off the side of the road. The vehicle flew into a Old GM personnel considered the problem to be a matter of telephone utility box and several trees. The airbags did not customer satisfaction, not safety. These personnel deploy, and two of the teenagers died. apparently also did not then fully realize that when a car shuts off, so do its airbags. But as early as August 2001, at *6 From February until October 2014, New GM would issue least some Old GM engineers understood that turning off over 60 recalls, with the number of affected vehicles in the the ignition switch could prevent airbags from deploying. United States alone surpassing 25 million. New GM hired attorney Anton Valukas of the law firm Jenner & Block to Complaints about the ignition switch continued. Between investigate; he did so and prepared an extensive report (the 2004 and 2005, NHTSA began asking questions about engine stalls. In 2005, several media outlets also reported on “Valukas Report”).14 the stalls. See, e.g., Jeff Sabatini, Making a Case for Keyless Ignitions, N.Y. Times (June 19, 2005). Senior attorneys In 1997, Old GM sold three out of ten cars on the road in North studied the stalls, but considered the risk to be “remote[ ].” America. See General Motors Corp., Annual Report (Form 10– J. App. 9734. At the same time, Old GM's product K) 60 (Mar. 20, 1998). Engineers began developing a new investigations unit recreated the ignition switch's issues by ignition switch that could be used in multiple vehicles across using only a heavy keychain to generate torque. Finally, in the GM brand, first by setting technical specifications for the December 2005, Old GM issued a bulletin to dealers, but switch and then by testing prototypes against those not to customers, warning them that “low ignition key specifications. cylinder torque” could cause cars to turn off. Id. at 9740. The bulletin did not mention that, as a result, cars could stall Throughout testing, which lasted until 2002, prototypes on the road. consistently failed to meet technical specifications. In particular, a low amount of torque could cause the ignition *7 Then came reports of fatalities. In late 2005 through 2006, 15 switch to switch to “accessory” or “off.” A low torque news of deaths from airbag non-deployments in crashes where threshold on an ignition switch would mean that little airbags should have deployed reached the desks of Old GM's force—perhaps even the bump of a stray knee— would be legal team. Around April 2006, Old GM engineers decided on needed to rotate the key in the switch from the “on” position a design change of the ignition switch to increase the torque. to the “accessory” or “off” position. Old GM engineers did so quietly, without changing the ignition switch's part number, a change that would have Near the end of testing, an engineer commented on the signaled that improvements or adjustments had been made. ignition switch's lingering problems in an email: he was “tired of the switch from hell.” J. App. 9696. Three months In February 2007, a Wisconsin state trooper's report made its later, in May 2002, the ignition switch was approved for way into the files of Old GM's legal department: “The two production, despite never having passed testing. front seat airbags did not deploy. It appears that the ignition switch had somehow been turned from the run position to In the fall of 2002, Old GM began producing vehicles with accessory prior to the collision with the trees.” Id. at 9764. the faulty ignition switch. Almost immediately, customers NHTSA similarly brought to Old GM's attention reported complained of moving stalls, sometimes at highway speeds airbag non-deployments. See Transportation Research Center, —instances where the engine and power steering and Indiana University, On– Site Air Bag Non–Deployment

Investigation 7 (Apr. 25, 2007, rev. Mar. 31, 2008). As more personal injuries, make repairs, and follow Lemon Laws, incidents with its cars piled up, Old GM finally drafted an but nothing else. The amount of purportedly barred updated bulletin to dealers warning them of possible “stalls,” liabilities was substantial— an estimated $7 to $10 billion but never sent it out. in economic losses, not to mention damages from pre- closing accidents. Old GM internally continued to investigate. By May 2009, staff had figured out that non-deployment of airbags in these crashes was attributable to a sudden loss of power. They IV. Proceedings Below believed that one of the two “most likely explanation[s] for the *8 On April 21, 2014, Steven Groman and others (the power mode signal change was ... a problem with the Ignition “Groman Plaintiffs”) initiated an adversary proceeding Switch.” J. App. 9783. By June 2009, Old GM engineers had against New GM in the bankruptcy court below, asserting implemented a change to the ignition key, hoping to fix the economic losses arising from the ignition switch defect. The problem once and for all. One engineer lamented that “[t]his same day, New GM moved to enforce the Sale Order to issue has been around since man first lumbered out of [the] sea enjoin those claims, as well as claims in other ignition and stood on two feet.” Id. at 9781. switch actions then being pursued against New GM.

Later, the Valukas Report commented on the general attitude Other plaintiffs allegedly affected by the Sale Order at Old GM. For eleven years, “GM heard over and over from included classes of individuals who had suffered preclosing various quarters—including customers, dealers, the press, and injuries arising from the ignition switch defect (“Pre– their own employees—that the car's ignition switch led to Closing Accident Plaintiffs”), economic losses arising from moving stalls, group after group and committee after the ignition switch defect in Old GM cars (“Ignition Switch committee within GM that reviewed the issue failed to take Plaintiffs”), and damages arising from defects other than the action or acted too slowly. Although everyone had ignition switch in Old GM cars responsibility to fix the problem, nobody took responsibility.” (“Non–Ignition Switch Plaintiffs”).17 Included within the J. App. 9650. Ignition Switch Plaintiffs were individuals who had purchased Old GM cars secondhand after the § 363 sale closed (“Used The Valukas Report recounted aspects of GM's corporate Car Purchasers”). culture. With the “GM salute,” employees would attend action meetings and literally cross their arms and point On appeal, several orders are before us. First, the Non–Ignition fingers at others to shirk responsibility. With the “GM nod,” Switch Plaintiffs filed a motion, asserting, among other things, employees would (again) literally nod in agreement to that the bankruptcy court lacked jurisdiction to enforce the endorse a proposed plan, understanding that they and others Sale Order. On August 6, 2014, the bankruptcy court denied had no intention of following through. Finally, the Report that motion. In re Motors Liquidation Co. (“MLC I”), 514 B.R. described how GM employees, instead of taking action, 377 (Bankr. S.D.N.Y. 2014) (Gerber, J.). would claim the need to keep searching for the “root cause” of the moving stalls and airbag nondeployments. This Second, after receiving further briefing and hearing oral “search for root cause became a basis for doing nothing to argument on the motion to enforce, on April 15, 2015 the resolve the problem for years.” Id. at 9906. bankruptcy court decided to enforce the Sale Order in part and dismiss any would-be claims against GUC Trust because relief Indeed, New GM would not begin recalling cars for ignition would be equitably moot. In re Motors Liquidation Co. (“MLC switch defects until February 2014. Soon after New GM's II”), 529 B.R. 510 (Bankr. S.D.N.Y. 2015) (Gerber, J.). The initial recall, individuals filed dozens of class actions bankruptcy court first determined plaintiffs lacked notice lawsuits, claiming that the ignition switch defect caused consistent with procedural due process. Id. at 540–60. In personal injuries and economic losses, both before and after particular, the bankruptcy court found that the ignition switch 16 the § 363 sale closed. New GM sought to enforce the Sale claims were known to or reasonably ascertainable by Old GM Order, invoking the liability shield to hold New GM “free prior to the sale, and thus plaintiffs were entitled to actual and clear” of various claims. This meant that when it came notice, as opposed to the mere publication notice that they to Old GM cars New GM would pay for post-closing received. Id. at 556–60. The bankruptcy court found, however,

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 34 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 that with one exception plaintiffs had not been “prejudiced” by DISCUSSION this lack of notice—the exception being claims stemming from New GM's own wrongful conduct in concealing defects (so- [4] The Code permits a debtor to sell substantially all of its called “independent claims”). Id. at 560–74. In other words, assets to a successor corporation through a § 363 sale, outside the bankruptcy court held that New GM could not be sued—in of the normal reorganization process. Here, no party seeks to bankruptcy court or elsewhere—for ignition switch claims that undo the sale of Old GM's assets to New GM, as executed 19 otherwise could have been brought against Old GM, unless through the Sale Order. Instead, plaintiffs challenge the those claims arose from New GM's own wrongful conduct. Id. extent to which the bankruptcy court may absolve New GM, at 574– 83. as a successor corporation, of Old GM's liabilities. See generally 3 Collier on Bankruptcy ¶ 363.02[2] (Alan N. In the same decision, the bankruptcy court addressed Resnick & Harry J. Sommer eds., 16th ed. 2013) [hereinafter arguments by GUC Trust that it should not be held as a source “Collier on Bankruptcy”] (noting that “use of a section 363 for relief either. Applying the factors set out in In re sale probably reached its zenith” with the GM bankruptcy). Chateaugay Corp. (“Chateaugay III”), 10 F.3d 944 (2d Cir. In particular, they dispute whether New GM may use the Sale 1993), the bankruptcy court concluded that relief for any late Order's “free and clear” provision to shield itself from claims claims against GUC Trust was equitably moot, as the plan had primarily arising out of the ignition switch defect and other long been substantially consummated. MLC II, 529 B.R. at defects. 583–92. Finally, the bankruptcy court outlined the standard for any future fraud on the court claims. Id. at 592–97. With these The decisions below generate four issues on appeal: (1) the issues resolved, the bankruptcy court certified its decision for bankruptcy court's jurisdiction to enforce the Sale Order, (2) appeal to this Court pursuant to 28 U.S.C. § 158. Id. at 597– the scope of the power to sell assets “free and clear” of all 98. interests, (3) the procedural due process requirements with respect to notice of such a sale, and (4) the bankruptcy court's *9 Third, the bankruptcy court issued another decision after ruling that would-be claims against GUC Trust are equitably the parties disagreed on the form of judgment and other moot. ancillary issues. On May 27, 2015, the bankruptcy court clarified that the Non–Ignition Switch Plaintiffs would be bound by the judgment against the other plaintiffs, but I. Jurisdiction would have seventeen days following entry of judgment to [5] We first address the bankruptcy court's subject matter object. In re Motors Liquidation Co. (“MLC III”), 531 B.R. jurisdiction. New GM argued below that successor liability 354 (Bankr. S.D.N.Y. 2015) (Gerber, J.). The bankruptcy claims against it should be enjoined, and the bankruptcy court left open the question of whether Old GM knew of court concluded as a threshold mater that it had jurisdiction other defects. to enforce the Sale Order. See MLC I, 514 B.R. at 380–83. The Non–Ignition Switch Plaintiffs challenge jurisdiction: On June 1, 2015, the bankruptcy court entered judgment (1) as a whole to enjoin claims against New GM, (2) with against all plaintiffs and issued an order certifying the respect to independent claims, which stem from New GM's judgment for direct appeal. Following briefing by the Non– own wrongful conduct, and (3) to issue a successive Ignition Switch Plaintiffs, on July 22, 2015, the bankruptcy injunction. We review de novo rulings as to the bankruptcy court rejected their objections to the judgment. court's jurisdiction. See In re Petrie Retail, Inc., 304 F.3d 223, 228 (2d Cir. 2002). New GM, GUC Trust, and the four groups of plaintiffs described above—the Groman Plaintiffs, Ignition Switch *10 [6] [7] [8] First, as to jurisdiction broadly, “[t]he Plaintiffs, Non–Ignition Switch Plaintiffs, and Pre– jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute.” Celotex Corp. 18 Closing Accident Plaintiffs—appealed. We turn to these v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d appeals. 403 (1995); see 28 U.S.C. § 1334. Bankruptcy courts may exercise jurisdiction, through referral from the district court, over three broad categories of proceedings: those “arising under title 11” of the Code, those “arising in ... a case under

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 35 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 title 11,” and those “related to a case under title 11.” 28 U.S.C. transferee liability.” J. App. 1621. By making the argument § 157(a). Proceedings “arising under title 11, or arising in a that the bankruptcy court could not enjoin independent case under title 11,” are deemed “core proceedings.” Stern v. claims through the Sale Order, the Non–Ignition Switch Marshall, 564 U.S. 462, 476, 131 S.Ct. 2594, 180 L.Ed.2d 475 Plaintiffs already assume that the bankruptcy court indeed (2011) (quoting 28 U.S.C. § 157(b)). In those proceedings, has jurisdiction to interpret the Sale Order to determine bankruptcy courts retain comprehensive power to resolve whether it covers independent claims and to hear a motion claims and enter orders or judgments. See In re Millenium to enforce in the first place. Seacarriers, Inc., 419 F.3d 83, 96 (2d Cir. 2005). [12] Third, the Non–Ignition Switch Plaintiffs argue that the [9] “[T]he meaning of the statutory language ‘arising bankruptcy court lacked power to issue a socalled successive in’ may not be entirely clear.” Baker v. Simpson, 613 F.3d injunction. In certain parts of the Sale Order, the bankruptcy 346, 351 (2d Cir. 2010). At a minimum, a bankruptcy court's court had included language that successor liability claims “arising in” jurisdiction includes claims that “are not based would be “forever prohibited and enjoined.” J. App. 1649. on any right expressly created by [T]itle 11, but nevertheless, But New GM was not seeking an injunction to stop plaintiffs would have no existence outside of the bankruptcy.” Id. from violating that prior injunction; New GM wanted the (quoting In re Wood, 825 F.2d 90, 97 (5th Cir. 1987)). bankruptcy court to confirm that the Sale Order covered these plaintiffs. In other words, New GM “did not seek a new [10] [11] A bankruptcy court's decision to interpret and injunction but, rather, ‘[sought] to enforce an injunction enforce a prior sale order falls under this formulation of already in place.’ ” In re Kalikow, 602 F.3d 82, 93 (2d Cir. “arising in” jurisdiction. An order consummating a debtor's 2010) (quoting In re Texaco Inc., 182 B.R. 937, 945 (Bankr. sale of property would not exist but for the Code, see 11 S.D.N.Y. 1995)). In such situations, bankruptcy courts have U.S.C. § 363(b), and the Code charges the bankruptcy court jurisdiction to decide a “motion s[eeking] enforcement of a with carrying out its orders, see id. § 105(a) (providing that pre-existing injunction issued as part of the bankruptcy bankruptcy court “may issue any order, process, or judgment court's sale order.” Petrie Retail, 304 F.3d at 230. that is necessary or appropriate to carry out the provisions of this title”). Hence, a bankruptcy court “plainly ha[s] *11 Accordingly, we agree that the bankruptcy court had jurisdiction to interpret and enforce its own prior orders.” jurisdiction to interpret and enforce the Sale Order. See MLC Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151, 129 S.Ct. I, 514 B.R. at 380–83. 2195, 174 L.Ed.2d 99 (2009); see Millenium Seacarriers, 419 F.3d at 96 (“A bankruptcy court retains post-confirmation jurisdiction to interpret and enforce its own orders, II. Scope of “Free and Clear” Provision particularly when disputes arise over a bankruptcy plan of We turn to the scope of the Sale Order. The Sale Order reorganization.” (quoting Petrie Retail, 304 F.3d at 230)). transferred assets from Old GM to New GM “free and clear That is what happened here. The bankruptcy court first of liens, claims, encumbrances, and other interests ..., interpreted the “free and clear” provision that barred including rights or claims ... based on any successor or successor liability claims—a provision that was integral to transferee liability.” J. App. 1621. The bankruptcy court did resolving Old GM's bankruptcy—and then determined not explicitly address what claims were covered by the Sale 20 whether to enforce that provision Order.

Second, the Non–Ignition Switch Plaintiffs specify that the [13] We address the scope of the Sale Order because it bankruptcy court lacked jurisdiction over independent implicates our procedural due process analysis that follows. If claims. Even though the bankruptcy court ultimately did not the Sale Order covers certain claims, then we would have to enjoin independent claims, we address this argument consider whether plaintiffs' due process rights are violated by because it implicates subject matter jurisdiction. In any applying the “free and clear” clause to those claims. If the Sale event, the argument is misguided. The Sale Order, on its Order did not cover certain claims, however, then those claims face, does not bar independent claims against New GM; could not be enjoined by enforcing the Sale Order and due instead, it broadly transfers assets to New GM “free and process concerns would not be implicated. We interpret the clear of liens, claims, encumbrances, and other interests ..., Sale Order de novo to determine what claims are barred. See including rights or claims ... based on any successor or In re Duplan Corp., 212 F.3d 144, 151 (2d Cir. 2000); see also

Petrie Retail, 304 F.3d at 229 (noting instance where may be used to bar a variety of successor liability claims that enforcement first required interpretation of prior order). relate to ownership of property: an “interest” might encompass Coal Act obligations otherwise placed upon a successor purchasing coal assets, In re Leckie Smokeless Coal A. Applicable Law Co., 99 F.3d 573, 581–82 (4th Cir. 1996), travel vouchers [14] The Code allows the trustee or debtor-in-possession to issued to settle an airline's discrimination claims in a sale of “use, sell, or lease, other than in the ordinary course of airline assets, Trans World Airlines, 322 F.3d at 288–90, or a business, property of the estate.” 11 U.S.C. § 363(b)(1). A sale license for future use of intellectual property when that pursuant to § 363(b) may be made “free and clear of any property is sold, FutureSource LLC v. Reuters Ltd., 312 F.3d interest in such property” if any condition on a list of 281, 285 (7th Cir. 2002). See generally Precision conditions is met. Id. § 363(f). “Yet the Code does not define Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 545 the concept of ‘interest,’ of which the property may be sold (7th Cir. 2003) (“[T]he term ‘interest’ is a broad term no free and clear,” 3 Collier on Bankruptcy ¶ 363.06[1], nor does doubt selected by Congress to avoid ‘rigid and technical it express the extent to which “claims” fall within the ambit of definitions drawn from other areas of the law.’ ” (quoting “interests.” Russello v. United States, 464 U.S. 16, 21, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983))). In these instances, courts require “a New GM asserts that In re Chrysler LLC, 576 F.3d 108, 126 relationship between the[ ] right to demand ... payments (2d Cir. 2009), resolved that successor liability claims are from the debtors and the use to which the debtors had put 21 interests. New GM Br. 75. But Chrysler was vacated by their assets.” Trans World Airlines, 322 F.3d at 289. the Supreme Court after it became moot during the certiorari process and remanded with instructions to dismiss the [16] [17] [18] We agree that successor liability claims can be appeal as moot. See Ind. State Police Pension Tr. v. Chrysler “interests” when they flow from a debtor's ownership of LLC, 558 U.S. 1087, 130 S.Ct. 1015, 175 L.Ed.2d 614 transferred assets. See 3 Collier in Bankruptcy ¶¶ 363.06[1], (2009). The Supreme Court vacated Chrysler pursuant to [7]; Trans World Airlines, 322 F.3d at 289. But successor United States v. Munsingwear, Inc., 340 U.S. 36, 41, 71 liability claims must also still qualify as “claims” under S.Ct. 104, 95 L.Ed. 36 (1950), which “prevent[s] a Chapter 11. Though § 363(f) does not expressly invoke the judgment, unreviewable because of mootness, from Chapter 11 definition of “claims,” see 11 U.S.C. § 101(5), it spawning any legal consequences.” See Russman v. Bd. of makes sense to “harmonize” Chapter 11 reorganizations and § Educ. of Enlarged City Sch. Dist., 260 F.3d 114, 121– 22 n. 363 sales “to the extent permitted by the statutory language.” 2 (2d Cir. 2001) (“[V]acatur eliminates an appellate Chrysler, 576 F.3d at 125; see Lionel, 722 F.2d at 1071 precedent that would otherwise control decision on a (“[S]ome play for the operation of both § 363(b) and Chapter contested question throughout the circuit.”). We had not 11 must be allowed for.”).23 Here, the bankruptcy court's addressed the issue before Chrysler, and now that case is no power to bar “claims” in a quick § 363 sale is plainly no 22 longer controlling precedent. See 576 F.3d at 124 (“We broader than its power in a traditional Chapter 11 have never addressed the scope of the language ‘any interest reorganization. Compare 11 U.S.C. § 363(f) (“free and clear of in such property,’ and the statute does not define the term.”). any interest in such property”), with § 1141(c) ( “free and clear of all claims and interests”). We thus consider what claims may *12 [15] Rather than formulating a single precise definition be barred under Chapter 11 generally. for “any interest in such property,” courts have continued to address the phrase “on a case-by-case basis.” In re PBBPC, [19] [20] Section 101(5) defines “claim” as any “right to Inc., 484 B.R. 860, 867 (B.A.P. 1st Cir. 2013). At minimum, payment, whether or not such right is reduced to judgment, the language in § 363(f) permits the sale of property free and liquidated, unliquidated, fixed, contingent, matured, clear of in rem interests in the property, such as liens that unmatured, disputed, undisputed, legal, equitable, secured, or attach to the property. See In re Trans World Airlines, Inc., unsecured.” 11 U.S.C. § 101(5). A claim is (1) a right to 322 F.3d 283, 288 (3d Cir. 2003). But courts have permitted payment (2) that arose before the filing of the petition. See a “broader definition that encompasses other obligations that Pension Ben. Guar. Corp. v. Oneida Ltd., 562 F.3d 154, 157 may flow from ownership of the property.” 3 Collier on (2d Cir. 2009). If the right to payment is contingent on future Bankruptcy ¶ 363.06[1]. Sister courts have held that § 363(f) events, the claim must instead “result from pre-petition

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 37 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 conduct fairly giving rise to that contingent claim.” In re broad language suggested that all of these claims fell within Chateaugay Corp. (“Chateaugay I”), 944 F.2d 997, 1005 (2d the scope of the “free and clear” provision. We hold, Cir. 1991) (internal quotation marks omitted). however, that the first two sets of claims are covered by the Sale Order but that the latter two sets of claims are not. This Court has not decided, however, “the difficult case of pre-petition conduct that has not yet resulted in detectable First, the pre-closing accident claims clearly fall within the injury, much less the extreme case of pre-petition conduct scope of the Sale Order. Those claims directly relate to the that has not yet resulted in any tortious consequence to a ownership of the GM automaker's business—Old GM built victim.” Id. at 1004. Chateaugay I considered a cars with ignition switch defects. And those plaintiffs' hypothetical bankrupt bridge building company, which claims are properly thought of as tort claims that arose could predict that out of the 10,000 bridges it built, one before the filing of the petition; indeed, the claims arise from would one day fail, causing deaths and other injuries. Id. at accidents that occurred pre-closing involving Old GM 1003. If that bridge did fail, the individuals might have tort cars.24 claims resulting from pre-petition conduct, namely the building of the bridge. Second, the economic loss claims arising from the ignition switch defect or other defects present a closer call. Like the *13 [21] Recognizing these claims would engender claims of Pre–Closing Accident Plaintiffs, these claims flow “enormous practical and perhaps constitutional problems.” from the operation of Old GM's automaker business. These Id. Thus, “ ‘claim’ cannot be extended to include ... claimants individuals also, by virtue of owning Old GM cars, had come whom the record indicates were completely unknown and into contact with the debtor prior to the bankruptcy petition. unidentified at the time [the debtor] filed its petition and Yet the ignition switch defect (and other defects) were only whose rights depended entirely on the fortuity of future revealed some five years later. occurrences.” Lemelle v. Universal Mfg. Corp., 18 F.3d 1268, 1277 (5th Cir. 1994); see In re Chateaugay Corp. GUC Trust thus asserts that there was no right to payment prior (“Chateaugay IV”), to the petition. We disagree. The economic losses claimed by 53 F.3d 478, 497 (2d Cir. 1995) (stating that, in “common these individuals were “contingent” claims. 11 U.S.C. § sense,” “claim” is “not infinite”). To avoid any practical and 101(5). That is, the ignition switch defect was there, but was constitutional problems, courts require some minimum not yet so patent that an individual could, as a practical matter, “contact,” Chateaugay I, 944 F.2d at 1003–04, or bring a case in court. The contingency standing in the way was “relationship,” Chateaugay IV, 53 F.3d at 497, that makes Old GM telling plaintiffs that the ignition switch defect identifiable the individual with whom the claim does or existed. In other words, Old GM's creation of the ignition would rest. switch defect fairly gave rise to these claims, even if the claimants did not yet know. See Chateaugay I, 944 F.2d at To summarize, a bankruptcy court may approve a § 363 sale 1005. “free and clear” of successor liability claims if those claims flow from the debtor's ownership of the sold assets. Such a *14 Third, however, the independent claims do not meet the claim must arise from a (1) right to payment (2) that arose Code's limitation on claims. By definition, independent claims before the filing of the petition or resulted from pre-petition are claims based on New GM's own post-closing wrongful conduct fairly giving rise to the claim. Further, there must conduct. Though the parties do not lay out the whole universe be some contact or relationship between the debtor and the of possible independent claims, we can imagine that some claimant such that the claimant is identifiable. claims involve misrepresentations by New GM as to the safety of Old GM cars. These sorts of claims are based on New GM's post-petition conduct, and are not claims that are based on a B. Application right to payment that arose before the filing of petition or that [22] We apply these principles to: (1) pre-closing accident are based on pre-petition conduct. Thus, these claims are claims, (2) economic loss claims arising from the ignition outside the scope of the Sale Order's “free and clear” provision. switch defect or other defects, (3) independent claims relating only to New GM's conduct, and (4) Used Car Purchasers' claims. The bankruptcy court assumed that the Sale Order's

Fourth, the Sale Order likewise does not cover the Used Car error standard is a deferential one, and if the bankruptcy court's Purchasers' claims. The Used Car Purchasers were individuals “ ‘account of the evidence is plausible in light of the record who purchased Old GM cars after the closing, without viewed in its entirety, the court of appeals may not reverse it knowledge of the defect or possible claim against New GM. even though convinced that had it been sitting as the trier of They had no relation with Old GM prior to bankruptcy. Indeed, fact, it would have weighed the evidence differently.’ ” as of the bankruptcy petition there were an unknown number Amadeo v. Zant, 486 U.S. 214, 223, 108 S.Ct. 1771, 100 of unknown individuals who would one day purchase Old GM L.Ed.2d 249 (1988) (quoting Anderson v. Bessemer City, 470 vehicles secondhand. There could have been no contact or U.S. 564, 573–74, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)). relationship— actual or presumed—between Old GM and these specific plaintiffs, who otherwise had no awareness of A. Notice the ignition switch defect or putative claims against New GM. The bankruptcy court first concluded that plaintiffs were not We cannot, consistent with bankruptcy law, read the Sale provided notice as required by procedural due process. See Order to cover their claims. See Chateaugay I, 944 F.2d at MLC II, 529 B.R. at 555–60. The bankruptcy court held that 1003–04 (calling such a reading “absurd”). because Old GM knew or with reasonable diligence should have known of the ignition switch claims, plaintiffs were New GM argues that “modifying” the Sale Order would entitled to actual or direct mail notice, but received only “knock the props out of the foundation on which the [Sale publication notice. See id. at 557–60. The parties dispute the Order] was based” or otherwise be unlawful. New GM Br. extent of Old GM's knowledge of the ignition switch 77 (internal quotation marks omitted). But we do not modify problem. the Sale Order. Instead, we merely interpret the Sale Order in accordance with bankruptcy law. Indeed, by filing a motion to enforce, New GM in effect asked for the courts to 1. Applicable Law interpret the Sale Order. See Petrie Retail, 304 F.3d at 229. *15 [25] [26] The Due Process Clause provides, “No person In sum, the “free and clear” provision covers preclosing shall ... be deprived of life, liberty, or property, without due accident claims and economic loss claims based on the process of law.” U.S. Const. amend. V. Certain procedural ignition switch and other defects. It does not cover protections attach when “deprivations trigger due process.” independent claims or Used Car Purchasers' claims. Connecticut v. Doehr, 501 U.S. 1, 12, 111 S.Ct. 2105, 115 Accordingly, we affirm the bankruptcy court's decision not L.Ed.2d 1 (1991). Generally, legal claims are sufficient to to enjoin independent claims, see MLC II, 529 B.R. at 568– constitute property such that a deprivation would trigger due 70, and reverse its decision to enjoin the Used Car process scrutiny. See N.Y. State Nat'l Org. for Women v. Purchasers' claims, see id. at 570–72. Pataki, 261 F.3d 156, 169– 70 (2d Cir. 2001).

of 1991, Pub.L. No. 102–166, 105 Stat. 1071. Indeed, a III. Procedural Due Process fundamental purpose of bankruptcy is to discharge, The Sale Order covers the pre-closing accident claims and restructure, or impair claims against the debtor in an orderly economic loss claims based on the ignition switch and other fashion. See Lines v. Frederick, 400 U.S. 18, 19, 91 S.Ct. defects. The Sale Order, if enforced, would thus bar those 113, 27 L.Ed.2d 124 (1970). “The general rule that emerges claims. Plaintiffs contend on appeal that enforcing the Sale ... is that notice by publication is not enough with respect to Order would violate procedural due process. We address a person whose name and address are known or very easily two issues: (1) what notice plaintiffs were entitled to as a ascertainable and whose legally protected interests are matter of procedural due process, and (2) if they were directly affected by the proceedings in question.” Schroeder provided inadequate notice, whether the bankruptcy court v. City of New York, 371 U.S. 208, 212–13, 83 S.Ct. 279, 9 erred in denying relief on the basis that most plaintiffs were L.Ed.2d 255 (1962); accord Mennonite Bd. of Missions v. not “prejudiced.” Adams, 462 U.S. 791, 800, 103 S.Ct. 2706, 77 L.Ed.2d 180 (1983). In other words, adequacy of notice “turns on what [23] [24] We review factual findings for clear error and legal the debtor ... knew about the claim or, with reasonable conclusions, including interpretations of the Constitution, de diligence, should have known.” DPWN Holdings (USA), novo. In re Barnet, 737 F.3d 238, 246 (2d Cir. 2013). Our clear Inc. v. United Air Lines, Inc., 747 F.3d 145, 150 (2d Cir.

2014) (citing Chemetron Corp. v. Jones, 72 F.3d 341, 345– proceedings, but if the claims were unknown, publication

[27] [28] [29] [30] Once due process is triggered,consistent with due process of law, then the Code affords 46 (3d Cir. 1995)). If the debtor knew or reasonably should notice suffices. Chemetron, 72 F.3d at 345–46. have known about the claims, then due process entitles potential claimants to actual notice of the bankruptcy [35] [36] If a debtor reveals in bankruptcy the claims against it and provides potential claimants notice the question becomes what process is due. Morrissey v. Brewer, purchaser of each vehicle ....”). This provision facilitates 408 U.S. 471, 481, 92 S.Ct. 2593, 33 L.Ed.2d 484 (1972). “An recalls and other consequences of the consumerautomaker elementary and fundamental requirement of due process in any relationship. Thus, to the extent that Old GM knew of defects proceeding which is to be accorded finality is notice reasonably in its cars, it would also necessarily know the identity of a calculated, under all the circumstances, to apprise interested significant number of affected owners. parties of the pendency of the action and afford them an opportunity to present their objections.” Mullane v. Cent. The facts paint a picture that Old GM did nothing, even as it Hanover Bank & Tr. Co., 339 U.S. 306, 314, 70 S.Ct. 652, 94 knew that the ignition switch defect impacted consumers. L.Ed. 865 (1950). Courts ask “whether the state acted From its development in 1997, the ignition switch never reasonably in selecting means likely to inform persons affected, passed Old GM's own technical specifications. Old GM knew not whether each property owner actually received notice.” that the switch was defective, but it approved the switch for Weigner v. City of New York, 852 F.2d 646, 649 (2d Cir. 1988). millions of cars anyway. Notice is adequate if “[t]he means employed [are] such as one desirous of actually informing the absentee might reasonably Once the ignition switch was installed, Old GM almost adopt to accomplish it.” Mullane, 339 U.S. at 315, 70 S.Ct. 652. immediately received various complaints. News outlets vast protections. Both § 1141(c) and § 363(f) permit “free reported about the faulty ignition switch. NHTSA approached and clear” provisions that act as liability shield. These Old GM about moving stalls and airbag non-deployments. A provisions provide enormous incentives for a struggling police report, which Old GM's legal team possessed, linked company to be forthright. But if a debtor does not reveal these breakdowns to a faulty ignition switch. Old GM even claims that it is aware of, then bankruptcy law cannot considered warning dealers (but not consumers) about moving protect it. Courts must “limit[ ] the opportunity for a stalls. By May 2009, at the latest, Old GM personnel had completely unencumbered new beginning to the ‘honest but essentially concluded that the ignition switch, moving stalls, unfortunate debtor.’ ” Grogan v. Garner, 498 U.S. 279, and airbag non-deployments were related. Considering the 286–87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (quoting airbag issues, they believed that one of the two “most likely Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, explanation[s] for the power mode signal change was ... a 78 L.Ed. 1230 (1934)). problem with the Ignition Switch.” J. App. 9783.

A bankruptcy court could reasonably read from this record 2. Application that Old GM knew about the ignition switch defect. Old GM *16 [37] The parties do not dispute that plaintiffs received knew that the defect caused stalls and had linked the airbag only publication notice. The question is whether they were non-deployments to the defect by May 2009. entitled to more. The bankruptcy court found that because Old GM knew or reasonably should [38] As background, [31] [32] [33] [34] This requirement also applies tohave known about the ignition switch defect prior to bankruptcy proceedings. See Martin v. Wilks, 490 U.S. bankruptcy, it should have provided direct mail notice 755, 762 n. 2, 109 S.Ct. 2180, 104 L.Ed.2d 835 (1989), to vehicle owners. We find no clear error in this factual superseded by statute on other grounds, Civil Rights Act finding. federal law requires that automakers keep records of the first Even assuming the bankruptcy court erred in concluding that owners of their vehicles. 49 U.S.C. § 30117(b)(1) (“A Old GM knew, Old GM—if reasonably diligent —surely manufacturer of a motor vehicle ... shall cause to be should have known about the defect. Old GM engineers maintained a record of the name and address of the first should have followed up when they learned their ignition

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 40 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 switch did not initially pass certain technical specifications. was required to preserve the value of the company and to Old GM lawyers should have followed up when they heard save it from liquidation. See New GM Br. 34 (“Time was of disturbing reports about airbag nondeployments or moving the essence, and costs were a significant factor.”). Forty days stalls. Old GM product safety teams should have followed up was indeed quick for bankruptcy and previously unthinkable when they were able to recreate the ignition switch defect with for one of this scale. While the desire to move through ease after being approached by NHTSA. If any of these leads bankruptcy as expeditiously as possible was laudable, Old had been diligently pursued in the seven years between 2002 GM's precarious situation and the need for speed did not and 2009, Old GM likely would have learned that the ignition obviate basic constitutional principles. Due process applies switch defect posed a hazard for vehicle owners. even in a company's moment of crisis. Cf. Home Building & Loan Ass'n v. Blaisdell, 290 U.S. 398, 425, 54 S.Ct. 231, 78 [39] Such “reckless disregard of the facts [is] sufficient L.Ed. 413 (1934) (“The Constitution was adopted in a period to satisfy the requirement of knowledge.” McGinty v. State, of grave emergency.”). 193 F.3d 64, 70 (2d Cir. 1999). In the face of all the reports and complaints of faulty ignition switches, moving stalls, We find no clear error in the bankruptcy court's finding that Old airbag non-deployments, and, indeed, serious accidents, and GM knew or should have known with reasonable diligence in light of the conclusions of its own personnel, Old GM had about the defect. See MLC II, 529 B.R. at 556– 60. Individuals an obligation to take steps to “acquire full or exact with claims arising out of the ignition switch defect were knowledge of the nature and extent” of the defect. United entitled to notice by direct mail or some equivalent, as required States v. Macias, 786 F.3d 1060, 1062 (7th Cir. 2015). Under by procedural due process. these circumstances, Old GM had a duty to identify the cause of the problem and fix it. Instead, the Valukas Report recounts a corporate culture that sought to pin responsibility B. “Prejudice” on others and a Sisyphean search for the “root cause.” After concluding that Old GM did not provide adequate notice, the bankruptcy court nonetheless enforced the Sale Order. See *17 Further, even if the precise linkage between the id. at 565–73. The bankruptcy court held that “prejudice” is an ignition switch defect and moving stalls and airbag non- “essential element” of procedural due process and that deployments was unclear, Old GM had enough knowledge. plaintiffs were not prejudiced—except as to independent At minimum, Old GM knew about moving stalls and airbag claims—because the bankruptcy court would have approved non-deployments in certain models, and should have the Sale Order even if plaintiffs were provided adequate notice. revealed those facts in bankruptcy. Those defects would Id. at 565. The parties dispute whether “prejudice” is required still be the basis of “claims,” even if the root cause (the and, if it is, whether there is prejudice here. ignition switch) was not clear.

New GM argues in response that because plaintiffs' claims 1. Applicable Law were “contingent,” those individuals were “unknown” creditors as a matter of law. But contingent claims are still The bankruptcy court held that “prejudice” is a requirement of claims, 11 U.S.C. § 101(5), and claimants are entitled to the Due Process Clause and that even if inadequate notice adequate notice if the debtor knows of the claims. deprived an individual of property without a meaningful Moreover, as discussed above, the only contingency was opportunity to be heard, there is no prejudice if in hindsight the Old GM telling owners about the ignition switch defect—a outcome would have been the same with adequate notice. Id. contingency wholly in Old GM's control and without Some courts have indeed held that “a party who claims to be bearing as to Old GM's own knowledge. New GM aggrieved by a violation of procedural due process must show essentially asks that we reward debtors who conceal claims prejudice.” Perry v. Blum, 629 F.3d 1, 17 (1st Cir. 2010). Other against potential creditors. We decline to do so. See courts have held otherwise that “a due process violation cannot Grogan, 498 U.S. at 286–87, 111 S.Ct. 654. constitute harmless error.” In re New Concept Hous., Inc., 951 F.2d 932, 937 n. 7 (8th Cir. 1991); see Fuentes v. [40] Finally, we address a theme in this case that the GM Shevin, 407 U.S. 67, 87, 92 S.Ct. 1983, 32 L.Ed.2d 556 (1972) bankruptcy was extraordinary because a quick § 363 sale (“The right to be heard does not depend upon an advance

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 41 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 showing that one will surely prevail at the hearing.”).25 Courts (1986) (asking whether adjudication in the criminal context have concluded that a “free and clear” clause was without procedural protections can “reliably serve its unenforceable because of lack of notice and a hearing in function as a vehicle for determination of” a case). In accordance with procedural due process, without exploring considering reliability, “[t]he entire record must be prejudice. See In re Savage Indus., 43 considered and the probable effect of the error determined in the light of all the evidence.” 11 Charles Alan Wright, Arthur F.3d 714, 721–22 (1st Cir. 1994); cf. Nolasco v. Holder, 637 R. Miller, et al., Federal Practice & Procedure § 2883 (3d F.3d 159, 164 (2d Cir. 2011) (“There may well be instances ed. 2016) [hereinafter “Wright & Miller”]; see Matusick v. in which ... failure to comply with [a procedural rule] Erie Cty. Water Auth., 757 F.3d 31, 50–51 (2d Cir. 2014). results in a lack of notice or the denial of a meaningful “[I]f [the court] cannot say, with fair assurance, after opportunity to be heard such that ... due process rights are pondering all that happened without stripping the erroneous violated.”). action from the whole, that the judgment was not substantially swayed by the error,” then it must find a *18 [41] The § 363 sale context presents unique challenges procedural due process violation. Kotteakos v. United States, for due process analysis. As seen here— with over 850 328 U.S. 750, 765, 66 S.Ct. 1239, 90 L.Ed. 1557 (1946). objections filed—objections may often be duplicative. See GM, 407 B.R. at 500 (finding successor liability “most debatable” of issues); cf Mullane, 339 U.S. at 319, 70 S.Ct. 2. Application 652 (“[N]otice reasonably certain to reach most of those interested in objecting is likely to safeguard the interests of [43] We need not decide whether prejudice is an element when all, since any objections sustained would inure to the benefit there is inadequate notice of a proposed § 363 sale, for even of all.”). Many of the objections, especially those made assuming plaintiffs must demonstrate prejudice, they have done against a “free and clear” provision, are not likely to be so here. After examining the record as a whole, we cannot say grounded in any legal right to change the terms of the sale, with fair assurance that the outcome of the § 363 sale but rather will be grounded in a particular factual context. proceedings would have been the same had Old GM disclosed Section 363 sales are, in essence, private transactions. On the ignition switch defect and these plaintiffs voiced their one side, the debtor-in-possession “has ample administrative objections to the “free and clear” provision. Because we cannot flexibility in the conduct of sales,” 3 Collier on Bankruptcy say with any confidence that no accommodation would have ¶ 363.02[2], and on the other side, the purchaser need not been made for them in the Sale Order, we reverse. take on liabilities unless it wishes to do so, see id. ¶ 363.06[7]. A bankruptcy court reviews a proposed § 363 At the outset, it is difficult to evaluate in hindsight what the sale's terms only for some minimal “good business reason.” objections would have been had plaintiffs participated in the Lionel, 722 F.2d at 1071; see also 3 Collier on Bankruptcy ¶ § 363 sale. Perhaps they would have tried to identify some 363.02[1][e] (“One of the major policy decisions in drafting legal defect in the Sale Order, asked that economic losses or the Code was to separate the court from the day-to-day pre-closing accidents arising from the ignition switch defect administrative activities in bankruptcy cases ....”). Many sale be exempted from the “free and clear” provision, or requested objections will thus sound in business reasons to change the greater priority in any GUC Trust distribution. But this proposed sale order, and not by reference to some legal uncertainty about the content of plaintiffs' objections is the natural result of the lack of any meaningful opportunity to be requirement that the order must be changed.26 heard in the § 363 sale proceedings. Cf. Lane Hollow, 137 [42] Assuming plaintiffs must demonstrate prejudice, the F.3d at 808 (“If there has been no fair day in court, the relevant inquiry is whether courts can be confident in the reliability of the result is irrelevant, because a fair day in court reliability of prior proceedings when there has been a is how we assure the reliability of results.”). This lack of procedural defect. See Lane Hollow Coal Co. v. Dir., Office certainty in turn influences our degree of confidence in the of Workers' Compensation Programs, 137 F.3d 799, 808 (4th outcome. Cir. 1998) (considering “fairness of the trial and its reliability as an accurate indicator of guilt”); see also Rose v. Clark, *19 The bankruptcy court instead concluded that it would 478 U.S. 570, 577–78, 106 S.Ct. 3101, 92 L.Ed.2d 460 have reached the same decision—that it would have entered

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 42 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 the Sale Order on the same terms—even if plaintiffs had been point or another.” J. App. 2084. The result of these given an opportunity to be heard. The bankruptcy court negotiations was an understanding that “lemon laws were concluded that these plaintiffs “offer no legally based covered under the notion of warranty claims” and inclusion arguments as to why they would have, or even could have, in the Sale Agreement of language reflecting this succeeded on the successor liability legal argument when all agreement. Id. at 2086. of the other objectors failed.” MLC II, 529 B.R. at 567; see GM, 407 B.R. at 499–506 (considering objections). The Opportunities to negotiate are difficult if not impossible to bankruptcy court found that other arguments were too recreate. We do not know what would have happened in 2009 “speculative.” MLC II, 529 B.R. at 567–68, 573. if counsel representing plaintiffs with billions of dollars in claims had sat across the table from Old GM, New GM, and We disagree. The bankruptcy court failed to recognize that Treasury. Our lack of confidence, however, is not imputed on the terms of this § 363 sale were not within its exclusive plaintiffs denied notice but instead bolsters a conclusion that control. Instead, the GM sale was a negotiated deal with enforcing the Sale Order would violate procedural due process. input from multiple parties—Old GM, New GM, Treasury, Indeed, for the following reasons, while we cannot say with any and other stakeholders. The Sale Order and Sale Agreement certainty that the outcome would have been different, we can reflect this polycentric approach: it includes some fifteen say that the business circumstances at the time were such that sets of liabilities that New GM voluntarily, and without plaintiffs could have had some negotiating leverage, and the legal compulsion, took on as its own. opportunity to participate in the proceedings would have been meaningful. The process of how New GM voluntarily assumed liabilities is most apparent with its assumption of *20 First, it is well documented that one of the primary impetuses behind a quick § 363 sale was to “restore consumer Lemon Law claims.27 Following the proposed sale order, confidence.” GM, 407 B.R. at 480. “The problem is that if the numerous state attorneys general objected that the proposed 363 Transaction got off track ..., the U.S. Government would sale would bar claims based on state Lemon Laws. But their see that there was no means of early exit for GM; ... customer objections were not particularly legal in character—that is, confidence would plummet; and ... the U.S. Treasury would no state attorney general focused on how a liability shield have to keep funding GM.” Id. at 492. If consumer confidence that barred Lemon Law claims would be illegal. Citing no dissipated, neither Treasury loans nor a § 363 sale could save law, the objection was that New GM should assume these GM: nobody would buy a GM car. liabilities “[i]n light of the relationship between [Old GM] and [New GM] ..., as well as the statements by the United These concerns were reflected in President Obama's $600 States government promising that all warranty obligations million guarantee of GM and Chrysler warranties. The business would be honored.” Bankr. ECF No. 2043, at 39; accord of cars is unique, dependent largely on the goodwill of Bankr. ECF No. 2076, at 10. In other words, because consumers. Cars are owned for years and form the cornerstones President Obama had promised to back warranties, the state of quintessentially American activities: dropping off and attorneys general argued that Lemon Laws should be picking up children from school, drive-ins and drive-thrus, honored as well. family vacations and road trips. “[T]he road and the automobile” are, in American history, “sanctuaries, hidden Following these objections, “Lemon Law claims were from the intrusive gaze of the state, [where] individuals live added as an assumed liability during the course of the 363 freely.” Sarah Seo, The New Public, 125 Yale L.J. 1616, 1620 Sale hearing after negotiation with the [state attorneys (2016). The safety and reliability of a car are central to these general].” MLC II, 529 B.R. at 534 n. 36. The state activities. As the head of President Obama's auto task force put attorneys general had made a practical, businessminded it, in relation to Chrysler's bankruptcy: “what consumer would argument, which brought Old GM, New GM, and Treasury buy another Chrysler if the company didn't honor its to the negotiating table. At the sale hearing, counsel to the warranties?” Ratner, supra note 8, at 181. In other words, National Association of Attorneys General commented that plaintiffs could have tried to convince the bankruptcy parties the state attorneys general “have worked very hard since the that it made good business sense to spend substantial sums to beginning of the case with debtors' counsel initially, with Treasury counsel, almost everybody in this room at some

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 43 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 preserve customer goodwill in the GM brand and, in turn, GM's *21 Finally, there is the detriment of added litigation— had business value. the class actions been filed in the midst of bankruptcy, the mere administration of those cases could have taken Second, New GM was not a truly private corporation. considerable resources. Had the government also brought Instead, the President and Treasury oversaw its affairs criminal charges—such as t he charges now suspended by during the bailout and Treasury owned a majority stake a deferred prosecution agreement with the U.S. Attorney's following the bankruptcy. While private shareholders Office for the Southern District of New York in which New expect their investments to be profitable, the government GM forfeited $900 million—managing how to juggle does not necessarily share the same profit motive. Treasury bankruptcy with a criminal prosecution could have taken injected hundreds of billions of dollars into the economy even longer. United States v. $900,000,000 in U.S. during the financial crisis, not on the expectation that it Currency, No. 15 Civ. 7342 (S.D.N.Y.), ECF No. 1; see 11 would make a reasonable rate of return but on the U.S.C. § 362(b)(1) (exempting from usual automatic stay understanding that millions of Americans would be criminal actions against debtor). The reasonable conclusion affected if the economy were to collapse. If the ignition is that, with the likelihood and price of disruption to the switch defect were revealed in the course of bankruptcy, bankruptcy proceedings being so high, plaintiffs at least had plaintiffs could have petitioned the government, as the a basis for making businessminded arguments for why they majority owner of New GM, to consider how millions of should receive some accommodation in or carve-out from faultless individuals with defective Old GM cars could be the Sale Order. affected. Indeed, during the later congressional hearings, Representatives and Senators questioned New GM's CEO Under these circumstances, we cannot be confident that the on her invocation of the liability shield when the Sale Order would have been negotiated and approved exactly government guided the process. See supra note 13. Senator as it was if Old GM had revealed the ignition switch defect in Richard Blumenthal, for instance, indicated that he would bankruptcy. The facts here were peculiar and are no doubt have objected in bankruptcy had he known, because he colored by the inadequate notice and plaintiffs' lack of any “opposed it at the time, as Attorney General for the state of meaningful opportunity to be heard. See Kotteakos, 328 U.S. at Connecticut, not [foreseeing] that the material adverse fact 765, 66 S.Ct. 1239 (directing courts to consider “all that being concealed was as gigantic as this one.” April 2, 2014 happened without stripping the erroneous action from the Senate Hearing, supra note 13, at 22–23 (statement of Sen. whole”). Given the bankruptcy court's focus on consumer Richard Blumenthal, Member, S. Subcomm. on Consumer confidence, the involvement of Treasury, the financial stakes at Prot, Prod. Safety & Ins.). the time, and all the business circumstances, there was a reasonable possibility that plaintiffs could have negotiated Third, we must price in the real cost of disrupting the some relief from the Sale Order. bankruptcy process. From the middle of 2007 through the first quarter of 2009, Old GM's average net loss exceeded We address two further concerns. First, the bankruptcy court $10 billion per quarter; a day's worth of delay would cost stated that it “would not have let GM go into the liquidation over $125 million, a week almost a billion dollars. We do that would have resulted if [it] denied approval of the 363 not know whether the proceedings would have been Sale.” MLC II, 529 B.R. at 567; see J. App. 1623. In other delayed, but some delay was certainly possible. For words, the bankruptcy court suggested that it would have instance, Congress called the GM CEO to testify over the approved the § 363 sale anyway, because the alternative was course of four days.28 Old GM likewise conducted a liquidation—and liquidation would have been catastrophic. thorough internal investigation on the ignition switch While we agree that liquidation would have been catastrophic, defect, and the Valukas Report took more than twoand-a- we are confident that Old GM, New GM, Treasury, and the half months to prepare. It seems unlikely that a bankruptcy bankruptcy court itself would have endeavored to address the court would have casually approved a “free and clear” ignition switch claims in the Sale Order if doing so was good provision while these investigations into the ignition switch for the GM business. The choice was not just between the Sale defect's precise nature were still ongoing. Order as issued and liquidation; accommodations could have been made.

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 44 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 Second, many of the peculiar facts discussed apply with less implementation of that relief would be inequitable.” In re force to the Non–Ignition Switch Plaintiffs, who assert claims Chateaugay Corp. (“Chateaugay II”), 988 F.2d 322, 325 (2d arising from other defects. The bankruptcy court entered Cir. 1993). “[A] bankruptcy appeal is presumed equitably moot judgment against the Non–Ignition Switch Plaintiffs based on when the debtor's reorganization plan has been substantially its opinion determining the rights of the other plaintiffs, but left consummated.” In re BGI, 772 F.3d at 108. To obtain relief in as an open question whether Old GM knew of the Non–Ignition these circumstances, a claimant must satisfy the so-called Switch Plaintiffs' claims based in other defects. See MLC III, “Chateaugay factors.” See Chateaugay III, 10 F.3d at 952–53. 531 B.R. at 360. Without factual findings relevant to determining knowledge, we have no basis for deciding whether The equitable mootness doctrine has enigmatic origins, and notice was adequate let alone whether enforcement of the Sale the range of proceedings in which it applies is not well Order would violate procedural due process as to these claims. settled. See In re Continental Airlines, 91 F.3d 553, 567 (3d Cir. 1996) (en banc) (Alito, J., dissenting) (labeling it a To conclude, we reverse the bankruptcy court's decision “curious doctrine”). Our Circuit has acknowledged that the insofar as it enforced the Sale Order to enjoin claims doctrine draws on “equitable considerations as well as the relating to the ignition switch defect.29 See MLC II, 529 constitutional requirement that there be a case or B.R. at 566–73. Because enforcing the Sale Order would controversy.” Chateaugay III, 10 F.3d at 952. Other courts violate procedural due process in these circumstances, the have focused instead on the doctrine's statutory bankruptcy court erred in granting New GM's motion to underpinnings and role in “fill[ing] the interstices of the enforce and these plaintiffs thus cannot be “bound by the Code.” In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir. terms of the [Sale] Order[ ].” In re Johns–Manville Corp., 1994) (explaining also difference between “inability to 600 F.3d 135, 158 (2d Cir. 2010). As to claims based in alter the outcome (real mootness) and unwillingness to alter non-ignition switch defects, we vacate the bankruptcy the outcome (‘equitable mootness')”). Indeed, several court's decision to enjoin those claims, see MLC III, 531 provisions of the Code prohibit modification of bankruptcy B.R. at 360, and remand for further proceedings consistent orders unless those orders are stayed pending appeal. See, with this opinion. e.g., 11 U.S.C. §§ 363(m), 364(e).

[49] [50] However broad the doctrine of equitable mootness, IV. Equitable Mootness Article III requires a case or controversy before relief may be *22 [44] [45] Finally, we address the bankruptcy court's equitably mooted.30 “[E]quitable mootness bears only upon decision that relief for any would-be claims against GUC the proper remedy, and does not raise a threshold question of Trust was equitably moot. MLC II, 529 B.R. at 583–92. We our power to rule.” In re Metromedia Fiber Network, Inc., 416 ordinarily review “dismissal on grounds of equitable F.3d 136, 144 (2d Cir. 2005) (emphasis added). mootness for abuse of discretion, under which we examine conclusions of law de novo and findings of fact for clear *23 [51] [52] [53] “The oldest and most consistent error.” In re BGI, Inc., 772 F.3d 102, 107 (2d Cir. 2014) thread in the federal law of justiciability is that federal (citation omitted). There were, however, no claims asserted courts will not give advisory opinions.” 13 Wright & Miller against Old GM or GUC Trust in bankruptcy court or in the § 3529.1. A controversy that is “appropriate for judicial multi-district litigation. Under these circumstances, we determination ... must be definite and concrete, touching the exercise our “independent obligation” to ensure that the case legal relations of parties having adverse legal interests.” “satisfies the ‘case-or-controversy’ requirement of Article III, Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240–41, 57 Section 2 of the Constitution.” United States v. Williams, 475 S.Ct. 461, 81 L.Ed. 617 (1937); see Flast v. Cohen, 392 F.3d 468, 478–9 (2d Cir. 2007). U.S. 83, 95, 88 S.Ct. 1942, 20 L.Ed.2d 947 (1968) ( “limit[ing] the business of federal courts to questions presented in an adversary context and in a form historically A. Applicable Law viewed as capable of resolution through the judicial [46] [47] [48] The doctrine of equitable mootness allows process”). “[F]ederal courts are without power to decide appellate courts to dismiss bankruptcy appeals “when, during questions that cannot affect the rights of litigants in the case the pendency of an appeal, events occur” such that “even before them. ” North Carolina v. Rice, 404 U.S. 244, 246, though effective relief could conceivably be fashioned, © 2016 Thomson Reuters. No claim to original U.S. Government Works. 45 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 92 S.Ct. 402, 30 L.Ed.2d 413 (1971) (emphasis added). Order's bar on successor liability, any claims remained with That is, courts may not give “an opinion advising what the Old GM and thus GUC Trust. law would be upon a hypothetical state of facts,” Aetna Life Ins., 300 U.S. at 241, 57 S.Ct. 461, for instance, where a J. App. 11038. But New GM has not sought to implead and party did not “seek the adjudication of any adverse legal bring cross-claims against GUC Trust in the multi-district interests,” S. Jackson & Son, Inc. v. Coffee, Sugar & Cocoa litigation under Federal Rule of Civil Procedure 14 or to do the Exch. Inc., 24 F.3d 427, 432 (2d Cir. 1994). same in the Groman Plaintiffs' adversary proceeding in bankruptcy under Federal Rule of Bankruptcy Procedure 7014. [54] These limitations apply to bankruptcy courts. See Wellness Int'l Network, Ltd. v. Sharif, ––– U.S. ––––, 135 *24 Moreover, GUC Trust has protested its involvement in the S.Ct. 1932, 1945, 191 L.Ed.2d 911 (2015) (“Bankruptcy case. At a May 2, 2014 hearing, GUC Trust notified the courts hear maters solely on a district court's reference bankruptcy court that it was “frankly [a] stranger[ ] to these [and] possess no free-floating authority to decide claims proceedings.” Id. at 11093. This was, according to GUC Trust's traditionally heard by Article III courts.”). In bankruptcy, uncontested representation, because: moreover, the adjudication of claims may be subject to other preparatory steps. Bankruptcy courts will generally No claimants, none of the plaintiffs, no set a “bar date” that fixes the time to file a proof of claim claimants or potential claimants had against the bankruptcy estate. See Fed. R. Bankr. P. raised this as a possibility. No one has 3002(c)(3). If the bar date has passed, then the initial step filed a motion to lift the bar date. The for an individual seeking relief against the estate would be only person that has raised it has been to seek permission to file a late proof of claim: only after New GM, based upon, you know, some permission is granted can that individual claim that she is statements of fact in some pleadings. entitled to relief. See Fed. R. Bankr. P. 9006(b) (1); see also But the only person that has actually Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd., 507 U.S. moved forward with it is New GM, and 380, 394–95, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993) frankly, you know, it's our view that this (setting forth standard for “excusable neglect” for late is essentially a way to deflect liability claims under Rule 9006(b)(1)). away, and you know, the attention away from New GM and put it on a third party. B. Application [55] Here, the bankruptcy court held that any relief from Id. at 11090. At a July 2, 2014 hearing, GUC Trust continued GUC Trust would be equitably moot. But plaintiffs never to push that litigation of the equitable mootness issue was sought relief from GUC Trust. The bankruptcy court's ruling premature, and dependent on whether the Sale Order could be 32 on equitable mootness was therefore advisory. enforced. Id. at 8485.

Neither GUC Trust nor Old GM are parties to the Nonetheless, the bankruptcy court asked the parties (including multidistrict litigation now ongoing in district court. Only GUC Trust) to brief initially whether claims against New GM one defendant is named: New GM. Likewise, as GUC Trust were really claims against Old GM's bankruptcy estate or GUC confirmed at oral argument, plaintiffs have not filed any Trust. As the bankruptcy court stated: “we're going to consider proofs of claim with GUC Trust, nor have they even asked as [a] threshold issue[ ] ... the possibility that the claims now the bankruptcy court for permission to file late proofs of being asserted may be claims against Old GM or the GUC claim or to lift the bar date, as would be required before Trust.” J. App. 11103 (emphases added). Following a later hearing, the bankruptcy court added an issue of whether claims, relief could be granted.31 if any, against GUC Trust should be “disallowed/dismissed on grounds of equitable mootness.” Id. at 5780. Instead, it appears from the record that GUC Trust became involved at New GM's behest. New GM noted “well there GUC Trust was thus not a “litigant[ ] in the case before [the is a GUC Trust” and suggested that because of the Sale bankruptcy court],” Rice, 404 U.S. at 246, 92 S.Ct. 402, who “s[ought] the adjudication of any adverse legal interests,” S.

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 46 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 Jackson & Son, Inc., 24 F.3d at 432. GUC Trust sought not to CONCLUSION be involved, but the bankruptcy court ordered otherwise. In doing so, the bankruptcy court was concerned with a For the reasons set forth above, with respect to the bankruptcy “hypothetical” scenario, see Aetna Life Ins., 300 U.S. at 241, court's decisions below, we: 57 S.Ct. 461—the *25 (1) AFFIRM the decision not to enforce the Sale Order “possibility” that there “may be” late-filed claims against as to the independent claims; GUC Trust, J. App. 11103. The bankruptcy court's decision on equitable mootness that followed essentially advised on (2) REVERSE the decision to enforce the Sale Order as this hypothetical controversy. to the Used Car Purchasers' claims and claims relating to the ignition switch defect, including preclosing accident [56] We acknowledge that the parties have expended claims and economic loss claims; considerable time arguing about equitable mootness. We are likewise cognizant that plaintiffs at one point sent a letter to (3) VACATE the decision to enforce the Sale Order as GUC Trust suggesting that it should freeze its distributions to claims relating to other defects; and pending the bankruptcy proceedings. See MLC II, 529 B.R. (4) VACATE the decision on equitable mootness as at 537–38. But plaintiffs did not pursue any claims. advisory. Ultimately, it is the parties, and not the court, that must create the controversy. See Dep't of Envtl. Prot. & Energy v. We REMAND the case for further proceedings consistent with Heldor Indus., Inc., 989 F.2d 702, 707 (3d Cir. 1993) this opinion. (rendering advisory “an answer to a question not asked” by the parties).

We thus conclude that the bankruptcy court's decision on equitable mootness was advisory and vacate that decision. See MLC II, 529 B.R. at 583–92.

All Citations

--- F.3d ----, 2016 WL 3766237, 62 Bankr.Ct.Dec. 229

Footnotes 1 The Clerk of Court is respectfully directed to amend the official caption to conform to the above. 2 Remarks on the United States Automobile Industry, 2009 Daily Comp. Pres. Doc. 2 (June 1, 2009). 3 For ease of reference, in the context of this appeal, we also refer to Wilmington Trust Company (the administrator of GUC Trust) and the unitholders of GUC Trust collectively and singularly as “GUC Trust.” 4 See 28 U.S.C. § 158(d)(2) (providing jurisdiction for courts of appeals to hear appeals if the bankruptcy court certifies that certain conditions are met). 5 Remarks on the American Auto Industry, 44 Weekly Comp. Pres. Doc. 1569 (Dec. 19, 2008). 6 Remarks on the United States Automobile Industry, 2009 Daily Comp. Pres. Doc. 2 (Mar. 30, 2009) [hereinafter “March 30, 2009 Presidential Remarks”]. 7 March 30, 2009 Presidential Remarks, supra note 6, at 3. 8 See Office of the Press Sec'y, White House, Obama Administration's New Warrantee Commitment Program (Mar. 30, 2009); see also Office of the Press Sec'y, White House, Obama Administration New Path to Viability for GM & Chrysler (Mar. 30, 2009); Steven Rattner, Overhaul: An Insider's Account of the Obama Administration's Emergency Rescue of the Auto Industry 299 (2010). 9 See generally Evan F. Rosen, Note, A New Approach to Section 363(f)(3), 109 Mich. L. Rev. 1529, 1538–39 (2011) (“However, unlike sales pursuant to the standard Chapter 11 plan confirmation process, 363(f) Sales occur without the benefit of the Chapter 11 Safeguards—the disclosure, notice, voting, and priority safeguards ... to protect secured creditors.”).

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 47 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 10 See Jacob A. Kling, Rethinking 363 Sales, 17 Stan. J.L. Bus. & Fin. 258, 262 (2012) (“A plan of reorganization must be submitted to a vote of creditors and equity holders after furnishing them with a disclosure statement, a process that can take years.” (footnote omitted)). 11 The Sale Agreement defined “Lemon Laws” as “state statute[s] requiring a vehicle manufacturer to provide a consumer remedy when such manufacturer is unable to conform a vehicle to the express written warranty after a reasonable number of attempts, as defined in the applicable statute.” J. App. 1676. 12 See, e.g., Bill Vlasic, G.M. Vow to Slim Includes Top Ranks, N.Y. Times (July 10, 2009) (“General Motors ... emerged from bankruptcy on Friday ....”); John D. Stoll & Neil King Jr., GM Set to Exit Bankruptcy, Wall Street Journal (July 10, 2009) (“The new General Motors Co. is poised to exit Chapter 11 protection as soon as Friday morning, and to emerge as a leaner, more focused company after only 40 days in bankruptcy court.”). 13 Staff of H. Comm. on Energy & Commerce, 113th Cong., Report on the GM Ignition Switch Recall: Review of NHTSA 1 (Sept. 16, 2014); Examining Accountability and Corporate Culture in Wake of the GM Recalls: Hearing Before the Subcomm. on Consumer Prot., Prod. Safety, & Ins. of the S. Comm. on Commerce, Sci., & Transp., 113th Cong. (2014); The GM Ignition Switch Recall: Investigation Update: Hearing Before the Subcomm. on Oversight & Investigations of the H. Comm. on Energy & Commerce, 113th Cong. (2014); Examining the GM Recall and NHTSA's Defect Investigation Process: Hearing Before the Subcomm. on Consumer Prot., Prod. Safety, & Ins. of the S. Comm. on Commerce, Sci., & Transp., 113th Cong. (2014) [hereinafter “April 2, 2014 Senate Hearing”]; The GM Ignition Switch Recall: Why Did It Take So Long?: Hearing Before the Subcomm. on Oversight & Investigations of the H. Comm. on Energy & Commerce, 113th Cong. (2014). 14 Plaintiffs and New GM each extensively cite and quote to the Valukas Report as an account of the underlying facts regarding the ignition switch defect, and we do as well. 15 Torque is a measure of twisting force—it is generated, for example, when one twists off the cap of a soda bottle or tightens a bolt with a wrench. 16 Those class actions are consolidated before a district judge in the United States District Court for the Southern District of New York. See In re General Motors LLC Ignition Switch Litigation, No. 14–MD–2543 (S.D.N.Y.) (Furman, J.). 17 On August 1, 2014, New GM filed motions to enforce the Sale Order against the Pre–Closing Accident Plaintiffs and Non–Ignition Switch Plaintiffs, who entered the bankruptcy proceedings later. 18 On appeal, the Non–Ignition Switch Plaintiffs are joined by certain ignition switch and pre-closing accident plaintiffs and call themselves the “Elliot, Sesay, and Bledsoe Plaintiffs.” That group also represents two other appellants captioned above: Berenice Summerville and Doris Powledge Phillips. For ease of reference, in the context of this appeal, we will continue to call the group the “Non–Ignition Switch Plaintiffs.” 19 Indeed, the bankruptcy court's opinion in GM, 407 B.R. 463, which approved the § 363 sale, has been reviewed on appeal has three times: a stay pending appeal was denied in In re General Motors Corp., No. M 47(LAK), 2009 WL 2033079 (S.D.N.Y. July 9, 2009), and the opinion was affirmed in In re Motors Liquidation Co., 428 B.R. 43 (S.D.N.Y. 2010), and in In re Motors Liquidation Co., 430 B.R. 65 (S.D.N.Y. 2010). 20 The bankruptcy court mentioned, however, that claims based on New GM's “independently wrongful, and otherwise actionable, conduct” could not be categorized as claims that could be assumed by New GM or retained by Old GM via the Sale Order. MLC II, 529 B.R. at 583. But the bankruptcy court did not explicitly address whether it still considered those claims to be covered by the Sale Order. 21 New GM also cites a non-precedential summary order on this issue. See Douglas v. Stamco, 363 Fed.Appx. 100 (2d Cir. 2010). 22 When the bankruptcy court determined that successor liability claims could constitute interests, Chrysler had not yet been vacated. See GM, 407 B.R. at 505 (“Chrysler is not distinguishable in any legally cognizable respect.”). 23 Although Chrysler was vacated on grounds of mootness, it still “constitute[s] persuasive authority.” Anderson v. Rochester–Genesee Reg'l Transp. Auth., 337 F.3d 201, 208 n. 5 (2d Cir. 2003). Both our Circuit and the Third Circuit have continued to cite Chrysler favorably. See In re N. New Eng. Tel. Operations LLC, 795 F.3d 343, 346 (2d Cir. 2015); In re Jevic Holding Corp., 787 F.3d 173, 188–89 (3d Cir. 2015). 24 To the extent that Pre–Closing Accident Plaintiffs assert claims arising after the petition but before the § 363 sale closing, no party on appeal suggests that we treat claims in this timeframe differently. In any event, those claims are contingent on the accident occurring and “result from pre-petition conduct fairly giving rise to [a] contingent claim.” Chateaugay I, 944 F.2d at 1005 (internal quotation marks omitted). 25 See, e.g., McNabb v. Comm'r Ala. Dep't of Corr., 727 F.3d 1334, 1347 (11th Cir. 2013) (“Our cases have long held that certain procedural due process violations, such as the flat- out denial of the right to be heard on a material issue, can never be harmless.”); Kim v. Hurston, 182 F.3d 113, 119 (2d Cir. 1999) (commenting that even though the “minimal hearing that procedural due process requires would have done [the plaintiff] little good since she could not have realistically contested the changed reason,” that “[nevertheless, the procedural due process requirements] ... must be observed”); Lane Hollow Coal Co. v. Dir., Office of Workers' Compensation Programs, 137 F.3d 799, 806 (4th Cir. 1998) (“[A] just result is not enough.”); In re Boomgarden, 780 F.2d 657, 661 (7th Cir. 1985) (“In bankruptcy proceedings, both debtors and creditors have a constitutional right to be heard on their claims, and the denial of that right to them is the denial of due process which is never harmless error.” (internal quotation marks omitted)); In re George W. Myers Co., 412 F.2d 785, 786 (3d Cir. 1969) (holding that “alleged bankrupt was denied procedural due process by the ... refusal of its offer to present evidence at the close of the evidence” and that such denial could not be “harmless error”);

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 48 In Matter of Motors Liquidation Company, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 229 Republic Nat'l Bank of Dallas v. Crippen, 224 F.2d 565, 566 (5th Cir. 1955) (“The right to be heard on their claims was a constitutional right and the denial of that right to them was the denial of due process which is never harmless error.”); Phila. Co. v. SEC, 175 F.2d 808, 820 (D.C. Cir. 1948) (“Denial of a procedural right guaranteed by the Constitution—in this instance denial of the type of hearing guaranteed ... by the due process clause—is never ‘harmless error.’ ”), vacated as moot, 337 U.S. 901, 69 S.Ct. 1047, 93 L.Ed. 1715 (1949). 26 See A. Joseph Warburton, Understanding the Bankruptcies of Chrysler and General Motors: A Primer, 60 Syracuse L. Rev. 531, 531 (2010) (“Certain creditors, who saw their investments in the companies sharply reduced, vigorously objected to the role of the government in the bankruptcy process. Some charged that in protecting the interests of taxpayers, the Treasury Department negotiated aggressively with creditors but, in protecting the interests of organized labor, it offered the United Autoworkers union special treatment.”); see also GM, 407 B.R. at 496 (“The objectors' real problem is with the decisions of the Purchaser, not with the Debtor, nor with any violation of the Code or caselaw.”). 27 New GM informs the Court that a similar process occurred with respect to New GM accepting responsibility for postclosing accidents. 28 See Rattner, supra note 8, at 304 (“The auto rescue succeeded in no small part because we did not have to deal with Congress.”). 29 In reversing, we express no views on the Groman Plaintiffs' request for discovery to prove a procedural due process violation or fraud on the court. 30 We do not resolve whether it is appropriate for a bankruptcy court—as opposed to an appellate court—to apply equitable mootness, which appears to be a recent phenomenon. E.g., In re Innovative Clinical Sols., Ltd., 302 B.R. 136, 141 (Bankr. D. Del. 2003) (citing In re Circle K Corp., 171 B.R. 666, 669 (Bankr. D. Ariz. 1994), which nominally applied constitutional mootness); see also Alan M. Ahart, The Limited Scope of Implied Powers of a Bankruptcy Judge: A Statutory Court of Bankruptcy, Not A Court of Equity, 79 Am. Bankr. L.J. 1, 32–33 (2005) ( “Since a bankruptcy court is not a court of equity, a bankruptcy judge ought not resort to non-statutory equitable principles, defenses, doctrines or remedies to excuse compliance with or to override provision(s) of the Bankruptcy Code or rules, or nonbankruptcy federal law.” (footnotes omitted)). Indeed, this Circuit's equitable mootness cases have all involved an appellate body applying the doctrine in the first instance. See, e.g., BGI, 772 F.3d 102; In re Charter Commc'ns, Inc., 691 F.3d 476 (2d Cir. 2012); In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005); In re Burger Boys, Inc., 94 F.3d 755 (2d Cir. 1996); In re Chateaugay Corp., 94 F.3d 772 (2d Cir. 1996); In re Best Prods. Co., 68 F.3d 26 (2d Cir. 1995); Chateaugay III, 10 F.3d 944; Chateaugay II, 988 F.2d 322. 31 The bankruptcy court lifted the bar date for independent claims as a remedy. See MLC II, 529 B.R. at 583. We note, however, that neither the Groman Plaintiffs nor Ignition Switch Plaintiffs requested this as relief. The Ignition Switch Plaintiffs only mentioned in a footnote in their opposition to the motion to enforce that Old GM failed to provide notice of the bar date. The Pre–Closing Accident Plaintiffs stated on behalf of all plaintiffs that “Plaintiffs are not asserting a due process challenge to a bar date order or a discharge injunction issued in favor of a debtor.” Bankr. ECF No. 13021, at 48 n. 26. 32 The bankruptcy court seemingly agreed momentarily, commenting at the hearing that they could proceed “without now addressing and while maintaining reservations of rights with respect to issues such as ... equitable [moot]ness.” Id. at 8491.

2016 WL 3854277 PRESENT: JOSÉ A. CABRANES, SUSAN L. CARNEY, This case was not selected for CHRISTOPHER F. DRONEY, Circuit publication in West's Federal Reporter. Judges. RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY *1 Appellant John Nagle Co. (“Nagle”) appeals from a FEDERAL RULE OF APPELLATE PROCEDURE judgment of the District Court affirming a judgment of the 32.1 AND THIS COURT'S LOCAL RULE 32.1.1. United States Bankruptcy Court for the Northern District of WHEN CITING A SUMMARY ORDER IN A New York (Robert E. Littlefield, Jr., Judge). See John Nagle DOCUMENT FILED WITH THIS COURT, A PARTY Co. v. McCarthy, 539 B.R. 205 (N.D.N.Y. 2015). The MUST CITE EITHER THE FEDERAL APPENDIX Bankruptcy Court had entered judgment in an adversary OR AN ELECTRONIC DATABASE (WITH THE proceeding against Nagle, a fish-and-seafood wholesaler, and NOTATION “SUMMARY ORDER”). A PARTY CITING in favor of appellee William J. McCarthy (the “trustee”), the A SUMMARY ORDER MUST SERVE A COPY OF IT Chapter 7 trustee to the bankruptcy estate of the Cousins Fish ON ANY PARTY NOT REPRESENTED BY COUNSEL. Market, Inc. (“Cousins”), in the amount of $109,325.01 plus United States Court of Appeals, costs and interest, after ruling that certain transfers from Second Circuit. Cousins to Nagle were avoidable preferences under 11 U.S.C. In re: The Cousins Fish Market, Inc., Debtor. § 547(b). John Nagle Co., Appellant, On appeal, Nagle principally argues that the Bankruptcy v. Court erred by (1) excluding certain documentary evidence William J. McCarthy, as the Chapter and witness testimony from the bench trial; and (2) 7 Trustee to Bankruptcy Estate of the concluding that Nagle failed to prove its two affirmative Cousins Fish Market, Inc., Appellee. defenses under 11 U.S.C. § 547(c)(1) and (c) (2). We assume No. 15-3710-bk the parties' familiarity with the underlying facts, the | procedural history of the case, and the issues on appeal. For July 12, 2016 the reasons set forth below, we reject Nagle's appeal as meritless. Appeal from a judgment of the United States District Court for the Northern District of New York (Gary L. Sharpe, First, we conclude that the Bankruptcy Court did not abuse its Judge). discretion in excluding evidence from the bench trial that had UPON DUE CONSIDERATION WHEREOF, IT IS not been produced to the trustee during discovery. After conducting a hearing on the trustee's motion in limine, the HEREBY ORDERED, ADJUDGED, AND DECREED Bankruptcy Court articulated the factors from Patterson v. that the October 14, 2015 judgment of the District Court is Balsamico, 440 F.3d 104, 117 (2d Cir. 2006), and considered AFFIRMED. each seriatim. The Bankruptcy Court found that, although the new evidence was important to Nagle because Nagle would Attorneys and Law Firms be unlikely to prove its affirmative defenses without it, the FOR APPELLANT: JOSEPH S.U. BODOFF, Rubin and other three factors weighed in favor of exclusion: The Rudman LLP, Boston, MA. Bankruptcy Court found that Nagle had failed to meaningfully explain why the evidence was not produced or FOR APPELLEE: CHRISTIAN H. DRIBUSCH, The disclosed; that prejudice to the trustee would be great given Dribusch Law Firm, East Greenbush, NY. that discovery had been closed for more than three months despite previous extensions; and that a continuance would be inopportune because the bench trial was scheduled to © 2016 Thomson Reuters. No claim to original U.S. Government Works. 50 In re Cousins Fish Market, Inc., --- Fed.Appx. ---- (2016) commence in only two weeks and pretrial statements were due in less than one week. As for the proposed witness testimony at issue, the Bankruptcy Court found that it would be improperly based on undisclosed evidence, not

personal knowledge. Based on the Bankruptcy Court's findings, and our independent review of the record, we cannot say that the Bankruptcy Court abused its discretion in excluding the documentary evidence and related witness testimony.

Second, we conclude that the Bankruptcy Court—based on the limited record evidence resulting from the above rulings—did not err in ruling that Nagle failed to establish its affirmative defenses. See 11 U.S.C. § 547(g) (“[T]he creditor or party in interest against whom recovery or avoidance is sought has the burden of proving the nonavoidability of a transfer under subsection (c) of this section.”).

With respect to the contemporaneous-exchange-for-newvalue defense, the Bankruptcy Court did not err in concluding that Nagle failed to prove the requisite intent. See id. § 547(c)(1). As the Bankruptcy Court pointed out, Nagle introduced no testimony or contractual terms governing the transfers. And although reasonable inferences of intent can be drawn from the invoices and corresponding checks between the parties, we cannot say in these circumstances that the Bankruptcy Court's finding that Nagle failed to prove intent was clearly erroneous. See Ceraso v. Motiva Enters., LLC, 326 F.3d 303, 316 (2d Cir. 2003) (explaining that the clearly erroneous standard “applies [after a bench trial] whether ... findings are based on witness testimony, or on documentary evidence, or on inferences from other facts” and that “[i]n reviewing findings for clear error, we are not allowed to secondguess ... the trial court's ... choice between permissible competing inferences”). Accordingly, the Bankruptcy Court did not err in ruling that Nagle failed to prove the defense

*2 With respect to the ordinary-course-of-business defense, the Bankruptcy Court did not err in concluding that Nagle failed to prove a sufficient baseline of prior dealings between the parties. See 11 U.S.C. § 547(c)(2). The Bankruptcy Court found that Nagle had submitted 44 invoices, but that 37 of these were dated within the preference period (July 28, 2009 to October 26, 2009), and the remaining 7 were dated within the week before the preference period; and that only 2 of the checks tendered by Cousins were dated before the preference period. The Bankruptcy Court further found a lack of evidence of when payments were due during the pre-preference period or of an agreement between the parties that showed the terms of the transfers or what was expected of the parties. Based on the Bankruptcy Court's findings, which were not clearly erroneous, and the paucity of evidence regarding pre-preference-period transfers, we agree with the Bankruptcy Court that Nagle failed to prove that the transfers at issue were made in the ordinary course of business or according to ordinary business terms. See id. Accordingly, the Bankruptcy Court did not err in ruling that Nagle failed to prove the defense.

CONCLUSION

We have considered all of the appellant's remaining arguments and find them to be without merit. Accordingly, we AFFIRM the October 14, 2015 judgment of the District Court.

All Citations

--- Fed.Appx. ----, 2016 WL 3854277 (Mem)

This case was not selected for v. publication in West's Federal Reporter. DENNIS A. KLEJNA, JPMORGAN RULINGS BY SUMMARY ORDER DO NOT HAVE CHASE & CO., Defendants - Appellees. PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY Nos. 14-3446(L) 1, 2007, IS PERMITTED AND IS GOVERNED BY | FEDERAL RULE OF APPELLATE PROCEDURE 14-3480(CON) 32.1 AND THIS COURT'S LOCAL RULE 32.1.1. | WHEN CITING A SUMMARY ORDER IN A At a stated term of the United States Court DOCUMENT FILED WITH THIS COURT, A PARTY of Appeals for the Second Circuit, held at MUST CITE EITHER THE FEDERAL APPENDIX the OR AN ELECTRONIC DATABASE (WITH THE Thurgood Marshall United States Courthouse, NOTATION “SUMMARY ORDER”). A PARTY CITING 40 Foley Square, in the City of New York, on A SUMMARY ORDER MUST SERVE A COPY OF IT the 29th day of July, two thousand sixteen. ON ANY PARTY NOT REPRESENTED BY COUNSEL. | United States Court of Appeals, July 29, 2016 Second Circuit. Appeal from a judgment of the United States District Court KENNETH M. KRYS, AS JOINT OFFICIAL for the Southern District of New York (Rakoff, J., Lynch, J.). LIQUIDATOR OF SPHINX LTD., SPHINX STRATEGY FUND, LTD., SPHINX PLUS SPC Attorneys and Law Firms LTD., SPHINX DISTRESSED LTD., SPHINX For Plaintiffs-Appellants: DAVID J. MOLTON (Andrew S. MERGER ARBITRAGE LTD., SPHINX MACRO Dash, on the brief), Brown Rudnick LLP, New York, NY., LTD., SPHINX LONG/SHORT EQUITY LTD., Leo R. Beus & Lee M. Andelin, Beus Gilbert PLLC, SPHINX MANAGED FUTURES LTD., ET AL.; AS Phoenix, AZ. ASSIGNEE OF CLAIMS ASSIGNED BY MIAMI CHILDRENS HOSPITAL FOUNDATION, OFI For Defendants-Appellees: PHILIP D. ANKER (Ross E. ASSET MANAGEMENT, GREEN & SMITH Firsenbaum, Ari J. Savitsky, on the brief), Wilmer Cutler INVESTMENT MANAGEMENT LLC, THALES Pickering Hale and Dorr LLP, New York, NY, for JPMorgan FUND MANAGEMENT LLC, KELLNER DILEO & Chase & Co., HELEN B. KIM, Thompson Coburn LLP, Los CO. LLC, MARTINGALE ASSET MANAGEMENT Angeles, CA, for Dennis A. Klejna. LP, LONGACRE FUND MANAGEMENT LLC, ET Present: ROSEMARY S. POOLER, PETER W. HALL, AL., MARGOT MACINNIS, AS JOINT OFFICIAL SUSAN L. CARNEY, Circuit Judges. LIQUIDATOR OF SPHINX LTD., SPHINX STRATEGY FUND, LTD., SPHINX PLUS SPC Opinion LTD., SPHINX DISTRESSED LTD., SPHINX *1 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that the MERGER ARBITRAGE LTD., SPHINX MACRO judgment of the district court is AFFIRMED. LTD., SPHINX LONG/SHORT EQUITY LTD., SPHINX MANAGED FUTURES LTD., ET AL.; AS Plaintiffs-Appellants, a group of now-defunct hedge funds, ASSIGNEE OF CLAIMS ASSIGNED BY MIAMI appeal from the district court's judgment adopting the Special CHILDRENS HOSPITAL FOUNDATION, OFI Master's Report and Recommendation and dismissing their ASSET MANAGEMENT, GREEN & SMITH state law claims against DefendantsAppellees Dennis A. INVESTMENT MANAGEMENT LLC, THALES Klejna and JPMorgan Chase & Co. (“Chase”).1 We assume FUND MANAGEMENT LLC, KELLNER DILEO & the parties' familiarity with underlying facts, procedural CO. LLC, MARTINGALE ASSET MANAGEMENT history, and issues presented on appeal. LP, LONGACRE FUND MANAGEMENT LLC, ET AL., HARBOUR TRUST CO. LTD., AS TRUSTEE OF THE SPHINX TRUST, Plaintiffs - Appellants, 1. Abstention

The plaintiffs argue that the district court was required to to Illinois state court, the “difference in timing appear[ed] to abstain from hearing the case under 28 U.S.C. § 1334(c)(2), be a matter of months, rather than years.” Parmalat Capital which provides that, for state-law causes of action “related Fin. Ltd. v. Bank of Am. Corp., 671 F.3d 261, 267 (2d Cir. to” (but not “arising under” or “arising in”) title 11, 2012) (Parmalat II). In this case, by contrast, many of the defendants were dismissed, and the claims against those with respect to which an action could not have been defendants would need to be litigated from scratch. Further, commenced in a court of the United States absent unlike the Parmalat litigation, this case does not raise any jurisdiction under this section, the district court shall novel legal questions, and the relevant state law was well- abstain from hearing such proceeding if an action is established. Cf. id. (noting uncertainty as to whether a in pari commenced, and can be timely adjudicated, in a State delicto defense would be available against a bankruptcy forum of appropriate jurisdiction. trustee under Illinois state law). Finally, the bankruptcy proceedings of SPhinX Ltd. (“SPhinX”), a plaintiff in this “Four factors come into play in evaluating § 1334(c)(2) case, remain open, and any damages awarded in this case timeliness: (1) the backlog of the state court's calendar could affect the administration of that estate, as the plaintiffs relative to the federal court's calendar; (2) the complexity of concede. We agree with the district court that, in these the issues presented and the respective expertise of each circumstances, abstention was not mandatory. forum; (3) the status of the title 11 bankruptcy proceeding to which the state law claims are related; and (4) whether the state court proceeding would prolong the administration or 2. Dismissal of Defendant Klejna liquidation of the estate.” Parmalat Capital Fin. Ltd. v. Bank *2 The plaintiffs further challenge the district court's of Am. Corp., 639 F.3d 572, 580 (2d Cir. 2011) (Parmalat I). dismissal of Defendant-Appellee Klejna. We review de novo “Whether an action can be timely adjudicated in state court is a district court's decision to grant a motion to dismiss. a mixed question of law and fact. The factual inquiry focuses Kassner v. 2nd Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d on how quickly a case can be adjudicated in state court; the Cir. 2007). To survive a motion to dismiss, a complaint must legal inquiry asks if this pace is sufficiently swift. Given this contain sufficient factual matter, accepted as true, to “state a mixed question of law and fact, we review the court's claim to relief that is plausible on its face.” Ashcroft v. Iqbal, determination de novo.” Id. 556 U.S. 662, 678 (2009).

The district court properly ruled that abstention was not We agree with the Special Master's reasoning and conclusion required.2 The plaintiffs argue that their claims could be that the plaintiffs lacked standing to sue Klejna. On a motion “timely adjudicated” in New York or New Jersey state courts. to dismiss, “it is the burden of the party [asserting standing to Although the plaintiffs rely on the general time-processing sue] ... clearly to allege facts demonstrating that he is a proper standards of those courts, this fails to account for the nature party to invoke judicial resolution of the dispute.” Thompson of their claims, which (as the district court found) were “one v. Cty. of Franklin, 15 F.3d 245, 249 (2d Cir. 1994) (quoting piece of a much larger, extremely complex litigation puzzle.” Warth v. Seldin, 422 U.S. 490, 518 (1975)). The Second Krys v. Sugrue, No. 08CIV3065(GEL), 2008 WL 4700920, Amended Complaint alleges that Klejna was involved with at *9 (S.D.N.Y. Oct. 23, 2008) (internal quotation marks diverting the plaintiffs' funds from Refco LLC into omitted). We have explained that “when the facts in a case unsegregated accounts at its unregulated, offshore subsidiary, are especially complex, the forum with greater familiarity Refco Capital Markets (“RCM”), where the funds were with the record may likewise be expected to adjudicate the commingled for use in fraudulent activities designed to matter more quickly.” Parmalat I, 639 F.3d at 581. As the conceal Refco's losses, bolster Refco's financial statements, district court recognized, remanding these actions to state and enrich various individuals. court “would simply complicate and slow down the resolution of those claims, as well as of the matters already While the plaintiffs have standing to sue for the excess funds pending before this Court.” Krys, 2008 WL 4700920, at *10 that were taken out of the Refco accounts and moved to (internal quotation marks omitted). The Second Circuit's RCM, the Special Master concluded that any damages to the decisions in Parmalat I and Parmalat II do not change this plaintiffs would not have flowed from that transfer, but conclusion. In those cases, the Court emphasized that because instead they flowed from the underlying Refco fraud. The the completed summary judgment record could be transferred plaintiffs lack standing to sue for the Refco fraud, however,

because their claims are derivative of the harm that occurred that there was a primary violation (e.g., fraud), (2) the to Refco. The plaintiffs allege, in essence, that Refco could defendant had “actual knowledge” of the primary violation, not pay them back because it was looted and went bankrupt. and (3) the defendant provided substantial assistance to We conclude for that reason that their damages are thus no advance the commission of the primary violation. Krys v. different from those suffered by any other creditor of Refco. Pigott, 749 F.3d 117, 127 (2d Cir. 2014). Moreover, under Fed. R. Civ. P. 9(b), “[i]n asserting claims of fraud— To the extent that the plaintiffs' damages arise from Refco's including claims for aiding and abetting fraud or a breach of insolvency, they must be resolved in the bankruptcy fiduciary duty that involves fraud— a complaint is required proceeding because they are property of the estate. See 11 to plead the circumstances that allegedly constitute fraud with U.S.C. § 541(a)(1). And those claims largely have been particularity.” Id. at 129. resolved. Klejna has settled with the Refco trustee, and payment pursuant to that settlement was made available for *3 The district court properly dismissed these claims creditors to pursue. Further, the plaintiffs settled with the because the plaintiffs did not plead Chase's knowledge with RCM trustee and agreed to relinquish their claims in particularity. The plaintiffs' complaint alleges a claim that exchange for approximately $50 million. Permitting the some Refco party breached its fiduciary duty by transferring plaintiffs to bring civil suit against Klejna when they have money to unsegregated accounts without authorization. already had the opportunity to recover as creditors to Refco Nothing in the complaint indicates, however, that Chase in the bankruptcy proceedings would give them the prospect knew the transfers were unauthorized. While Chase may have of a double recovery, and it would undermine “[t]he trustee's known that the money was transferred from segregated to single effort [which] eliminates the many wasteful and unsegregated accounts, this transfer in and of itself was not a competitive suits of individual creditors.” Koch Refining v. breach of fiduciary duty without Chase having knowledge Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1342– 43 that the transfers were unauthorized. (7th Cir. 1987). For substantially the reasons set forth in the Special Master's Report and Recommendation, we find the plaintiffs' arguments unpersuasive. Because the plaintiffs' Conclusion claims against Klejna for damages arising from Refco's insolvency estate are derivative, the plaintiffs lack standing We have considered Appellants' remaining arguments and to pursue them. Dismissal of the claims against Klejna was find them to be without merit. The judgment of the district proper. court is AFFIRMED.

FOR THE COURT: 3. Dismissal of claims against Chase Finally, the plaintiffs challenge the district court's dismissal CATHERINE O'HAGAN WOLFE, CLERK of their claims against Chase for aiding and

All Citations Footnotes --- Fed.Appx. ----, 2016 WL 4059542 abetting fraud (and related claims). To plead aiding and abetting under New York law, the plaintiffs must allege (1) 1 Since oral argument, the parties have stipulated timely to raise it because the plaintiffs' arguments fail pursuant to Fed. R. App. P. 42(b) to dismiss the on the merits in any event. appeals as to Defendants-Appellees Merrill Lynch, End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. Pierce, Fenner & Smith Incorporated, as successor- by-merger to Banc of America Securities LLC, and Credit Suisse Securities LLC, FKA Credit Suisse First Boston LLC. (See Order, ECF No. 232). 2 We need not address the defendants' argument that the plaintiffs waived their abstention claim by failing

On May 4, 2014, the Debtors filed chapter 11 bankruptcy 62 Bankr.Ct.Dec. 246 petitions. On July 25, 2014, the Court confirmed the Debtors' chapter 11 plan of reorganization. (D.I.316.) The Defendant filed a proof of claim seeking $260,866.67 from the unpaid 2016 WL 3963978 stock-based portion of his compensation. On March 18, 2016, United States Bankruptcy Court, the Debtors filed a complaint seeking a declaration that the D. Delaware, Defendant's claim is not a general unsecured claim or, FOR THE DISTRICT OF DELAWARE. alternatively, that the claim should be subordinated under section 510(b). (Adv.D.I.1.) The Debtors filed an amended In re: GSE Environmental, Inc., et al., Debtors. complaint on March 25, 2016. (Adv.D.I.6.) The Defendant GSE Environmental, Inc., and filed an answer to the amended complaint on May 10, 2016. GSE Holding, Inc. Plaintiffs, (Adv.D.I.8.) On May 25, 2016, the Debtors filed a Motion for v. Judgment on the Pleadings. (Adv.D.I.12.) A notice of Charles A. Sorrentino, Defendant. completion of briefing on that motion was filed on June 24, 2016, and the matter is now ripe for decision. (Adv.D.I.25.) Case No. 14-11126 (MFW) Jointly Administered | Adversary No. 16-50377 (MFW) II. JURISDICTION | The Court has subject matter jurisdiction over this adversary Signed July 18, 2016 proceeding. 28 U.S.C. §§ 1334(b) & 157(b) (1). The Court may enter a final order in proceedings concerning claim allowance. Stern v. Marshall, 131 S.Ct. 2594, 2611 (2011).

MEMORANDUM OPINION1 III. DISCUSSION Mary F. Walrath, United States Bankruptcy Judge A. Standard of Review *1 Before the Court is a Motion for Judgment on the Rule 12(c) provides that “[a]fter the pleadings are closed — Pleadings filed by GSE Environmental, Inc., and GSE but early enough not to delay trial — a party may move for Holding, Inc. (the “Debtors”) seeking a declaration that the judgment on the pleadings.” Fed.R.Civ.P. 12(c). When a claim filed by Charles Sorrentino (the “Defendant”) plaintiff moves for judgment on the pleadings, “[u]nder Rule constitutes an equity security. For the reasons set forth below, 12(c), judgment will not be granted unless the movant clearly the Debtors' Motion will be granted. establishes that no material issue of fact remains to be resolved and that he is entitled to judgment as a matter of law. I. BACKGROUND In reviewing the grant of a Rule 12(c) motion, [a court] must The Defendant began serving as the Debtors' interim view the facts presented in the pleadings and the inferences president and chief executive officer on July 1, 2013. (Adv. to be drawn therefrom in the light most favorable to the non- D.I. 1 at 1.) Under the parties' original employment moving party.” Jablonski v. Pan Am. World Airways, Inc., agreement, the Defendant earned a base salary of $186,000 863 F.2d 289, 290–91 (3d Cir.1988) (internal quotation per month payable in cash. (Id. at 4.) In August 2013, the marks and citations omitted). If a defendant moves for parties amended the employment agreement to provide that judgment on the pleadings, a court applies the standard for $100,000 of Defendant's monthly compensation would be failure to state a claim under Rule 12(b)(6). See Turbe v. payable in cash and $86,000 payable in company stock. (Id.) Virgin Islands, 938 F.2d 427, 428 (3d Cir.1991). Although the Defendant received the full cash portion of his compensation under the amended employment agreement, B. Equity Security the stock-based component *2 The Debtors contend that the amount owed for the share- remains unpaid. (Id. at 5.) based component of the Defendant's compensation constitutes an equity security. The

Defendant disagrees, contending that the amounts owed Footnotes should be characterized as a general unsecured claim. Although the quantity of stock owed to the Defendant under the amended employment agreement was based on a fixed The Bankruptcy Code defines “equity security” to encompass dollar amount, the fact remains that the agreement entitled the “warrants or rights ... to purchase, sell ... a share, security, or Defendant only to company stock, not cash. See Nantahala interest” in a corporation. 11 U.S.C. § 101(16) (A),(C). Capital Partners, LP v. Wash. Mut., Inc. (In re Wash. Mut., Common stock received in exchange for labor constitutes a Inc.), 464 B.R. 656, 666– 68 (Bankr.D.Del.2012). Further, purchase and sale of a security under the Code. Frankum v. the stock rights received under the amended employment Int'l Wireless Commc'ns Holdings, Inc. (In re Int'l Wireless agreement constitute a purchase and sale of a security Commc'ns Holdings, Inc.), 279 B.R. 463, 467 (D.Del.2002) because they were given in exchange for the Defendant's (“That Appellants received the Debtors' stock as part of a labor. Touch America, 381 B.R. at 104. Therefore, the Court compensation package does not preclude the transfer from concludes that the Defendant's stock-based compensation fits being characterized as a purchase/sale of the Debtors' squarely within the Code's definition of equity security. See stock.”); In re Touch America Holdings, Inc., 381 B.R. 95, 11 U.S.C. § 101(16). For the foregoing reasons, the Courts 104 (Bankr.D.Del.2008) (adopting a broad reading of the finds that the unpaid stock-based compensation constitutes an term “purchase” and noting that “stock given to an employee equity security. as compensation nonetheless involves a ‘bargain and exchange of value’ ”). An entity asserting an equity interest is not a creditor and does not have a “claim” under the Code. IV. CONCLUSION In re Lehman Bros. Holdings Inc., 519 B.R. 47, 66 For the reasons set forth above, the Debtors' Motion for (Bankr.S.D.N.Y.2014), aff'd, 548 B.R. 663 (S.D.N.Y.2016) Judgment on the Pleadings will be granted. (citation omitted). An appropriate Order follows. The Defendant contends that the value of stock owed to him constitutes a claim because the stock component of his All Citations compensation was calculated as a fixed dollar amount rather than a fixed number of shares. The Court disagrees. Slip Copy, 2016 WL 3963978, 62 Bankr.Ct.Dec. 246

1 This Memorandum Opinion constitutes the findings of

fact and conclusions of law of the Court pursuant to

Rule 7052 of the Federal Rules of Bankruptcy Procedure.

2016 WL 4011727 Tyson supplied meat products to the Debtors.4 On June 17, United States Bankruptcy Court, 2014, Tyson filed a motion for allowance of an administrative D. Delaware. expense claim seeking payment for the post-petition deliveries (the “Administrative Claim”). On July 15, 2014 In re: Quantum Foods, LLC, et al.,1 Debtors. this Court entered the Order Allowing Administrative Expense Claim of Tyson Fresh Meats, Inc. Pursuant to 11 Case No. 14–10318 (Jointly Administered) U.S.C. § 503(b)(1)(A) (“Administrative Claim Order”) in the | 5 Adv. No. 15–50254 (KJC) amount of $2,603,841.09. | Signed July 25, 2016 On March 25, 2015, the Committee initiated an adversary proceeding against Tyson, seeking to avoid preferential and fraudulent transfers under §§ 547 and 548, to recover those transfers under § 550, and to disallow any of Tyson's claims against the Debtor until after the voided transfers are returned OPINION2 pursuant to § 502(d).6 On April 30, 2015, Tyson answered BY: KEVIN J. CAREY, UNITED STATES BANKRUPTCY the Committee's complaint, denying that Debtors' transfers to JUDGE Tyson constitute avoidable preferences, and asserting counterclaims and third-party claims against the Debtors. *1 The Official Committee of Unsecured Creditors (the Tyson contends that the Committee's claims to recover “Committee”) of Quantum Foods, LLC seeks to avoid and avoidable preferential transfers are post-petition causes of recover multiple transfers totaling $13,596,149 to Tyson action and that Tyson is entitled to set off any recovery claims Fresh Meats, Inc. and $151,784 to Tyson Foods, Inc. (referred by the amount of its allowed post-petition Administrative to jointly herein as “Tyson”) pursuant to Claim. Tyson also seeks a declaratory judgment that Bankruptcy Code §§ 547, 548(a)(1)(B), and 550. The disallowance under § 502(d) applies only to pre-petition Committee also asserts that any claim Tyson holds against claims and therefore will not interfere with the allowed post- the Debtors' estates should be disallowed pursuant to petition Administrative Claim. The Committee answered Bankruptcy Code § 502(d) until Tyson returns the amount of Tyson's counterclaims, and the Debtors answered Tyson's the alleged preferential transfers to the Debtors' estates. In thirdparty complaint. response, Tyson disputes that the transfers are voidable, asserts various defenses, and claims a right to set off a *2 The Committee filed a Motion for Judgment on the previously allowed post-petition administrative expense Pleadings with respect to Count I of the Counterclaim and claim. The Committee argues that Tyson's setoff claim is not Third–Party Complaint of Tyson Fresh Meats, Inc. (the proper and now move for judgment on the pleadings with 7 8 respect to Tyson's setoff claim. “Motion”). The Debtors filed a joinder to the Motion. The parties requested oral argument on the Motion, which was held on February 3, 2016. Undisputed Facts

The parties agree on the following relevant facts: Discussion

On February 18, 2014 (the “Petition Date”), the Debtors filed As far as I am able to determine, this case presents a question voluntary chapter 11 bankruptcy petitions in this Court. On of first impression in this Court: Whether an allowed post- February 27, 2014, the U.S. Trustee appointed the petition administrative expense claim can be used to set off Committee. On July 14, 2014, this Court entered an order preference liability. There is no provision in the Bankruptcy conferring standing on the Committee to investigate and Code that deals expressly with postpetition setoff.9 prosecute, among other claims, the Debtors' causes of action under chapter 5 of the Bankruptcy Code.3 Approximately two The parties agree that In re Friedman's makes clear that months after the Petition Date, “goods or services provided to the debtor post-petition cannot

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 57 In re Quantum Foods, LLC, Slip Copy (2016) 62 Bankr.Ct.Dec. 244 be used as ‘subsequent new value.’ ”10 Tyson instead argues *4 I am not persuaded by the Committee's argument that that its claim is an extrinsic setoff claim, wholly unrelated to Tyson's claim is a disguised new value defense because it has the concept of new value defense or to the § 547 preference the effect of reducing the amount of preferential transfers analysis generally. The Committee and the Debtors argue that returned to the estate. Tyson's setoff claim does not affect the Tyson's setoff claim is really a “disguised” or “renamed” bottom line of the preference calculation; rather, setting off post-petition new value defense because, like a new value Tyson's Administrative Claim effects only the amount paid to defense, it has the effect of reducing the total amount of the estate. Tyson's Administrative Claim affects the preferential transfers restored to the estate. According to the preference claim externally, not internally. This distinction is Committee and the Debtors, such a result would also violate not merely semantic but rather evinces the nature of Tyson's § 502(d), which prohibits courts from allowing claims by claim. preferencedefendants until after they have paid the amount Tyson's claim fits squarely into the definition of “setoff,” for which they are liable.11 which is “[a] counterclaim demand which defendant holds against plaintiff, arising out of a transaction that is extrinsic *3 If, as contended by the Committee and the Debtors, 15 Tyson's claim is a new value defense, it is not allowable of plaintiff's cause of action.” Here, the Committee's cause pursuant to the rationale implicit in the Friedman's holding of action is the § 547(b) preference action, whereas Tyson's that post-petition activity may not factor into the preference counterclaim is an independent, pre-existing and wholly unrelated postpetition administrative expense claim. calculation.12 If it is not a new value defense but rather an ordinary setoff claim, as contended by Tyson, set off may be I conclude that Tyson correctly characterizes its claim as a allowable. setoff claim, rather than as a post-petition new value defense. As articulated by the Third Circuit in Friedman's, the Setoff claim or post-petition new value defense? preference analysis cannot be affected by post-petition In the absence of explicit statutory pronouncement on the activity. matter, some courts have held that a preference analysis, including the impact of new value on such analysis, need not Setoff Analysis be cut off at the petition date.13 However, as expressed by the Third Circuit in Friedman's, none of these courts has made a Having concluded that Tyson's claim is an assertion of setoff convincing contextual argument and the law and reasoning in rights and not a new value defense, I turn to whether Tyson's favor of confining preference calculations to the preference setoff claim is allowed under the law concerning setoff.16 period is sufficiently weighty.14 The term “new value,” as The judicial consensus is that “setoff is only available in used in § 547(c)(4), is a specific defense to a preference claim bankruptcy when the opposing obligations arise on the same and only has meaning or applicability in the context of a side of the ... bankruptcy petition date.”17 Indeed, many preference analysis which, as articulated by the Third Circuit, courts have held that setoff applies to mutual, post-petition is limited to the preference period. Thus it makes no sense to obligations, including the Courts of Appeals for the Fifth refer to any claim arising outside of the preference period as Circuit,18 and the Tenth Circuit,19 and bankruptcy courts in a new value defense. “New value defense” necessarily the Eastern involves pre-petition activity, so juxtaposition of the term 20 “post-petition” and the term “new value defense” is District of Pennsylvania, and the Districts of New incongruous. The essence of Tyson's assertion of its right to Jersey,21 Rhode Island,22 and Massachusetts.23 Tyson's retain the value of its allowed postpetition Administrative Administrative Claim is clearly a post-petition obligation of Claim reveals that it cannot be a “new value defense,” Debtor. Therefore, setoff is permissible in this case only if the precisely because it is comprised exclusively of post-petition allegedly opposing obligation—the preference claim—also activity; a § 547(c)(4) new value defense is limited to pre- arises post-petition, Tyson argues that § 547 preferential petition activity. transfer claims are post-petition causes of action. The Third Circuit says impliedly in Friedman's— and it is axiomatic— that a preference cause of action concerns only preference

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 58 In re Quantum Foods, LLC, Slip Copy (2016) 62 Bankr.Ct.Dec. 244 period or pre-petition facts.24 Just as obvious is the fact that that a preference would be used to prevent payment of their a preference claim can be asserted only after the filing of a administrative claims, they would be extremely reluctant to 29 bankruptcy petition—or post-petition. extend post-petition credit to a chapter 11 debtor.”

*5 The Bankruptcy Code defines “claim” as a “right to The Committee and the Debtors emphasize the importance of payment.”25 A preference “right to payment,” or preference equality of distribution among a debtors' creditors. After all, the purpose of a preference action is to facilitate this prime claim, necessarily arises only post-petition: bankruptcy policy.30 Judge Walrath rejected a similar The estate's causes of action for the equality of distribution argument in In re Communication preferences did not exist before the Dynamics, Inc., stating that “[e]quity does not mandate that filing of the Chapter 11 petition. If the one creditor lose rights it has under state law and the Debtor had never filed bankruptcy, Bankruptcy Code simply because other creditors will benefit none of the preference actions could by that loss.”31 ever have been brought by anybody.... The fact that the trustee's ability to *6 Moreover, in Friedman's, the Third Circuit observed that recover a given transfer as a the rule of treating creditors equally is not hard and fast: preference depends on prepetition actions is irrelevant. A preference If it is a rule in bankruptcy that all creditors must be treated action can only be initiated in the equally, surely the exceptions swallow the rule. It could be context of a bankruptcy case after the said that some creditors are treated more equally than filing of a bankruptcy case.26 others. There are special provisions for aircraft leases and shopping center leases, and some claims are given priority over others. The balancing of interests in, for instance, Bankruptcy Code § 502(d) wage orders, has been held to justify the type of unequal Section 502(d) of the Bankruptcy Code states broadly that treatment condemned in cases that would include the post- “the court shall disallow any claim of any entity ... that is a petition payment in the preference analysis. See, e.g., In re transferee of a transfer avoidable under ... [§ 547] ... unless Primary Health Sys., Inc., 275 B.R. 709, 709 such entity or transferee has paid the amount ... for which (Bankr.D.Del.2002) (holding payments pursuant to court such entity or transferee is liable.”27 order allowing debtor to pay employee wages and benefits to be out of reach of § 547). Inequality perse is not to be The Committee argues that § 502(d) prohibits set off of avoided; indeed, reasoned and justified inequality Tyson's administrative claim against any potential preference sometimes prevails, usually based on what is in the best liability. The argument overlooks case law recognizing that interest of the estate. For this reason, the courts positing “administrative expense claims are accorded special that the interpretation that “results in absolutely equal treatment under the Bankruptcy Code and are not subject to treatment of all unsecured claims” is the “most reasonable 32 section 502(d).”28 Section 502(d), by its terms, does not interpretation of section 547(c)(4),”... are misguided. include administrative expense claims. Conversely, § 503, which addresses administrative expense claims, has no Conclusion provision similar to 502(d) disallowing administrative claims if the administrative claimant fails to satisfy a preference The Committee's Motion for judgment on the pleadings with liability. In Lids, Judge Walrath went on to say, “extensions respect to Count I of Tyson's counterclaim will be denied. An of 502(d) to administrative claims could have devastating appropriate order follows. effects on a debtor's ability to reorganize. If trade vendors felt All Citations

Slip Copy, 2016 WL 4011727, 62 Bankr.Ct.Dec. 244

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 59 In re Quantum Foods, LLC, Slip Copy (2016) 62 Bankr.Ct.Dec. 244 Footnotes 1 The chapter 11 cases of the following Debtors are jointly administered: Quantum Foods, LLC; Quantum Foods 213–D, LLC; Quantum Culinary, LLC; GDC Logistics, LLC; and Choice One Foods, LLC (the “Debtors”). 2 This Opinion constitutes the findings of fact and conclusions of law, as required by Fed. R. Bankr.P. 7052. This Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 157 and § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B), (F), and (H). 3 Order dated July 14, 2016 (Main Case D.I. 525). 4 While the exact dates of delivery are uncertain, both parties agree that Tyson sold various meat products to the Debtors between April 11, 2014 and April 23, 2014. See Defendants' Answer to Complaint, and Defendants' Counterclaims and Third– Party Complaint, p. 14, 8, 10 (Main Case, D.I. 5) (the “Answer”) and Debtors' Answer to Third–Party Complaint of Tyson Fresh Meats, Inc., p. 3, 8, 10 (Main Case, D.I. 16) (the “Debtors' Answer to Third–Party Complaint”). 5 Main Case D.I. 536. 6 I do not address the § 548 count for fraudulent transfer, a claim that often accompanies a preference claim. Since the parties center on the preference aspects of the question surrounding setoff, for purposes of this decision only, I, too, will focus on the Committee's request for § 547 relief. 7 Adv. D.I. 29. 8 Adv. D.I. 32. 9 Including 11 U.S.C. § 549–“Postpetition transactions” and 11 U.S.C. § 553–“Setoff”, which deals exclusively with prepetition setoff. 10 See Opening Br. in Support of Mot. for J. on the Pl., 4–5 (Adv.D.I. 30); Answering Br., 13 (Adv.D.I.34); and Reply, p. 1 (Adv.D.I.36) (citing generally Friedman's Liquidating Tr. v. Roth Staffing Co., LP (In re Friedman's, Inc.), 738 F.3d 547 (3d Cir.2013)). This idea is not expressly stated in the Friedman's opinion. Friedman's dealt with services provided to the debtor pre-petition and payment issued to the creditor for those services post-petition. The Friedman's Court held that the post- petition payment did not affect the preference analysis because the petition date marks the end of the preference analysis period. Both Friedman's and the case at hand are bankruptcy cases about the effect of post-petition activity on preference claims, but the parallels end there. In Friedman's, the debtor obtained a post-petition wage order to pay (and did pay) the preference-defendant for services performed during the pre-petition preference period. Here, however, preferencedefendant Tyson obtained a post- petition order allowing payment by the debtor of its administrative claim for goods delivered post-petition, but Tyson was not paid. In Friedman's the preference- defendant asserted a new value defense to the preference action based on new value provided to the debtor during the preference period. Here, Tyson asserts a right to set off its allowed post-petition administrative claim against any liability that may result in the preference action. In Friedman's, the plaintiff insisted that the preference-defendant's new value defense based on pre-petition services be adjusted by the post-petition payment of those services. Here, the Committee insists that Tyson not be permitted to set off any post-petition preference judgment with an allowed post-petition administrative claim. 11 11 U.S.C. § 502(d).

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 60 In re Quantum Foods, LLC, Slip Copy (2016) 62 Bankr.Ct.Dec. 244 12 Friedman's, 738 F.3d at 556 (“Extending preference analysis past the petition date would be inconsistent with 11 U.S.C. § 547(b)(5).”). 13 See Friedman's, 738 F.3d at 553–54 (citing Gonzales v. Sun Life Ins. Co. (In re Furr's Supermarkets, Inc.), 485 B.R. 672, 733–34 (Bankr.D.N.M.2012) (holding that cutting off preference calculation at petition date “makes no economic sense”); Moglia v. Am. Psychological Ass'n (In re Login Bros. Book Co.), 294 B.R. 297, 300 (Bankr.N.D.Ill.2003) (“[B]oth the plain language and policy behind the statute indicate that the timing of a repayment of new value is irrelevant.”); MMR Holding Corp. v. C & C Consultants, Inc. (In re MMR Holding Corp.), 203 B.R. 605, 609 (Bankr.M.D.La.1996) (“An unavoidable post-petition transfer on account of new value extended subsequent to a preference should limit the use of § 547(c) (4) by the amount of the unavoidable transfer, as without a reduction in the new value offset, the transferee would be receiving double use of the new value .... ”); and Wallach v. Vulcan Steam Forging (In re D.J. Mgmt. Grp.), 161 B.R. 5, 8 (Bankr.W.D.N.Y.1993) (holding that post-petition payments on new value must be considered under § 547(c)(4))). 14 See Friedman's, 738 F.3d at 554–57. Friedman's gives no fewer than five reasons why the preference calculation should be cutoff at the petition date: [1] otherwise the analysis would be perpetually open-ended, [2] the title of § 547 is “Preferences,” which suggests it concerns activity occurring during the preference period only, [3] the “hypothetical liquidation test” must be performed as of the petition date, [4] the statute of limitations for filing a preference avoidance action under § 547 in a voluntary case begins to run on the petition date, and [5] extending the preference analysis past the petition date would be inconsistent with the “improvement-in- position” test articulated in § 547(c)(5). 15 NVF Co. v. New Castle Cty., 276 B.R. 340, 353 (D.Del.2002), aff'd 61 F. App'x 778 (3d Cir.2003) (citing Black'S Law DICTIONARY 1372 (6th ed.1990)); see also Pennington v. Wells Fargo Bank, N.A., 947 F.Supp.2d 529, 534–35 (E.D.Pa.2013) (using the same definition). 16 As noted earlier, Bankruptcy Code § 553 addresses set off of pre-petition obligations, including several exceptions not relevant here. 11 U.S.C. § 553(a). 17 Pa. State Employees' Ret. Sys. v. Thomas (In re Thomas), 529 B.R. 628, 637 n.2 (Bankr.W.D.Pa.2015); see also generally Lee v. Schweiker, 739 F.2d 870 (3d Cir.1984). 18 Palm Beach Cty. Bd. Of Pub. Instruction v. Alfar Dairy, Inc. (In re Alfar Dairy, Inc.), 458 F.2d 1258, 1262 (5th Cir.1972), cert. den. 409 U.S. 1048 (1972) (set off of post- petition claims permitted). 19 Zion First Nat'l Bank, N.A. v. Christiansen Bros., Inc. (In re Davidson Lumber Sales, Inc.), 66 F.3d 1560 (10th Cir.1995) (set off of post-petition claims permitted). 20 Zerodec Mega Corp. v. Terstep of Tex., Inc. (In re Zerodec Mega Corp.), 59 B.R. 272, 274 (Bankr.E.D.Pa.1986) (“Thus, only if we conclude that the commission is a postpetition claim, can Terstep set-off that claim against the postpetition obligation it owes the debtor.”). 21 Elsinore Shore Assoc. v. First Fidelity Bank, N.A., S. Jersey (In re Elsinore Shore Assoc.), 67 B.R. 926, 936 (Bankr.D.N.J.1986) ( “There also exists authority for the concept of setoff to apply to mutual post-petition obligations.”).

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 61 In re Quantum Foods, LLC, Slip Copy (2016) 62 Bankr.Ct.Dec. 244 22 In re Pub Dennis of Cumberland, Inc., 142 B.R. 38, 41 (Bankr.D.R.I.1992) (creditor allowed to set off administrative expense claim against amount due under promissory note). 23 Mohawk Indus. v. United States (In re Mohawk Indus., Inc.), 82B.R. 174 (Bankr.D.Mass, 1987) (creditor was allowed to set off amounts due to the debtor under a contract that parties continued to operate under post-petition against amounts due to the creditor under another post-petition contract). 24 Friedman's at 554–57. 25 11 U.S.C. § 101(5). 26 In re Tek–Aids Indus., Inc., 145 B.R. 253, 256 (Bankr.N.D.Ill.1992). 27 11 U.S.C. § 502(d) (emphasis added). 28 In re Lids, Corp., 260 B.R. 680, 683 (Bankr.D.Del.2001). 29 Id. at 684. 30 See Union Bank v. Wolas, 502 U.S. 151, 161 (1991) (“[T]he preference provisions facilitate the prime bankruptcy policy of equality of distribution creditors of the debtor. Any creditor that received a greater payment than others of his class is required to disgorge so that all may share equally.”) (quoting H.R.Rep. No. 95–595, at 177–78, U.S.Code Cong. & Admin. News 1978, pp. 6137, 6138) (emphasis added). See also Kimmelman v. The Port Auth. of N.Y. & N.J. (In re Kiwi Int'l Air Lines, Inc.), 344 F.3d 311, 316 (3d Cir.2003). 31 CDI Trust v. U.S. Electronics, Inc. (In re Commc'n Dynamics, Inc.), 382 B.R. 219, 228 (Bankr.D.Del.2008). 32 Friedman's, 738 F.3d at 560 (footnote omitted) (quoting Furr's Supermarkets, 485 B.R. at 734).

In the Matter of: Richard Eugene Kessler, Jr., Virginia Mae..., --- Fed.Appx. ---- (2016)

2016 WL 3667575 Despite their failure to make the post-petition mortgage This case was not selected for payments, the Kesslers moved for discharge. The bankruptcy publication in West's Federal Reporter. court denied their motion because the Kesslers had not made See Fed. Rule of Appellate Procedure 32.1 the direct payments on their mortgage debt and therefore did generally governing citation of judicial decisions not satisfy the requirements of 11 U.S.C. § 1328(a).1 The issued on or after Jan. 1, 2007. See also U.S.Ct. of App. 5th Cir. Rules 28.7 and Kesslers appealed to the district court, arguing that the 47.5. United States Court of Appeals, Fifth bankruptcy court erred by holding that: (1) payments on the Circuit. postpetition mortgage debt were provided for “under the plan” and thus nonpayment barred discharge; and (2) BOA In the Matter of: Richard Eugene Kessler, did not waive its right to object to the Kesslers' failure to Jr., Virginia Mae Kessler Debtors make their mortgage payments. The district court affirmed RICHARD EUGENE KESSLER, JR.; the bankruptcy court, and the Kesslers appealed. VIRGINIA MAE KESSLER, Appellants v. ROBERT B. WILSON, Chapter 13 Trustee, Appellee Standard of Review

No. 15-11252 We review the bankruptcy court's findings of fact for clear | error and decide issues of law de novo. In re Packer, 816 F.3d Date Filed: 07/08/2016 87, 91 (5th Cir. 2016) (per curiam). Appeal from the United States District Court for the Northern District of Texas USDC No. 6:15-CV-40 Discussion

Before CLEMENT, OWEN, and HIGGINSON, Circuit The Kesslers argue that the district court erred in relying on Judges. In re Foster, 670 F.2d 478 (5th Cir. 1982) to conclude that their post-petition mortgage payments were required Opinion payments under the plan. And the Kesslers contend that even if their failure to make payments is construed as a failure to PER CURIAM:* comply with § 1328(a), BOA waived any objection to the *1 Debtor-Appellants Richard and Virginia Kessler (the discharge by failing to challenge their motion. “Kesslers”) appeal the denial of their request to discharge debts in their Chapter 13 bankruptcy plan. Chapter 13 bankruptcy is governed by § 1328(a). Debtors may obtain discharge of their debts through a courtconfirmed The Kesslers filed for Chapter 13 bankruptcy in November payment plan that directs payment of their debts out of their 2009, and the bankruptcy court confirmed their plan. Their future income over a period of time. And the court shall grant Chapter 13 plan provided for monthly payments to a trustee discharge of the debts “as soon as practicable after to cure their pre-petition mortgage arrears and for direct completion ... of all payments under the plan.” 11 U.S.C. § payments to certain secured creditors, including regular, post- 1328(a). Long-term debts, like the Kesslers' mortgage, on petition mortgage payments to Bank of America Home Loans which the last payment is due after the final payment under (“BOA”), the mortgagee. The Kesslers completed all the plan, cannot be discharged. A plan may provide, however, payments due to the trustee, but did not make the direct for curing default on such debts and for maintaining post- mortgage payments, resulting in a post-petition arrearage of petition payments. 11 U.S.C. §§ 1322(b)(5), 1328(a)(1). $40,922.89. Because post-petition mortgage payments are explicitly nondischargeable under § 1322(b)(5), the Kesslers argue that

In the Matter of: Richard Eugene Kessler, Jr., Virginia Mae..., --- Fed.Appx. ---- (2016)

these direct payments fall outside of their plan and cannot be required for discharge under § 1328(a).

*2 In Foster, we considered a bankruptcy court's refusal to Footnotes confirm a Chapter 13 plan that provided for current payments Chapter 13 plan. We held that post-petition payments of § on the debtor's mortgage to be made “outside the plan,” i.e. 1322(b)(5) debts fall under the plan when pre-petition directly to the creditors. 670 F.2d at 482. We concluded that defaults are also provided for in the plan. Foster, 670 F.3d at the bankruptcy code allows for such direct payments, and 489, 493. Here, the Kesslers plainly included terms in their explained that post-petition mortgage payments, whether paid Chapter 13 plan for maintaining their postpetition mortgage directly or through a trustee, are paid “under the plan” when payments; therefore, their post-petition payments are the plan also provides for the curing of pre-petition arrears on payments under the plan as required by Foster. the debt. Id. at 486, 488–89. Thus, a Chapter 13 plan does not need to provide for curing default on § 1322(b)(5) debts, but Finally, the Kesslers argue that the bankruptcy court should if it does, then it must also provide for maintenance of the have granted discharge because BOA waived its right to post-petition payments. Id. at 488–89 (“[A] plan cannot challenge discharge when it did not respond or object to their provide that the current portion of a mortgage claim will be discharge motion. This argument also has no merit. The made ‘outside the plan’ ... when the arrearages on the Kesslers erroneously rely on United Student Aid Funds, Inc. mortgage claim are being cured under § 1322.”). Both the v. Espinosa, 559 U.S. 260 (2010) for their contention that payments toward curing pre-petition mortgage arrears and the trustees or creditors must object. In Espinosa, the Supreme post-petition maintenance payments fall under a Court refused to grant relief under Fed. R. Civ. Pro. 60(b)(4) from a discharge order several years after a creditor failed to Chapter 13 plan because both payments concern the same object to the discharge. 559 U.S. at 263–64. The Court claim. Id. at 493. concluded that the creditor had not been denied due process that would justify Rule 60(b)(4) relief because it had notice The district court rightly concluded that Foster controls here. of the plan's contents and confirmation; the creditor thus had The Kesslers' Chapter 13 plan included terms for curing their the opportunity to object to confirmation but did not do so. pre-petition mortgage arrears and provided for maintenance Espinosa, 559 U.S. at 276. But nothing in Espinosa stands for of post-petition payments. Because the Kesslers failed to the proposition that a creditor's failure to object to a requested complete post-petition mortgage payments that fall under the discharge requires a bankruptcy judge to grant a discharge. plan, they do not qualify for discharge under the plain terms Section 1328 contains no requirement that trustees or of § 1328(a), which instructs a court to grant discharge only creditors must object in order for a court to deny discharge. after completion of all payments under the plan. 11 U.S.C. § 11 U.S.C. § 1328. 1328(a). For the reasons set forth above, we AFFIRM the judgment of The Kesslers' argument that Foster does not control has no the district court, which affirmed the bankruptcy court's merit. They contend that Foster is inapplicable because it denial of discharge. concerned plan confirmation (rather than discharge) and dealt with a since-repealed provision regarding trustee fees.2 But All Citations in Foster, we decided the larger question of whether payments on § 1322(b)(5) debts fall within a --- Fed.Appx. ----, 2016 WL 3667575

1 Under § 1328(a), once a debtor completes all payments discharge of the debts provided for by the plan. under the plan, courts shall, with a few exceptions, grant a

In the Matter of: Richard Eugene Kessler, Jr., Virginia Mae..., --- Fed.Appx. ---- (2016)

2 The repealed provision, 11 U.S.C. § 1302(e)(2), stated that trustees “shall collect such percentage fee from all payments under plans in the cases under this chapter for

which such individual serves as standing trustee.” 11

U.S.C. § 1302(e)

(2) (repealed 1986).

[2] Bankruptcy 2016 WL 3902658 United States Bankruptcy Appellate Panel of the Eighth Circuit. Bankruptcy Appellate Panel (BAP) reviews for an abuse of discretion the bankruptcy In re: Civic Partners Sioux City, LLC, Debtor court's decision to dismiss a Chapter 11 Civic Partners Sioux City, LLC, Debtor–Appellant case. v. Main Street Theatres, Inc.; Main StreetSioux City, Cases that cite this headnote Inc.; Steven Semingson; Northwest Bank, successor by merger with First National Bank; [3] Bankruptcy City of Sioux City, Objectors–Appellees

No. 15-6024 Bankruptcy court abuses its discretion when | a relevant factor that should have been given Submitted: May 19, 2016 significant weight is not considered; when | an irrelevant or improper factor is Filed: July 19, 2016 considered and given significant weight; or Synopsis when all proper factors and no improper Background: Debtor limited liability company (LLC) appealed ones are considered, but the court commits a from order of the United States Bankruptcy Court for the clear error of judgment in weighing those Northern District of Iowa dismissing its Chapter 11 case. factors.

Cases that cite this headnote

[Holding:] The Bankruptcy Appellate Panel, Nail, J., held that dismissal of debtor's Chapter 11 case was not appropriate, based [4] Bankruptcy on delay and lack of progress in case directly attributable to debtor's attempts to appeal bankruptcy court's rulings regarding In the absence of any suggestion that amended lease with lessee relating to certain commercial amended lease was ambiguous, Bankruptcy property. Appellate Panel (BAP) would review de novo the bankruptcy court's interpretation of Reversed and remanded. it.

Cases that cite this headnote

West Headnotes (10) [5] Bankruptcy

[1] Bankruptcy Bankruptcy Appellate Panel's (BAP)

jurisdiction extends to the events and rulings Bankruptcy Appellate Panel (BAP) reviews for clear leading to bankruptcy court's final order. error the bankruptcy court's findings of fact, and reviews de novo its legal conclusions. Cases that cite this headnote

Cases that cite this headnote [6] Contracts

Under Iowa law, in order to have standing to [10] Bankruptcy assert a breach of contract, a party not privy to such contract must be regarded as a direct Dismissal of debtor limited liability company's beneficiary to the contract, and not as an (LLC) Chapter 11 case was not appropriate, based incidental beneficiary; that is, he must be on delay and lack of progress in case directly regarded as either a donee beneficiary or a attributable to debtor's attempts to appeal creditor beneficiary in order to recover damages bankruptcy court's rulings regarding amended flowing from breach of a contract to which he was lease with lessee relating to certain commercial not a party. property; although the original lease, not the amended lease, controlled debtor's relationship Cases that cite this headnote with lessee under Iowa law because debtor had terminated the amended lease pursuant to its [7] Contracts contractual right to do so, the bankruptcy court did not consider the possibility that debtor might be able to propose a confirmable plan predicated on Under Iowa law, one is a donee beneficiary to a contract the original lease. if it appears from the terms of the promise in light of surrounding circumstances that the purpose of the Cases that cite this headnote promisee in obtaining the promise of all or part of the performance thereof is to make a gift to the beneficiary or to confer upon him a right against the promisor to some performance neither due nor supposed nor asserted Appeal from United States Bankruptcy Court for the to be due from the promisee to beneficiary. Northern District of Iowa—Sioux City Cases that cite this headnote Attorneys and Law Firms

[8] Contracts Anthony Steven Chavez, argued, Irvine, CA, (A. Frank Baron, of Sioux City, IA., Anthony Steven Chavez, James D. Stroffe, Andrew R. Nelson, William Q. Tran, Under Iowa law, one is a creditor beneficiary to a Irvine, CA., on the brief), for Debtor-Appellant. contract if no purpose to make a gift appears from the terms of the promise in accompanying circumstances George Mark Rice, argued, Des Moines, IA, (Richard but performance of the promise will satisfy an actual or Patrick Jeffries, Omaha, NE., Jeff William Wright, supposed or asserted duty of the promisee to the Sioux City, IA., George Mark Rice, John H. Moorlach, beneficiary. Des Moines, IA., on the brief), for Objectors-Appellees

Cases that cite this headnote Before KRESSEL, SCHERMER, and NAIL, Bankruptcy Judges. [9] Contracts Opinion

Under Iowa law, one is merely an incidental beneficiary NAIL, Bankruptcy Judge. to a contract, and no rights accrue to him from the contract, if he fails to qualify as either a donee *1 Civic Partners Sioux City, LLC appeals the July 8, beneficiary or creditor beneficiary. 2015 order of the bankruptcy court dismissing its chapter 11 bankruptcy case. We reverse and remand. Cases that cite this headnote

BACKGROUND the amended lease with Main Street described in the settlement agreement on or before December 31, 2009. In Civic Partners Sioux City, LLC (“Civic Partners”) owns the event Civic Partners was unable to do so, the restructure commercial real estate, known as the Promenade, in the agreement provided the loan modification would be void Historic Fourth Street Redevelopment District of Sioux City, and without effect. Iowa (“City”). Northwest Bank (“Bank”) holds a mortgage against the Promenade and an assignment of rents to secure a Civic Partners was not able to formalize the agreement promissory note executed by Civic Partners. City also holds with City: In December 2009, the city council declined a mortgage against the Promenade to secure a promissory to ratify the settlement agreement. Civic Partners and note executed by Civic Partners. Main Street Theatres, Inc. Main Street nevertheless agreed to several extensions of (“Main Street”) leases and occupies the majority of the space the January 31, 2010 deadline for Civic Partners to in the Promenade. declare the amended lease null and void. The last such extension pushed the deadline to March 31, 2011. Soon after entering into the lease with Civic Partners in 2004, Main Street fell behind on its lease payments. This in turn caused *2 In the meantime, in December 2010, Bank Civic Partners to fall behind on its loan payments to Bank and to commenced a state court lawsuit against Civic Partners. City. In 2009, Civic Partners, Main Street, Bank, and City In January 2011, City followed suit. mediated their various disputes.1 The mediation sessions led to a tentative resolution of the parties' disputes, which was On March 30, 2011, Civic Partners notified Main Street memorialized in a settlement agreement. The settlement it was terminating the amended lease. Fifteen days later, agreement was subject to ratification by the city council. Civic Partners filed a petition for relief under chapter 11 of the bankruptcy code.

1 Another party, Liberty National Bank, also participated in the In July 2012, on Civic Partners' motion to determine mediation. However, neither its dispute with Civic Partners whether the original lease or the amended lease nor the resolution of that dispute is directly implicated by this controlled, the bankruptcy court concluded the amended appeal. lease was still in effect and controlled Civic Partners' relationship with Main Street. The bankruptcy court In the settlement agreement, Bank agreed to restructure Civic held Iowa rescission law prevented Civic Partners from Partners' loan, City agreed to reduce the Promenade's tax terminating the amended lease without returning a assessment value, and City further agreed to address certain $200,000.00 “restructuring payment” it had received construction defects in public works adjacent to the Promenade. from Main Street. Alternatively, the bankruptcy court In return, Civic Partners agreed to enter into an amended lease held Civic Partners could not terminate the amended with Main Street that would lower Main Street's annual rent and lease without Bank's consent. forgive the back rent owed by Main Street.

In January 2013, on Civic Partners' motion to reconsider In November 2009, Civic Partners and Main Street entered into its earlier ruling, the bankruptcy court again held the the amended lease contemplated by the settlement agreement. amended lease was still in effect and controlled Civic Civic Partners' obligations under the amended lease were Partners' relationship with Main Street. Civic Partners conditioned on Civic Partners' formalizing the agreements with appealed both orders. Because the bankruptcy court's Bank and City described in the settlement agreement on or before January 15, 2010. In the event Civic Partners was unable to do so, the amended lease gave Civic Partners the right to declare the amended lease null and void on or before January 31, 2010.

That same month, Civic Partners was able to formalize the agreement with Bank. Bank's obligations under the parties' restructure agreement were conditioned on, inter alia, Civic Partners' formalizing the agreement with City and entering into

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 68 In re Civic Partners Sioux City, LLC, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 231 orders were interlocutory, we dismissed the appeal in early v. Ungar (In re Ungar), 633 F.3d 675, 678–79 (8th February 2013.1 Cir.2011). We review for an abuse of discretion the bankruptcy court's decision to dismiss a chapter 11 case. Civic Partners continued to argue the amended lease had been Cedar Shore Resort, Inc. v. Mueller (In re Cedar Shore terminated, the plan was predicated on the amended lease, in Resort, Inc.), 235 F.3d 375, 379 (8th Cir.2000). compliance with the bankruptcy court's earlier rulings. In early October 2013, the bankruptcy court denied confirmation of the [3] A court abuses its discretion when plan, in large part because the bankruptcy court determined it a relevant factor that should have been given was not feasible. significant weight is not considered; when an irrelevant or improper factor is considered and given significant weight; or when all 3 Two earlier versions of Civic Partners' plan had not been proper factors and no improper ones are considered, but the court commits a clear error confirmed. With certain exceptions, the proponent of a of judgment in weighing those factors. plan may modify its plan at any time either before or after confirmation. 11 U.S.C. § 1127. In some jurisdictions, City of Duluth v. Fond du Lac Band of Lake Superior such modified plans are referred to as amended plans. Chippewa, 702 F.3d 1147, 1152 (8th Cir.2013). Four days later, Bank filed a motion to dismiss Civic Partners' bankruptcy case. The matter was held in abeyance while Civic [4] [5] Our review necessarily includes Partners again appealed several of the bankruptcy court's a review of the bankruptcy court's orders, including its orders regarding the amended lease and its interpretation of the amended lease, one of the order denying confirmation of Civic Partners' plan. Because rulings that led to its decision to dismiss the bankruptcy court's orders were interlocutory, we dismissed 4 the appeals in late October 2013. On Civic Partners' further Civic Partners' chapter 11 case. In the absence of any appeal, the Eighth Circuit Court of Appeals did likewise in suggestion that the amended lease was ambiguous, we March 2015. review de novo the bankruptcy court's interpretation of it. Arvest Bank v. Cook (In re Cook), 504 B.R. 496, 502 After the Eighth Circuit Court of Appeals denied Civic (8th Cir. BAP 2014). Partners' motion for rehearing and for rehearing en banc in April 2015, the bankruptcy court held a continued hearing on 4 Our jurisdiction extends to “the events and rulings Bank's motion to dismiss. The bankruptcy court took the matter under advisement and on July 8, 2015, entered an order leading to a final order.” Zahn v. Fink (In re Zahn), dismissing Civic Partners' bankruptcy case. Civic Partners 526 F.3d 1140, 1143 (8th Cir.2008). timely appealed.

DISCUSSION

STANDARD OF REVIEW Under Iowa law,2 our analysis of the amended lease *3 [1] [2] We review for clear error the bankruptcy court's begins and ends with the language of the amended lease. findings of fact; we review de novo its legal conclusions. Islamov

1 before it reiterated its holding—Civic Partners filed a While Civic Partners' appeal was pending, the bankruptcy “Second Amended and Substituted Plan of court entered an “Amended Ruling on [Civic Partners'] 3 Motion to Reconsider Withdrawing and Superseding the Reorganization (Dated September 26, 2012).” While 2 Court's Opinion/Order Ruling on Motion to Pursuant to ¶ 30.5 of the amended lease, “The laws of the Reconsider.” State of Iowa shall govern the validity, In the meantime, in September 2012—after the bankruptcy construction, performance[,] and enforcement of court first held the amended lease was still in effect, but this Lease.”

The following propositions are deemed so well payments Main Street had made under the amended lease to established that authorities need not be cited in support Main Street's obligations under the original lease. of them: *4 Civic Partners and Main Street were well within their ... rights to include such a provision in the amended lease.

n. In the construction of written contracts, the cardinal We have here a contract which by principle is that the intent of the parties must control, its terms is specific. In retaking and except in cases of ambiguity, this is determined by the property the appellant was but what the contract itself says. exercising his rights under the contract, and upon the exercise of Iowa R. App. P. 6.904(3). which, by the very terms of the contract, the purchase money [Civic Partners'] obtaining (each being already paid was to be considered a “Condition”) definitive agreements: as rent for the use of the property. (i) from [City] restructuring [Civic The parties had a right to so Partners'] existing indebtedness with contract. Upon the exercise of this [City] and real estate taxes for the right in a legal manner, the legal [Promenade] as more fully described in effect is to terminate the contract. [the settlement agreement;] (ii) from It did not amount to a rescission of [City] to remedy the Outside the contract, but amounted to the Construction Defects at [City's] exercise of rights under the expense[; and] (iii) from [Bank] contract. restructuring [Civic Partners'] existing indebtedness with [Bank] for the Smith v. Russell, 223 Iowa 123, 272 N.W. 121, 125–26 [Promenade] as more fully described in (1937). [the settlement agreement] .... If [Civic Partners] is unable to satisfy any one or When Civic Partners terminated the amended lease, it more of the Conditions on or before was simply exercising its contractual right to do so. January 15, 2010, [Civic Partners] shall Smith tells us this was not a rescission under Iowa law. have the right (but not the obligation) until and including January 31, 2010 to Bank, Main Street, and City nevertheless argue another declare this Lease null and void with provision of the amended lease—specifically, ¶ 30.23 written notice to [Main Street]. Upon —required Civic Partners to return the $200,000.00 such declaration by [Civic Partners], restructuring payment to Main Street before terminating the Original Lease shall be deemed the amended lease. We disagree. reinstated by the parties as if this Lease was never entered into and all payments Paragraph 30.23 of the amended lease provides: by [Main Street] under this Lease shall In consideration of [Civic be applied to the Original Lease. Partners'] entering into this Lease, [Main Street] shall pay to This provision is clear and unambiguous. Because Civic Partners [Bank], on account of [Civic was not able to enter into an agreement— definitive or Partners], the sum of $200,000 otherwise—with City, Civic Partners had the right to terminate in immediately available the amended lease, reinstate the original lease, and apply the funds (the “Restructuring

Paragraph 30.24 of the amended lease provides: [Civic Partners'] obligations under this Lease are conditioned upon

Payment”) as follows: (i) $150,000 6 That is, of course, for the bankruptcy court to determine, if on the Effective Date[;] and (ii) and when called upon to do so. $50,000 on or before December 15, 2009. The Restructuring Payment is *5 Undaunted, Bank, Main Street, and City argue the an obligation of [Main Street] bankruptcy court held, in the alternative, Bank was “more separate and distinct from all other than an incidental beneficiary” of the amended lease. obligations of [Main Street] under Under Iowa law, this Lease and shall not be a credit against, or otherwise on account of [6] in order to have standing to assert a breach of any Minimum Annual Rent, contract, a party not privy to such contract must be Percentage Rent, Additional Rent regarded as a direct beneficiary to the contract, and not or any other sums payable by [Main as an incidental beneficiary. That is, he must be Street] to [Civic Partners] pursuant regarded as either a donee beneficiary or a creditor to this Lease. beneficiary, as those terms are defined in Restatement, Contracts, Section 133, in order to recover damages flowing from breach of a contract to which he was not This provision is also clear and unambiguous. Main Street was a party. ... required to make the restructuring payment under the amended lease, and the restructuring payment was not to be applied [7] [8] [9] One is a donee beneficiary if it appears from toward any other payments Main Street made under the the terms of the promise in light of surrounding amended lease. Nothing in ¶ 30.23 required Civic Partners to circumstances that the purpose of the promisee in return the restructuring payment to Main Street before obtaining the promise of all or part of the performance terminating the amended lease. Likewise, nothing in ¶ 30.23 thereof is to make a gift to the beneficiary or to confer prohibited Civic Partners from applying the restructuring upon him a right against the promisor to some payment—and any other payments Main Street made under the performance neither due nor supposed nor asserted to amended lease—to Main Street's obligations under the original be due from the promisee to beneficiary. One is a lease. creditor beneficiary if no purpose to make a gift appears from the terms of the promise in Bank, Main Street, and City also argue Civic Partners agreed— accompanying circumstances but performance of the in the assignment of rents Civic Partners gave Bank—not to promise will satisfy an actual or supposed or asserted terminate the amended lease without Bank's written consent, duty of the promisee to the beneficiary. One is merely which was not given. Civic Partners counters Bank consented— an incidental beneficiary and no rights accrue to him in the restructure agreement between Civic Partners and Bank— from the contract if he fails to qualify as either a donee to Civic Partners' including in the amended lease its right to beneficiary or creditor beneficiary. terminate the amended lease. Bank's consenting to Civic Partners' having the right to terminate the amended lease, Peter Kiewit Sons' Co. v. Iowa S. Util. Co., 355 F.Supp. however, is not the same thing as Bank's consenting in writing 376, 392 (S.D.Iowa 1973) (citations and internal to Civic Partners' exercising that right. quotation marks omitted).

Civic Partners' failure to obtain Bank's written consent before The bankruptcy court's finding that Bank was more than terminating the amended lease may have been a default under an incidental beneficiary of the amended lease is not the assignment of rents.6 Bank's remedies for a default under the clearly erroneous. The record does not support a finding that Bank was a donee beneficiary: Nothing in the assignment of rents are described in that document. However, amended lease or the surrounding circumstances Bank, Main Street, and City have not identified any provision suggests either Civic Partners or Main Street intended to in either the amended lease or the assignment of rents that, in make a gift to Bank. However, the record does support the event of a default under the assignment of rents, would a finding that Bank was a creditor beneficiary, at least render ineffective Civic Partners' termination of the amended to the extent of the $200,000.00 restructuring payment: lease. In ¶ 30.23 of the amended lease, Main Street promised to pay that sum to Bank on account of Civic Partners.

Consequently, we agree Bank was more than an incidental CONCLUSION beneficiary of the amended lease. *6 [10] Having reviewed de novo the amended lease, we Bank's status as a creditor beneficiary of the amended lease conclude the original lease, not the amended lease, would give it standing to assert a breach of contract and the controls Civic Partners' relationship with Main Street. In right to recover damages flowing from the breach. Id. For keeping with its earlier rulings, the bankruptcy court did example, if Main Street had failed to make the $200,000.00 not consider the possibility that Civic Partners might be restructuring payment to Bank on account of Civic Partners, able to propose a confirmable plan predicated on the Bank could have sued Main Street to recover that sum. original lease. This is a relevant factor that should be However, Bank, Main Street, and City have not identified any given significant weight in determining whether to way in which Civic Partners breached the amended lease. dismiss Civic Partners' chapter 11 case. We therefore Terminating it was not a breach: As previously discussed, the reverse the bankruptcy court's July 8, 2015 order amended lease specifically gave Civic Partners the dismissing Civic Partners' chapter 11 bankruptcy case contractual right to terminate it. and remand for further proceedings consistent with this opinion.7 In deciding to dismiss Civic Partners' chapter 11 case, the bankruptcy court was primarily concerned with the delay and 7 lack of progress in the case and with Civic Partners' failure to In light of our decision to remand, we do not reach the confirm a plan. However, much of the delay and lack of progress remaining issues raised by Civic Partners. We are in the case was directly attributable to Civic Partners' earlier not expressly or impliedly disposing of those unsuccessful attempts to appeal the bankruptcy court's rulings remaining issues; likewise, we are not explicitly or regarding the amended lease. Constrained by those rulings, Civic implicitly adopting any of the bankruptcy court's Partners was unable to propose a plan that was confirmable, as rulings regarding them. See Stalnaker v. Allison (In amply demonstrated by the bankruptcy court's order denying re Tri–State Financial, LLC), 519 B.R. 759, 765 confirmation of Civic Partners' most recent plan. Under the (8th Cir. BAP 2014). circumstances, the only way for Civic Partners to move the case along was to allow the case to be dismissed and to then seek All Citations appellate review of the bankruptcy court's interlocutory rulings. --- B.R. ----, 2016 WL 3902658, 62 Bankr.Ct.Dec. 231

2016 WL 3902659 Cases that cite this headnote Only the Westlaw citation is currently available. United States Bankruptcy Appellate Panel of the Eighth Circuit. [2] Bankruptcy

In re: Mary A. Hurst, Debtor Courts apply a totality-of-the- Mary A. Hurst, Plaintiff-Appellant circumstances test in determining whether a v. student loan should be discharged as an Southern Arkansas University; Renee S. Williams, Chapter undue hardship. 11 U.S.C.A. § 523(a)(8). 7 Trustee, Defendants-Appellees

No. 15-6031 Cases that cite this headnote | Submitted: May 19, 2016 [3] Bankruptcy |

Filed: July 19, 2016 Under totality-of-the-circumstances test in Synopsis determining whether a student loan should Background: Chapter 7 debtor appealed from order of the United be discharged as an undue hardship, courts States Bankruptcy Court for the Western District of Arkansas must consider the debtor's past, present, and denying her request to discharge her student loan for undue reasonably reliable future financial hardship. resources; the debtor's reasonable and necessary living expenses; and any other relevant facts and circumstances. 11 [Holding:] The Bankruptcy Appellate Panel, Federman, Chief U.S.C.A. § 523(a)(8). Judge, held that debtor was not entitled to discharge of her student loan obligation under Bankruptcy Code's undue hardship Cases that cite this headnote provision. [4] Bankruptcy Affirmed. Debtor has the burden of proving student Shodeen, J., filed separate opinion dissenting. loan should be discharged as an undue hardship by a preponderance of the evidence. 11 U.S.C.A. § 523(a)(8). West Headnotes (10) Cases that cite this headnote

[1] Bankruptcy [5] Bankruptcy

Bankruptcy Appellate Panel (BAP) reviews de novo If debtor's reasonable future financial the bankruptcy court's determination that repayment resources will sufficiently cover payment of debtor's student loan debt would impose an “undue of the student loan debt, while still allowing hardship,” however, subsidiary findings of fact upon for a minimal standard of living, then the which that legal conclusion is based are reviewed for debt should not be discharged. 11 U.S.C.A. clear error, and the BAP may affirm on any basis § 523(a)(8). supported by the record. 11 U.S.C.A. § 523(a) (8). Cases that cite this headnote

[6] Bankruptcy the control of the debtor, (2) whether the debtor has made a good faith effort to negotiate a deferment or forbearance of Chapter 7 debtor was not entitled to discharge of her payment, (3) whether the hardship will be student loan obligation under Bankruptcy Code's undue long-term, (4) whether the debtor has hardship provision; debtor had monthly expenses of made payments on the student loan, (5) $1,482.02 with income averaging at least $1,800 per whether there is permanent or long-term month, and therefore had sufficient income to make the disability of the debtor, (6) the ability of $42 student loan payment, debtor had not made the debtor to obtain gainful employment in payments voluntarily on the loan, and although she had the area of the study, (7) whether the hearing and vision problems which could affect her debtor has made a good faith effort to ability to earn income, there was no evidence that such maximize income and minimize expenses, problems would lead to a reduction in her income during (8) whether the dominant purpose of the the time that she continued to work and debtor testified bankruptcy petition was to discharge the she intended to continue to work until age 70. 11 student loan, and (9) the ratio of student U.S.C.A. § 523(a)(8). loan debt to total indebtedness; these are mere factors for a court to consider, and a Cases that cite this headnote court need not address each and every one of them, particularly where there is no [7] Bankruptcy evidence, one way or the other, concerning a factor. 11 U.S.C.A. § 523(a)(8). When a student loan dischargeability Cases that cite this headnote adversary proceeding is brought years after Chapter 7 discharge was entered, a bankruptcy court should consider the debtor's financial circumstances between her [10] Bankruptcy discharge and the trial date. 11 U.S.C.A. § 523(a)(8).

Cases that cite this headnote The standard for discharging student loans in the Eighth Circuit is onerous, and the [8] Bankruptcy debtor bears the burden of proving undue hardship. 11 U.S.C.A. § 523(a)(8).

To be reasonable and necessary, and thus properly Cases that cite this headnote deductible from debtor's net monthly income in calculating her ability, without “undue hardship,” to repay student loan debt, an expense must be modest and commensurate with the debtor's resources. 11 U.S.C.A. Appeal from United States Bankruptcy Court for the § 523(a)(8). Western District of Arkansas—El Dorado

Cases that cite this headnote Attorneys and Law Firms

David C. Graham, Jr., of Magnolia, AR, for appellant. [9] Bankruptcy Patrick E. Hollingsworth, AAG, of Little Rock, AR, for Totality-of-the-circumstances test for appellee. determining whether a student loan should be discharged as an undue hardship is very broad, Before FEDERMAN, Chief Judge, SALADINO and and courts consider: (1) total present and future SHODEEN, Bankruptcy Judges. incapacity to pay debts for reasons not within

Opinion Bankruptcy Code. Following a trial, the Bankruptcy Court held that the Debtor failed to prove that her FEDERMAN, Chief Judge. student loan debt should be discharged. The Debtor appeals. *1 Debtor Mary A. Hurst appeals from the Bankruptcy

Court's1 order denying her request to discharge her student loan for undue hardship pursuant to 11 U.S.C. § 523(a)(8). For the STANDARD OF REVIEW reasons that follow, we affirm. [1] We review the Bankruptcy Court's determination of undue hardship de novo.2 Subsidiary findings of fact on 1 The Honorable Richard D. Taylor, United States Bankruptcy Judge which the legal conclusions are based are reviewed for for the Western District of Arkansas. clear error.3 We may affirm on any basis supported by the record.4 FACTUAL BACKGROUND 2 The Debtor obtained a $4,000 federal Perkins student loan while In re Long, 322 F.3d 549, 554 (8th Cir.2003); attending Southern Arkansas University, majoring in education, Educational Credit Management Corporation v. for the 1994—1995 academic year. At the end of that school year, Jesperson, 571 F.3d 775, 779 (8th Cir.2009). she traveled to Texas for a summer job and broke her ankle which, 3 she testified, made it impossible for her to return to SAU for the Jesperson, 571 F.3d at 779; In re Reynolds, 425 F.3d following semester. She had two surgeries and therapy on the 526 (8th Cir.2005). ankle, and was on crutches for a year and a half. While still in Texas recovering from the ankle injury, she was involved in a car 4 Kaler v. Charles (In re Charles), 474 B.R. 680, 687 accident and totaled her car, further preventing her from returning (8th Cir. BAP 2012). to SAU. The Debtor remained in Texas until about 2009, when she moved back to Magnolia, Arkansas, where she owned a home. She never returned to school. UNDUE HARDSHIP DISCHARGE OF STUDENT LOANS The Debtor is 66 years old, and plans to work to age 70. She has vision problems as a result of an unsuccessful cataract surgery, [2] [3] [4] [5] Section 523(a)(8) of the Bankruptcy and hearing problems, as well as some occasional problems with Code provides that student loans are nondischargeable her ankle. As discussed more fully below, the Debtor is employed, “unless excepting such debt from discharge ... would working part-time at SAU's cafeteria, and collects social security impose an undue hardship on the debtor and the benefits. She has no mortgage on her home, although it took her debtor's dependents.”5 In the Eighth Circuit, courts some amount of time (and money) to repair vandalism damage apply a totality-of-the-circumstances test in which had occurred while she was away in Texas. determining whether a student loan should be discharged as an undue hardship.6 Under this test, Before the Debtor went into default on the student loan, the courts must consider the debtor's past, present, and regular payment amount was $42. She never made a single reasonably reliable future financial resources; the voluntary payment on the loan, although SAU intercepted debtor's reasonable and necessary living expenses; and approximately $600 in income tax refunds and applied that to the 7 balance. As of the date of trial, the balance on the student loan any other relevant facts and circumstances. The debtor was $7,476.78. has the burden of proving undue hardship by a preponderance of the evidence.8 The burden has been The Debtor filed a Chapter 7 bankruptcy case on February described as “rigorous”: “Simply put, if the debtor's 11, 2011. She did not list SAU as a creditor, but reopened the reasonable future financial resources will sufficiently case on November 25, 2014 to seek a discharge of her student cover payment of the student loan debt—while still loan as an undue hardship pursuant to § 523(a)(8) of the

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 75 In re Hurst, --- B.R. ---- (2016) allowing for a minimal standard of living—then the debt The Debtor testified concerning her employment should not be discharged.”9 history: While she was in Texas after leaving SAU, she worked at a convenience store for two years, earning $600— $800 per month, and then for a limousine 5 11 U.S.C. § 523(a)(8). company, earning $1,500—$1,600 per month. After she moved back to Magnolia, she worked as an 6 Nielsen v. ACS, Inc. (In re Nielsen), 473 B.R. 755, 759 (8th advocate at an area women's shelter, earning $1,000 per Cir. BAP 2012), aff'd 502 Fed.Appx. 634 (8th Cir.2013). month. At some point after 2011, she left employment at the shelter and got a job with Aramark at the cafeteria 7 Id. (citing Jesperson, 571 F.3d at 779). at SAU, running the cash register, sweeping the floors, and cleaning tables. The cafeteria is not open during the 8 Id. summer months or Christmas break, but the Debtor testified she is able to occasionally work some hours on 9 Id. (quoting Jesperson, 571 F.3d at 779). catering jobs through Aramark during those time *2 The Debtor here expressly states in her Brief on appeal that periods. She also collects social security, as well as she does not take issue with the Court's findings of fact, which unemployment benefits during times of under- were made on the record at the conclusion of the trial.10 Rather, employment. The Court found that Debtor failed to she contends that the facts lead to the inescapable conclusion offer any evidence showing that she attempted to find that she will suffer an undue hardship if her student loan is not work during the summers or other school vacation discharged. She asserts that, rather than focusing on her periods. The Court also found that she made no effort financial circumstances and ability to pay, the Bankruptcy to use income tax refunds toward payments on her Court focused too heavily on the fact that she has never made student loan. any attempt to repay the student loan. We disagree, but in any event, the Court made ample factual findings sufficient to The Debtor's schedules, which were offered as support its conclusion that the Debtor has income sufficient to evidence at trial, showed that when the Debtor filed her maintain a minimal standard of living while making payments bankruptcy case in 2011, she was earning $1,000 a on the student loan. month in wages from the women's shelter, plus $818 in social security benefits, for total income of $1,818.

10 See Appellant's Brief at 20. As stated, the Debtor stopped working at the shelter at some point after the bankruptcy filing and began working for Aramark at the cafeteria. She testified that, The Debtor's Past, Present, and Reasonably Reliable at the time of trial, she was earning around $600—$700 Future Financial Resources per month from Aramark, pre-tax, during the school [6] [7] As stated, the Debtor has the burden of proving that she year. She testified she earns less during the summer does not have reasonably reliable current or future financial months, but she also collects some unemployment resources to make payments on her student loan. When a student benefits during those months. In addition, she testified loan dischargeability adversary proceeding is brought years after she now receives about $1,000 per month from social the bankruptcy discharge was entered, as was the situation here, a security. As a result, her testimony was that she bankruptcy court should consider the debtor's financial receives a total of about $1,600— $1,700 per month, circumstances between her Chapter 7 discharge and the trial pre-tax, during the school year, and less during the summer months. The Court found the Debtor's date.11 The Court found that the Debtor has resources sufficient testimony overall to be credible. to pay on her student loan, and that she plans to continue working for approximately four more years until retirement. The documentary evidence admitted at trial further supports the Court's conclusion that she had income 11 Walker v. Sallie Mae Serv. Corp. (In re Walker), 650 F.3d 1227, sufficient to make payments. The evidence shows that 1231 (8th Cir.2011). the Debtor actually earns about $1,600—$1,700, on average, year-round. Specifically, the Debtor submitted

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 76 In re Hurst, --- B.R. ---- (2016) her 2013 and 2014 income tax returns as evidence at trial. minimal standard of living—then the debt should not be According to the tax returns, in 2013, the Debtor received discharged.”16 $11,250 in wages and $13,365 in social security, for a total of $24,615. In 2014, she earned $6,320 in wages, $115 in 15 unemployment compensation, and $13,563 in social Jesperson, 571 F.3d at 780 (citation and internal security, for a total of $19,998. Thus, the tax returns showed quotation marks omitted). Debtor earned an average of $2,051.25 per month in 2013,12 16 and $1,666.50 in 2014.13 Also, the tax returns indicate that Id. at 779 (citation omitted). modest amounts had been withheld from her paychecks for SAU did not argue at trial, nor does it here, that any of the Debtor's particular expenses are unreasonable or taxes, as the Court found.14 unnecessary. Rather, the question is whether the Debtor has income remaining after paying those expenses with 12 $11,250 + $13,365 ÷ 12 = $2,051.25. which to make her student loan payments. 13 $6,320 + $115 + $13,563 ÷ 12 = $1,666.50. The evidence concerning current expenses was sparse at trial. The documentary evidence concerning 14 The Debtor received federal income tax refunds of $541 expenses is limited to the Debtor's Schedule J from in 2013 and $350 for 2014. 2011. As the Bankruptcy Court found, Schedule J showed expenses totaling $1,779.02, leaving $38.98 in *3 The Debtor also submitted Aramark paystubs and her checking account statements for the three months from May 19, net income in 2011. 2015 through August 17, 2015. The checking account statements The only specific evidence about the Debtor's current showed deposits from paychecks and unemployment benefits expenses was her testimony that she no longer has a car totaling $754, $690, and $500 for those three months, payment, which was $297. On that point, the Debtor respectively. These would, of course, be the net amounts after testified generally that she needs the extra $297 “to live taxes were withheld. The Debtor testified that her social security on,” but she did not point to any specific expense which benefits of approximately $1,000 are deposited into a separate now eats up those extra funds. And, although she said savings account. that that using some of that money to make student loan payments would “make things harder on [her],” she However, the tax returns showed the Debtor was in fact receiving acknowledged that some of that money could go toward $13,300 to $13,500 per year in social security in 2013 and 2014, making a payment. The Bankruptcy Court found that approximately $1,100 per month. Thus, based on her testimony part of the $297 per month could go toward student loan and the documentary evidence, the Debtor's income totaled payments. $1,600—$1,854 per month in the summer of 2015, which is consistent with the 2013 and 2014 tax returns showing an This finding was supported by the evidence. The Eighth average of $1,666—$2,000 per month. The Court found that the Circuit has said on more than one occasion that “[a] Debtor has average income of $1,818 per month, which is amply court may not engage in speculation when determining supported by the evidence. net income and reasonable and necessary living expenses.”17 Bearing in mind that the Debtor bears the burden of proving that she has no excess funds with The Debtor's Reasonable and Necessary Living Expenses which to make the student loan payment, there simply [8] The second factor in the totality of the circumstances test is was no evidence as to how the $297 might be being the Debtor's reasonable and necessary living expenses. “To be spent. The Debtor's budget is modest, but a finding that reasonable and necessary, an expense must be modest and she is spending the $297 on living expenses, without evidence of that, would require speculation. In sum, commensurate with the debtor's resources.”15 “Simply put, if the without actual evidence as to how the Debtor's debtor's reasonable financial resources will sufficiently cover expenses might have otherwise changed since 2011, the payment of the student loan debt—while still allowing for a only evidence was that the Debtor now has monthly

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 77 In re Hurst, --- B.R. ---- (2016) expenses of $1,482.02. With income averaging at least her retirement. The Court further found that she has not $1,800 per month, as found by the Court and discussed made payments voluntarily on the loan. The Court did above, the record shows she has sufficient income to make find that she had hearing and vision problems which the $42 student loan payment and the Bankruptcy Court did could affect her ability to earn income, but there was no not clearly err in so finding. evidence that such problems would lead to a reduction in her income during the time that she continues to work. Indeed, the Debtor testified she intends to 17 Walker, 650 F.3d at 1233 (quoting Jesperson, 571 F.3d at 780). continue to work until age 70. With regard to the sixth factor, the evidence was that she has not been able to obtain gainful employment in the field of education. As Other Relevant Facts and Circumstances far as the Debtor having made a good faith effort to maximize income and minimize expenses, the Court *4 “Because the totality-of-the-circumstances test is ‘very held there was no evidence she had attempted to broad,’ courts in the Eighth Circuit have looked to a number of supplement her income during the school vacation facts and circumstances to assist them in making this periods, or that she had used tax refunds toward student 1 determination.” Such factors include: loan payments. There was no evidence offered as to the eighth and ninth factors. Thus, the Bankruptcy Court [9] (1) total present and future incapacity to considered all the enumerated factors for which pay debts for reasons not within the control evidence was offered. of the debtor; (2) whether the debtor has made a good faith effort to negotiate a Nevertheless, the Debtor asserts that the Court placed a deferment or forbearance of payment; (3) significant amount of emphasis on the second and whether the hardship will be long-term; (4) fourth factors, namely, that she had not made a single whether the debtor has made payments on voluntary payment on, or otherwise attempt to even the student loan; (5) whether there is address, her student loan in the twenty years since she permanent or long-term disability of the incurred them, despite the fact that the payments were debtor; (6) the ability of the debtor to obtain only $42 per month. gainful employment in the area of the study; (7) whether the debtor has made a good faith The Eighth Circuit said in In re Jesperson that, “[w]ith effort to maximize income and minimize the receipt of a government-guaranteed education, the expenses; (8) whether the dominant purpose student assumes an obligation to make a good faith of the bankruptcy petition was to discharge effort to repay those loans, as measured by his or her the student loan; and (9) the ratio of student efforts to obtain employment, maximize income and 2 loan debt to total indebtedness. minimize expenses.”20 In essence, what the Bankruptcy Court concluded was that, to the extent that These are mere factors for a court to consider, and a court need requiring the Debtor to repay the loan—given her age not address each and every one of them, particularly where there and the current balance of nearly $7,500—could be is no evidence, one way or the other, concerning a factor. viewed as an undue hardship, those circumstances were of the Debtor's own making, inasmuch as she never or forbearance on her loan. As to whether the hardship made any attempt at all to pay or otherwise address the imposed by loan payments would be long term, the Court student loan in more than twenty years.21 Although the found that she has the ability to make payments, at least until

1 The Court found that the Debtor has the ability to Jesperson, 571 F.3d at 783 (Smith, concurring) make some payments on her student loan debt, so the (citation omitted). first factor weighed against dischargeability. Next, the court found that she had made no effort to obtain 2 Id. at 783–84 (Smith concurring) (citation omitted). deferment

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 78 In re Hurst, --- B.R. ---- (2016) facts in Jesperson are dissimilar to those here, the Eighth representative testified that the loan could be Circuit has said: “rehabilitated” through twelve months of negotiated payments, at which time the loan would come out of default *5 While the size of student loan status and the Debtor could resume the $42 monthly debts relative to the debtor's financial payments. As stated, the Debtor never applied to participate condition is relevant, this should in that rehabilitation program, and so was not able to offer rarely be a determining factor: it any evidence as to what her payment would be during the would be perverse to allow the debtor one-year rehabilitation period. Nevertheless, the evidence to benefit from [his] own inaction, showed that she has the ability to make payments in excess delay and recalcitrance by of $42 per month, at least during the year required. automatically granting a discharge simply because the debt is a sizeable 23 one. This, of course, would benefit In re Walker, 427 B.R. at 486–87 (“Although those who delay and obstruct the some question remains as to the weight to be given to the ability to make an [IBRP] payment longest and could encourage other following Jesperson, the Eighth Circuit made it students to follow the [same] clear that the ability to do so is, at a minimum, an course.22 important factor in the analysis.”). The dissenting opinion points out that the Bankruptcy Court—and this panel—cannot speculate in making 20 571 F.3d at 782 (citations omitted). student loan determinations. In other words, student loan cases must be decided based only on the evidence 21 Accord, Johnson v. Dept. of Educ. (In re Johnson), 543 B.R. offered. And, the Debtor carries both the burden of 601, 609–610 (Bankr.W.D.Mo.2015) (holding that going forward with the evidence, and the burden of choosing to take out loans later in life, entering multiple deferments, and making no payments— resulting in debtor persuasion as to the outcome. Here, as to the Debtor's being post-retirement age at the conclusion of the repayment present ability to make payments, except as to the plan—did not warrant a discharge of student loans). vague testimony that she uses all of her income “to live on,” the evidence was uncontradicted that the Debtor 22 Jesperson, 571 F.3d at 780 (quoting United States v. has up to $300 per month in income available with Kephart, 170 B.R. 787, 792 (W.D.N.Y.1994)). which she could be making student loan payments. The Debtor has, therefore, failed to prove that she lacks the [10] As the Bankruptcy Court acknowledged, the standard for present ability to make payments on her student loans. discharging student loans in the Eighth Circuit is onerous, and the Perhaps the Debtor could have proven that she has Debtor bears the burden of proving undue hardship. While the current expenses in excess of her income, but she did Court acknowledged that the Debtor's circumstances were not do so. Therefore, her action seeking discharge of “sympathetic,” it concluded that she had not proven that she her student loan as an undue hardship must fail.24 lacked ability to make student loan payments while maintaining a minimal standard of living, given the evidence of her income and expenses, and despite the fact that the balance had ballooned due 24 In re Walker, 427 B.R. at 479 (suggesting in dicta to nonpayment. The Court found that the other facts and that § 523(b) and Federal Rule of Bankruptcy circumstances it considered did not justify a different result. Procedure 4007(b) may permit debtors to seek a Those factual findings were not clearly erroneous. discharge of student loans in a second bankruptcy case, based on changed circumstances, notwithstanding a determination of Finally, the Eighth Circuit has said that the availability of an nondischargeability in a prior case). income-based repayment program is an important factor to consider in discharging student loans.23 Here, SAU's representative testified that, because the university still holds the CONCLUSION loan, it is not subject to the Department of Education's *6 For the reasons stated, the Bankruptcy Court did not frequently-discussed incomebased programs. However, the err in holding that the Debtor did not meet her burden

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 79 In re Hurst, --- B.R. ---- (2016) of proving that repayment of the student loan would impose undue hardship case to be an undue hardship on her. ACCORDINGLY, the Judgment examined on the unique facts and of the Bankruptcy Court is AFFIRMED. circumstances that surround the particular bankruptcy.

Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 SHODEEN, Bankruptcy Judge dissenting. F.3d 549, 554 (8th Cir.2003). Instead, we apply a more flexible approach under the totality of the The majority concludes that sufficient facts support the circumstances test, which has three components: (1) the bankruptcy court's determination that Hurst does not qualify for debtor's past, present, and reasonably reliable future discharge of her student loans for undue hardship. I believe this financial resources; (2) a calculation of the debtor's and result rests upon an overly narrow application of the totality of the her dependent's reasonable necessary living expenses; circumstances test, and, therefore, I respectfully dissent. and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case. Id. Discharge of student loan debt in bankruptcy is governed by 11 Applying the facts contained in the record to all three U.S.C. § 523(a)(8) which in relevant part states: “[a] discharge areas of inquiry, I believe an undue hardship exists. under section 727 ... of this title does not discharge an individual debtor from any debt unless excepting such debt from discharge under this paragraph would impose an undue hardship on the 1. Past, Present and Future Financial Resources debtor and the debtor's dependents.” The intent of this statute is to prevent abuse of the bankruptcy system by undeserving students According to her original Schedules I and J, Hurst did seeking to discharge their student loan obligations. Andresen v. not have sufficient income to make her student loan Neb. Student Loan Program, Inc. (In re Andresen), 232 B.R. 127, payment at the time she filed bankruptcy. While she no 130 (8th Cir. BAP 1999). The term undue hardship is not defined longer has to make her $297 per month car payment, in the Bankruptcy Code. Consequently, the standards to determine this saving is offset by Hurst's decreased income. On a what constitutes undue hardship have been developed by the month when she works all of the hours available to her courts. There are two primary tests used to evaluate whether an at Aramark, Hurst makes $300 to $400 less than what undue hardship exists for discharge of student loans. The majority she was able to make working at the shelter. Also of of Circuits follow the test adopted by the Second Circuit in note is the fact that Hurst's monthly income is not Brunner v. New York State Higher Education Services Corp., 831 consistent due to the sporadic availability of work at F.2d 395 (2d Cir.1987). Under Brunner, three required elements Aramark. To calculate her average monthly income must be met to establish an undue hardship: (1) the debtor cannot based upon her annual income may not truly reflect the maintain, based on current income and expenses, a “minimal” actual amount she receives from wages and standard of living for herself and her dependents if forced to repay unemployment in a given month when school is not in the loan; (2) additional circumstances exist that indicate this state session. of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) the debtor has made *7 Additionally, both the majority and the bankruptcy good faith efforts to repay the loans. Id. at 396. court overlook the relevant inquiry into the reliability of Hurst's future income to make the loan payments. Many debtors fail to meet the rigid standards imposed by the See Jesperson, 571 F.3d at 782 (discussing evidence Brunner test, which has been expressly rejected by the Eight that debtor could enjoy sustained legal employment); Circuit: Nielsen v. ACS, Inc. (In re Nielsen), 473 B.R. 755, 759– 60 (8th Cir. BAP 2012) (emphasizing debtor's ability We are convinced that requiring our for professional advancement and likelihood of future bankruptcy courts to adhere to the strict tax refunds), aff'd 502 Fed.Appx. 634 (8th Cir.2013); parameters of a particular test would Ford v. Student Loan Guar. Found. of Ark. (In re Ford), diminish the inherent discretion 269 B.R. 673, 676 (8th Cir. BAP 2001) (finding that contained in § 523(a)(8) .... We believe debtor's worsening arthritic condition will decrease that fairness and equity require each future ability to work and increase medical costs). Hurst

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 80 In re Hurst, --- B.R. ---- (2016) earns $7.50 an hour at her job. According to her tax return, options that were and are available to Hurst are very her combined income from all sources in 2014 was $19,883 different from the testimony that described the Perkins which included her gross wages ($6,320), unemployment Loans as being popular with nursing and educational ($115) and social security benefits ($13,563). There are no students due to the availability of loan cancelation under facts to suggest that these amounts will increase in the certain circumstances, which do not include an inability to foreseeable future. Instead the record shows that Hurst's pay. hearing and vision problems will almost certainly affect her ability to work. See Reynolds v. Pa. Higher Educ. Assistance 25 Agency (In re Reynolds), 425 F.3d 526, 532 (8th Cir.2005) Both the bankruptcy court and the majority conclude (declining to ignore the reality that in many cases “a debtor's that $42 is the monthly payment that would be the amount required to rehabilitate to the loan but health and financial position are inextricably intertwined”); neither that amount nor other conditions are Ford, 269 B.R. at 676. There is nothing in the record to clearly ascertained from the record. indicate that Hurst's reliable future income at retirement will The bankruptcy court focused on Hurst's failure to take consist of anything other than her monthly social security the initiative to obtain a payment accommodation and benefit. That benefit amount is currently less than her her failure to make any voluntary payment on the necessary monthly expenses, even after adjusting for the student loan. Without elaboration, these failures are removal of the car payment. described as self-imposed conditions in the majority opinion. Even under the more stringent Brunner test, a 2. Reasonable and Necessary Living Expenses failure to make minimal payments does not preclude a determination of undue hardship when a debtor's Due to the delay in bringing the discharge action, the relevant time income has never significantly risen above living period for examination of current income and expenses is expenses. See Roth v. Educ. Credit Mgmt. Corp. (In re evaluated at the time of trial. Amended Schedules I and J were not Roth), 490 B.R. 908, 918 (9th Cir. BAP 2012). submitted to the court for this time period. Hurst's testimony Similarly, under the totality of the circumstances test a indicated that there had been a change in her expenses because failure to make payments or participate in available she no longer had a car payment. The addition of these funds to loan programs does not preclude a determination of her monthly budget results in a higher disposable income amount. undue hardship. It is simply one factor that can be With that adjustment there is no dispute that the expenses are both considered. See Jesperson, 571 F.3d at 784-85 (citation reasonable and necessary. omitted).

3. Any Other Relevant Facts and Circumstances CONCLUSION Nothing in the record disputes Hurst's statements that she attempted to contact the University regarding her student loan *8 The totality of the circumstances test is not a purely obligation. Eventually, she learned that she did not qualify for any mathematical formula. Id. at 788. Its purpose is to deferment or forbearance because the loan was in default and had permit all of a debtor's relevant circumstances to be been accelerated. Exhibits 4 and 5 explain the options available to fully considered to determine whether repayment of a Hurst. Rehabilitation of the loan was possible through consecutive student loan qualifies as an undue hardship. Non- monthly payments of an agreed upon amount for a one year pecuniary considerations are equally as important to pecuniary ones in the analysis. “We will not adopt an period25. If she had followed this course of action and made all of interpretation of ‘undue hardship’ that causes the courts the required payments without a default, Hurst could then apply to shut their eyes to factors that may lead to disaster, for forbearance or deferment on her loan obligation. To qualify both personal and financial, for a suffering debtor.” for a deferment of up to three years the borrower must be Reynolds, 425 F.3d at 531. “Each bankruptcy case unemployed. Forbearance, during which interest continues to involving a student loan must be examined on the facts accrue, may be granted for economic hardship defined by the and circumstances surrounding that particular poverty guidelines and whether the debt “is excessive in bankruptcy for the Court to make a determination of comparison to income.” The terms of the loan do not permit the ‘undue hardship.’ ” Id. at 532 (citation omitted). Both school to cancel the debt or adjust payments due to hardship. The

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 81 In re Hurst, --- B.R. ---- (2016) the bankruptcy court and the majority opinion rely on in that case to those of Hurst. In Jesperson the debtor's Jesperson in reaching their conclusions. There are a number young age, good of relevant distinguishing factors between the circumstances health, number of degrees, marketable skills, and lack complete rehabilitation of the loan, she would be another of physical impairments all weighed against granting an year closer to retirement at which time she could request undue hardship discharge. 571 F.3d at 780. Each one of a forbearance of her payments. Hurst's current and future these factors, when

income will not result in considered on the basis of the record substantial repayment on her here, weighs markedly in favor of granting an undue student loans under any circumstances. At retirement hardship discharge in this case. she will be left with a loan balance and a fixed income

consisting only of her monthly social security benefit.

A court is not permitted to speculate or make unsupported Under de novo adjustments to a debtor's income, expenses review and for the reasons stated, I or circumstances in determining undue hardship. These conclude that an undue hardship exists under the totality are the undisputed facts in this of the circumstances test. case: Hurst moved to Texas Accordingly, I would reverse after completing her first year as

the bankruptcy court's order and a student with the intent remand for entry of a of returning to school. Due to a series of judgment discharging Hurst's student loan accidents, she obligation.

remained in Texas and did not finish her education. Since 1995 she has consistently held low paying jobs. Hurst is All Citations approaching retirement age, is working at a minimum wage job, and has significant health difficulties which --- B.R. ----, 2016 WL 3902659 compromise her ability to work. If she did successfully

2016 WL 3629028 Holdings: The Court of Appeals, Kelly, Circuit Judge, held Only the Westlaw citation is currently available. that: United States Court of Appeals, Eighth Circuit. [1] the district court did not err in determining In re: LaToya L. Steward, Debtor thatChapter 7 trustee had abandoned debtor's claim for James C. Robinson, Critique disgorgement; Services, LLC Appellant Elbert A. Walton, Jr.; Debra Lynne Wilson [2] neither the bankruptcy court nor the district v. courtabused its discretion in denying appellants' multiple LaToya L. Steward, Debtor Appellee E. motions for recusal; Rebecca Case, U.S. Trustee In re: LaToya L. Steward Debtor [3] the bankruptcy court properly exercised its James C. Robinson, Appellant inherentauthority to construe debtor's pro se complaint as Critique Services, LLC, Elbert a motion to disgorge and to order that the improperly A. Walton, Jr., Appellant docketed pleading be docketed correctly; Debra Lynne Wilson v. [4] former counsel and firm with which he was LaToya L. Steward, Debtor Appellee affiliatedwere properly treated as a single entity, for E. Rebecca Case U.S. Trustee purposes of service of motion to disgorge and the making of discovery requests; No. 15-1857, No. 15-1988 | [5] under Missouri law, the bankruptcy court did not Submitted: January 12, 2016 err inrefusing to dismiss debtor's claim on the basis of | “unclean hands”; Filed: July 7, 2016 [6] the bankruptcy court's imposition of sanctions for Synopsis civilcontempt was proper; and Background: Chapter 7 debtor filed motion to disgorge fees against her former bankruptcy counsel and the firm with which [7] the bankruptcy court's suspension of former he was affiliated. After former counsel and firm failed to counseland his attorney from practice before the court was respond to debtor's discovery requests, and then failed to a proper exercise of its authority and did not constitute an comply with court-ordered discovery, the United States abuse of discretion. Bankruptcy Court for the Eastern District of Missouri, Charles E. Rendlen, III, J., entered judgment finding former counsel and firm in contempt and, inter alia, imposing monetary sanctions Affirmed. of $30,000 against them, jointly and severally with their attorney, for their refusal to comply with the court's discovery orders, imposing monetary sanctions of $19,720 against former counsel, firm, and their attorney for fees incurred by debtor in West Headnotes (32) litigating the discovery dispute, awarding debtor a refund of the $495 in fees that she paid to former counsel and firm, and, [1] Bankruptcy pursuant to F.R.B.P. 9011, suspending both former counsel and Legal or equitable interests in general attorney from practice before the bankruptcy court for one year Bankruptcy estate includes all of a debtor's legal for having made false statements at hearings and in pleadings. and equitable interests as of the time of the Former counsel, firm, and attorney appealed. The District commencement of the case. 11 U.S.C.A. § Court, Rodney W. Sippel, J., 529 B.R. 903, affirmed. Former 541(a)(1). counsel, firm, and attorney appealed.

Cases that cite this headnote

[2] Bankruptcy Cases that cite this headnote Abandonment

Finding that Chapter 7 trustee had abandoned debtor's [6] Judges claim for disgorgement of attorney fees against former Time of making objection bankruptcy counsel, despite the lack of any explicit Motions to recuse bankruptcy judge filed by order of abandonment in the case, was supported by Chapter 7 debtor's former bankruptcy counsel, evidence that, before debtor filed her motion for the firm with which he was affiliated, and their disgorgement, trustee had certified that the bankruptcy attorney, the first of which was filed more than estate was fully administered and requested that she be four months after movants' participation in the discharged from any further duties, and that, after case began and, most notably, immediately debtor had filed her motion to disgorge and the case after the bankruptcy court entered an order was reopened for adjudication of the motion, trustee compelling discovery and indicated an again certified that the estate had been fully unwillingness to tolerate further obfuscation, administered and asked to be discharged from any were not timely; although movants attempted other duties. 11 U.S.C.A. §§ 541(a) to explain their untimeliness by asserting that (1), 554(a). they were not aware that firm was considered a Cases that cite this headnote party to the case, former counsel identified himself as “d/ b/a [the firm]” from the very beginning of the litigation, and refused to [3] Bankruptcy provide discovery that would have clarified his Discretion affiliation with the firm. 28 U.S.C.A. § 455(a). Bankruptcy Review Cases that cite this headnote Court of Appeals reviews the bankruptcy court's and the district court's decisions on recusal for abuse of [7] Judges discretion. Time of making objection Timeliness requirement for motions to recuse Cases that cite this headnote on the basis that a judge's “impartiality might reasonably be questioned” is intended to avoid [4] Judges the risk that the party might hold its application Time of making objection as an option in the event the trial court rules Motions for recusal on the basis that a judge's against it. 28 U.S.C.A. § 455(a). “impartiality might reasonably be questioned” must be timely. 28 U.S.C.A. § 455(a). Cases that cite this headnote

Cases that cite this headnote [8] Judges Determination of objections [5] Judges Party introducing a motion to recuse carries a Time of making objection heavy burden of proof; a judge is presumed to Timeliness doctrine, under statute requiring a be impartial and the party seeking judge to disqualify himself in any proceeding disqualification bears the substantial burden of in which his impartiality might reasonably be proving otherwise. 28 U.S.C.A. § 455(a). questioned, requires a party to raise a claim at the earliest possible moment after obtaining Cases that cite this headnote knowledge of facts demonstrating the basis for such a claim. 28 U.S.C.A. § 455(a). [9] Judges

Bias and Prejudice [13] Bankruptcy Party is not entitled to recusal merely because a judge Procedure is “exceedingly ill disposed” toward them, where the Concept of harmless error does not affect the judge's knowledge and the opinion it produced were bankruptcy court's inherent authority to control properly and necessarily acquired in the course of the proper docketing of pro se pleadings. Fed. R. proceedings. 28 U.S.C.A. § 455(a). Bankr. P. 9005.

Cases that cite this headnote Cases that cite this headnote

[10] Judges [14] Bankruptcy Determination of objections Conclusions of law; d e novo review Motions to recuse bankruptcy judge filed by Chapter 7 Bankruptcy debtor's former bankruptcy counsel, the firm with Clear error which he was affiliated, and their attorney were Bankruptcy properly denied on the basis that movants failed to Review demonstrate that judge's impartiality might reasonably Court of Appeals reviews the bankruptcy have been questioned; although movants alleged that court's and the district court's factual findings judge, based on his prior service as United States for clear error and legal conclusions de novo. Trustee (UST), might have become aware of facts outside the record about the firm, which had been the Cases that cite this headnote subject of two adversary proceedings brought by the Trustee's Office, judge explained that he was not personally involved with the Office's investigations [15] Bankruptcy into the firm and was exposed to no information Process; s ervice relevant to debtor's motion to disgorge attorney fees Bankruptcy from firm. 28 U.S.C.A. § 455(a). Examination and Discovery Chapter 7 debtor's former bankruptcy counsel Cases that cite this headnote and the firm with which he was affiliated were properly treated as a single entity, for purposes [11] Federal Civil Procedure of service of debtor's motion to disgorge and Pro Se or Lay Pleadings the making of discovery requests, such that the Pro se pleadings are to be construed more liberally than bankruptcy court had jurisdiction to compel those prepared by counsel. firm to comply with discovery requests, and firm could be sanctioned for failure to do so; Cases that cite this headnote counsel and firm repeatedly refused to disclose the nature of counsel's affiliation with firm, this continued refusal was a significant barrier to [12] Bankruptcy the progress of the litigation before the Procedure bankruptcy court, and, if firm had genuinely Bankruptcy court properly exercised its wanted to act as an independent party, it could inherent authority to construe Chapter 7 at any time have made its intention clear by debtor's pro se complaint against her former complying with the bankruptcy court's order to bankruptcy counsel as a motion to disgorge and explain or clarify its relationship with counsel. to order that the improperly docketed pleading be docketed correctly. Cases that cite this headnote

Cases that cite this headnote [16] Bankruptcy

Presentation of grounds for review [20] Bankruptcy Because mootness is jurisdictional, the Court of Judicial authority or approval Appeals would consider the issue despite appellants' Bankruptcy failure to raise it before the bankruptcy court. Examination and Discovery Bankruptcy court retained authority to order Cases that cite this headnote Chapter 7 debtor to accept discovery and to sanction opposing party for their failure to [17] Federal Courts meet their discovery obligations, after the Bankruptcy parties had ostensibly reached an agreement that did not require the discovery process to Chapter 7 debtor's claim against her former bankruptcy continue, where the case was never actually counsel, the firm with which he was affiliated, and settled; merely filing a motion for approval of their attorney was not moot, despite fact that a settlement does not divest the bankruptcy defendants had directed a payment of $199 to debtor's court of authority to manage the progress of a counsel; even if the payment in question were case. considered a partial refund, it did not moot debtor's claim for disgorgement of attorney fees, as the motion Cases that cite this headnote to disgorge sought significantly more than a mere refund of the $199 fee she had paid to counsel and firm, the record did not show that it was counsel and firm [21] Equity who in fact made the $199 payment, and debtor's He Who Comes into Equity Must Come with counsel indicated that debtor would not accept that Clean Hands amount in settlement of the issues raised by the motion Under Missouri law, the doctrine of unclean to disgorge, such that debtor retained a concrete hands is equitable, intended to serve the interest in the outcome of the litigation, and the interests of public policy and protect the bankruptcy court retained the power to grant effectual integrity of the courts. relief. Cases that cite this headnote Cases that cite this headnote

[22] Equity [18] Federal Courts He Who Comes into Equity Must Come with Rights and interests at stake Clean Hands Case is not “moot” so long as the parties retain Under Missouri law, the doctrine of unclean hands is any concrete interest, however small, in the applied when its application would promote right and outcome of the litigation. justice, considering all of the facts and circumstances of a particular case. Cases that cite this headnote Cases that cite this headnote [19] Bankruptcy Judicial authority or approval [23] Equity Bankruptcy court's rejection of proposed He Who Comes into Equity Must Come with settlement without prejudice based on parties' Clean Hands failure to meet procedural requirement is Under Missouri law, the doctrine of unclean hands is “highly unlikely” to constitute an abuse of not intended to aid wrongdoers who attempt to use it discretion. Fed. R. Bankr. P. 9019. as a shield for their own misconduct.

Cases that cite this headnote Cases that cite this headnote

[24] Equity injustice would result if the Court of Appeals Nature of unconscionable conduct declined to consider it. Under Missouri law, the bankruptcy court did not err in refusing to dismiss Chapter 7 debtor's disgorgement Cases that cite this headnote claim against her former bankruptcy counsel on the basis of “unclean hands”; although debtor admittedly [28] Contempt made several false statements in her initial bankruptcy Purging contempt after adjudication petition, including falsely stating her address and Civil contempt is distinguished from criminal falsely claiming her three nephews as dependents, she contempt by the presence of a purgation later voluntarily corrected these false statements, provision, which allows the contemnor to explaining that counsel and his staff had directed her purge himself of contempt by complying with to include the false information in her petition and that the court's orders. she did not understand the consequences of doing so until the first meeting of creditors, and, given the role 1 Cases that cite this headnote of counsel and the firm with which he was affiliated in debtor's wrongdoing, they were not entitled to benefit from the doctrine of unclean hands. [29] Bankruptcy Contempt Cases that cite this headnote Bankruptcy courts have the authority to exercise civil contempt power, which is [25] Equity intended to coerce compliance with court He Who Comes into Equity Must Come with orders or to compensate for damages Clean Hands associated with non-compliance. Under Missouri law, the unclean hands doctrine is Cases that cite this headnote properly used to bar a claim only when the wrongful conduct at issue is the source of that claim. [30] Bankruptcy Cases that cite this headnote Frivolity or bad faith; s anctions Bankruptcy [26] Bankruptcy Examination and Discovery Discretion Bankruptcy court's imposition of sanctions for civil Court of Appeals reviews the imposition of contempt against Chapter 7 debtor's former bankruptcy sanctions by the bankruptcy court for abuse of counsel, the firm with which he was affiliated, and discretion. their attorney, for their refusal to comply with courtordered discovery in debtor's fee disgorgement Cases that cite this headnote proceeding, was proper; the court explicitly indicated that contempt sanctions imposed were civil in nature, explained exactly how contemnors might purge [27] Bankruptcy themselves of the sanctions, that is, by providing Presentation of grounds for review discovery, and gave them multiple opportunities to do Court of Appeals declined to deviate from its so, mere fact that contemnors' failure to comply with general rule that it does not consider arguments the court's orders caused the contempt sanctions to raised for the first time on appeal where ultimately come due did not render those sanctions appellants' argument was not raised before criminal in nature, and the record showed that either the bankruptcy court or the district court, contemnors had multiple notices of impending and appellants made no argument that manifest sanctions, had multiple opportunities to respond, and

appeared before the court on multiple occasions before Louis, MO. Counsel who presented argument on behalf of sanctions were made final. Appellants Robinson and Walton in 15-1988 was Elbert Arthur Walton, Jr. of St. Louis, MO. Also appearing on 1 Cases that cite this headnote this brief was James C. Robinson of St. Louis, MO.

Counsel who presented argument on behalf of the appellee [31] Attorney and Client was David Nelson Gunn, of Brentwood, MO. The Power of judge at chambers following attorney also appeared on the appellee brief; Bankruptcy Gary D. Bollinger, of Saint Louis, MO. Power and Authority Bankruptcy court's suspension of Chapter 7 debtor's Before LOKEN, GRUENDER, and KELLY, Circuit former bankruptcy counsel and his attorney from Judges. practice before the court, pursuant to the court's inherent authority to discipline attorneys appearing Opinion before it and pursuant to the local rules authorizing exercise of that authority, was a proper exercise of its KELLY, Circuit Judge. authority and did not constitute an abuse of discretion; *1 Attorney James Robinson, Attorney Elbert Walton, and the bankruptcy court carefully and thoroughly detailed Critique Services, LLC, appeal from the judgment of the the misconduct that was the basis for counsel's and his 5 attorney's suspension, which included making false district court affirming the judgment of the bankruptcy statements to the court, and provided ample notice and court2 on LaToya Steward's motion to disgorge attorney's opportunities to be heard. Cases that cite this headnote fees. Upon careful review of all issues raised, we affirm.

[32] Attorney and Client 2 The Honorable Charles E. Rendlen III, United Jurisdiction to admit States Bankruptcy Judge for the Eastern District of Missouri. Bankruptcy Power and Authority Bankruptcy I. Background Frivolity or bad faith; s anctions The issues in this case arose out of an extensive and chaotic Bankruptcy courts have the authority to procedural history, recounted here in the necessary detail. sanction persons appearing before them, and LaToya Steward filed a petition for Chapter 7 bankruptcy on this authority includes the right to control June 17, 2011. She was represented by James C. Robinson, admission to their bar. d/b/a Critique Services, LLC. Steward received a discharge on November 21, 2011, but before the discharge she reaffirmed a 1 Cases that cite this headnote debt of $10,966.60 to Ford Motor Credit Company. Steward sought to rescind the reaffirmation agreement, but Robinson apparently abandoned his representation and did not assist her in doing so. On November 16, 2012, Steward filed a pro se Appeals from United States District Court for the Eastern motion to reopen her bankruptcy proceedings in order to District of Missouri-St. Louis discharge her debt to Ford. On December 4, 2012, Steward filed an adversary complaint against Ford, in which she asserted that Attorneys and Law Firms Robinson's poor representation had caused her to miss the deadline to rescind the reaffirmation agreement. At a hearing on Counsel who presented argument on behalf of Appellant this complaint, the bankruptcy court advised Steward that she Critique Services in 15-1857 was Laurence D. Mass, of St. should amend her complaint, and on April 5, 2013, Steward

5 United States District Court for the Eastern The Honorable Rodney W. Sippel, Chief Judge, District of Missouri.

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 88 In re Steward, --- F.3d ---- (2016) filed an amended complaint against Robinson and Critique *2 In the days following the September 18 status Services. On April 8, 2013, the bankruptcy court entered an conference, Robinson filed multiple motions, including a order deeming Steward's complaint to be a motion to disgorge motion to recuse the bankruptcy judge, a motion for attorney's fees based on Robinson's inadequate representation, judgment on the pleadings, a motion to set aside the order and set a hearing for May 8, 2013. On May 7, 2013, Elbert granting Steward's motion to compel, a motion for a Walton entered his appearance on behalf of protective order, and a motion to dismiss for lack of subject matter jurisdiction. The bankruptcy court denied all of Robinson, d/b/a Critique Services, 6 and filed an untimely Robinson's motions. At a status conference on October 1, response to Steward's motion. 2013, the court determined that Robinson had not complied with the order compelling discovery and that he had no Steward was eventually forced to file a motion to compel. intention of doing so. On October 2, the bankruptcy court After the September 18 status conference, the bankruptcy entered an order imposing sanctions on Robinson, which court noted Robinson's “willful noncompliance” with his began to accrue on October 9, 2013. Consistent with the 4 discovery obligations, granted Steward's motion to court's advisory to the parties at the September 18 status compel, ordered Robinson to pay the attorney's fees conference, the court sanctioned Robinson $1000 for each incurred in litigating the motion to compel, and warned subsequent day of non-compliance with his discovery both Robinson and Walton that further obfuscation would obligations. be met with sanctions. The court also ordered Robinson to provide information about his affiliation with Critique On November 13, 2013, the bankruptcy court entered a Services (i.e., whether Critique Services had a corporate second order on sanctions. The court ended the accrual of identity independent of Robinson or whether it was simply the daily monetary sanction, ordered payment of the Robinson's corporate alter ego). accrued sanctions, and found Robinson in contempt of court pursuant to Fed. R. Civ. P. 37(b)(2)(A) (vii). Robinson attempted to appeal, characterizing the 4 Among other things, Robinson failed to timely respond to bankruptcy court's order as a final order for criminal Steward's interrogatories and requests for production, sanctions, so the bankruptcy court entered a clarifying repeatedly raised waived objections to the discovery notice on December 2, 2013. The court stated that requests, falsely represented to the bankruptcy court Robinson could purge the sanctions by complying with the that he had provided complete responses when in fact order compelling discovery and participating appropriately he had declined to respond to most of the discovery in the discovery process. requests, ignored communications from Steward's counsel, stated to Steward's counsel that he would Early in 2014, the parties engaged in settlement negotiations. provide no discovery without an order compelling However, on March 22, 2014, Steward notified the court that him to, and, failing all that, accused Steward of perjury and the bankruptcy court of personal bias. attempts to settle the case had failed. On April 3, the bankruptcy Robinson refused to respond to such basic discovery court entered a notice advising Robinson that the discovery requests as an interrogatory asking him to describe deadline was April 11, 2014, and that if Robinson did not meet bar complaints filed against him and a request for his discovery obligations by that date the court would impose production of tax and financial information. further sanctions. The court also advised Walton that it was considering imposing sanctions against him, for facilitating Robinson's obstreperous behavior and participating in such

6 September 18 hearing, the parties—Steward now represented For clarity in this recitation of facts, we refer to Robinson, by counsel—had extensive discovery disputes. Robinson d/b/a Critique Services, as a single unit under the moved to quash Steward's requests for discovery, and the name “Robinson.” Critique Services much later in the bankruptcy court denied the motion as frivolous. Status proceedings sought to be treated as an independent conferences on the discovery issues were held on August 14, party, rather than as Robinson's corporate alter ego. September 4, and September 11. The hearing was eventually reset as a status conference for September 18, 2013. As the case progressed in advance of the

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 89 In re Steward, --- F.3d ---- (2016) behavior himself, and set a deadline for him to file a brief on the incurred by Steward's counsel in litigating discovery. The matter. On April 10, Walton filed a motion to withdraw and court also sanctioned Robinson and Walton for making Robinson filed a notice of dismissal of counsel. The bankruptcy false statements to the court by suspending them from court did not allow Walton to end his representation of practice before the United States Bankruptcy Court for the Robinson, believing this to be an attempt to delay the case and Eastern District of Missouri, and ordered that Robinson avoid consequences for their joint ongoing refusal to comply and Walton's actions be referred to the U.S. District Court with the court's orders. for the Eastern District of Missouri, the Office of the U.S. Trustee, and the Office of Chief Disciplinary Counsel of Also on April 10, 2014, Steward filed a motion for approval of the Missouri Supreme Court for any appropriate a settlement agreement. Steward also filed a notice stating that investigation and disciplinary action. Finally, the court she believed she could no longer accept discovery from awarded Steward a refund of the $495 in fees she paid to Robinson, given their settlement. On April 11, the bankruptcy Robinson, but denied relief as to damages related to the court ordered Steward to accept discovery should Robinson reaffirmation of Steward's debt to Ford. attempt to provide it, on the basis that providing such discovery would allow Robinson to purge the sanctions he had accrued. Robinson, Walton, and Critique Services (now acting as an That same day, Robinson filed a second motion to recuse the independent party and represented by separate counsel) bankruptcy judge. Walton also filed a motion to substitute appealed to the district court. On March 31, 2015, the counsel based on an alleged conflict of interest with Critique district court affirmed the bankruptcy court's judgment in Services. The bankruptcy court denied both motions on April all respects. Robinson, Walton, and Critique Services 14, 2014. (collectively, Appellants) timely appealed, raising numerous issues, with varying degrees of merit, before us.7 Walton then sued the bankruptcy judge in his personal capacity, We address each issue in turn. raising various claims of tortious interference. The suit was dismissed. On April 21, 2014, the bankruptcy court entered a [1] [2] Appellants first argue that Steward did not have standing notice directed to both Robinson and Walton, advising them that to bring a motion to disgorge attorney's fees, because that claim the court intended to impose sanctions based on false statements properly belonged to the Chapter 7 made over the course of the litigation and giving them an 6 opportunity to respond. On April 22, Walton filed a third motion Trustee. A bankruptcy estate includes all of a debtor's legal to recuse the bankruptcy judge on behalf of both Robinson and and equitable interests as of the time of the commencement himself. The bankruptcy court denied that motion on April 23. of the case. 11 U.S.C. § 541(a)(1); United States ex rel. Finally, on April 28, 2014, the bankruptcy court denied Gebert v. Transp. Admin. Servs., 260 F.3d 909, 913 (8th Cir. Steward's motion for approval of the settlement without 2001). The parties appear to agree on this much: To the extent prejudice, based on the fact that such a motion must be filed by Steward's claim for disgorgement existed at the time her the Chapter 7 Trustee rather than by the debtor. The Trustee did bankruptcy petition was filed, it was included in the not refile the motion for settlement approval. bankruptcy estate and could properly be brought only by the Trustee; but if the Trustee had abandoned the claim, Steward *3 On June 10, 2014, the bankruptcy court entered had the right to bring it on her own behalf. See Vreugdenhil judgment in favor of Steward. The court found Robinson v. Hoekstra, 773 F.2d 213, 215 (8th Cir. 1985). The district in contempt, struck Robinson's claims and defenses, made court found that the Trustee abandoned any interest in final $30,000 in accrued monetary sanctions, ordered that Steward's bankruptcy estate, returning to Steward the right to Walton be jointly and severally liable for the $30,000 in file a motion for disgorgement of attorney's fees. We review sanctions, and imposed additional sanctions on Robinson and Walton in the amount of $19,720 for attorney's fees

7 appellants collectively, distinguishing them only Robinson and Walton appeal together, while Critique when necessary. Services appeals separately, raising slightly different sets of issues. To minimize confusion, we treat the issues as having been raised by all II. Steward's Standing to Bring Motion to Disgorge

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 90 In re Steward, --- F.3d ---- (2016) this factual determination for clear error. In re Reynolds, 425 III. Recusal F.3d 526, 531 (8th Cir. 2005). *4 [3] Appellants next argue that the bankruptcy court should have granted one of their three motions to recuse Bankruptcy Judge Rendlen from this case. They argue that 6 Appellants did not raise this issue before the bankruptcy court, Judge Rendlen's impartiality in this case “might reasonably and it was therefore considered by the district court in be questioned,” based on his service as United States the first instance. In re Foster, 516 B.R. 537, 544 (B.A.P. Trustee for the Eastern District of Missouri from June 2003 8th Cir. 2014), aff'd, 602 Fed.Appx. 356 (8th Cir. 2015) to May 2006. During that time, the Trustee's Office pursued (“Standing is a component of subject matter jurisdiction two adversary proceedings against Critique Services. that may be challenged at any time during the Appellants assert that Judge Rendlen was aware of facts proceeding.”). outside the record about Critique Services, and Assuming that Steward's claim was property of her Chapter 7 demonstrated bias by making various negative remarks bankruptcy estate, we find no clear error in the district court's about Robinson, Walton, and Critique Services. The district conclusion that the Trustee abandoned this property. On July court, however, found that nothing in the record supported a 26, 2011, before Steward filed her motion for disgorgement, finding that Judge Rendlen's impartiality “might reasonably the Chapter 7 Trustee certified that the bankruptcy estate was be questioned by an objective, neutral observer,” and upheld fully administered and requested that she be discharged from his denial of the motions to recuse. We review the lower any further duties. On July 26, 2013, after Steward had filed courts' decisions on recusal for abuse of discretion. Moran her motion to disgorge attorney's fees and the case was v. Clarke, 296 F.3d 638, 648 (8th Cir. 2002). reopened for adjudication of the motion, the Trustee again certified that the estate had been fully administered and asked [4] [5] [6] [7] Though their positions on the basis for recusal to be discharged from any other duties. Though no explicit have shifted as this case has progressed, Appellants now argue order of abandonment was entered in this case, there is only that Judge Rendlen should have recused himself under 28 sufficient evidence in the record from which the district court U.S.C. § 455(a).7 Section 455(a) requires “[a]ny justice, judge, could have concluded that the requirements of abandonment or magistrate judge of the United States [to] disqualify himself were met. See 11 U.S.C. § 554(a) (“After notice and a in any proceeding in which his impartiality might reasonably be hearing, the trustee may abandon any property of the estate questioned.” As an initial matter, motions for recusal under § that is burdensome to the estate or that is of inconsequential 455(a) must be timely. Tri–State Fin., LLC v. Lovald, 525 F.3d value and benefit to the estate.”). The record supports a 649, 653 (8th Cir. 2008). “The timeliness doctrine under § 455 conclusion that the parties had notice of the Trustee's intent ‘requires a party to raise a claim at the earliest possible moment to abandon Steward's disgorgement claim, and that a hearing after obtaining knowledge of facts demonstrating the basis for under 11 U.S.C. § 341 (a meeting of creditors) took place at such a claim.’ ” Id. (quoting Fletcher v. Conoco Pipe Line Co., which the abandonment could presumably have been 323 F.3d 661, 664 (8th Cir. 2003)). Here, Appellants did not file contested. Id.; cf. Vreugdenhill v. Navistar Int'l Transp. their first motion to recuse until September 24, 2013, more than Corp., 950 F.2d 524, 526 (8th Cir. 1991) (holding that for four months after their participation in the case began—and property to be abandoned by operation of law pursuant to 11 most notably, immediately after the bankruptcy court entered an U.S.C. § 554(c), the property must be formally scheduled). order compelling discovery and indicated an unwillingness to Appellants' failure to raise this issue before the bankruptcy tolerate further obfuscation.8 The timeliness requirement under court did result in some inconsistency in the record. But Appellants do not articulate how this inconsistency rendered § 455 is intended “to avoid the risk that the party might hold its the district court's factual finding of abandonment clearly application as an option in the event the trial court rules against erroneous, and the mere fact of the inconsistency alone is it,” which appears to be what happened here. Id. insufficient for us to so conclude —particularly where the Trustee did not take any actions that were incompatible with 7 Appellants have, at various times, argued for recusal abandonment. pursuant to 28 U.S.C. § 455(a), 28 U.S.C. § 455(b)(1), and 28 U.S.C. § 144. Other than a passing reference to § 144—which does not apply to bankruptcy judges — Appellants provide specific argument only as to § 455(a).

8 *5 [11] [12] Appellants assert that the bankruptcy court erred Appellants attempt to explain their untimeliness by asserting that they were not aware that Critique in docketing Steward's pro se complaint as a motion to Services was considered a party to this case. We disgorge attorney's fees. But pro se pleadings are to be discuss Critique Services' status in this litigation construed more liberally than those prepared by counsel. See further infra, at Section V. Insofar as this issue is Wishnatsky v. Rovner, 433 F.3d 608, 610 (8th Cir. 2006) relevant to the motions for recusal, suffice it to say that (citing Haines v. Kerner, 404 U.S. 519, 520, 92 S.Ct. 594, 30 Robinson identified himself as “d/b/a Critique L.Ed.2d 652 (1972)). In the case, as the district court correctly Services” from the very beginning of this litigation, determined, the bankruptcy court properly exercised its and refused to provide discovery that would have authority to construe Steward's pro se complaint as a motion clarified his affiliation with Critique Services. Based to disgorge and to order that the improperly docketed on the record before us, it is implausible that pleading be docketed correctly. Appellants only realized the supposed conflict between Judge Rendlen and Critique Services in September [13] Appellants cite to Federal Rule of Bankruptcy 2013. Procedure 9005 as the source of error. Rule 9005 adopts the [8] [9] [10] Even if the motions to recuse were timely, concept of harmless error in bankruptcy proceedings, stating Appellants have not demonstrated that Judge Rendlen's that “[w]hen appropriate, the court may order the correction of impartiality might reasonably be questioned. “A party any error or defect or the cure of any omission which does not introducing a motion to recuse carries a heavy burden of proof; affect substantial rights.” But Rule 9005 is inapplicable to this a judge is presumed to be impartial and the party seeking docketing issue, because the concept of harmless error does not disqualification bears the substantial burden of proving affect the court's inherent authority to control proper docketing otherwise.” Fletcher, 323 F.3d at 664 (quoting Pope v. Fed. of pro se pleadings. To conclude otherwise would be to suggest Express Corp., 974 F.2d 982, 985 (8th Cir. 1992)). Moreover, a that Appellants had a substantive right not to face a motion for party is not entitled to recusal merely because a judge is disgorgement based on the allegations that they had provided “exceedingly ill disposed” toward them, where the judge's inadequate representation to Steward. Such a suggestion finds “knowledge and the opinion it produced were properly and no support in our case law, and would be fundamentally necessarily acquired in the course of the proceedings ....” Liteky incompatible with the purpose of liberally construing pro se v. United States, 510 U.S. 540, 551, 114 S.Ct. 1147, 127 pleadings. See Castro v. United States, 540 U.S. 375, 381, 124 L.Ed.2d 474 (1994). S.Ct. 786, 157 L.Ed.2d 778 (2003) (“Federal courts sometimes will ignore the legal label that a pro se litigant attaches to a Appellants have supplied no evidence from which we motion and recharacterize the motion in order to place it within could conclude that Judge Rendlen was not impartial. The a different legal category. They may do so in order to avoid an only information in the record supporting such a unnecessary dismissal, to avoid inappropriately stringent conclusion comes from the allegations in Appellants' application of formal labeling requirements, or to create a better motions. And Judge Rendlen's orders contravene those correspondence between the substance of a pro se motion's allegations: In the orders denying the motions to recuse, claim and its underlying legal basis.” (citations omitted)). Judge Rendlen explained that he was not personally involved with the United States Trustee's investigations into Critique Services and was exposed to no information relevant to Steward's motion to disgorge attorney's fees. V. Critique Services' Status and Participation in On this record, we cannot find that Appellants “[bore] the the Litigation substantial burden” of proving that Judge Rendlen was not impartial. Neither the bankruptcy court nor the district [14] Appellants make three related arguments regarding court abused its discretion in denying Appellants' multiple Critique Services' status as a litigant in this case. First, Critique motions for recusal. Services argues that it was never properly served as an independent party, and so the bankruptcy court did not have jurisdiction to compel it to comply with discovery requests. Second, Critique Services argues that because no discovery IV. Construing Steward's requests were directed to it, the bankruptcy court erred in Complaint as Motion to Disgorge imposing sanctions for failure to participate in discovery.

Finally, Robinson and Walton argue that they cannot be held [17] [18] Appellants have failed to show that Steward's claim accountable for Critique Services' failure to provide discovery, was moot. A case is not moot so long as the parties retain any because they had no control over Critique Services' actions. “concrete interest, however small, in the outcome of the We review the lower courts' factual findings for clear error and litigation.” Chafin v. Chafin, ––– U.S. ––––, 133 S.Ct. 1017, legal conclusions de novo. Reynolds, 425 F.3d at 531. 1023, 185 L.Ed.2d 1 (2013) (quoting Knox v. Serv. Employees Int'l Union, Local 1000, ––– U.S. ––––, 132 S.Ct. [15] Appellants did not make the first two arguments before 2277, 2287, 183 L.Ed.2d 281 (2012)). Here, Steward's the bankruptcy court, raising them for the first time before the motion to disgorge sought significantly more than a mere district court. Noting this failure, the district court nevertheless refund of the $199 fee she had paid to Robinson and Critique addressed the substance of Appellants' arguments, ultimately Services. The bankruptcy court ultimately found that Steward concluding that Critique Services had been properly served and was entitled to disgorgement of $495, a finding that appears that discovery requests were properly directed to it. We agree. to be uncontested by Appellants and was not clearly Appellants' continued refusal to disclose the nature of erroneous. Moreover, the record does not show that it was Robinson's affiliation with Critique Services was a significant Robinson and Critique who in fact made the $199 payment to barrier to the progress of the litigation before the bankruptcy Steward. And Steward's counsel indicated that Steward court. If Critique Services had genuinely wanted to act as an would not accept this amount in settlement of the issues independent party, it could at any time have made its intention raised by the motion to disgorge. Even if we considered the clear by complying with the bankruptcy court's order to explain payment of $199 a partial refund, Steward claimed more than or clarify its relationship with Robinson. We find no error in the that in damages. She therefore retained a concrete interest in district court's finding that the bankruptcy court correctly the outcome of the litigation, and the bankruptcy court determined that Robinson and Critique Services were properly retained the power to grant effectual relief. See Chafin, 133 treated as a single entity, or its conclusion that Critique Services S.Ct. at 1023. The district court correctly concluded that waived its challenge to the bankruptcy court's jurisdiction Steward's claim was not mooted by the alleged refund of $199 through its conduct in the litigation. See Yeldell v. Tutt, 913 in attorney's fees. F.2d 533, 539 (8th Cir. 1990). Appellants raise the third VII. Denial of Motion to Approve Settlement argument for the first time in this court, and we decline to [19] Next, Appellants argue that the bankruptcy court abused consider it. Ames v. Nationwide Mut. Ins. Co., 760 F.3d 763, its discretion in denying Steward's motion to approve the parties' 770 (8th Cir. 2014), cert. denied, ––– U.S. ––––, 135 S.Ct. 947, settlement agreement. Appellants did not raise this argument 190 L.Ed.2d 829 (2015) (we do not generally consider issues before the district court. We therefore do not reach the question raised for the first time on appeal, except in the limited of whether the bankruptcy court abused its discretion in circumstances where failing to consider such an issue would rejecting the settlement, see Ames, 760 F.3d at 770, and note result in a clear miscarriage of justice). only in passing that the bankruptcy court rejected the settlement without prejudice based on the parties' failure to meet a procedural requirement,9 an action highly unlikely to constitute VI. Mootness an abuse of discretion. See Fed. R. Bankr. P. 9019 (the *6 [16] Appellants assert that the bankruptcy court should bankruptcy court may approve a settlement only “[o]n motion have dismissed Steward's claim sua sponte for lack of by the trustee and after notice and a hearing”); In re Cockhren, subject matter jurisdiction after Appellants directed a 468 B.R. 838, 844 (B.A.P. 8th Cir. 2012) (we review the payment of $199 to Steward's counsel in October 2013. bankruptcy court's decision to approve or reject a settlement for They argue that this payment was the amount of the abuse of discretion, which “occurs if the court bases its ruling attorney's fee that Steward had paid to Robinson and on an erroneous view of the law or on a clearly erroneous Critique Services, and that its refund mooted her claim for assessment of the evidences”). disgorgement of attorney's fees. Because mootness is jurisdictional, we consider this issue despite Appellants' 9 failure to raise it before the bankruptcy court. Ali v. We again note some inconsistency in both requiring that the Cangemi, 419 F.3d 722, 724 (8th Cir. 2005). trustee file the motion to approve settlement and finding that the trustee had previously abandoned Steward's claim for disgorgement on behalf of the estate. However, the

bankruptcy court correctly applied the letter of Rule 9019 statements in her initial petition for bankruptcy, including based on the circumstances of the case before it at the falsely stating her address and falsely claiming her three time, and any inconsistency is the result of Appellants' nephews as dependents. However, she voluntarily failure to raise their claims before the lower courts. corrected these false statements in 2013, explaining that [20] Appellants did, however, raise a related issue before the Robinson and his staff had directed her to include the false district court, arguing that the bankruptcy court erred by information in her petition and that she did not understand ordering Steward to accept discovery and by sanctioning the consequences of doing so until the first meeting of Appellants for their failure to meet their discovery obligations creditors in 2011. The district court found that, given after the parties had ostensibly reached an agreement that did Robinson and Critique Services' role in Steward's not require the discovery process to continue. They argue that wrongdoing, Appellants were not entitled to benefit from when the parties settled, the bankruptcy court no longer had the doctrine of unclean hands, and the bankruptcy court did authority to impose sanctions based on their refusal to comply not err in refusing to dismiss Steward's claim on this basis. with the court's prior orders. This issue is easily resolved based We agree. Moreover, we note that the unclean hands on the fact that, as the district court correctly determined, the doctrine is properly used to bar a claim only when the case was never actually settled. See In re Petters Co., 455 B.R. wrongful conduct at issue is the source of that claim, which 166, 172 (B.A.P. 8th Cir. 2011) (settlement is contingent on the is not the case here. Graham Const. Servs. v. Hammer & bankruptcy court's approval). Though Steward had filed a Steel Inc., 755 F.3d 611, 620 (8th Cir. 2014). motion for approval of the parties' settlement agreement, the bankruptcy court denied that motion without prejudice based on IX. Sanctions Fed. R. Bankr. P. 9019's requirement that such a motion be filed [26] [27] Finally we reach the crux of this case: the significant by the Chapter 7 Trustee. Appellants cite no authority to support sanctions imposed on Appellants by the bankruptcy court. We the proposition that merely filing a motion to approve a review the imposition of sanctions by the bankruptcy court for settlement divests the bankruptcy court of authority to manage abuse of discretion. In re Kujawa, 270 F.3d 578, 581 (8th Cir. the progress of a case. Because settlement in this case was never 2001). Appellants make three separate arguments as to the completed, the bankruptcy court retained authority to order sanctions imposed in this case. First, they argue that the Steward to accept discovery and to sanction Appellants for monetary sanctions—$30,000 plus $19,720 in attorney's failing to comply with the court's orders. fees—were excessive in light of the small sum at issue in the case. This argument was not raised before either the bankruptcy court or the district court, and Appellants have made no argument that manifest injustice will result if we VIII. Unclean Hands decline to consider it. See Ames, 760 F.3d at 770. We therefore *7 [21] [22] [23] In their final, and perhaps most frivolous, will not deviate from our general rule that we do not consider effort to argue that Steward's claim for disgorgement should arguments raised for the first time on appeal. Even if we did have been dismissed, Appellants assert that the bankruptcy reach this issue on the merits, we would be disinclined to find court should have applied the doctrine of unclean hands to her an abuse of discretion. Though $49,720 in monetary sanctions claim. The doctrine of unclean hands is equitable, intended “to is a significant sum, it is proportionate to Appellants' repeated serve the interests of public policy and protect the integrity of and drawn-out bad faith conduct in this case. Appellants the courts.” Pony Express Cmty. Bank v. Campbell, 206 repeatedly ignored the bankruptcy court's orders despite being S.W.3d 399, 402 (Mo. Ct. App. 2006). The doctrine is applied warned of the consequences, persistently refused to comply when its application would “promote [ ] right and justice ... with the most basic requirements of litigation, and prejudiced considering all of the facts and circumstances of a particular Steward by forcing her to remain involved in the case while case.” Id. (quoting Sangamon Assoc. Ltd. Appellants engaged in a protracted power struggle with the v. Carpenter 1985 Family P'ship Ltd., 165 S.W.3d 141, bankruptcy court. 145–46 (Mo. 2005) (en banc)). It is not intended to “aid wrongdoers who attempt to use it as a shield for their own [28] [29] [30] Second, Appellants argue that the bankruptcy misconduct.” Id. (quoting Nelson v. Emmert, 105 S.W.3d court improperly imposed penalties for criminal contempt, 563, 569 (Mo. App. 2003)). because they had no opportunity to purge themselves of contempt, and that the court's contempt order failed to comply [24] [25] Steward admittedly made several false with applicable procedural rules. Civil contempt is

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 94 In re Steward, --- F.3d ---- (2016) distinguished from criminal contempt by the presence of a shown and after having been given an opportunity to be purgation provision, which allows the contemnor to purge heard, may be disbarred or otherwise disciplined himself of contempt by complying with the court's orders. In re Mayex II Corp., 178 B.R. 464, 470 (Bankr. W.D. Mo. 1995). “It .... is well established that bankruptcy courts have the authority to exercise civil contempt power,” which is intended to coerce and Rule IV-A of the Rules of Disciplinary Enforcement for compliance with court orders or to compensate for damages the Eastern District of Missouri states that associated with non-compliance. Id. at 469–70. In this case, the bankruptcy court explicitly indicated that the contempt [f]or misconduct defined in these sanctions imposed were civil in nature, explained exactly how Rules, and for good cause shown, Robinson and Walton might purge themselves of the sanctions, and after notice and opportunity to and gave them multiple opportunities to do so. In fact, this was be heard, any attorney admitted to the reason for the court's order requiring Steward to accept any practice before this court may be discovery provided by Appellants even after a motion for disbarred, suspended from practice settlement approval was filed—simply by providing discovery, before this court, reprimanded or Appellants could have purged themselves of contempt. The subjected to such other disciplinary mere fact that Appellants' failure to comply with the court's action as the circumstances may orders caused the contempt sanctions to ultimately come due warrant.10 does not render those sanctions criminal in nature. Furthermore, Appellants fail entirely to explain how the bankruptcy court's As the district court found, the bankruptcy court carefully and finding of contempt failed to comply with the procedural rules thoroughly detailed the misconduct that was the basis for requiring notice and a hearing. The record shows that Robinson and Walton's suspension, and provided ample notice Appellants had multiple notices of the impending sanctions and and opportunities to be heard. We conclude, as did the district multiple opportunities to respond, and appeared before the court court, that the bankruptcy court's suspension of Robinson and on multiple occasions before the sanctions were made final. We Walton from practice in the Bankruptcy Court for the Eastern agree with the district court that the bankruptcy court's District of Missouri was a proper exercise of its authority and imposition of sanctions for civil contempt was proper. did not constitute an abuse of discretion.

*8 [31] [32] Third, Robinson and Walton argue that the 10 Though Robinson and Walton attempt to rely on bankruptcy court did not have the authority to unilaterally suspend them from practice under the local rules governing Rule V of the Rules of Disciplinary Enforcement, that attorney discipline. The district court found that the rule simply states that a judge may refer disciplinary matters to counsel appointed by the district court if suspension was proper under the bankruptcy court's inherent such a referral is warranted. authority to discipline attorneys appearing before it and pursuant to the local rules authorizing exercise of that authority, and we agree. Bankruptcy courts have the authority X. Conclusion to sanction persons appearing before them, and this authority For the foregoing reasons, we affirm the judgment of the district includes the right to “control admission to [their] bar.” In re court. Burnett, 450 B.R. 116, 132 (Bankr. E.D. Ark. 2011) (quoting Chambers v. NASCO, Inc., 501 U.S. 32, 43, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991)); Law v. Siegel, –––U.S. ––––, 134 All Citations S.Ct. 1188, 1194, 188 L.Ed.2d 146 (2014); In re Clark, 223 --- F.3d ----, 2016 WL 3629028 F.3d 859, 864 (8th Cir. 2000). Local Rule 12.02 for the Eastern District of Missouri states that

2016 WL 3672073 [2] Federal Courts United States Court of Appeals, Eighth Dismissal for failure to state a claim Circuit. In reviewing the grant of a motion to dismiss Domick Nelson, Plaintiff–Appellant for failure to state a claim, the Court of Appeals assumes as true all factual v. Midland Credit Management, Inc., Defendant– allegations in the pleadings, interpreting Appellee. them most favorably to the nonmoving National Association of Consumer Bankruptcy party. Fed. R. Civ. P. 12(b)(6). Attorneys, Amicus on Behalf of Appellant(s) Cases that cite this headnote ACA International, Amicus on Behalf of Appellee(s)

No. 15-2984 [3] Federal Civil Procedure | Insufficiency in general Submitted: March 15, 2016 | Federal Civil Procedure Filed: July 11, 2016 Matters deemed admitted; a cceptance as true of allegations in complaint Synopsis A complaint must contain sufficient factual Background: After bankruptcy court disallowed as untimely the matter, accepted as true, to state a claim to proof of claim filed by debt collector in debtor's Chapter 13 relief that is plausible on its face and, bankruptcy proceeding, debtor brought action against the debt thereby, survive a motion to dismiss for collector, alleging the collector violated the Fair Debt Collection failure to state a claim. Fed. R. Civ. P. Practices Act (FDCPA) by filing the proof of claim on a time- 12(b)(6). barred debt. The United States District Court for the Eastern District of Missouri, E. Richard Webber, J., 2015 WL 5093437, Cases that cite this headnote dismissed for failure to state a claim. Debtor appealed.

[4] Antitrust and Trade Regulation Practices prohibited or required in [Holding:] The Court of Appeals, Benton, Circuit Judge, held general that debt collector's filing of a time-barred proof of claim in Antitrust and Trade Regulation debtor's Chapter 13 proceeding was not false, deceptive, Communications, representations, and misleading, unfair, or unconscionable under the notices; d ebtor's response FDCPA. Even if a debt collector does not make express misrepresentations, the Fair Debt Affirmed. Collection Practices Act (FDCPA) bars a debt collector from filing or threatening a lawsuit to collect a time-barred debt. Fair Debt Collection Practices Act, § 807, 15 West Headnotes (5) U.S.C.A. § 1692e(2) (A), (5).

[1] Federal Courts 1 Cases that cite this headnote Pleading Court of Appeals reviews de novo a dismissal for [5] Antitrust and Trade Regulation failure to state a claim. Fed. R. Civ. P. 12(b)(6). Practices prohibited or required in general Cases that cite this headnote Bankruptcy Time for Filing

Debt collector's filing of a time-barred proof of *1 In November 2006, Domick R. Nelson defaulted on claim in debtor's Chapter 13 bankruptcy proceeding a consumer debt of $751.87. On February 25, 2015, she was not false, deceptive, misleading, unfair, or filed a Chapter 13 petition in bankruptcy court. Midland unconscionable under the Fair Debt Collection Credit Management, Inc., as agent for the creditor, filed Practices Act (FDCPA); although FDCPA a proof of claim in bankruptcy court for the amount of prohibited debt collector from filing or threatening a the debt. According to the proof of claim, Nelson made lawsuit to collect a time-barred debt, this rule did not no payment on the debt after November 2006. Nelson extend to time-barred proofs of claim, because there objected to the proof of claim, arguing it was time- was no need to protect debtors who were already barred. See § 516.120(1) RSMo 2000; Discovery Grp. under the protection of the bankruptcy court. Fair LLC v. Chapel Dev., LLC, 574 F.3d 986, 990 (8th Cir. Debt Collection Practices Act, §§ 807, 808, 15 2009) (recognizing that Missouri statutes of limitations U.S.C.A. §§ 1692e, 1692f. are procedural, not substantive, and merely suspend the remedy without extinguishing the right). The 1 Cases that cite this headnote bankruptcy court agreed, disallowing Midland's claim. See 11 U.S.C. § 558 (including statutes of limitation as a defense for a bankruptcy estate).

Appeal from United States District Court for the Eastern Nelson then sued Midland, alleging that, by filing the District of Missouri—St. Louis proof of claim on the time-barred debt, Midland violated the Fair Debt Collection Practices Act (FDCPA). The Attorneys and Law Firms district court1 dismissed for failure to state a claim, holding that the FDCPA is not implicated by a debt Counsel who presented argument on behalf of the appellant and collector filing an accurate and complete claim on a appeared on the brief was Richard A. Voytas, Jr., of Saint Louis, timebarred debt. Nelson appeals. Having jurisdiction MO. under 28 U.S.C. § 1291, this court affirms.

Counsel who presented argument on behalf of the appellee was 1 Jason B. Tompkins, of Birmingham, AL. The following attorneys The Honorable E. Richard Webber, United States also appeared on the appellee brief; Joshua C. Dickinson, of District Judge for the Eastern District of Missouri. Omaha, NE., Shilee T. Mullin, of Omaha, NE., Chase T Espy, of Birmingham, AL. [1] [2] [3] This court reviews de novo the Rule 12(b) (6) dismissal of Nelson's claims. Cox v. Mortgage Elec. Counsel who presented argument for amicus National Registration Sys., Inc., 685 F.3d 663, 668 (8th Cir. Association of Consumer Bankruptcy Attorneys on behalf of 2012). This court assumes as true all factual allegations appellant(s) was Daniel Luke Geyser, of Los Angeles, CA. The in the pleadings, interpreting them most favorably to following attorneys also appeared on the amicus brief; Peter K. Nelson, the nonmoving party. Bell v. Pfizer, Inc., 716 Stris, of Los Angeles, CA., Tara A. Twomey, of San Jose, CA. F.3d 1087, 1091 (8th Cir. 2013). “[A] complaint must contain sufficient factual matter, accepted as true, to The following attorney appeared on the amicus brief of ACA state a claim to relief that is plausible on its face.” International on behalf of appellee(s); Brian Melendez, of Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, Minneapolis, MN. 173 L.Ed.2d 868 (2009).

Before WOLLMAN, BENTON, and SHEPHERD, “Enacted to eliminate abusive debt collection practices, Circuit Judges. the FDCPA imposes civil liability on debt collector[s] for certain prohibited debt collection practices.” Opinion Hemmingsen v. Messerli & Kramer, P.A., 674 F.3d 814, 817 BENTON, Circuit Judge. (8th Cir. 2012) (alteration in original). Nelson alleges that Midland's claim violated three prohibitions in the FDCPA:

“engag[ing] in any conduct the natural consequence of which is would be harassed, misled or deceived by” the debt to harass, oppress, or abuse any person in connection with the collector's acts. Freyermuth, 248 F.3d at 771. The collection of a debt,” 15 U.S.C. § 1692d; “us[ing] any false, bankruptcy process protects against such harassment deceptive, or misleading representation or means in connection and deception. Unlike defendants facing a collection with the collection of any debt,” § 1692e; and “us[ing] unfair or lawsuit, a bankruptcy debtor is aided by “trustees who unconscionable means to collect or attempt to collect any debt,” owe fiduciary duties to all parties and have a statutory § 1692f. Because each of these allegations stem from the same obligation to object to unenforceable claims.” In re conduct—the filing of the proof of claim —this court may Gatewood, 533 B.R. 905, 909 (8th Cir. BAP 2015); see consider the provisions together. See Hemmingsen, 674 F.3d at 11 U.S.C. §§ 704(a)(5), 1302 (b)(1) (outlining trustees' 817. duties, including objecting “to the allowance of any claim that is improper”). [4] More specifically, under the FDCPA, a debt collector may neither falsely represent “the character, amount, or legal status of Defending a lawsuit to recover a time-barred debt is any debt,” 15 U.S.C. § 1692e(2)(A), nor threaten “to take any more burdensome than objecting to a time-barred proof action that cannot legally be taken or that is not intended to be of claim. “[T]he Bankruptcy Code provides for a claims taken,” id. § 1692e(5). Nelson argues that Midland, by submitting resolution process involving an objection and a hearing its claim, represented that the claim was valid and enforceable. to assess the amount and validity of the claim ... [that] See 11 U.S.C. § 502(a) (“A claim or interest ... is deemed allowed, is generally a more streamlined and less unnerving unless a party in interest ... objects.”). Even if—as here—the debt prospect for a debtor than facing a collection lawsuit.” collector does not make express misrepresentations, the FDCPA In re Gatewood, 533 B.R. at 909. Because a proof of bars a debt collector from filing or threatening a lawsuit to collect claim does not expand the pool of available funds in a time-barred debt. See Freyermuth v. Credit Bureau Servs., Inc., bankruptcy, debtors have less at stake than a collection 248 F.3d 767, 771 (8th Cir. 2001) (“[I]n the absence of a threat defendant. Rather, an unsecured creditor likely shares of litigation or actual litigation, no violation of the FDCPA has only “pro rata in the distribution of the pool of available occurred when a debt collector attempts to collect on a potentially funds and see[s] the unpaid portion of its claim timebarred debt that is otherwise valid.”). discharged.” Id.

*2 [5] Nelson urges this court to follow the Eleventh Circuit and These protections against harassment and deception extend to bankruptcy claims the rule against actual or threatened satisfy the relevant concerns of the FDCPA. “There is litigation on time-barred debts. See Crawford v. LVNV Funding, no need to protect debtors who are already under the LLC, 758 F.3d 1254 (11th Cir. 2014); see also Johnson v. protection of the bankruptcy court, and there is no need Midland Funding, LLC, ––– F.3d ––––, ––––, 2016 WL 2996372, to supplement the remedies afforded by bankruptcy at *3 (11th Cir. May 24, 2016) (clarifying Crawford by holding itself.” Simmons v. Roundup Funding, LLC, 622 F.3d that the Bankruptcy Code does not preempt the FDCPA). In 93, 96 (2d Cir. 2010) (so stating while rejecting an Crawford, the Eleventh Circuit held that knowingly filing a time- FDCPA suit even where the proof of claim was barred proof of claim violated the FDCPA's prohibitions against inaccurate and inflated). unfair, unconscionable, deceptive, or misleading conduct. 758 F.3d at 1261. The Crawford court reasoned that the same This court rejects extending the FDCPA to time-barred concerns underlying the rule against litigating or threatening to proofs of claim. An accurate and complete proof of litigate time-barred debts—the debtor's faded memory and lost claim on a time-barred debt is not false, deceptive, records, possible ignorance of the statute of limitations, and misleading, unfair, or unconscionable under the expense to contest the stale debt—apply equally to a debt FDCPA. The district court properly dismissed for collector filing a claim on a stale debt. Id. failure to state a claim.

Crawford, however, ignores the differences between a bankruptcy claim and actual or threatened litigation. In * * * * * * * Freyermuth, this court held that a defendant's FDCPA liability turns on “whether an unsophisticated consumer The judgment is affirmed.

All Citations

--- F.3d ----, 2016 WL 3672073, 62 Bankr.Ct.Dec. 218

[2] Bankruptcy Willful or Malicious Injury Under statute preventing discharge of debts for willful and malicious 2016 WL 3974164 United States Court of Appeals, Eighth injury by the debtor to another entity, willful and malicious Circuit. are two different characteristics; they should not be lumped together to create an amorphous standard to prevent Blake Roussel, Appellant v. Clear Sky Properties, LLC; discharge for any conduct that may be judicially considered LuAnn Deere, Appellees to be deplorable. 11 U.S.C. § 523(a)(6).

No. 15-3048 | Submitted: June 16, 2016 | Filed: July 25, Cases that cite this headnote 2016 [3] Bankruptcy Willful or Malicious Injury A simple Synopsis Background: Judgment creditors commenced interference with legal rights is not enough in itself to adversary proceeding, asserting that a state judgment for breach prevent discharge of a debt under statute preventing of fiduciary duty owed by debtor and related attorney fee award discharge of debts for willful and malicious injury by the were nondischargeable. The Bankruptcy Court, James G. debtor to another entity. 11 U.S.C. § 523(a)(6). Mixon, J., 483 B.R. 915, ruled that most of the debt was dischargeable, and creditors appealed. The United States District Cases that cite this headnote Court for the Eastern District of Arkansas, Susan Webber Wright, J., 504 B.R. 510, reversed and remanded. After the [4] Judgment Courts or Other Tribunals Rendering Bankruptcy Court, Phyllis M. Jones, J., 536 B.R. 254, ruled that Judgment Collateral estoppel applies in bankruptcy court. attorney fee award was nondischargeable, the District Court, Wright, J., 2015 WL 4779247, affirmed, and debtor appealed. Cases that cite this headnote

Holdings: The Court of Appeals, Benton, Circuit Judge, held Roussel v. Clear Sky Properties, LLC, --- F.3d ---- (2016) 62 that: Bankr.Ct.Dec. 239

[1] jury's finding of malice when awarding punitive damages in © 2016 Thomson Reuters. No claim to original U.S. state court action against debtor for breach of fiduciary duty had Government Works. 2 collateral estoppel effect in Chapter 7 proceeding on issue of whether the judgment debt was nondischargeable; [5] Judgment Courts or Other Tribunals Rendering Judgment Judgment Matters actually litigated and [2] evidence was sufficient to establish that debtor, the managing determined If the same issue was actually litigated and member of an limited liability company (LLC), acted willfully determined by a final judgment, and was essential to that when he breached fiduciary duty owed to the LLC; and final judgment, it cannot be relitigated in bankruptcy court; an issue may be actually decided even if it is not explicitly [3] award of attorney fees against debtor did not have to be decided, for it may have constituted, logically or practically, apportioned between dischargeable breach of contract claim and a necessary component of the decision reached in the prior nondischargeable breach of fiduciary duty claim. litigation.

Affirmed. Cases that cite this headnote

West Headnotes (14) [6] Bankruptcy Malice; m alicious injury “Maliciousness” under statute preventing discharge of debts for willful and [1] Bankruptcy Conclusions of law; d e novo review Bankruptcy malicious injury by the debtor to another entity is conduct Clear error The Court of Appeals reviews findings of fact for targeted at the creditor . at least in the sense that the conduct clear error and legal conclusions de novo. is certain or almost certain to cause financial harm; while intentional harm may be very difficult to establish, the Cases that cite this headnote likelihood of harm in an objective sense may be considered in evaluating intent. 11 U.S.C. § 523(a)(6).

Cases that cite this headnote © 2016 Thomson Reuters. No claim to original U.S. Government Works. 3 [7] Bankruptcy In general; f raud Judgment Bankruptcy Jury's finding of malice when awarding punitive damages in state court Cases that cite this headnote action against debtor for breach of fiduciary duty had collateral estoppel effect in Chapter 7 proceeding on issue of whether the [12] Bankruptcy In general; f raud Evidence was sufficient judgment debt was nondischargeable as a debt for willful and to establish that debtor, the managing member of an limited malicious injury by the debtor; jury was instructed to award liability company (LLC), acted willfully when he breached punitive damages if the debtor “knew or ought to have known” fiduciary duty owed to the LLC, as required for state court that his conduct would “naturally and probably result in award of punitive damages against the debtor to be damages” and continued acting “in reckless disregard of nondischargeable; debtor opened a competing brokerage firm under the same franchise as the LLC in the same town, the consequences from which malice may be inferred.” 11 with LLC's agents, knowing that the LLC intended to U.S.C. § 523(a)(6). expand its operations in the town. 11 U.S.C. § 523(a)(6).

Cases that cite this headnote Cases that cite this headnote

[8] Bankruptcy Willful or Malicious Injury Malice under statute [13] Bankruptcy Costs and Fees Bankruptcy Claims preventing discharge of debts for willful and malicious injury by Bankruptcy Interest Ancillary obligations such as attorneys' the debtor to another entity requires more than recklessness or fees and interest may attach to the primary debt; their status reckless disregard. 11 U.S.C. § 523(a)(6). depends on that of the primary debt.

Cases that cite this headnote Cases that cite this headnote

[9] Bankruptcy Willfulness; w illful injury A “willful injury” [14] Bankruptcy Award on determination of under statute preventing discharge of debts for willful and nondischargeability State court's award of attorney fees malicious injury by the debtor to another entity is a deliberate or against debtor did not have to be apportioned between intentional invasion of the legal rights of another. 11 U.S.C. § dischargeable breach of contract claim and 523(a)(6). nondischargeable breach of fiduciary duty claim in Chapter 7 proceeding, where the breach of contract claim was deeply Cases that cite this headnote intertwined with the breach of fiduciary duty claim. 11 U.S.C. § 523(a)(6). [10] Bankruptcy Willful or Malicious Injury Nondischargeability under statute preventing discharge of debts Cases that cite this headnote for willful and malicious injury by the debtor to another entity takes a deliberate or intentional injury, not merely a deliberate Appeal from United States District Court for the Eastern or intentional act that leads to injury. 11 U.S.C. § 523(a)(6). District of Arkansas—Little Rock, Honorable Susan Webber Wright Cases that cite this headnote Attorneys and Law Firms [11] Bankruptcy Willfulness; w illful injury Willfulness under statute preventing discharge of debts for willful and malicious Counsel who presented argument on behalf of the appellant injury by the debtor to another entity is subjective, requiring was Kevin P. Keech, of Little Rock, AR. The following proof that the debtor desired to bring about the injury or was, in attorney also appeared on the appellant brief: Rachel V. fact, substantially certain that his conduct would result in the Warnick, of Little Rock, AR. injury that occurred. 11 U.S.C. § 523(a)(6). Counsel who presented argument on behalf of the appellees Roussel v. Clear Sky Properties, LLC, --- F.3d ---- (2016) 62 was H. Wayne Young, Jr., of Little Rock, AR. The following Bankr.Ct.Dec. 239

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 101 Roussel v. Clear Sky Properties , LLC, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 239 attorney also appeared on the appellee brief; Daniel Herrington, They argued, under the doctrine of collateral estoppel, the of Little Rock, AR. state court judgment bound the bankruptcy court to find the debt nondischargeable. Roussel countered that the § Before SMITH, GRUENDER, and BENTON, Circuit Judges. 523(a)(4) and (a)(6) issues were not actually litigated in state court. Agreeing with Roussel, the bankruptcy court found Opinion the entire Judgment Debt dischargeable, except the $1,480 award for property damage. In re Roussel, 483 B.R. 915 BENTON, Circuit Judge. (Bankr. E.D. Ark. 2012). Clear Sky and Deere appealed to the district court.1 The district court reversed, finding the *1 Blake Roussel and LuAnne Deere formed Clear Sky, LLC entire Judgment Debt nondischargeable. In re Roussel, 504 d/b/a Exit First Choice Realty—an Exit Realty brokerage B.R. 510 (E.D. Ark. 2013). It remanded the attorneys' fees franchise—in Conway, Arkansas. Clear Sky purchased the right issue to the bankruptcy court. On further appeal, this court to operate its franchise in one half of Conway. The Operating held it lacked jurisdiction to review the case until the Agreement provided that existing members had the right to veto pending attorneys' fees issue was resolved. In re Roussel, a proposed sale of another member's interest; it also included a 769 F.3d 574 (8th Cir. 2014). provision allowing attorneys' fees. 1 The Honorable Judge Susan Webber Wright, United States About a year after forming Clear Sky, Roussel wanted to sell his District Court for the Eastern District of Arkansas. [1] The 50% interest, but Deere refused. Roussel then proposed to sell bankruptcy court found the attorneys' fees award two-thirds of his 50% interest. Deere agreed. Three months later, nondischargeable. In re Roussel, 536 B.R. 254 (Bankr. E.D. Roussel and two Clear Sky real estate agents filed articles of Ark. 2015). The district court affirmed, and Roussel appeals. organization for Select Group Investments d/b/a Exit Realty This court reviews findings of fact for clear error and legal Select—an Exit Realty brokerage franchise—in Conway, conclusions de novo. Pearson Educ., Inc. v. Almgren, 685 Arkansas. Select Group Investments purchased the right to F.3d 691, 694 (8th Cir. 2012). Having jurisdiction under 28 operate its franchise in the other half of Conway. Twelve Clear U.S.C. § 1291, this court affirms the district court. Sky agents soon joined Select Group Investments. I. Deere and Clear Sky sued Roussel in state court for breach of fiduciary duty, fraud, breach of contract, and violations of the *2 [2] [3] Roussel argues the district court erred in finding Arkansas Franchise Practices Act. A jury found that Roussel the Judgment Debt nondischargeable under 11 U.S.C. § breached his fiduciary duty to Clear Sky and Deere. To Clear 523(a)(6), which prevents discharge of debts “for willful and Sky, the jury awarded $184,683.60 for lost revenue, $1,480.00 malicious injury by the debtor to another entity or to the for damage to property, and $113,836.40 in punitive damages. property of another entity.” Willful and malicious “are two To Deere, different characteristics. They should not be lumped together to create an amorphous standard to prevent Roussel v. Clear Sky Properties, LLC, --- F.3d ---- (2016) 62 discharge for any conduct that may be judicially Bankr.Ct.Dec. 239 considered to be deplorable.” In re Long, 774 F.2d 875, 880– © 2016 Thomson Reuters. No claim to original U.S. 81 (8th Cir. 1985). A simple interference with legal rights Government Works. 4 “is not enough in itself to prevent discharge of a debt.” Id. at 879, discussing Davis v. Aetna Acceptance Co., 293 U.S. the jury awarded $58,800 for breach of fiduciary duty and 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934). $40,000 for breach of contract. The court ordered Roussel to pay attorneys' fees. [4] [5] Roussel first contends the district court erred in applying collateral estoppel to find he acted maliciously Roussel filed Chapter 7 bankruptcy. Clear Sky and Deere filed under 11 U.S.C. § 523(a)(6). Collateral estoppel applies in an adversary proceeding against Roussel, requesting that the bankruptcy court. Grogan v. Garner, 498 U.S. 279, 284 n. bankruptcy court declare the entire state court judgment 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). If the same issue nondischargeable under 11 U.S.C. § 523(a) (4) and § 523(a)(6).

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 102 Roussel v. Clear Sky Properties , LLC, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 239 was actually litigated and determined by a final judgment, and Washington, 2013 Ark. 510, 431 S.W.3d 210, 220 (2013) was essential to that final judgment, it cannot be relitigated in (“[A]n award of punitive damages is justified only where the bankruptcy court. In re Harper, 378 B.R. 836, 849 (Bankr. E.D. evidence indicates that the defendant acted wantonly or with Ark. 2007). “An issue may be ‘actually’ decided even if it is not such a conscious indifference to the consequences that explicitly decided, for it may have constituted, logically or malice may be inferred.” (emphasis added)). In finding practically, a necessary component of the decision reached in the malice, the instruction thus required the jury to consider the prior litigation.” Id., quoting In re Smith, 270 B.R. 544, 548 (D. “likelihood of harm in an objective sense,” and whether Mass. 2001). Roussel acted while “intending or fully expecting” the consequences. See Long, 774 F.2d at 881–82. See also [6] Maliciousness is conduct “targeted at the creditor ... at least Harper, 378 B.R. at 852 (applying collateral estoppel in a § in the sense that the conduct is certain or almost certain to cause 523(a)(6) case to find the debtor acted with malice because financial harm.” Long, 774 F.2d at 881. See also In re Porter, the Arkansas jury instruction “required punitive damages to 539 F.3d 889, 893 (8th Cir. 2008). “While intentional harm may be awarded only if the action was taken with either the intent be very difficult to establish, the likelihood of harm in an to cause harm or with the knowledge that harm was objective sense may be considered in evaluating intent.” Long, substantially certain to occur”). 774 F.2d at 881. *3 The district court did not err in applying collateral [7] The state court's jury instruction allowed punitive damages if estoppel to the requirement of malice under § 523(a)(6). the jury found Roussell [9] [10] [11] [12] Roussel next contests the district court's knew or ought to have known in light of the surrounding finding that he acted willfully. A willful injury is “a circumstances, his conduct would naturally and probably result deliberate or intentional invasion of the legal rights of in damages, and that he continued such conduct in reckless another. ...” Porter, 539 F.3d at 894. “[N]ondischargeability disregard of the consequences from which malice may be takes a deliberate or intentional injury, not merely a inferred; or second, that Blake Roussel intentionally pursued a deliberate or intentional act that leads to injury.” Kawaauhau course of conduct for the purpose of causing damage, or both. v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). Willfulness is subjective, “requiring proof that the (Emphasis added). Roussel insists this instruction is not a basis debtor desired to bring about the injury or was, in fact, for applying collateral estoppel to find he acted with malice. substantially certain that his conduct would result in the First, he questions whether the “reckless disregard” or injury that occurred.” In re Patch, 526 F.3d 1176, 1180–81 “intentionally” prongs were the reason for the punitive damages. (8th Cir. 2008). This court agrees with the district court that Second, he asserts that the “reckless disregard” prong does not the undisputed evidence shows Roussel acted willfully. It rise to the level of malice necessary for § 523(a)(6). was clear error for the bankruptcy court to find otherwise. See Almgren, 685 F.3d at 694. [8] Malice under § 523(a)(6) requires more than recklessness or reckless disregard. See Long, 774 F.2d While a Clear Sky managing member, Roussel opened a brokerage firm under the same franchise as Clear Sky, in Roussel v. Clear Sky Properties, LLC, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 239 the same town as Clear Sky, and with Clear Sky agents. He testified that after Deere rejected his first offer to sell his © 2016 Thomson Reuters. No claim to original U.S. 50% interest, he met with two Clear Sky agents to discuss Government Works. 5 opening a competing franchise. He did not tell Deere about this. He further testified he knew Clear Sky intended to at 881. However, the jury instruction does not simply ask expand its operations in Conway to prevent the opening of a whether Roussel acted in reckless disregard of the consequences. competing Exit Realty franchise, and Roussel in fact It asks whether he “knew or ought to have known” that his purchased the area of Conway that Clear Sky intended to conduct would “naturally and probably result in damages” and purchase “as soon as [Clear Sky] could afford it.” These then continued acting “in reckless disregard of the consequences facts show Roussel acted willfully, that he knew “that the from which malice may be inferred.” See Ford Motor Co. v.

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 103 Roussel v. Clear Sky Properties , LLC, --- F.3d ---- (2016) 62 Bankr.Ct.Dec. 239 consequences [were] certain, or substantially certain, to result from his conduct.” See Patch, 526 F.3d at 1181.

The district court did not err in concluding that the Judgment Debt is nondischargeable under § 523(a)(6).2

2 Because this court agrees Roussel acted willfully and maliciously in violation of § 523(a)(6), it need not address the defalcation argument under § 523(a)(4).

II.

[13] [14] Roussel challenges the finding that the state court's award of attorneys' fees is nondischargeable. “Ancillary obligations such as attorneys' fees and interest may attach to the primary debt. ...” In re Hunter, 771 F.2d 1126, 1131 (8th Cir. 1985). Their status “depends on that of the primary debt.” Id. Roussel maintains that the state court's attorneys' fees award must be apportioned between the dischargeable and nondischargeable parts of the underlying debt. Because the $40,000 breach-ofcontract award (to Deere) is dischargeable, he argues, attorneys' fees attached to this debt are also dischargeable. However, apportionment is inappropriate here because the Deere's breach-of contract-claim is deeply intertwined with the breach-of-fiduciary-duties claim by Deere and Clear Sky.

The judgment is affirmed.

All Citations

--- F.3d ----, 2016 WL 3974164, 62 Bankr.Ct.Dec. 239

2016 WL 3749156 Division, Department of Justice, Washington, D.C.; for United States Court of Appeals, Defendant–Appellee. Ninth Circuit. A. Lavar Taylor, Law Offices of Lavar Taylor, Santa Ana, In re Martin Smith, Debtor, California, as and for Amicus Curiae. Martin Smith, Plaintiff–Appellant, v. United States Internal Before: Jerome Farris, Diarmuid F. O'Scannlain, and Morgan Revenue Service, Defendant– Christen, Circuit Judges. Appellee.

No. 14-15857 OPINION | Argued and Submitted May 12, CHRISTEN, Circuit Judge: 2016 San Francisco, California | Martin Smith did not file a 2001 tax form on time. Instead, Filed July 13, 2016 he filed a Form 1040 seven years after it was due, and three years after the IRS assessed a deficiency against him. Smith Synopsis later filed for bankruptcy and sought to discharge his 2001 Background: Chapter 7 debtor brought adversary proceeding tax liability. The bankruptcy court permitted the discharge, seeking determination that his federal income tax liabilities but the district court reversed. Smith appeals the district were dischargeable. The Bankruptcy Court entered judgment court's ruling. in favor of debtor, and the Internal Revenue Service (IRS) appealed. The United States District Court for the Northern District of California, Yvonne Gonzalez Rogers, J., 527 B.R. 14, reversed. Debtor appealed. FACTUAL AND PROCEDURAL BACKGROUND

After Martin Smith failed to timely file his 2001 tax forms, the IRS prepared a Substitute for Return or “SFR” based on [Holding:] The Court of Appeals, Christen, Circuit Judge, information it gathered from third parties. In March 2006, held that return that debtor filed more than seven years after it the IRS mailed Smith a notice of deficiency. Smith did not was due, and more than three years after the IRS had prepared challenge the notice of deficiency within the allotted 90 days substitute return and begun to collect taxes, did not represent and the IRS assessed a deficiency against him of $70,662. Three years later, in May 2009, Smith filed a Form 1040 for “honest and reasonable attempt” by debtor to satisfy the year 2001 on which he wrote “original return to replace requirements of tax law, and did not qualify as “return.” SFR.” On this late-filed form, Smith reported a higher Affirmed. income than the one the IRS calculated in its assessment, thereby increasing his tax liability. The IRS added the additional arrearage to its assessment. Two months after that, Appeal from the United States District Court for the Northern in July 2009, Smith submitted an offer in compromise, District of California, Yvonne Gonzalez Rogers, District hoping to resolve his tax liability. The IRS rejected his offer. Judge, Presiding, D.C. No. 4:13–cv– 00871–YGR. Smith later lost his job and the IRS allowed him to pay his tax bill in monthly installments of $150. Attorneys and Law Firms After about five months, Smith declared bankruptcy and Robert L. Goldstein (argued), Law Offices of Robert L. sought to discharge his 2001 tax debt before the bankruptcy Goldstein, San Francisco, California, for Plaintiff– court. Smith and the IRS agreed that the increase in the Appellant. assessment based on Smith's late-filed form was Julie C. Avetta (argued) and Ellen Page DelSole, Attorneys; dischargeable, but they disputed whether the IRS's original Tamara W. Ashford, Acting Assistant Attorney General; Tax $70,662 assessment was also dischargeable. The bankruptcy court ruled that it was. The district court

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 105 In re Smith, --- F.3d ---- (2016) 117 A.F.T.R.2d 2016-5127, 2016-2 USTC P 50,341, 62 Bankr.Ct.Dec. 219... reversed. Smith appeals the district court's ruling. We have (4th Cir. 2011); In re Justice, 817 F.3d 738, 740–41 (11th jurisdiction under 28 U.S.C. § 158(d), and we affirm the Cir. 2016); and the Tax Court has not wavered in its district court's order entering summary judgment in favor application of this common-law test in the sixteen years of the IRS. since we decided Hatton. See, e.g., Estate of Sanders v. Comm'r of Internal Revenue, 144 T.C. 63 (2015).

The parties' dispute centers on whether Smith's filing met the STANDARD OF REVIEW fourth requirement of the operative test: was his filing “an *2 [1] [2] This court reviews de novo the bankruptcy court's honest and reasonable attempt to satisfy the requirements of interpretation of the bankruptcy code. In re Hatton, 220 F.3d the tax law?” Hatton considered this question under similar 1057, 1059 (9th Cir. 2000). We also review de novo a district circumstances. The taxpayer in Hatton failed to file a tax court's order granting a motion for summary judgment. Ditto return and the IRS computed and assessed his tax liability by v. McCurdy, 510 F.3d 1070, 1075 (9th Cir. 2007). creating an SFR. Hatton, 220 F.3d at 1059. Throughout the process, the IRS sent numerous notices to Hatton, but it received no responses. Id. Hatton finally met with the IRS more than seven years after the original return was due and DISCUSSION more than four years after the IRS assessed a deficiency. Id. The bankruptcy code exempts from discharge “any ... debt He did not dispute his liability and the IRS agreed to a $200- for a tax ... with respect to which a return, or equivalent a-month payment plan. Id. We held that Hatton's “belated report or notice, if required ... was not filed or given.” 11 acceptance of responsibility” was not an honest and U.S.C. § 523(a)(1)(B)(I). In In re Hatton, we adopted the reasonable attempt to comply with the tax code. Id. at 1061. Tax Court's widely-accepted definition of “return.” 220 F.3d at 1060 (internal citation omitted). There, we stated [3] Here, Smith failed to make a tax filing until seven years that “[i]n order for a document to qualify as a [tax] return: after his return was due and three years after the IRS went to (1) it must purport to be a return; (2) it must be executed the trouble of calculating a deficiency and issuing an under penalty of perjury; (3) it must contain sufficient data assessment. Under these circumstances, Smith's “belated to allow calculation of tax; and (4) it must represent an acceptance of responsibility” was not a reasonable attempt to honest and reasonable attempt to satisfy the requirements comply with the tax code. Many of our sister circuits have held of the tax law.” Id. at 1060–61 (internal citation and that post-assessment tax filings are not “honest and quotation marks omitted). reasonable” attempts to comply and are therefore not “returns” at all. See In re Justice, 817 F.3d at 746; In re Payne, 431 F.3d When we decided Hatton, the bankruptcy code did not 1055, 1057– 60 (7th Cir. 2005); In re Moroney, 352 F.3d 902, define “return,” id. at 1060, but Congress amended the 907 (4th Cir. 2003); In re Hindenlang, 164 F.3d 1029, 1034– bankruptcy code in 2005 and it added a definition. In 35 (6th Cir. 1999). But see In re Colsen, 446 F.3d 836, 840– pertinent part, the amendment reads: 41 (8th Cir. 2006). We need not decide the close question of whether any post-assessment filing could be “honest and For purposes of this subsection, the reasonable” because these are not close facts; the IRS term “return” means a return that communicated with Smith for years before assessing a satisfies the requirements of deficiency, and Smith waited several more years before applicable nonbankruptcy law responding to the IRS or reporting his 2001 financial (including applicable filing information. requirements). *3 Smith argues that Hatton's “honest and reasonable” 11 U.S.C. § 523(a). inquiry requires looking only at the face of the filing, and that Hatton's facts are distinguishable because Hatton did not file We have not interpreted this new definition, but both parties a tax form at all. We disagree. Hatton focused the “honest and and several of our sister circuits agree that Hatton's four- reasonable” inquiry on the honesty and reasonableness of the factor test still applies, see In re Ciotti, 638 F.3d 276, 280 taxpayer's conduct, not on any deficiency in the documents' form or content. See Hatton, 220 F.3d at 1061 (“Hatton made

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 106 In re Smith, --- F.3d ---- (2016) 117 A.F.T.R.2d 2016-5127, 2016-2 USTC P 50,341, 62 Bankr.Ct.Dec. 219... every attempt to avoid paying his taxes until the IRS left him AFFIRMED. with no other choice.”). We hold that Hatton applies to the

All Citations Footnotes --- F.3d ----, 2016 WL 3749156, 117 A.F.T.R.2d bankruptcy code as amended, and that Smith's tax filing, 2016-5127, 2016-2 USTC P 50,341, 62 Bankr.Ct.Dec. 219, made seven years late and three years after the IRS assessed 16 Cal. Daily Op. Serv. 7476 a deficiency against him, was not an “honest and reasonable” attempt to comply with the tax code.1

1 The IRS argues that even if Smith's filing was a return, the deficiency it assessed against Smith was not a “debt

for a tax ... with respect to which” a return was filed because Smith had not yet filed anything when it

assessed the deficiency.

We do not reach this argument because we hold that

Smith's filing was not a return.

2016 WL 4011194 Peter P. Meringolo, Luther Orton, PMRK Law, LLP, San United States Court of Appeals, Francisco, CA, for Defendants-Appellees Davis Wright Ninth Circuit. Tremaine LLP and Foley & Lardner LLP.

In the Matter of Heller Ehrman LLP, Debtor, Shay Dvoretzky, Jones Day, Washington, D.C., for Heller Ehrman LLP, Liquidating Defendant-Appellee Jones Day. Debtor, Plaintiff-Appellant, v. Eric A. Shumsky, Orrick, Herrington & Sutcliffe LLP, Davis Wright Tremaine LLP, Defendant-Appellee. Washington, D.C., Rachel Wainer Apter, Christopher J. In the Matter of Heller Ehrman LLP, Debtor, Cariello, Orrick, Herrington & Sutcliffe LLP, New York, Heller Ehrman LLP, Liquidating NY, Pamela Phillips, Jonathan W. Hughes, Arnold & Porter Debtor, Plaintiff-Appellant, LLP, San Francisco, CA, for Defendant-Appellee Orrick, v. Herrington & Sutcliffe LLP. Jones Day, Defendant-Appellee. Before: Richard R. Clifton, and Sandra S. Ikuta, Circuit In the Matter of Heller Ehrman LLP, Debtor, * Heller Ehrman LLP, Liquidating Judges, and Royce C. Lamberth, District Judge. Debtor, Plaintiff-Appellant, v. Foley & Lardner LLP, Defendant-Appellee. ORDER In the Matter of Heller Ehrman LLP, Debtor, Heller Ehrman LLP, Liquidating We ask the California Supreme Court to resolve a question of Debtor, Plaintiff-Appellant, state law: whether a dissolved law firm has a property interest v. Orrick Herrington & in legal matters that are in progress but not completed at the Sutcliffe LLP, Defendant- time the law firm is dissolved, where the dissolved law firm Appellee. had been retained to handle the matters on an hourly basis. This question resolves the bankruptcy appeal before us No. 14-16314, No. 14-16315, because if a dissolved law firm does not have a property No. 14-16317, No. 14-16318 interest in such matters, the transfer of those matters to a new | law firm does not constitute a fraudulent transfer under the Argued and Submitted June 13, Bankruptcy Code. Although California courts of appeal have 2016 San Francisco, California applied pre-1996 partnership law to address this issue, we | have found no published California state court opinion Filed July 27, 2016 addressing it after the California legislature revised the Appeal from the United States District Court for the Northern applicable state partnership law in 1996. Accordingly, District of California; Charles R. Breyer, Senior District pursuant to Rule 8.548 of the California Rules of Court, we Judge, Presiding; D.C. No. 3:14-cv-01236-CRB, D.C. No. certify the following question to the California Supreme 3:14-cv-01237-CRB, D.C. No. 3:14-cv-01238- Court: CRB, D.C. No. 3:14-cv-01239-CRB Under California law, does a dissolved law firm have a Attorneys and Law Firms property interest in legal matters that are in progress but not completed at the time the law firm is dissolved, when Christopher D. Sullivan, Diamond McCarthy LLP, Jeffrey T. the dissolved law firm had been retained to handle the Makoff, Valle Makoff LLP, Kevin W. Coleman, Schnader matters on an hourly basis? Harrison Segal & Lewis LLP, San Francisco, CA, for Plaintiff-Appellant Heller Erhman LLP. Our phrasing of this question should not restrict the Court's consideration of the issues involved. The Court may rephrase Steven A. Hirsch, Keker & Van Nest LLP, San Francisco, the question as it sees fit in order to address the contentions CA, for Defendant-Appellee Davis Wright Tremaine LLP. of the parties. If the Court agrees to decide this question, we

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 108 IN THE MATTER OF HELLER EHRMAN LLP, Debtor, HELLER..., --- F.3d ---- (2016) 16 Cal. Daily Op. Serv. 7966 agree to accept its decision. We recognize that the Court has *2 The common law partnership rules enunciated in Osment a substantial caseload, and we submit this question only and Little were superseded in 1929, when the California because of its significance to the bankruptcy administration legislature adopted the Uniform Partnership of dissolved law firms in the state of California. Act (UPA), see Jacobson v. Wikholm, 29 Cal. 2d 24, 27– 28 (1946), which it later codified as part of the state's Corporations Code, see Cal. Corp. Code § 15001 et.

I seq. (1998).1 Under UPA, partners had a fiduciary duty to each other to “account to the partnership for any benefit, and We start by providing a brief history of the development of hold as trustee for it any profits derived by him without the the California doctrine of dissolved law firms' rights to consent of the other partners....” Cal. Corp. Code § 15021(1) pending legal matters, and then provide the facts of the (1998). Partners retained this duty even after the dissolution particular appeal before us. of the partnership, with only one exception: UPA provided that “[n]o partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is A entitled to reasonable compensation for his or her services in winding up the partnership affairs.” Id. § 15018(f). The While it has long been established that partners have fiduciary California Supreme Court interpreted this language to mean duties towards each other, see Gorman v. Russell, 14 Cal. that, after the death of a partner, the surviving partner was 531, 539 (1860), the California Supreme Court has addressed entitled to reasonable compensation “based upon the time, the fiduciary duties of former partners of a dissolved law firm labor, and skill expended” in winding up pending matters. with respect to the unfinished business pending at the time of Jacobson, 29 Cal. 2d at 32. dissolution in only two cases, both from the 1800s. The first case involved an agreement between former partners to share The California Court of Appeal relied on § 15018(f) in contingency fees and the second involved a surviving partner. holding that each former partner had a duty to the rest of their In Osment v. McElrath, 68 Cal. 466 (1886), a two-partner law former partners to share in attorneys' fees from a dissolved firm dissolved with several cases pending. The former law firm's unfinished business. In Jewel v. Boxer, a four- partners agreed to share any contingency fees from the partner law firm dissolved, and the former partners pending matters, but the lawyer who completed the legal subsequently formed two new firms. 156 Cal. App. 3d 171, work on the matters later refused to do so. Id. at 467, 470. 175 (1984). Jewel reasoned that under § 15018(f), the former The California Supreme Court affirmed the trial court's partners were not surviving partners, and therefore were not apportionment of the fees between the partners. Id. at 472. entitled “to extra compensation for services rendered in Rejecting the argument that the working lawyer was entitled completing unfinished business.” Id. at 176. As a result, any to a greater share of the fees, the Court pointed to the common attorneys' fees generated from matters that had been pending law rule that partners are not entitled to compensation for when the law firm dissolved were “to be shared by the former services rendered to the partnership, even after dissolution. partners according to their right to fees in the former Id. at 471. However, the Court left open the question whether partnership, regardless of which former partner provides a different rule might apply to winding up partnerships legal services in the case after the dissolution.” Id. at 174. The between lawyers “where the profits of the firm are the result former partners would be entitled only “to reimbursement for solely of professional skill and labor.” Id. Eight years later, reasonable overhead expenses,” and not for their work on a the California Supreme Court held in Little v. Caldwell, 101 quantum meruit basis. Id. at 180. The court rejected the Cal. 553 (1894), that after one law firm partner dies leaving argument that such a conclusion is contrary to the rule that a contingency fee contract not fully performed, the surviving “clients have an absolute right to the attorney of their choice,” partner has a duty to “complete the unfinished contract for the because the client's right is “irrelevant to the rights and duties benefit of the partnership,” and the contract “is still to be between the former partners with regard to income from viewed by a court of equity as an asset of the partnership.” Id. unfinished partnership business.” Id. at 177–78. at 560–61.

Subsequent court of appeal decisions consistently applied 15021(1), which had provided that partners had a fiduciary Jewel's interpretation of § 15018(f) to contingency fee matter duty to account for benefits and profits to the other partners, cases. See, e.g., Fox v. Abrams, 163 Cal. App. 3d 610, 612– with § 16404(b)(1), which sets forth a partner's fiduciary duty 13 (1985) (applying rule that former partners had a right to “[t]o account to the partnership and hold as trustee for it any share in attorneys' fees from a dissolved law firm's unfinished property, profit, or benefit derived by the partner in the contingency fee cases); Rosenfeld, 191 Cal. App. 3d at 1063 conduct and winding up of the partnership business or (same). In 1993, a California court for the first time expressly derived from a use by the partner of partnership property or applied Jewel' s interpretation of § 15018(f) to matters that information, including the appropriation of a partnership the dissolved law firm had been handling on an hourly basis. opportunity.” Cal. Corp. Code § 16404(b)(1). But at the same See Rothman v. Dolin, 20 Cal. App. 4th 755, 757–59 (1993). time, RUPA changed the rule regarding partners' post- Rothman reasoned that “the policy reasons for the rule dissolution rights to reasonable compensation; it replaced § announced in Jewel, that is, that fees received in connection 15018(f), which had provided that only a “surviving partner with the unfinished business of a partnership are to be is entitled to reasonable compensation for his or her services allocated according to the former partners' respective in winding up the partnership affairs,” with § 16401(h), interests in the partnership rather than on a quantum meruit which provides that all partners are entitled to “reasonable basis, apply with equal force to both contingency and hourly compensation for services rendered in winding up the rate cases.” Id. at 758. No other published case in California business of the partnership.” Cal. Corp. has expressly addressed this issue. Code § 16401(h).2 According to the official comment to *3 Although the California Supreme Court has not directly RUPA § 401(h) (which is identical to § 16401(h) of the addressed the question of dissolved law firms' interest in legal California Corporations Code), this revision was intended to matters pending at the time of dissolution, the Court provide that “any partner winding up the business is entitled acknowledged Jewel's interpretation of § 15018(f) in one to compensation, not just a surviving partner winding up after case, Howard v. Babcock, 6 Cal. 4th 409, 424 n.8 (1993). In the death of another partner.” RUPA § 401 cmt. 9. Howard, the Court held that an “an agreement among law partners imposing a reasonable toll on departing partners who California's adoption of RUPA is material to the question compete with the firm” was enforceable. Id. at 412. The raised in this case. Jewel had primarily based its conclusion defendants argued that such an agreement would violate rule that lawyers had to account to their former partners for all 1-500 of the Rules of Professional Conduct because it income generated from a dissolved law firm's unfinished discouraged withdrawing partners from continuing to business on the language in § 15018(f) that precluded former represent clients who wished to employ them. In rejecting this partners from earning extra compensation for winding up contention, Howard noted that “in some respects, the ‘no- partnership business. Jewel, 156 Cal. App. 3d at 176. But compensation rule’ of partnership law, whereby departing under RUPA, partners are entitled to “reasonable partners are compensated for winding up the unfinished compensation” for such work. Cal. Corp. Code § 16401(h). business of the partnership according to their partnership Because “reasonable compensation” means fees “attributable interest, may be just as much a disincentive on the to the services and skill” of the partner performing the work, withdrawing partner to continue to represent clients of the Jacobson, 29 Cal. 2d at 30, the language in § 16401(h) firm as an anticompetitive penalty, and yet this is not suggests that former partners now have a claim to some or all considered to be a violation of rule 1-500.” Id. at 424 n.8 of their hourly rate for working on unfinished business. (citing Jewel, 156 Cal. App. 3d 171, among other cases). Howard did not otherwise address the Jewel issue. Despite the significance of this legislative change, no California court has considered (in a published opinion3) In 1996, the California legislature revised its partnership law whether there remains a basis for holding that a partnership by replacing UPA with RUPA. See Cal. Corp. Code § 16100 has a property interest in legal matters pending at the time the et. seq.; see also 9 Witkin, Summary Partnership firm is dissolved, when the firm was retained on an hourly § 15, 590 (10th ed. 2005). Among its other modifications, basis, now that the California legislature has repealed § RUPA clarified the fiduciary duties of partners after the 15108(f) and replaced it with § 16401(h). dissolution of the partnership. It replaced former section §

B seeking a declaration that the profits from the legal matters that were pending when the law firm dissolved were property *4 We now explain Jewel's continuing impact on bankruptcy of the dissolved law firm. Id. at 330. law. In 2009, a bankruptcy court determined that the rule enunciated in Jewel, that former partners of a dissolved law The bankruptcy court agreed. It first held that under Jewel, firm had a right to share in attorneys' fees received on cases the dissolved law firm had a property interest in the profits that had been pending when the law firm dissolved, had from the legal matters that were pending at the time of the significance in a bankruptcy context. See In re Brobeck, dissolution, whether those cases were billed on an hourly or Phleger & Harrison LLP, 408 B.R. 318 (N.D. Cal. 2009). contingent fee basis. Id. at 338–39. It did not address the question whether RUPA affected the applicability of Jewel to The reasoning in Brobeck relies on underlying principles of such profits. Id. at 337–38. It then held that the law firm bankruptcy law. Under 11 U.S.C. § 548, a bankruptcy trustee waived its interests in these profits when its partners entered has the power to set aside the debtor's transfer of “an interest into the dissolution agreement. Id. at 338. This waiver “gave of the debtor in property” to a third party when the transfer what was otherwise property of [the law firm] to the [former was made within a specified period before the date of filing a law firm] partners.” Id. The bankruptcy court then concluded petition in bankruptcy, and the transfer was made either with that the trustee had established that the law firm had intent to “hinder, delay or defraud” creditors, id. § transferred the profits in the pending legal matters to the 548(a)(1)(A), or was constructively fraudulent because it met former partners, and this transfer could be challenged as a certain criteria, id. § 548(a)(1)(B). For purposes of § 548, the fraudulent transfer under § 548(a). Id. at 339–40. debtor has an interest in any property “that would have been part of the estate had it not been transferred before the *5 After Brobeck was decided, the Second Circuit addressed commencement of bankruptcy proceedings.” Begier v. IRS, a similar issue arising under New York law. See In re Thelen 496 U.S. 53, 58 (1990); see also 11 U.S.C. § 541(a) (1) LLP, 736 F.3d 213 (2d Cir. 2013). Thelen considered (defining the debtor's property interests as including “all legal “whether, for purposes of administering the firm's related or equitable interests of the debtor in property as of the bankruptcy, New York law treats a dissolved law firm's commencement of the case”). Since “[p]roperty interests are pending hourly fee matters as its property.” Id. at 216. The created and defined by state law,” Butner v. United States, court certified the question to the New York Court of 440 U.S. 48, 55 (1979), we “look to state law to determine Appeals. Id. at 225. property interests” of the debtor, In re Perl, 811 F.3d 1120, 1127 (9th Cir. 2016). The New York Court of Appeals held that a dissolved law firm does not have a property interest in income generated Brobeck involved a national law firm partnership that from unfinished hourly legal matters. In re Thelen LLP, 24 experienced serious financial difficulties. 408 B.R. at 326. N.Y.3d 16, 28 (2014). The court rejected the concept that a The partners entered into a dissolution agreement stating that law firm has a property right in unfinished law firm business. neither the partners nor the partnership would have any claim Id. Although acknowledging that courts in other jurisdictions to legal matters that were ongoing at the time of the had interpreted UPA (which was also the basis for New dissolution of the partnership. Id. at 327. Specifically, the York's Partnership Law) to the contrary, Thelen stated that provision stated it was “intended to expressly waive, opt out the Partnership Law “does not define property; rather, it of and be in lieu of any right any Partner or the Partnership supplies default rules for how a partnership upon dissolution may have to ‘unfinished business' of the Partnership, as that divides property as elsewhere defined in state law.” Id. term is defined in Jewel v. Boxer, or as otherwise might be Accordingly, the law “has nothing to say about whether a law provided in the absence of this provision through firm's ‘client matters' are partnership property.” Id. Further, interpretation or application of the California Revised because “clients have always enjoyed the ‘unqualified right Uniform Partnership Act.” Id. After the law firm's to terminate the attorney-client relationship at any time’ dissolution, its partners moved to other firms, taking pending without any obligation other than to compensate the attorney legal matters along with them. Id. at 328. The law firm was for ‘the fair and reasonable value of the completed services,’ subsequently put into involuntary bankruptcy, and the trustee ” id. (citing Matter of Cooperman, 83 N.Y.2d 465, 473 in bankruptcy commenced two adversary proceedings (1994)), the “expectation of any continued or future business

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 111 IN THE MATTER OF HELLER EHRMAN LLP, Debtor, HELLER..., --- F.3d ---- (2016) 16 Cal. Daily Op. Serv. 7966 is too contingent in nature and speculative to create a present of liquidation was approved, and the plan became effective in or future property interest,” id. (quoting Verizon New September 2010. A plan administrator was appointed and England Inc. v. Transcom Enhanced Servs., Inc., 21 N.Y.3d became responsible for pursuing claims to recover assets for 66, 72 (2013)). Accordingly, Thelen held that “no law firm the benefit of Heller's creditors. has a property interest in future hourly legal fees because they are ‘too contingent in nature and speculative to create a In December 2010, the plan administrator filed adversary present or future property interest.’ ” Id. (quoting Verizon proceedings in bankruptcy court on behalf of Heller against New England Inc., 21 N.Y.3d at 72). the sixteen law firms, seeking to avoid the dissolution agreement's waiver of Heller's rights to postdissolution legal fees as a fraudulent transfer under 11 U.S.C. § 548(a)(1)(B) or under California Civil Code § 3439.05 (which has II essentially the same elements as § 548(a)(1)(B)). Basing its This is an appropriate case in which to seek the California action on Brobeck (which had been decided by the same Supreme Court's guidance because, as in Brobeck and Thelen, bankruptcy judge hearing Heller's case), Heller alleged that it it raises the question whether hourly fee matters pending at had a property right in legal fees generated by work on hourly the time of the law firm's dissolution are property of the matters after its dissolution, that the waiver of this right in the dissolved law firm in the context of an adversary action in dissolution agreement constituted a transfer of Heller's bankruptcy. interest in property (presumably to the shareholders), and that the new law firms were the subsequent transferees of such Heller was a global law firm with more than 700 attorneys. transfers. Heller further alleged that such transfers met the The partnership was comprised of professional corporations, additional statutory criteria in § 548(a)(1)(B) to be avoidable each of which employed attorneys as shareholders. The as fraudulent transfers. shareholders controlled Heller through shareholder votes and management committees. By August 31, 2008, Heller After the bankruptcy court denied the new law firms' motions experienced financial distress. Its balance sheet reflected to dismiss, all but four of the sixteen firms settled with Heller. around $5 million in cash and nearly $55 million in bank debt. In June 2012, Heller and the four non-settling law firms On September 19, 2008, Bank of America, acting as an agent (Davis Wright Tremaine LLP; Jones Day; Orrick, Herrington for itself and Citibank, declared Heller in default. Soon after, & Sutcliffe LLP; and Foley & Lardner LLP) filed cross Heller's shareholders voted to approve a dissolution plan. motions for summary judgment on whether the waiver in the dissolution agreement constituted a transfer of Heller's The dissolution plan included a waiver by the law firm of any property to the defendants and whether any such transfer was rights and claims “under the doctrine of Jewel v. Boxer, 156 a fraudulent transfer under 11 U.S.C. § 548. Relying on its Cal. App. 3d 171 (1984) to seek payment of legal fees earlier decision in Brobeck, the bankruptcy court granted generated after the departure date of any lawyer or group of Heller's motion. lawyers with respect to non-contingency/nonsuccess fee matters only.” The waiver provision stated that it was “an After further proceedings in bankruptcy court, the bankruptcy inducement to encourage Shareholders to move their clients court certified to the district court that the case could proceed to other law firms and to move Associates and Staff with to bench and jury trials for factual determination of the them, the effect of which will be to reduce expenses to the amount of damages in the four cases. The district court Firm-in-Dissolution.” entered an order withdrawing the reference from the bankruptcy court, but instead of proceeding to trial, the court *6 In the following months, Heller's former shareholders asked for briefing on the waiver issue. Reviewing the joined at least sixteen other law firms, and many of Heller's bankruptcy court's rulings de novo, the district court granted former clients signed new fee agreements with those law summary judgment in favor of the four defendants. Among firms to continue to receive representation. other things, the district court reasoned that RUPA undermined the legal foundation on which Jewel rests because RUPA contains no provision giving dissolved law In December 2008, Heller filed a petition under Chapter 11 firms the right to demand an accounting for profits earned by of the Bankruptcy Code. In August 2010, Heller's joint plan

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 112 IN THE MATTER OF HELLER EHRMAN LLP, Debtor, HELLER..., --- F.3d ---- (2016) 16 Cal. Daily Op. Serv. 7966 its former partners under a new retainer agreement, but allows basis. Indeed, the Court expressly held this issue open some partners to obtain “reasonable compensation” for helping to 130 years ago, and has not revisited it since. See Osment, 68 wind up partnership businesses. Because Jewel did not apply, Cal. at 470. “When the state's highest court has not squarely the court held that Heller did not have a property interest in addressed an issue,” we predict “how the highest state court its pending hourly matters at dissolution. Therefore, it did not would decide the issue using intermediate appellate court reach the issue whether the Jewel waiver constituted a decisions, decisions from other jurisdictions, statutes, treaties fraudulent transfer. and restatements for guidance.” Glendale Assocs., 347 F.3d at 1154 (quoting N.L.R.B. v. Calkins, 187 F.3d 1080, 1089 *7 On appeal, Heller argues that RUPA did not abrogate the (9th Cir. 1999)). But the California Legislature's replacement rule in Jewel, and under California law, a dissolved law firm of § 15018(f) with 16401(h) has substantially affected the has a property interest in the profits from the firm's unfinished basis for the court's conclusion in Jewel, and none of the business. Heller notes that two unpublished California Courts of Appeal have applied Jewel in a published opinion after the enactment of RUPA. California cases4 and two legal commentaries5 have reached the same conclusion. According to Heller, § 16401(h) does For the reasons stated above, we need guidance from the not undermine Jewel because it merely allows former California Supreme Court to determine whether Heller has a partners to receive some compensation for completing the property interest in its unfinished hourly fee matters upon dissolved law firm's unfinished business. To the extent that dissolution. The Court's decision determines the outcome of completion of the work generated profits beyond such this appeal. If Heller has no such property interest then Heller “reasonable compensation,” the former partners would cannot claim that the dissolution agreement constituted a continue to have a fiduciary duty to account for such profits transfer of the property interest. If Heller did have a property to the former partnership. Accordingly, Heller argues, the interest in its unfinished hourly fee matters, then we will former partners continue to have a fiduciary duty to account remand to the district court to determine the remaining issues, for the legal fees generated from the hourly matters that were namely whether the transfer met the criteria in § 548(a)(1) to pending when Heller dissolved, and Heller continues to have constitute a fraudulent transfer that is avoidable by the plan a property interest in such fees. administrator.

In response, the four defendant law firms argue, among other *8 This issue is significant for California lawyers and law things, that partners completing the firm's unfinished hourly firms, as well as for their clients. Partners in California law fee matters are entitled under § 16401(h) to their hourly rate firms need clarity regarding their obligations after a law firm for such work, so Heller has no ongoing property interest in dissolves. Absent guidance from the California Supreme the matters that have been transferred to other firms. As a Court, law firms will have difficulty predicting their policy matter, they argue that giving dissolved law firms a entitlement to revenue from completing the unfinished property interest in hourly fee matters that have been business of dissolving law firms. Clients may also be transferred to third party law firms would discourage such disadvantaged by this ambiguity, as it may be unclear how firms from representing clients of a dissolved firm because their matters will be handled at a new law firm, if the hourly they would have no ability to profit from that representation. fees from their matters must be shared with a dissolved law firm. Moreover, lawyers in dissolving law firms may have difficulty providing accurate guidance to clients regarding the III effect of a law firm dissolution on their matters. This may make compliance with Rule 3-700(A)(2) of the California We are bound by decisions of the state's highest court in Rules of Professional Conduct more difficult. See Cal. R. analyzing questions of that state's law, Glendale Assocs., Ltd. Prof. Conduct 3-700(A)(2) (requiring a withdrawing v. N.L.R.B., 347 F.3d 1145, 1154 (9th Cir. 2003), but the attorney, including an attorney withdrawing as a result of the California Supreme Court has not addressed the question dissolution of the attorney's law firm, to take “reasonable (either before or after RUPA was enacted) whether a steps to avoid reasonably foreseeable prejudice to the rights dissolved law firm has a property interest in unfinished of the client, including giving due notice to the client, business where the law firm had been retained on an hourly allowing time for employment of other counsel, complying

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 113 IN THE MATTER OF HELLER EHRMAN LLP, Debtor, HELLER..., --- F.3d ---- (2016) 16 Cal. Daily Op. Serv. 7966 with rule 3-700(D) [by returning the client's papers and Plaintiff-Appellant property], and complying with applicable laws and rules.”). The importance of this issue is underscored by the numerous v. amicus briefs this court received from bar associations and law firms in California. JONES DAY, Defendant-Appellee and

We therefore respectfully ask that the California Supreme 14-16317 Court decide the certified question. IN THE MATTER OF HELLER EHRMAN LLP, Debtor IV HELLER EHRMAN LLP, Liquidating Debtor The Clerk of Court is hereby directed to transmit forthwith to PlaintiffAppellant the California Supreme Court, under official seal of the Ninth Circuit, a copy of this order and request for certification and v. all relevant briefs and excerpts of record pursuant to California Rule of Court 8.548. Submission of this case is FOLEY & LARDNER LLP, Defendant-Appellee and withdrawn, and the case will be resubmitted following receipt of the California Supreme Court's opinion on the certified 14-16318 question or notification that it declines to answer the certified question. The panel shall retain jurisdiction over further IN THE MATTER OF HELLER EHRMAN LLP, proceedings in this court. The parties shall notify the Clerk of Debtor this court within one week after the California Supreme Court accepts or rejects certification. In the event the California HELLER EHRMAN LLP, Liquidating Debtor Plaintiff- Supreme Court grants certification, the parties shall notify the Appellant Clerk within one week after the court renders its opinion. v. The captions of these cases are: 14-16314 ORRICK HERRINGTON & SUTCLIFFE LLP, Defendant-Appellee IN THE MATTER OF HELLER EHRMAN LLP, Debtor Counsel for the parties are as follows: HELLER EHRMAN LLP, Liquidating Debtor, Plaintiff-Appellant For Plaintiff-Appellant Heller Erhman LLP: v. Christopher D. Sullivan

DAVIS WRIGHT TREMAINE LLP Defendant- Diamond McCarthy LLP Appellee and 150 California Street, Suite 2200 14-16315 San Francisco, California 94111 IN THE MATTER OF HELLER EHRMAN LLP, Debtor Telephone (415) 692-5200

Jeffrey T. Makoff HELLER EHRMAN LLP, Liquidating Debtor,

Valle Makoff LLP Jones Day

Two Embarcadero Center, Suite 2370 51 Louisiana Ave., N.W.

San Francisco, California 94111 Washington, D.C. 20001

Telephone (415) 986-8001 Telephone (202) 879-3939

Kevin W. Coleman For Defendant-Appellee Orrick, Herrington & Sutcliffe LLP:

Schnader Harrison Segal & Lewis LLP Eric A. Shumsky

650 California Street, 19th Floor Orrick, Herrington & Sutcliffe LLP

San Francisco, California 94108 Columbia Center

Telephone (415) 364-6700 1152 15th Street, N.W.

For Defendant-Appellee Davis Wright Tremaine LLP: Washington, D.C. 20005

Steven A. Hirsch Telephone (202) 339-8400

Keker & Van Nest LLP Rachel Wainer Apter

633 Battery Street Christopher J. Cariello

San Francisco, California 94111-1809 Orrick, Herrington & Sutcliffe LLP

Telephone (415) 391-5400 51 West 52nd Street

For Defendants-Appellees Davis Wright Tremaine LLP and New York, New York 10019 Foley & Lardner LLP: Telephone (212) 506-5000 Peter P. Meringolo *9 Pamela Phillips Luther Orton Jonathan W. Hughes PMRK Law, LLP Arnold & Porter LLP One Sansome Street, Suite 3500 Three Embarcadero Center, 10th Floor San Francisco, California 94104 San Francisco, California 94111 Telephone (415) 964-4445 Telephone (415) 471-3100 CERTIFICATION For Defendant-Appellee Jones Day: REQUESTED; SUBMISSION VACATED.

Shay Dvoretzky

All Citations

--- F.3d ----, 2016 WL 4011194, 16 Cal. Daily Op. Serv.

7966 (1997) (discussing fiduciary duties under RUPA and noting that no change in current law was intended).

Footnotes * The Honorable Royce C. Lamberth, United States District End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. Judge for the District of Columbia, sitting by designation. 1 The National Conference of Commissioners on Uniform State Laws (the Uniform Law Commission, or ULC) publishes model codes, such as UPA, which are frequently adopted by state legislatures. The California legislature adopted the majority of UPA in 1929, effective August 14, 1929. The ULC subsequently published a revision to UPA, the Uniform Partnership Act of 1994 (termed the Revised Uniform Partnership Act, or RUPA), which the California legislature also adopted in 1996, and which governed all partnerships as of January 1, 1999. See Cal. Corp. Code § 16111. The ULC's official comments to the model codes are considered by California courts for guidance. See, e.g., Rappaport v. Gelfand, 197 Cal. App. 4th 1213, 1227 (2011); Rosenfeld, Meyer & Susman v. Cohen, 191 Cal. App. 3d 1035, 1059

(1987).

2 Section 16401(h) provides in full: “A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership.” 3 Appellant points out that two unpublished California opinions have applied Jewel after the enactment of RUPA. See Marquart v. Smith, 2014 WL 1990286 (Cal. Ct. App. May 16, 2014); Kuist v. Hodge, 2008 WL 510075 (Cal. Ct. App. Feb. 27, 2008). Under the Supreme Court's rules, these unpublished cases may not be cited or relied on by a court or a party. See California Rules of Court 8.1115. 4 See supra note 3. 5 The legal commentaries cited by Heller indicate that RUPA did not alter the fiduciary duties of partners. See 9 Witkin, Summary Partnership § 30, 604 (10th ed. 2005) (“Although [RUPA] treats the topic of fiduciary duties extensively, the Partnerships Committee of the State Bar, in reviewing California cases dealing with the fiduciary duties of partners, concluded that none would have been decided differently under [RUPA].”); see also Donald J. Weidner, Cadwalader, RUPA and Fiduciary Duty, 54 Wash. & Lee L. Rev. 877, 913

2016 WL 4039278 monthly payment, he “shall surrender the Property to This case was not selected for Lender.” R. at 366. Wells Fargo then dismissed the state publication in West's Federal Reporter. foreclosure action on November 3. See Fed. Rule of Appellate Procedure 32.1 generally governing citation of judicial Almost immediately, Mr. Jester failed to make payments decisions issued on or after Jan. 1, 2007. under the new loan agreement. As a result, Wells Fargo filed See also U.S.Ct. of App. 10th Cir. Rule 32.1. another foreclosure action in state court on July 6, 2012. The United States Court of Appeals, Tenth state court granted summary judgment in favor of Wells Circuit. Fargo, over Mr. Jester's objection, on October 8, 2014. Three In re: Timmy Dewayne Jester, a/k/ a weeks later, Mr. Jester moved to reopen the Jesters' Tim D. Jester; Rebecca Jo Jester, a/ bankruptcy case so that he could commence an adversary k/a Becky Jo Jester, f/k/a Rebecca Jo proceeding in the bankruptcy court against Wells Fargo, his Hillsberry, f/k/a Becky Jo Hillsberry, Debtors. previous counsel, and Wells Fargo's counsel. He alleged that, Timmy Dewayne Jester; inter alia, his debt to Wells Fargo was discharged in Rebecca Jo Jester, Appellants, bankruptcy and Wells Fargo's attempt to foreclose on the v. property post-discharge violated the automatic stay and Wells Fargo Bank N.A., Appellee. discharge injunction. He asked the bankruptcy court to hold Wells Fargo in contempt and assess punitive damages against No. 15-7079 it. The court held a hearing and denied the motion, finding | that there was no violation of the stay or discharge and that it (BAP No. 15-002-EO) (Bankruptcy Appellate Panel) had no authority to review the state court's final judgment or | otherwise grant the relief requested. Reviewing the Filed July 25, 2016 bankruptcy court's denial for an abuse of discretion, the Bankruptcy Appellate Panel (BAP) affirmed. Before HARTZ, HOLMES, and McHUGH, Circuit On appeal to this court, Mr. Jester argues that the bankruptcy Judges. court abused its discretion in denying the motion to reopen. Regarding the automatic stay and discharge injunction, Mr. Jester contends that Wells Fargo violated the stay by not ORDER AND JUDGMENT* dismissing the prepetition state-court foreclosure suit upon filing of the bankruptcy petition and that the entire process of Jerome A. Holmes, Circuit Judge loan modification was violative of the stay and discharge. The remainder of Mr. Jester's claims on appeal strike at the other *1 Timmy Jester, proceeding without the assistance of relief that the bankruptcy court said it was without authority counsel, appeals from the Bankruptcy Appellate Panel's to grant: (1) Wells Fargo failed to agree to reaffirmation affirmance of the bankruptcy court's denial of their motion to during the bankruptcy proceedings, which rendered the loan reopen their bankruptcy case. Exercising jurisdiction under modification invalid; (2) Wells Fargo and its counsel 28 U.S.C. §§ 158(d)(1) & 1291, we affirm. committed various breaches of the loan modification contract; (3) it was impossible for the Jesters to default on the On February 23, 2011, Wells Fargo initiated proceedings in loan because the debt was discharged after bankruptcy; (4) state court against Mr. Jester and his now ex-wife to foreclose Wells Fargo did not prove it had a valid lien on the property on their residence. Two months later, the Jesters filed a no- and thus it lacked standing to foreclose; (5) Wells Fargo asset bankruptcy petition under Chapter 7 of the bankruptcy violated the Fair Debt Collection Practices Act (FDCPA). code. They listed their real property as exempt and received a discharge on July 27, 2011. Thereafter, Mr. Jester and Wells *2 “A case may be reopened in the court in which such case Fargo entered into a loan modification agreement, wherein he was closed to administer assets, to accord relief to the debtor, acknowledged Wells Fargo's security interest in the property or for other cause.” 11 U.S.C. § 350(b). The bankruptcy court was still valid and agreed that should he fail to pay his has “broad discretion in deciding whether to reopen the case.”

Watson v. Parker (In re Parker), 264 B.R. 685, 691 (10th Cir. proceeding and what claims can be redressed by the BAP 2001). We review the denial of a motion to reopen for bankruptcy court. He fails to appreciate the difference an abuse of discretion. See Woods v. Kenan (In re Woods), between the discharge of their personal obligation on the loan 173 F.3d 770, 778 (10th Cir. 1999). We independently review secured by the property and Wells Fargo's continued interest the bankruptcy court's decision and give no deference to the in the property via the security instrument. The former was BAP's rulings (though they may be persuasive). See In re discharged, the latter was not. See Johnson v. Home State Schupbach Invs., LLC, 808 F.3d 1215, 1219 (10th Cir. 2015). Bank, 501 U.S. 78, 84 (1991) (“[A] bankruptcy discharge extinguishes only one mode of enforcing a claim — namely, We affirm. The bankruptcy court did not abuse its discretion an action against the debtor in personam —while leaving in denying the motion to reopen the bankruptcy proceedings intact another — namely, an action against the debtor in because there was no violation of the automatic stay or the rem.”). Consequently, the parties' failure to reach a discharge injunction. As to whether Wells Fargo violated the reaffirmation agreement in the bankruptcy proceedings had automatic stay by not dismissing the state-court case after Mr. no effect on Wells Fargo's ability to foreclose on the property, Jester filed the bankruptcy petition, the Jesters do not allege with or without loan modification. Regardless, any claims of that Wells Fargo continued its prosecution of the case during breach of the loan modification contract or lack of standing the pendency of bankruptcy proceedings, which is the only to foreclose are not redressable by the bankruptcy court, activity the automatic stay prohibits. See Eskanos & Adler, which lacks jurisdiction to review the state-court foreclosure P.C. v. Leetien, 309 F.3d 1210, 1214 (9th Cir. 2002) judgment. See Exxon Mobil Corp. v. Saudi Basic Indus. (allowing a stay of non-bankruptcy proceedings to avoid Corp., 544 U.S. 280, 284–86 (2005) (barring federal court violating the automatic stay). Further, because the loan review of prior state-court judgments and claims inextricably modification agreement was executed post-discharge and did intertwined with those judgements). Finally, Mr. Jester did not attempt to make the Jesters personally liable for the not even raise his FDCPA claim before the bankruptcy court, discharged debt, it was not violative of the stay or discharge thus waiving that argument. Turner v. Pub. Serv. Co. of Colo., injunction. See Chandler Bank of Lyons v. Ray, 804 F.2d 577, 563 F.3d 1136, 143 (10th Cir. 2009) (“Absent extraordinary 579 (10th Cir. 1986) (per curiam) (discharge injunction “does circumstances, we will not consider arguments raised for the not preclude in rem actions by secured creditors.”); Kline v. first time on appeal.”). Deutsche Bank Nat'l Trust Co. (In re Kline), 472 B.R. 98, 103–04 (10th Cir. BAP 2012) (actions taken after discharge *3 Thus, there is no basis for us to find that the bankruptcy do not constitute stay violations). court erred in denying the motion to reopen. Because the bankruptcy court acted within its discretion, we affirm. Nor did the bankruptcy court err in holding it could not provide Mr. Jester the other relief he sought. Mr. All Citations

Footnotes --- Fed.Appx. ----, 2016 WL 4039278 Jester demonstrates a fundamental misunderstanding of both what happened at the conclusion of the bankruptcy * After examining the briefs and appellate record, this panel End of Document © 2016 Thomson Reuters. No claim to original U.S. Government Works. has determined unanimously that oral argument would not materially assist in the determination of this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is therefore ordered submitted without oral argument. This order and judgment is not binding

precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel. It may be

cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.

2016 WL 3947837 [4] trustee was not entitled to an award of attorney fees United States Bankruptcy Court, D. andcosts under the bad faith exception to the American Rule. Utah.

In re: Adam L. Peeples and Jennifer Plaintiffs' motion for summary judgment denied, K. Peeples, Debtors. defendant's motion for summary judgment granted, and Adrian J. Lee and Angela L.N. Lee, Plaintiffs, defendant's motion for fees denied. v. Scott J. McCardle, an individual, and Scott J. McCardle, trustee of the Jack and Attorneys and Law Firms Ruth McCardle Trust, Defendants. Adrian James Lee, Salt Lake City, UT, pro se. Bankruptcy Number: 14–23970 Daniel K. Brough, Bennett Tueller Johnson & Deere, Salt Lake | City, UT, for Defendants. Adversary Proceeding No. 14–2159 | Signed July 14, 2016 MEMORANDUM DECISION Synopsis Background: Judgment creditors who, in an effort to enforce R. KIMBALL MOSIER, U.S. Bankruptcy Judge their judgments against Chapter 7 debtors, had obtained writs *1 The central question in this declaratory judgment action of garnishment directed to trustee of trust in which debtor is the scope of the automatic stay. This adversary proceeding allegedly held an interest, filed adversary complaint against does not affect Adam and Jennifer Peeples (Debtors), the trustee, seeking declaratory judgment that the automatic stay chapter 7 trustee, or her administration of the bankruptcy was applicable to a state-court proceeding and seeking estate. Other than the plaintiffs, Adrian J. Lee and Angela damages for trustee's alleged stay violation in obtaining a state- L.N. Lee, it does not affect any of the Debtors' creditors. court judgment against judgment creditor after debtors had This is a fight between the Lees, or more correctly Adrian filed bankruptcy. Judgment creditors moved for summary Lee (Lee), and a third party, Scott J. McCardle (McCardle). judgment. Trustee moved for summary judgment and attorney There is no basis for this Court to exercise jurisdiction under fees. 28 U.S.C. § 1334, except that the Lees contend that they are entitled to protection under

1 Holdings: The Bankruptcy Court, R. Kimball Mosier, J., held 11 U.S.C. § 362. The Lees assert that McCardle violated that: the § 362 stay by obtaining a judgment against Lee after the Peepleses had filed bankruptcy. The Lees argue that the [1] whether an action or proceeding is subject to automatic stay is so broad that it stays third-party actions theautomatic stay is not determined by a party's subjective against a creditor simply because the creditor was suing that intent; third party with the subjective intent to recover a claim against the debtor. [2] actions are not subject to the automatic stay if theyassert claims that are independent of claims against the The matters before the Court are the Lees' motion for debtor; summary judgment, McCardle's motion for summary judgment and McCardle's motion for attorney's fees. Having [3] judgment creditor's state-court lawsuit against considered the arguments of counsel, the Joint trusteewas not subject to the automatic stay, even if judgment Statement of Undisputed Facts,2 and the record in this case, creditor's subjective intent in bringing the lawsuit was to the Court makes the following findings and conclusions. recover a claim against debtors; and This memorandum decision constitutes this Court's statement pursuant to Fed.R.Civ.P. 52(a) and 56(a) of its reasons for denying the Lees' motion for summary

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 119 In re Peeples, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 236 judgment, granting McCardle's motion for summary in the Third Judicial District Court for the State of Utah judgment, and denying McCardle's motion for fees. (State Court Lawsuit) naming McCardle, individually and as trustee of the Trust, as defendant. The State Court Lawsuit asserts three claims: (1) that McCardle exerted undue influence upon his mother, Ruth McCardle, to modify JURISDICTION the Trust; (2) rescission of the modifications to the Trust The Lees commenced this adversary proceeding, seeking a based upon Ruth McCardle's mistaken understanding; and declaratory judgment that the automatic stay is applicable to a (3) McCardle's breach of fiduciary duty. state court proceeding and seeking damages under § 362(k)(l). This Court has jurisdiction over this adversary proceeding McCardle filed a motion for summary judgment on March pursuant to 28 U.S.C. § 157(a) and (b) and § 1334. This is a 23, 2014. The state court granted McCardle's motion for core proceeding within the meaning of 28 U.S.C. § summary judgment, awarded him attorney's fees, and 157(b)(2)(G), and the Court may enter a final order. Venue is entered an order dismissing Lee's claims (Dismissal Order). appropriate under 28 U.S.C. § 1409. The Dismissal Order stated that it did not constitute the state court's final judgment and instructed McCardle to submit a declaration of attorney's fees and costs. McCardle submitted a Declaration of Attorney Fees and Costs and Proposed UNDISPUTED FACTS Final Judgment on March 25, 2014, and a Supplemental A. The Lees' Claims Against the Peepleses. Declaration of Fees and Costs on April 11, 2014. The The Lees have two state court judgments against the Peepleses. Debtors filed their bankruptcy petition on April 17, 2014. In an effort to enforce these judgments, the Lees obtained writs of garnishment directed to McCardle as trustee of the Jack and On April 22, 2014, Lee filed a notice of bankruptcy stay in Ruth McCardle Trust (Trust). In response to the garnishment the State Court Lawsuit and informed McCardle's counsel interrogatories, the Trust denied holding any of Adam that the State Court Lawsuit was stayed by virtue of the Peeples's property except for a few inconsequential household Debtors' bankruptcy. Notwithstanding the notice of items. The Trust maintains that Adam Peeples's beneficial bankruptcy, on May 29, 2014 the state court entered a final interest in the Trust was terminated prior to the garnishment judgment and award of attorney's fees and costs (State Court proceedings. Judgment). The State Court Judgment dismissed Lee's claims with prejudice, confirmed the earlier Dismissal The Trust was created on May 11, 1991 by Jack and Ruth Order, and entered the amount of attorney's fees awarded to McCardle. Jack and Ruth were the trustees and primary McCardle in the principal judgment amount of $41,889.00 beneficiaries of the Trust. Upon the death of both Jack and and “all further attorney fees and costs incurred by Ruth, McCardle was to become the trustee. On June 3, 1993, [McCardle] in collecting the Principal Judgment Amount.”3 Jack and Ruth signed a memorandum amending the Trust. Among other things, this memorandum provided that upon the death of both Jack and Ruth, the Trust would be distributed 1/3 C. This Adversary Proceeding. The Lees commenced this adversary proceeding (Adversary to McCardle, 1/3 to Patti Ann Peeples, and 1/3 would be Proceeding) on May 22, 2014. In their First Amended divided equally among Jack and Ruth's grandchildren: Adam Complaint, the Lees allege that once the notice of stay was L. Peeples, Sarah C. Peeples, and Aaron D. Peeples. Jack died filed in the State Court Lawsuit, McCardle's actions in the on February 1, 2008. On September 17, 2008, Ruth signed a State Court Lawsuit violated the § 362(a) (1) stay in the memorandum purporting to change the Trust to provide that Peepleses' bankruptcy case. The Lees' complaint seeks a after paying debts, the Trust would be divided equally between declaratory judgment that the State Court Judgment was McCardle and Patti Ann, thus eliminating the grandchildren's void ab initio, and also seeks sanctions against McCardle beneficial interests. B. Lee's Claims Against McCardle. and his attorneys. *2 Lee took exception to the Trust's answers to the The Lees filed a motion for summary judgment, which this garnishment interrogatories. But instead of continuing with Court denied. McCardle then filed a motion for summary the garnishment proceedings, Lee chose to initiate a lawsuit

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 120 In re Peeples, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 236 judgment and request for an award of attorney's fees. The debtor.” The Lees contend that it is undisputed that Adrian Lee Court granted McCardle's motion for summary judgment and initiated the State Court Lawsuit with the intention of denied his request for attorney's fees. This memorandum recovering the judgment claims against Adam Peeples. They decision supplements this Court's oral rulings with respect to also argue that “[i]n view of the Congressional intent, and the the Lees' motion for summary judgment and McCardle's case law, it is difficult to imagine that the intent of the actor motion for summary judgment and request for attorney's fees has no relevance at all, and that it is not determinative when all to correctly reflect the Court's intention in determining this parties (and the debtor) know what the intent is.”5 This proceeding. statement can only be read to suggest that the Lees believe Adrian Lee's intent in bringing the State Court Lawsuit is determinative of whether the State Court Lawsuit was an ANALYSIS action to recover a claim against Adam Peeples and was therefore stayed under § 362(a)(1). A. The State Court Lawsuit Was Not Subject to the Automatic Stay. From the Lees' perspective, intent matters because of the The Lees contend that when the Peepleses filed bankruptcy, statute's purpose. They contend that one of Congress's aims the State Court Lawsuit was stayed under § 362(a)(1). Section in drafting § 362(a) was to create a guide for all entities to 362(a)(1) provides: apply in evaluating whether their actions run afoul of the 6 (a) Except as provided in subsection (b) of this section, a automatic stay. From this premise, the Lees make the claim petition filed under section 301, 302, or 303 of this title, or that because many entities lack legal expertise, their intent an application filed under section 5(a)(3) of the Securities must be the pole star by which they reckon whether they Investor Protection Act of 1970, operates as a stay, have drifted into proscribed waters.7 The implicit applicable to all entities, of— conclusion is that because “nonlegal personnel” must use their intent to evaluate their actions, that intent must be (1) the commencement or continuation, including the relevant to determining ultimately whether the automatic issuance or employment of process, of a judicial, stay applies to a given action. administrative, or other action or proceeding against the debtor that was or could have been commenced before [1] [2] The Lees' argument fails for two reasons. In the first the commencement of the case under this title, or to place, if an entity's intent were important in § 362(a), why recover a claim against the debtor that arose before the would Congress go through all the trouble of drafting a commencement of the case under this title. detailed and complex statute that omits any mention of intent? *3 Because the State Court Lawsuit was not an action or Congress has extensive experience in drafting statutes that proceeding against the Peepleses, the § 362(a)(1) stay would require intent as an element, so if Congress wanted entities' only apply if the State Court Lawsuit were an action or actions to be viewed through the lens of intent, one would expect to find in § 362(a) straightforward language to the effect proceeding to recover a claim against the Peepleses.4 that an entity's intent is determinative, or at least relevant, to the issue of whether the stay applies to an entity's particular 1. Whether an Action or Proceeding Is Subject to actions. But the statute contains no such language. What the the Automatic Stay Is Not Determined by a Party's Lees propose as an explanation—that Congress omitted any Subjective Intent. reference to intent in § 362(a) but tacitly desired that it be Although not stated in so many words, the Lees' position relevant because it would be easier for entities to eschew determining whether an entity's particular action is subject to actions against non-debtors, then the co-debtor stay set to the automatic stay. forth in §§ 1201 and 1301 would be unnecessary.

*4 [3] [4] [5] [6] [7] Second, the Tenth Circuit has[10] Another example of actions against non-debtors that appears to be that the State Court Lawsuit was stayed under § “comprehensive legal analysis” and use their intent as a kind 362(a)(1) because Adrian Lee's subjective intent in bringing of shorthand—cannot be credited. Merely because an entity the State Court Lawsuit was “to recover a claim against the may evaluate its actions through its intent does not elevate that

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 121 In re Peeples, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 236 intent to relevance for purposes of rejected the argument that are not stayed under § 362(a)(1) are actions against an entity's subjective intent is relevant in the stay-violation codefendants. “It is clearly established that the automatic context. The § 362 stay arises automatically by operation of stay does not apply to non-bankrupt co-defendants of a law. A violation of the automatic stay may be only technical or debtor even if they are in a similar legal or factual nexus it may be willful. The Tenth Circuit BAP has defined “willful” with the debtor.”14 This principle has been followed even 8 for purposes of § 362(k) as conduct that is “volitional and when the action taken was against a former manager of the deliberate” as opposed to “unintentional or accidental.”9 debtor who argued that “the real party in interest is the Debtor,” and that the proceeding “would adversely affect In In re Johnson,10 the Tenth Circuit refined the definition of the administration of the estate.”15 “willful” for purposes of § 362(k), holding “that in order to demonstrate a violation of § 362(k)(l), the debtor bears the These examples illustrate some of the automatic stay's burden of establishing, by a preponderance of the evidence, boundaries, and bankruptcy courts lack jurisdiction to that the creditor knew of the automatic stay and intended the extend its scope to a non-debtor.16 The Tenth Circuit further actions that constituted the violation, no specific intent is delineated the limits of the automatic stay: required.”11 Whether an actor intended the actions that constituted the violation is relevant to a determination of It would make no sense to extend the willfulness, but an actor's good faith belief, “no matter how automatic stay protections to solvent reasonable,” has no bearing on willfulness.12 Critical to the co-defendants. They don't need it, Johnson analysis was the absence of a suggestion that an and at the same time it would work a actor's subjective intent or good faith belief has any effect on hardship on plaintiffs, by giving an the stay. Simply put, an actor's intent to violate the stay is not unwarranted immunity from suit to necessary to establish a stay violation. It therefore stands to solvent co-defendants. Extending the reason that an actor's intent in taking measures against a debtor stay to protect solvent co-defendants is not necessary to establish the existence of the automatic stay. would not advance either of the Instead, it is the objective nature of the action undertaken that purposes underlying the automatic determines whether the automatic stay applies to that action. stay. Accordingly, we join the other circuit courts in concluding that 11 U.S.C. § 362 stays litigation only 2. Actions Are Not Subject to the Automatic Stay if They against the debtor, and affords no Assert Claims That Are Independent of Claims Against protection to solvent co- the Debtor. defendants.17 debtors to be a party to an action or proceeding in order for from the Miller Group. The debtor filed Chapter 11 bankruptcy [8] [9] The Lees assert that “[i]t is legal error to require *5 [11] In Valley Transit Mix of Ruidoso, Inc. v. within continuation of that action or proceeding to be prohibited by 11 one year from the date B.C.R. recorded its mechanic's lien. U.S.C. § 362(a)(1).”13 This Court is not suggesting that debtors B.C.R. argued that its foreclosure action was stayed by § 362 and must be parties to an action in order for the automatic stay to be subject to the tolling provisions of § 108(c). The Miller Group applicable, but it is clear that an action against a non-debtor is not argued that B.C.R.'s enforcement period had expired because the stayed simply because a creditor is attempting to recover a claim automatic stay did not apply to B.C.R.'s efforts to foreclose its for which the debtor is liable. For example, other than the limited mechanic's lien against the Miller Group and therefore § 108(c) stay imposed under §§ 1201 and 1301, a creditor is not stayed did not toll the statutory enforcement period. The Tenth Circuit from continuing an action against persons who are liable on a held that: 18 debt with the debtor. If § 362(a)(1) applies Miller, the Tenth The stay provisions of section 362 are broad. The stay Circuit considered the scope of the automatic stay under § protects not only property of the estate but also prohibits “any 362(a)(1). In Valley Transit Mix, a creditor, B.C.R., was required act to collect ... or recover a claim against the debtor ...” by state law to foreclose its mechanic's lien within one year of Bankruptcy courts, construing section 362, have held that it recording. The mechanic's lien arose as a result of construction precludes foreclosure of property when a debtor has a work done by B.C.R. for the debtor on property the debtor leased “leasehold” or “possessory” interest in the property and the

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 122 In re Peeples, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 236 debt sought to be satisfied out of the property is that of the B. Defendants' Request for Attorney's Fees and Costs debtor. Here, B.C.R.'s foreclosure claim was based upon Should Be Denied. a debt incurred by [the debtor]. Therefore, B.C.R.'s *6 The Defendants seek an award against the Lees for foreclosure claim was stayed by section 362.19 their attorney's fees and costs incurred in this Adversary Proceeding. The Defendants raise three separate The Tenth Circuit made clear that an action is stayed by § arguments seeking an award of fees and costs, to wit: (1) 362(a)(1) if the action is dependent upon the creditor's claim the bad faith exception to the American Rule; (2) the Utah against the debtor. However, if the basis for the action is Uniform Trust Code; and (3) the State Court Judgment. independent of the claim against the debtor, then the action is not stayed. Put another way, even though a creditor may have a claim against the debtor, a creditor is free to pursue its claim 1. The Bad Faith Exception to the American Rule Is against a non-debtor so long as there is an independent basis for Inapplicable. the creditor to pursue that claim. [13] [14] [15] [16] [17] [18] The American Rule provides that each party is responsible for paying its own attorney's fees unless specific authority granted by statute 3. The State Court Lawsuit Was Not Based Upon a Claim or contract allows the assessment of those fees against the Against the Debtor. other party, or unless the bad faith exception is applied by [12] The State Court Lawsuit asserted three causes of action the court. Under the bad faith exception to the American based on McCardle's alleged wrongful conduct: (1) that Rule, a court may award attorney's fees when a party's McCardle exerted undue influence upon his mother, Ruth opponent acts “in bad faith, vexatiously, wantonly, or for McCardle, to modify the Trust; (2) rescission of the oppressive reasons. A party acts in bad faith only when modifications to the Trust based upon Ruth McCardle's mistaken the claim brought is entirely without color and has been understanding; and (3) McCardle's breach of fiduciary duty. asserted wantonly, for purposes of harassment or delay, Notwithstanding the Lees' extensive briefing, the analysis of the or for other improper reasons.”21 The bad faith exception State Court Lawsuit clearly reveals it was not an action to recover “is a narrow one and may be resorted to only in a claim against the Peepleses. exceptional cases. Hence, it is not surprising that attorneys' fees are awarded only when there is ‘clear In his amended complaint in the State Court Lawsuit, Lee evidence’ that challenged actions are taken entirely alleged that he was the “legal successor in interest of Adam L. without color and are pursued for reasons of harassment Peeples” and thus a “beneficiary” of the Trust. Assuming Lee is 22 correct, and he had acquired Adam Peeples's interest, Lee was or delay.” This Court found that none of the claims and standing in Adam Peeples's shoes when he filed the State Court legal contentions brought by the Lees were unwarranted Lawsuit. In that case, the State Court Lawsuit was an action to by existing law or by a nonfrivolous argument for the recover Adam Peeples's claim against McCardle and the Trust, extension, modification, or reversal of existing law or the not Lee's action to recover a claim against the Peepleses. establishment of new law.23 The pleadings and actions of the Lees do not fit the narrow exception to the American The other alternative is that Lee did not acquire Adam Peeples's Rule, nor do the facts of this case call for an exception to interest in the Trust prior to filing the State Court the American Rule based upon dominating reasons of justice. The Defendants' motion for fees and costs will be Lawsuit.20 If Lee did not acquire Adam Peeples's interest denied as regards its argument based on the bad faith in the Trust, Lee had no standing to assert Adam Peeples's exception to the American Rule. claims against the Trust. Regardless of whether Lee had acquired Adam Peeples's interest in the Trust, the causes of action asserted in the State Court Lawsuit were not 2. The Utah Uniform Trust Code Is Inapplicable. based upon claims against the Peepleses, but were claims [19] The Defendants argue that they are statutorily entitled to an directly against McCardle, and the State Court Lawsuit award of attorney's fees and costs pursuant to Utah Code Ann. § was not subject to the automatic stay. 75–7–1004(1), which states that: “[i]n a judicial proceeding involving the administration of a trust, the court may, as justice

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 123 In re Peeples, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 236 and equity may require, award costs and expenses, including the Lees' complaint, which seeks a declaration that the reasonable attorney's fees, to any party, to be paid by another State Court Lawsuit was stayed by the automatic stay, party or from the trust that is the subject of the controversy.” The will be dismissed with prejudice. Court finds that Utah Code Ann. § 75–7–1004 is inapplicable. The questions of law addressed in this Adversary Proceeding Because the State Court Lawsuit was not stayed by the focused on the scope of § 362(a) and whether or not the automatic automatic stay, Count 2 of the Lees' complaint, which stay was violated. This Court did not address questions seeks judgment against the Trust under § 362(k), will be “involving the administration of a trust,” either directly or dismissed with prejudice. indirectly. The Defendants' motion for fees and costs will be denied as regards its argument under Utah Code Ann. § 75–7– Because the State Court Lawsuit was not stayed by the 1004. automatic stay and because § 362(k) is inapplicable, Count 3 of the Lees' complaint, which seeks judgment against McCardle personally under § 362(k), will be 3. The State Court Judgment Is Inapplicable. dismissed with prejudice. *7 [20] The Defendants also seek an award of attorney's fees and costs citing to the award of attorney's fees found in the State Having found that the automatic stay was not applicable Court Judgment. The State Court Judgment confirmed a to the State Court Lawsuit and that § 362(k) is judgment for attorney's fees and costs in the amount of inapplicable, there is no basis upon which to award $41,889.00 in favor of the Defendants and against Lee. The State attorney's fees or sanctions, and therefore Count 4 of the Court Judgment states that the judgment may be “augmented ... Lees' complaint will be dismissed with prejudice. to encompass and include all further attorney fees and costs incurred by Defendants in collecting the Principal The Court will deny the Defendants' motion for an award Judgment Amount.”24 This Adversary Proceeding was not of attorney's fees and costs because the bad faith exception to the American Rule is inapplicable, the Utah commenced in an effort to collect upon the State Court Uniform Trust Code is inapplicable, and the State Court Judgment. For that reason, the Court finds no authority upon Judgment provides no authority for this Court to award which to award attorney's fees based on the State Court attorney's fees. Judgment.

For the reasons stated above, each party is to bear their own CONCLUSION attorney's fees and costs. The Debtors did not claim any interest in the Trust in their bankruptcy schedules and statements. Neither the This order is SIGNED. Debtors nor the bankruptcy estate were party to the State Court Lawsuit. The State Court Lawsuit was not a judicial All Citations action or proceeding against the Debtors, nor was it an effort to recover a claim against the Debtors. Count 1 of --- B.R. ----, 2016 WL 3947837, 62 Bankr.Ct.Dec. 236 17, 2014.” Plaintiffs' Supplemental Briefing on the Issue of Whether the State Case Is an Action “To Recover a Claim Against the Debtor” Within the Footnotes Meaning of 11 U.S.C. § 362(a)(1), Docket No. 78, at 2. 1 All subsequent statutory references are to Title 11 of 5 Id. at 6. the United States Code unless otherwise indicated. 6 The § 362 stay is commonly referred to as the 2 Joint Statement of Undisputed Facts, Docket No. 72. “automatic stay.” 3 Joint Statement of Undisputed Facts, Docket No. 72, ¶ 7 See id. The Lees ask the rhetorical question: “Are non- 29. legal personnel (who could be subject to the stay regardless of whether they have legal representation) 4 As the Lees state, “the question reduces to whether or really expected to do comprehensive legal analysis in not the Subject State Case was an action ‘to recover a order to make the determination on whether or not they claim’ against Adam Peeples that arose before April can act based on the merits of their case, whether or

In re Peeples, --- B.R. ---- (2016) 62 Bankr.Ct.Dec. 236

not they have standing, and other complex matters?” 23 See Order Denying Defendants' Motion for Sanctions, Id. Docket No. 50. 8 The 2005 amendments changed § 362(h) to § 362(k). 24 Joint Statement of Undisputed Facts, Docket No. 72, ¶ 9 In re Diviney, 225 B.R. 762, 774 (10th Cir. BAP 1997). 29. 10 In re Johnson, 501 F.3d 1163, 1172–73 (10th Cir.2007). The Tenth Circuit expressly acknowledged End of Document © 2016 Thomson Reuters. No claim to original that the Diviney definition of willful was not incorrect. U.S. Government Works.

11 Id. at 1172. (emphasis added).

12 Id. at 1173. 13 Plaintiffs' Response to Defendants' Motion for Summary Judgment, Docket No. 56, at 5. 14 Seiko Epson Corp. v. Nu–Kote Int'l, Inc., 190 F.3d 1360, 1364 (Fed.Cir.1999) (internal quotation marks and citation omitted); see also Teachers Ins. & Annuity Ass'n of Am. v. Butler, 803 F.2d 61, 65 (2d Cir.1986) (“It is well-established that stays pursuant to § 362(a) are limited to debtors and do not encompass non- bankrupt co-defendants.”). 15 Oklahoma ex rel. Oklahoma State Dep't of Health v. Medical Mgmt. Grp., Inc. (In re Medical Mgmt. Grp., Inc.), Nos. WO– 03–004, 01–14494–WV, 302 B.R. 112, ––––, 2003 WL 21487310, at *4 (10th Cir. BAP June 27, 2003). 16 Bill Roderick Distrib., Inc. v. A.J. Mackay Co. (In re A.J. Mackay Co.), 50 B.R. 756, 760 (D.Utah 1985) (“The bankruptcy court had neither in rem nor in personam jurisdiction to protect [a third party] from his creditors.”). 17 Fortier v. Dona Anna Plaza Partners, 747 F.2d 1324, 1330 (10th Cir.1984) (citations omitted). 18 Valley Transit Mix of Ruidoso, Inc. v. Miller, 928 F.2d 354 (10th Cir.1991) 19 Valley Transit Mix, 928 F.2d at 356 (emphasis added) (citations omitted). 20 It is undisputed that the Lees did not complete the garnishment proceeding. 21 Sterling Energy, Ltd. v. Friendly Nat'l Bank, 744 F.2d 1433, 1435 (10th Cir.1984) (internal quotation marks and citation omitted). 22 Federal Deposit Ins. Corp. v. Schuchmann, 319 F.3d 1247, 1250 (10th Cir.2003) (citation omitted); see also United States v. McCall, 235 F.3d 1211, 1216 (10th Cir.2000) (“The bad faith exception is drawn very narrowly and may be resorted to only in exceptional cases and for dominating reasons of justice.”) (internal quotation marks omitted).

services are recoverable under several theories, including KeyCite Blue Flag – Appeal Notification fraudulent transfer, constructive trust, and unjust enrichment. Appeal Filed by KLEIN v. MICHELLE TURPIN, P.C., ET AL, 10 th Cir., August 4, 2016 The Turpin Firm moves for summary judgment arguing that all of the Receiver's claims should be dismissed.2 The

2016 WL 3661226 Receiver moves for partial summary judgment on his First, Only the Westlaw citation is currently Second, and Third Claims for Relief, requesting recovery of 3 available. United States District $78,135.37. He has stipulated to the dismissal of his Fourth, Court, D. Utah, Central Division. Fifth, and Sixth Claims for Relief.

R. Wayne Klein, as Receiver, Plaintiff, After careful consideration and for the reasons stated below, v. the court dismisses with prejudice Plaintiff's Fourth, Fifth, and Michelle Tuprin & Associates, P.C., a dissolved Utah Sixth Claims for Relief, grants in part and denies in part professional corporation, and Michelle Turpin, Defendants' Motion for Summary Judgment, and grants P.C., a Utah professional corporation, Defendants. Plaintiff's Motion for Partial Summary Judgment.

Case No. 2:14-cv-00302-RJS-PMW | Signed 07/05/2016 BACKGROUND

Attorneys and Law Firms In 2012, the SEC brought an enforcement action against NNU and its owner Wayne LaMar Palmer, claiming that Peggy Hunt, Christopher J. Martinez, Jeffrey M. Armington, 4 Sarah E. Goldberg, Dorsey & Whitney, Salt Lake City, UT, Mr. Palmer operated NNU as a Ponzi scheme. The court in for Plaintiff. the enforcement action appointed Wayne Klein to serve as receiver for NNU and Mr. Palmer's assets.5 The Receiver was Barry C. Toone, Blake D. Miller, Deborah Rae Chandler, Miller Toone PC, William B. Ingram, Strong & Hanni, Salt charged with, among other things, preserving the receivership Lake City, UT, for Defendants. property. He was authorized to bring legal actions for this purpose.6 The Receiver filed this action to recover payments totaling $88,135.37 that NNU made to the Turpin Firm MEMORANDUM DECISION AND ORDER between 2008 and 2012.7

ROBERT J. SHELBY, United States District Judge I. NNU Operated as a Ponzi Scheme In his Motion for *1 The Receiver for a single-member LLC that was operated Summary Judgment, the Receiver sets forth facts establishing as a Ponzi scheme seeks in this case to recover payments the that Mr. Palmer operated NNU as a Ponzi scheme during the LLC made to Defendants Michelle Turpin & Associates and period that it made these payments to the Turpin Firm.8 A Michelle Turpin, P.C. (collectively, the Ponzi scheme is “an investment scheme in which returns to Turpin Firm) for legal tax services.1 The present dispute investors are not financed through the success of the focuses on who received the reasonable equivalent value of underlying business venture, but are taken from principal the Turpin Firm's services under the Utah Fraudulent sums of newly attracted investments.”9 “In order to show that Transfers Act (UFTA). an investment scheme falls within the definition of a Ponzi scheme, the Receiver must prove by a preponderance of the Plaintiff Wayne Klein was appointed Receiver for National evidence the sine qua non of a Ponzi scheme: that returns to Note of Utah, LLC (NNU) after the Securities and Exchange earlier investors were paid by funds from later investors.”10 Commission filed a lawsuit alleging that NNU was operated as a Ponzi scheme. The Receiver later filed this action against *2 In his motion, the Receiver asserts that during the relevant the Turpin Firm alleging that fees NNU paid for legal tax time period NNU used cash from new investors to pay earlier

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 126 Klein v. Michelle Tuprin & Associates, P.C., Slip Copy (2016) investors.11 He also states that NNU attracted new investors could issue a charging order to receive Mr. Palmer's distributions from NNU, the IRS could not directly levy by promising large returns with little to no risk.12 By the time NNU's assets to pay Mr. Palmer's income tax.24 the SEC began its enforcement action, NNU owed over $110 million to its investors.13 The Turpin Firm does not dispute *3 During the time the Turpin Firm was providing services these facts, so they are established for the purpose of summary related to the Notice of Deficiency, NNU “continued as a 14 judgment. On this basis, the court finds that NNU was viable business entity separate and apart from its member” for operated as a Ponzi scheme during the period when it made all business purposes save for income tax liability.25 NNU the relevant payments to the Turpin Firm. maintained its books and records in accordance with IRS rules in such a way that “the integrity of the LLC as a separate II. The Turpin Firm's Services business entity was maintained and it is unlikely that a creditor This case involves payments NNU made to the Turpin Firm of [NNU] could expect to prevail in a court action against 26 for its work on two matters. First, NNU paid the Turpin Firm [Mr.] Palmer.” for its work resolving an IRS Statutory Notice of Deficiency that was issued to Mr. Palmer and his wife in 2008. Second, The Turpin Firm was ultimately successful in persuading the NNU paid the Turpin Firm for services in connection with an IRS to concede all the disputed adjustments at issue in the IRS audit of NNU in 2011. The court discusses these two 2008 Notice of Deficiency.27 The Receiver does not appear to events below. dispute that the Turpin Firm's services in defending against the Statutory Notice of Deficiency were satisfactory and worth the The Turpin Firm first performed work in response to a 2008 amount charged. IRS Statutory Notice of Deficiency sent to Mr. Palmer and his 15 wife for tax years 2004, 2005, and 2006. In December 2008, The Turpin Firm next performed work in response to an IRS Mr. Palmer contacted the Turpin Firm for assistance in audit of NNU's 2008 income tax return, which was reported responding to the Notice.16 The Notice was addressed to on Form 1120S.28 While NNU's business activities were “Wayne Palmer conducted in the same manner, its organizational structure had & C. Negrett-Palmer.”17 The adjustments disputed in the changed since the first time the Turpin Firm provided 29 Notice resulted mainly from the IRS's examination of NNU's services. “On or about January 1, 2007, [Mr.] Palmer, as the books and records.18 Correspondence between Mr. Palmer single member of the LLC, ... elect[ed] to have the corporation taxed as an and the Turpin Firm appears to reference Mr. S corporation.”30 The IRS corresponded with the Chief Palmer as the client.19 The Turpin Firm claims, however, that Financial Officer for NNU, Victor Wagner, regarding the NNU was also a client because “anytime that you have a pass- audit and it appears that Mr. Palmer was not involved in the through entity, you're going to represent the entity and all of 31 the recipients of the K-1 distributions or pass-through. You're examination process. The Turpin Firm's work responding to 32 always going to have both.”20 the audit involved only NNU's records and tax return.

During the tax years covered by the Notice, NNU was In his Complaint, the Receiver asks for recovery of the full organized as a single-member LLC, with Mr. Palmer as the $88,135.37 NNU paid to the Turpin Firm, but in his Motion single member.21 As a single-member LLC, NNU was for Summary Judgment he requests judgment only in the 33 disregarded by the IRS for income tax purposes, meaning that amount of $78,135.37. In its Motion for Summary “the business activity carried on by the LLC for federal Judgment, however, the Turpin Firm asks for judgment in its income tax purposes was treated as though it was owned by favor on the entire $88,135.37.34 The Parties do not explain the member and the income was reported by the member.”22 this discrepancy in their motions, but Mr. Williams in his Because NNU was a disregarded entity for income tax expert report notes that “based on the summary of checks ... purposes, any income tax liability assessed for NNU's the sum of $78,135.37 was paid on the first examination of activities was a tax liability of Mr. Palmer.23 While the IRS National Note's books and records and the balance of

$10,000.00 was paid on the second audit.”35 During oral the Receiver requests only $78,135.37 in his Motion for argument on these motions the Parties acknowledged that this Summary was the case. Judgment.44 Further, in his response to the Turpin Firm's Motion for Summary Judgment, the Receiver's arguments are directed only to the work the Firm provided on the Notice of SUMMARY JUDGMENT STANDARD Deficiency, and do not address the significance of NNU's reorganization as an S corporation with income tax The court must grant summary judgment when “the movant liabilities.45 Because the Receiver did not move for this shows that there is no genuine issue of material fact and the $10,000 and failed to oppose the Turpin Firm's motion on this 36 movant is entitled to judgment as a matter of law.” In basis, Defendants' motion is granted on the $10,000 paid for conducting this analysis, the court “view[s] all of the facts in services provided in relation to the audit of NNU's 2008 tax the light most favorable to the nonmovant and draw[s] all return. reasonable inferences from the record in the non-movant's favor.”37 While the court “view[s] the record in the light most The court now addresses the remaining claims—the Receiver's favorable to the non-moving party, that party must still First, Second, and Third Claims for Relief as to the $78,135.77 identify sufficient evidence requiring submission to the jury to paid to the Turpin Firm for its work in response to the 2008 survive summary judgment.”38 IRS Statutory Notice of Deficiency. All of these claims arise under the Utah Fraudulent Transfers Act (UFTA). Under the UFTA, fraudulent transfers are avoidable and recoverable by On summary judgment, “[t]he movant bears the initial burden of making a prima facie demonstration of the absence of a a creditor. “In an action for relief against a transfer ... under this chapter, a creditor ... may obtain: (a) avoidance of the genuine issue of material fact and entitlement to judgment as transfer ... to the extent necessary to satisfy the creditor's a matter of law.”39 If the moving party meets this initial claim[.]”46 “[T]o the extent a transfer is voidable in an action burden, “the burden shifts to the nonmovant to ... set forth specific facts ... from which a rational trier of fact could find by a creditor under Subsection 25-6-8(1)(a), the creditor may recover judgment for the value of the asset transferred ....”47 for the nonmovant.”40 Further, when considering cross- motions for summary judgment the court is “entitled to The Receiver alleges payments NNU made to the Turpin Firm assume that no evidence needs to be considered other than that were fraudulent transfers under three alternative provisions of filed by the parties, but summary judgment is nevertheless the Utah Code. The Receiver asserts separate claims for relief inappropriate if disputes remain as to the material facts.”41 through avoidance of fraudulent transfers because the debtor And “[c]rossmotions for summary judgment are ... treated (1) had actual intent to defraud under Section 25-6-5(1)(a); (2) separately; the denial of one does not require the grant of did not receive reasonably equivalent value and intended to 42 another.” incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due under Section 25-6-5(1)(b); or (3) did not receive ANALYSIS reasonably equivalent value and was insolvent at the time of the transfer under Section 25-6-6(1). *4 As an initial matter, the court grants Defendants' Motion for Summary Judgment in part. First, the court grants the The Turpin Firm argues, first, that the Receiver lacks standing Turpin Firm's Motion for Summary Judgment on the to pursue these claims; second, that the Receiver cannot prove Receiver's Fourth, Fifth, and Sixth Claims for Relief. The so-called actual fraudulent transfer under the UFTA because Receiver stipulated to the dismissal of these claims in his he cannot prove intent; and third, that the Receiver cannot response to the Turpin Firm's Motion.43 Second, the court prove constructive fraudulent transfer under the UFTA. For grants Defendants' Motion for Summary Judgment on the the reasons discussed below, the court concludes that the $10,000 claim that correlates with the Turpin Firm's work to Receiver has standing. The court also concludes that the defend the audit of NNU's 2008 return. As discussed above, Receiver can prove both actual and constructive fraudulent transfer. Therefore, the court grants Plaintiff's Motion for

Summary Judgement on his First, Second, and Third claims in articulated such a limitation on the Ponzi scheme exception. the amount of $78,135.77. The court addresses these issues in In Klein v. Cornelius, the Tenth Circuit considered whether a turn. company that was run as a Ponzi scheme had standing to pursue transfers that it made to a law firm under the Uniform 57 I. The Receiver has Standing Fraudulent Transfers Act. In addressing this issue, the court Generally, “the [UFTA] requires a ‘creditor-debtor concluded simply that “a business entity abused by a Ponzi relationship,’ ” with the plaintiff being the creditor seeking to scheme qualifies as a defrauded creditor,” thus allowing the recover fraudulent transfers made by the debtor.48 The statute company to pursue the transfers made to the law firm.58 The speaks in terms of remedies available to the creditor49 and court did not limit standing to allow the receiver to pursue only states that “[a] transfer made or obligation incurred by a debtor transfers made “in furtherance of the scheme,” but instead is fraudulent as to a creditor” under certain specified employed general language that on its face permits receivers to pursue claims that might be available to a defrauded circumstances.50 When receivers are appointed over entities, creditor.59 they generally have standing to pursue the claims of the 51 entities themselves, not of the entities' creditors. Under these In sum, the court does not read Cornelius to impose the principles the Receiver, who has here stepped into the shoes limitation urged by the Turpin Firm. Rather, this binding of NNU, would lack standing under the UFTA to recover fees authority appears to provide receivers standing to pursue paid to the Turpin Firm because the Firm and NNU are not in claims that would otherwise be available to a defrauded a creditor-debtor relationship. creditor. Because NNU was operated as a Ponzi scheme at the time it made all of the relevant payments, the Receiver has *5 But the Seventh Circuit announced, and the Tenth Circuit standing to bring fraudulent transfer claims seeking to recover subsequently adopted, an exception to this general rule for payments made to the Turpin Firm. companies run as Ponzi schemes. This exception allows receivers to pursue fraudulent transfers made in the course of Ponzi schemes as if the entities in receivership were creditors. II. Actual Fraudulent Transfer This rule was first announced in Scholes v. Lehmann.52 In that Having concluded that the Receiver has standing, the court addresses the Receiver's First Claim, his actual fraudulent case, Judge Posner explained that normally a debtor is not able transfer claim. Section 25-6-5 of the UFTA states that: to recoup fraudulent transfers it has made because “the wrongdoer must not be allowed to profit from his wrong by (1) A transfer made or obligation incurred by a debtor is recovering property that he had parted with in order to thwart fraudulent as to a creditor, whether the creditor's claim 53 his creditors.” The court explained, however, that when an arose before or after the transfer was made or the obligation owner operates a company as a Ponzi scheme the company is incurred, if the debtor made the transfer or incurred the in effect an “evil zombie [ ]” and when the company is freed obligation: from the owner's spell it becomes “entitled to the return of moneys—for the benefit not of [the owner] but of innocent (a) with actual intent to hinder, delay, or defraud any investors—that [the owner] had made the creditor of the debtor; ...

[company] divert to unauthorized purposes.”54 Under this Section 25-6-9 of the UFTA also provides a good faith defense theory, the company has standing because, as an independent to this provision, under which “a transfer is not voidable under legal entity, it too was harmed by the owner's fraudulent Subsection 26-6-5(1)(a) against a person who took in good faith and for reasonably equivalent value.” The Receiver does conveyances.55 not dispute that the Turpin

The Turpin Firm argues that this exception provides receivers Firm took in good faith.60 Therefore, the court must resolve standing to pursue only “payments made in furtherance of two questions: (1) whether the Receiver has shown that NNU Ponzi schemes” and that the Receiver lacks standing to pursue made the transfers at issue “with actual intent to hinder, delay, the claims here because the payments made to the Firm were or defraud”; and, if so, (2) whether the Turpin Firm can show not in furtherance of the scheme.56 The Tenth Circuit has not that the transfers were made for

“reasonable equivalent value.” value are independent components of this affirmative defense, and the burden is upon the Defendant to establish both the element of good faith and the element of value.”68 A. Intent is Properly Inferred Under Here, the Receiver accepts for purposes of summary the Ponzi Presumption judgment that the Turpin Firm took in good faith.69 The issue presented is whether the Turpin Firm provided *6 The UFTA sets forth a non-exhaustive list of factors the “reasonably equivalent value.” court may consider to determine actual intent, including whether “the transfer or obligation was to an insider,” whether *7 Determining whether the Turpin Firm provided “the transfer or obligation was disclosed or concealed,” and “reasonably equivalent value” under the UFTA requires a two- whether “the transfer was of all or substantially all of the 61 step analysis. First, the court must determine if the Turpin debtor's assets.” But when a Ponzi scheme is the transferor, Firm provided “value” to NNU. If the Turpin Firm did in fact courts presume that the Ponzi scheme made the transfer with provide value, the court must then consider whether this value the intent to defraud.62 This Ponzi presumption is applied was “reasonably equivalent.” Because the court concludes that because the Turpin Firm did not provide value to NNU, the court need not consider the issue of reasonable equivalence. “Ponzi schemes are insolvent by definition.”63 And “[i]f the ‘Ponzi presumption’ applies, the Receiver's burden of proving The UFTA states that “[v]alue is given for a transfer or an intent to defraud shifts, and the transferee then has the burden obligation if, in exchange for the transfer or obligation, 64 of ‘establishing a statutory defense from liability.’ ” property is transferred or an antecedent debt is secured or satisfied.”70 When applying the statute, courts have held that As noted above, there is no dispute here that NNU operated as “[t]he primary consideration in analyzing the exchange of a Ponzi scheme when it made the payments at issue to the value for any transfer is the degree to which the transferee's Turpin Firm. The Firm nevertheless attempts to limit the Ponzi 71 presumption to transfers made both in furtherance of the net worth is preserved.” This is so because “value is to be scheme and made to “Ponzi scheme investors or persons who determined in light of the act's purpose, in order to protect received referral fees for enticing investors to invest in the creditors.”72 The Utah Supreme Court has recognized that Ponzi scheme.”65 No such limitation exists in binding case under the UFTA “where the debtor ... receive [s] reasonable law. While the Turpin Firm points to many cases in the equivalent value, the transfer puts one asset beyond the reach bankruptcy context, as well as cases from other jurisdictions, of the creditors, but replaces the asset with one of equivalent case law in this jurisdiction uniformly applies the Ponzi value, thus avoiding harm to the creditors.”73 It is the debtor, presumption to transfers made by the debtor acting as a Ponzi therefore, who must receive the reasonable equivalent value.74 66 scheme. The court concludes that the Ponzi presumption is “In other words, the question is not whether Defendants ‘gave applicable to the transfers made by NNU while it operated as reasonably equivalent value; it is whether [the debtor] a Ponzi scheme, including those made to the Turpin Firm. received reasonably equivalent value.’ ”75

Here, the Turpin Firm argues that through its services it B. NNU Did Not Receive Reasonable Equivalent Value preserved the receivership estate because the Firm Because the Ponzi presumption applies, the court infers successfully challenged the “IRS's tax deficiency of over a that NNU's transfers to the Turpin Firm were made with million dollars.”76 The Turpin Firm asserts that if it had done “actual intent to hinder, delay, or defraud” as required by nothing in response to the IRS Statutory Notice of Deficiency Section 25-6-5(1)(a). The burden now shifts to the Turpin additional taxes would have been imposed and “Wayne 67 firm to show that the good faith defense applies. Under Palmer would have appropriately paid those taxes from the Section 25-6-9(1), a transfer that would otherwise be assets of [NNU].”77 The Receiver disagrees, arguing that any avoidable under Section 25-6-5(1)(a) cannot be voided if tax benefit from the Turpin Firm's services flowed only to Mr. the defendant “took in good faith and for a reasonably Palmer because NNU could not have had any tax liability as a equivalent value.” “Good faith and reasonably equivalent disregarded entity. He also argues that the Turpin Firm's

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 130 Klein v. Michelle Tuprin & Associates, P.C., Slip Copy (2016) assertion that it preserved the receivership estate is this issue is a dispute over who “retained” the Turpin Firm. speculative.78 While the Parties do not explicitly frame their arguments in terms of contract, the necessary implication of their dispute is While the Parties speak broadly in their papers about the that the entity that retained the Firm would be the one benefit NNU received—or did not receive—from the Turpin contractually liable to pay for its services —and would hold Firm's services, in the first step of the court's analysis it is not the antecedent debt. The court, thus, analyzes the issue of concerned with benefit. While benefit received may be “value” under contract law because that is the legal theory relevant to whether the value was “reasonably equivalent,” the directly implicated by the Parties' arguments. Also, in its court does not reach that issue in this case. In determining briefing, the Turpin Firm does not suggest an alternative legal whether NNU received “value,” the court is necessarily theory that would make its fees NNU's legally cognizable 81 focused on the language of the statute itself,79 and particularly antecedent debt. the term “value” as it is used there. In its motion, the Turpin Firm claims that the “value” it provided NNU was the The Receiver points to evidence that the contractual enormous reduction in potential tax burden. But framing relationship was between the Turpin Firm and Mr. “value” in this way is inconsistent with the UFTA's definition Palmer, not between the Turpin Firm and NNU.82 The of value as applied to this case. Receiver submits that “[t]he Palmers retained the Turpin Firm to respond to a notice of deficiency issued to the *8 Value is a defined term in the UFTA. And value is Palmers by the Internal Revenue Service,” and “National provided under the Act only if “property is transferred or an 83 antecedent debt is secured or satisfied.”80 This narrow Note did not retain the Turpin Firm.” The Receiver directs definition conforms with the goals of the statute— the court to several exhibits that appear to identify Mr. Palmer preservation of funds available to creditors. If the debtor as the client of the Turpin Firm, without reference to NNU.84 receives property or satisfies an antecedent debt, the assets In response to the Receiver's assertion that NNU did not retain available to creditors have not been diminished and creditors the Turpin Firm, the Firm cites the following from Ms. have not been damaged. Here, the antecedent debt that has Turpin's deposition —“anytime you have a pass-through been satisfied is the debt that was due to the Turpin Firm for entity, you're going to represent the entity and all of the its services, not some speculative amount of tax liability that recipients of the K-1 distributions or the pass-through. You're was never assessed. The Turpin Firm presumably, and always going to have both.”85 rightfully, would have pursued payment of its fees for services even if those services did not result in millions in tax savings. *9 The Turpin Firm has failed to come forward with competent evidence from which a reasonable jury could The issue then is whether NNU's payments to the Turpin Firm conclude that the Firm provided NNU “value” as required to were in satisfaction of NNU's antecedent debt. More precisely, establish its good faith defense. The Firm has failed to show the question here is whether NNU would have been legally that NNU's transfers were in satisfaction of an antecedent debt obligated to pay for the Turpin Firm's services. If NNU was that NNU owed, and therefore has not proven “value.” A bare legally obligated to pay for the Firm's services, then by making assertion made by Ms. Turpin well after the commencement this payment it satisfied an antecedent debt that would of litigation, stating that “you're always going to have both” is rightfully have come out of NNU's assets and it would have not enough to establish that NNU undertook a contractual received value. And if this were so, the court would have to obligation to pay the Firm's fees.86 determine whether this value was “reasonably equivalent.” But if NNU was not obligated to pay for those services, NNU Also, the Turpin Firm appears to argue that Mr. Palmer and was not satisfying a debt through this payment, NNU's net NNU should be considered the same entity for purposes of the worth was not preserved, and NNU did not receive value 87 under the UFTA. payment of its fees. If Mr. Palmer and NNU were the same entity, then the antecedent debt for the Turpin Firm's services In its motion, the Turpin Firm has not provided the legal likely would be NNU's. But the Turpin Firm has failed to show standards or facts to support a claim that NNU was legally that Mr. Palmer and NNU were the same legal entity. As the obligated to pay for its services. The closest the Parties get to Turpin Firm correctly noted, “[f]or federal tax purposes,

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 131 Klein v. Michelle Tuprin & Associates, P.C., Slip Copy (2016) owners of disregarded entities are treated as conducting the [a] transfer made ... by a debtor is activities of their entities.”88 However, these company actions fraudulent as to a creditor whether the are considered the actions of the owner only for federal creditor's claim arose before or after the transfer was made ..., if the debtor income tax purposes.89 The Turpin Firm does not cite to any made the transfer ...: (b) without authority stating that payments made by a disregarded entity receiving a reasonably equivalent value are treated as being made by the owner for any purpose other in exchange for the transfer ...; and the than federal income tax. Instead, the Turpin Firm's own debtor: ... (ii) intended to incur, or expert, Mr. Williams, stated in his report that Mr. Palmer and believed or reasonably should have NNU were separate legal entities and that the debts of Mr. believed that he would incur, debts Palmer could not be imputed to NNU during the time period beyond his ability to pay as they 90 at issue. The court will not on this record disregard corporate became due. form and impute to NNU an antecedent debt that has not been proven to belong to it simply because it was a singlemember Proof that an entity is operating as a Ponzi scheme establishes LLC at the time the debt was incurred. that the entity “intended to incur, or believed or reasonably should have believed that [it] would incur, debts beyond [its] In sum, the court concludes that the Receiver has shown actual ability to pay as they became due.”92 Hence, the question fraudulent transfer under the UFTA, and that the Turpin Firm again is whether NNU received “reasonable equivalent value has failed to show that its statutory good faith defense applies. for the transfer.” In the context of the Receiver's Second Because the Receiver has established that the Ponzi Claim, however, “reasonable equivalent value” is an element presumption applies, the court infers that the debtor made the of the Receiver's affirmative claim, rather than the Turpin transfer “with actual intent to hinder delay or defraud any Firm's affirmative defense. For this reason, it is the Receiver's creditor of the debtor.”91 The Turpin Firm has failed to show burden on this claim to show that NNU did not receive that it provided NNU “reasonable equivalent value” because reasonable equivalent value—that NNU did not owe the it has failed to provide competent evidence from which a Turpin Firm an antecedent debt for its services.93 reasonable jury could conclude that NNU's transfers were in satisfaction of NNU's antecedent debt. The Receiver prevails As discussed above, the Receiver in his motion asserted that on his First Claim for Relief. NNU did not retain the Turpin Firm and therefore would have no obligation to pay its fees.94 The court finds that the evidence submitted by the Receiver is sufficient to meet his III. Constructive Fraudulent Transfer burden to make a prima facie showing that NNU did not owe *10 In addition to his First Claim for actual fraud, the an antecedent debt to the Turpin Firm. Thus, the burden shifts Receiver also asserts two constructive fraud claims under the to the Turpin Firm to “set forth specific facts ... from which a UFTA. In his Second Claim for Relief, the Receiver argues 95 NNU did not receive reasonably equivalent value and intended rational trier of fact could find for” the Firm. But the only to incur, or believed or reasonably should have believed that it evidence that the Turpin Firm cites to dispute this assertion is would incur, debts beyond its ability to pay as they became Ms. Turpin's deposition testimony where she stated that due under Section 25-6-5(1)(b). In his Third Claim for Relief, “anytime you have a pass-through entity, you're going to the Receiver argues NNU did not receive reasonably represent the entity and all of the recipients of the K-1 equivalent value and was insolvent at the time of the transfer distributions or the pass-through. You're always going to have under Section 25-6-6(1). The court analyzes each of these both.”96 As discussed above, even considering Ms. Turpin's claims below concluding that the Receiver prevails on both. statement in the light most favorable to the Firm as the nonmoving party, there is insufficient evidence to create a genuine issue of material fact for the jury. No reasonable jury A. Second Claim for Relief Under could conclude based on this evidence that the Turpin Firm Utah Code Section 25-6-5(1)(b) and NNU had entered into a contractual relationship, with the necessary meeting of the minds on the material terms of a Under Section 25-6-5(1)(b), contract.97

*11 The court concludes that the Receiver has established correlates with the Firm's work to defend the audit of NNU's constructive fraud under Section 25-6-5(1)(b) of the UFTA. 2008 tax return. The court denies the Firm's motion on the The Receiver met its burden of showing that NNU did not owe Receiver's First, Second, and Third Claim for Relief. the Turpin Firm an antecedent debt, and the Turpin Firm has not sufficiently rebutted this showing. Also, because NNU The court directs the Clerk of Court to close the case. operated as a Ponzi scheme the Receiver has established that the entity intended to incur debts beyond its ability to pay. SO ORDERED this 5th day of July, 2016.

All Citations B. Third Claim for Relief Under Utah Code Section 25-6-6(1) Slip Copy, 2016 WL 3661226

Having concluded that the Receiver prevails on his First and Second Claims for Relief, the court now considers his final claim under Section 25-6-6(1). Under this Section, “[a] transfer made ... by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made ... if: (a) the debtor made the transfer ... without receiving a reasonably equivalent value in exchange for

Footnotes the transfer ...; and (b) the debtor was insolvent at the time or became insolvent as a result of the transfer ....”98 “A debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets at a fair valuation.”99

As discussed above, the Receiver has established that NNU did not receive reasonably equivalent value for the payments made to the Turpin Firm. Further, there exists no dispute here that the sum of NNU's debts was greater than all of NNU's assets at a fair valuation before the first payment was made to the Turpin Firm. For these reasons, the court concludes that the relevant transfers to the

Turpin Firm were fraudulent under Section 25-6-6(1).100

CONCLUSION

Plaintiff's Motion for Summary Judgement is GRANTED.

Because the Receiver has met his burden to show that the transfers were fraudulent, Plaintiff is entitled to recover the full value of the transfers under Sections 25-6-8(1)(a) and 25- 6-9(2)(a). Defendants' Motion for Summary Judgment is GRANTED in part and DENIED in part. The court grants the Turpin Firm's Motion for Summary Judgment on the Receiver's Fourth, Fifth, and Sixth Claims for Relief. The court also grants Defendants' motion on the $10,000 claim that

1 This case initially included Michelle Turpin as a defendant. Plaintiff voluntarily dismissed Michelle Turpin from the suit without prejudice. Dkt. 18 at 2. 2 Dkt. 30. 3 Dkt. 32. 4 SEC v. National Note of Utah, LLC, 2:12-cv-000591-BSJ (D. Utah), Dkt. 1. 5 SEC v. National Note of Utah, LLC, 2:12-cv-000591-BSJ (D. Utah), Dkt. 9; see Dkt. 32 at 4. 6 SEC v. National Note of Utah, LLC, 2:12-cv-000591-BSJ (D. Utah), Dkt. 9 at 4–5. 7 Dkt. 2 at 4. 8 See Dkt. 32 at 7–11. 9 Sender v. Nancy Elizabeth R. Heggland Family Trust (In re Hedged-Inv. Assoc., Inc.), 48 F.3d 470, 471 n.2 (10th Cir. 1995) (citation omitted). 10 SEC v. Mgmt. Soutions., Inc., No. 2:11-cv-1165, 2013 WL 4501088, at *19 (D. Utah Aug. 22, 2013) (citing Am. Cancer Soc'y v. Cook, 675 F.3d 524 (5th Cir. 2012)). 11 Dkt. 32 at 9. 12 Id. at 9–10. 13 Id. 14 See FED. R. CIV. P. 56(c)(1) (“A party asserting that a fact cannot be or is genuinely disputed must support the assertion by ... citing to particular parts of the materials in the record ....”); DUCiv 56-1(c)(2)(B) (“If a fact is disputed, so state and concisely describe and cite with particularity the evidence on which the non-moving party relies to dispute that fact ....”). 15 Williams Report, Dkt. 31-1 at 4. 16 Id. 31-1 at 4. 17 Turpin Deposition, Dkt. 33-9 at 34–37; Exhibit 6. 18 Williams Report, Dkt. 31-1 at 5–7; Dkt. 30 at 8; Dkt. 34 at 6. 19 See Dkt. 32 at 14 n.44; see, e.g., Turpin Deposition, Dkt. 33-9 at 5–7 (noting that the engagement letter was addressed to Mr. Palmer); 53 (noting that the attorney agreement stated that “[t]his Client and Attorney Agreement is entered into between Wayne Palmer (‘Client’), and Michelle Turpin & Associates, P.C. (the ‘firm’)”). 20 Turpin Deposition, Dkt. 33-9 at 24. 21 Id. at 2. 22 Dkt. 30 at 7 (citing Turpin Depo 50: 4–5); see also Dkt. 34 at 5 (responding to the paragraph quoted, stating that “[t]o the extent that facts are being alleged, they are undisputed for purposes of the Motion and this Opposition only”); Dkt. 31-1 at 2. 23 Dkt. 36 at 15; Dkt. 37-2 at 32 (“[E]ven though it's a disregarded entity it could still have a liability for other types of taxes. It could be withholding taxes other than income taxes....[T]o say they never pay taxes, that's not correct. They do have to pay taxes.”).

24 See Williams Report, Dkt. 31-1 at 2–3 (citing IRM 5.1.21.6.3.2) (“This includes protection of [the single member LLC's] assets from IRS levies for federal income taxes owed by the member.”); Williams Deposition, Dkt. 37-2 at 24:24-25:15. 25 Williams Report, Dkt. 31-1 at 2–3. 26 Id. at 2. 27 Dkt. 34 at 6. 28 Williams Report, Dkt. 31-1 at 7. 29 Id. at 3. 30 Id. 31 Id. at 8. 32 Id. 33 Dkt. 32 at 24. 34 Dkt. 30 at 3 (asserting that the Reciever is seeking $88,135.37); Dkt. 30 at 26 (“The Court should grant summary judgment against the Receiver on all claims against Turpin.”). 35 Dkt. 31-1 at 1. 36 FED. R. CIV. P. 56. 37 Fischer v. Forestwood Co., 525 F.3d 972, 978 (10th Cir. 2008). 38 Id. (internal quotation marks omitted). 39 Whitsel v. Sengenberger, 222 F.3d 861, 867 (10th Cir. 2000). 40 Id. (internal quotation marks omitted). 41 Atlantic Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1148 (10th 2000) (citation omitted). 42 See also US Airways, Inc. v. O'Donnell, 627 F.3d 1318, 1324 (10th Cir. 2010) (alteration in original) (internal quotation marks omitted).

43 Dkt. 34 at 2. 44 See Dkt. 32 at 24. 45 Dkt. 34 at 11 (“The Turpin Firm admits that National Note, as a single-member limited liability company, had no liability for the Palmer's income tax liabilities .... The Turpin Firm admits that its services had no impact on National Note's tax liabilities.”). 46 UTAH CODE § 25-6-8(1)(a). 47 UTAH CODE § 25-6-9(2). 48 Tolle v. Fenley, 132 P.3d 63, 66 (Utah Ct. App. 2006). 49 UTAH CODE § 25-6-8. 50 UTAH CODE § 25-6-5. 51 Klein v. Cornelius, 786 F.3d 1310, 1316 (10th Cir. 2015) (recognizing that “receivers may only sue to redress injuries to the entity in receivership, and not directly on behalf of the entity's creditors”). 52 56 F.3d 750 (7th Cir. 1995). 53 Id. at 754. 54 Id. 55 Id. at 754–55; see also Knauer v. Jonathon Roberts Fin. Grp., Inc., 348 F.3d 230, 234 (7th Cir. 2003) (explaining that “[a]s long as an entity is legally distinct from the person who diverted the funds from the entity, a receiver for the entity has standing to recover the removed funds”).

56 Dkt. 30 at 17–18. 57 786 F.3d 1310, 1313 (10th Cir. 2015).

58 Id. at 1316. 59 Id. at 1316–17. 60 Dkt. 34 at 10. 61 UTAH CODE § 25-6-5(2)(a)–(k). 62 Cornelius, 786 F.3d at 1320 (“And because Ponzi schemes are insolvent by definition, we presume that transfers from such entities involve actual intent to defraud.”); see, e.g., Miller v. Wulf, 84 F. Supp. 3d 1266, 1274 (D. Utah 2015) (“The Receiver's burden of proving actual intent on summary judgment is conclusively established by proving the entities under his control were operated as a Ponzi scheme.”). 63 Cornelius, 786 F.3d at 1320. 64 SEC v. Mgmt. Solutions., Inc., No. 2:11-cv-1165, 2013 WL 4501088, at *6 (D. Utah Aug. 22, 2013) (quoting Warfield v. Carnie, No. 3:04-cv-633, 2007 WL 1112591, at *9 (N.D. Tex. Apr. 13, 2007)). 65 Dkt. 30 at 19. 66 See, e.g., Cornelius, 786 F.3d at 1320 (applying the Ponzi presumption to transfers made for a third party's legal fees); Klein v. Ravkind & Assocs., No. 2:12-cv-00022, 2014 WL 4249882, at *2 (D. Utah Aug. 27, 2014) (same); Klein v. King & King & Jones, No. 2:12-cv-00051, 2013 WL 4498831, at *2 (D. Utah Aug. 19, 2013) (same), aff'd 571 Fed.Appx. 702 (10th Cir. 2014). 67 In addition to the statutory defense discussed in this section, the Turpin Firm also raised Section 25-6-9(7) as an affirmative defense. However, Section 25-6-9(7) was enacted during the 2015 legislative session with an effective date of May 12, 2015. See Dkt. 32 at 20–22. “A provision of the Utah Code is not retroactive, unless the provision is expressly declared to be retroactive.” UTAH CODE § 68-3-3. Because there is no provision expressly declaring it retroactive, the Turpin Firm is unable to invoke Section 25-6-9(7) as a defense in this case. 68 Klein v. King & King & Jones, No. 2:12-cv-00051, 2013 WL 4498831, at *2 (D. Utah Aug. 19, 2013) (citation omitted), aff'd 571 Fed.Appx. 702 (10th Cir. 2014). 69 Dkt. 41 at 10. 70 UTAH CODE § 25-6-4. 71 Cornelius, 786 F.3d at 1321 (quoting SEC v. Res. Dev. Int'l, 487 F.3d 295, 301 (5th Cir. 2007)). 72 Res. Dev. Int'l, 487 F.3d at 30 (citation omitted) (discussing commentary to the Uniform Fraudulent Transfers Act); see UNIF. FRAUDULENT TRANSFER ACT § 3 cmt. 2 (1984) (“Consideration having no utility from a creditor's viewpoint does not satisfy the statutory definition.”). 73 Rupp v. Moffo, 358 P.3d 1060, 1064 (Utah 2015). 74 See Klein v. King & King & Jones, P.C., No. 2:12-cv-00051, 2013 WL 4498831 (D. Utah Aug. 19, 2013) (recognizing “that in order to establish reasonable equivalent value under the UFTA it is ... the debtor [ ] who must have received the equivalent value”). 75 Klein v. Cornelius, No. 2:11-cv-01159, 2013 WL 6008304, at *3 (D. Utah Nov. 13, 2013) (quoting In re Lucas Dallas, Inc., 185 B.R. 801, 807 (B.A.P. 9th Cir. 1995)), aff'd 786 F.3d 1310 (10th Cir. 2015). 76 Dkt. 30 at 22; Dkt. 36 at 12 (“Turpin provided tax and legal services to National Note preserved [sic] the net worth available to creditors by approximately $1,500,000.”). 77 Dkt. 39 at 7. 78 Dkt. 41 at 14–16. 79 Monarrez v. Utah Dept. of Transp., 2016 UT 10, ¶ 11 (“When interpreting a statute, it is axiomatic that this court's primary goal is to give effect to the legislature's intent in light of the purpose that the statute is meant to achieve. And as we have often noted [t]he best evidence of the legislature's intent is the plain language of the statute itself.” (internal quotation marks omitted)). 80 UTAH CODE § 25-6-4(1) (“Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied. However, value does not include an unperformed promise made other than in the ordinary course of the promisor's business to furnish support to the debtor or another person.”).

81 At oral argument, the Turpin Firm argued that “antecedent debt” is broader than a contractual obligation and that the Turpin Firm could have sued NNU for its fees under a quantum meruit theory. Because the Turpin Firm did not argue this theory in its motion, the court does not consider it. See, e.g., United States v. Polatis, No. 2:10-cr-0364, 2011 WL 1667919 (D. Utah May 3, 2011) (“[C]ourts have repeatedly recognized that failure to raise arguments in the briefing is a legitimate basis for the court to disregard such arguments.”) (citing Haynes v. Trane Serv. Agency v. Am. Std., Inc., 573 F.3d 947, 959 (10th Cir. 2009)). 82 Dkt. 32 at 14 (asserting that “National Note did not retain the Turpin Firm”). 83 Dkt. 32 at 14, ¶¶ 2, 4. 84 Dkt. 32 at 14 n.44 (referencing the following language in various correspondence: in a letter from Turpin addressed to Mr. Palmer—“You [referring to Palmer] have asked us to represent you with regard to any tax related issues;” letter to Receiver signed by Turpin—“our firm represents Wayne and Christy Palmer in relation to an IRS audit that covered multiple years. The audits involved the income and expenses of National Note of Utah and other business entities which flowed through to the personal returns of Wayne and Christy Palmer” and that there was an outstanding balance due “from Wayne and Christy Palmer relating to [their] representation;” a “client and attorney agreement” identifying the “client” as “Wayne Palmer” and making no mention of NNU; and a client information sheet identifying the taxpayer as Wayne Palmer and his spouse as Christy.). 85 Dkt. 36 at 15. 86 The court makes no finding on whether it was treated separately; the denial of one does not require the grant of another.” (alteration in original) (internal appropriate for NNU to pay Turpin's fees or whether quotation marks omitted)). these payments were ordinary business expenses as 94 See supra § IIB. this is not the issue before the court. 95 Whitsel v. Sengenberger, 222 F.3d 861, 867 (10th Cir. 87 Dkt. 39 at 3, 6–7; Dkt. 36 at 24–25. 2000). 88 Jerald David August et al., Federal Income Taxation of 96 Dkt. 36 at 14–15. Single Member Entities: “Tax Nothings”, ST018 97 And this is assuming that Ms. Turpin's testimony was a SUPPLEMENT ALI-ABA 1, § IV.A.4 (2012). statement of fact and not a legal conclusion. On its face, 89 See Martin J. McMahon, Now You See It, Now You it appears to be a legal statement which the court could Don't: The Comings and Goings of Disregarded Entities, properly exclude. See Christiansen v. City of Tulsa, 332 F.3d 1270, 1283 (10th Cir. 2003) (finding that the district 65 TAX LAW. (Number 2) 259, 263 (2012) (“For federal court properly excluded, on summary judgment, expert income tax purposes, the formation of a single-member testimony as a legal conclusion when the expert LLC that does not affirmatively elect to be treated as a discussed whether the defendant acted recklessly). corporation simply is a nonevent. Even though ownership of the assets transferred to the LLC is 98 UTAH CODE § 25-6-6(1). 99 UTAH CODE § 25-6-3(1). effective for state law purposes, all of the assets continue to be owned by the transferor member of the 100 Defendants raise Utah Code Section 25-6-9(7) as an LLC for federal income tax purposes.”). affirmative defense to a fraudulent transfer under Section 25-6-5(1) (b) and Section 25-6-6(1). However, 90 Williams Report, Dkt. 31-1 at 2 (“National Note as previously discussed, Section 25-6-9(7) was enacted maintained its books and records in compliance with the during the 2015 legislative session with an effective date record keeping requirements of the internal revenue of May 12, 2015, is not retroactive, and does not apply laws and in a manner that it could prove that it operated to this case. in fact as a business entity separate and apart from its

owner .... As such, the integrity of the LLC as a separate business entity was maintained and it is unlikely that a creditor of National Note could expect to prevail in a court action against Palmer.”).

91 See UTAH CODE § 25-6-5. 92 Klein v. King & King & Jones, No. 2:12-cv-00051, 2013 WL 4498831, at *4 (D. Utah Aug. 19, 2013) (alterations in original) (quoting Donell v. Kowell, 533 F.3d 762, 770 (9th Cir. 2008)), aff'd 571 Fed.Appx. 702 (10th Cir. 2014).

93 See US Airways, Inc. v. O'Donnell, 627 F.3d 1318, 1324 (10th Cir. 2010) (“Cross motions for summary judgment are ...

2016 WL 3675462 U.S. Department of Justice, Civil Division, Washington, Only the Westlaw citation is currently available. DC, Stuart F. Williams, Andrew Taylor Sheeran, Leslei United States Court of Appeals, Eleventh Circuit. Gayle Street, Florida Agency for Health Care Administration, Tallahassee, FL, Roberta Josephina In re: Bayou Shores SNF, LLC, Debtor. Bodnar, U.S. Attorney's Office, Orlando, FL, Arthur Lee Florida Agency for Health Care Administration, Bentley, III, Sean Flynn, Colleen D. Murphy–Davis, U.S. United States of America, on behalf of the Attorney's Office, Tampa, FL, for Plaintiffs–Appellees. Secretary of the United States Department of Health and Human Services, Plaintiffs–Appellees, Elizabeth A. Green, Tiffany D. Payne, Baker & Hostetler, v. LLP, Orlando, FL, Jeffrey T. Kuntz, Frank Terzo, Bayou Shores SNF, LLC, Defendant–Appellant. GrayRobinson, PA, Fort Lauderdale, FL, for Defendant– Appellant. No. 15-13731 | Before HULL, JULIE CARNES, and CLEVENGER,* July 11, 2016 Circuit Judges. Synopsis Background: Secretary of Health and Human Services Opinion appealed bankruptcy court's orders enjoining Secretary from terminating Chapter 11 debtor's Medicare and Medicaid CLEVENGER, Circuit Judge: provider agreements. The United States District Court for the *1 Bayou Shores SNF, LLC (“Bayou Shores”) operates a Middle District of Florida, No. 8:14cv-02816-JSM, James S. skilled nursing facility in St. Petersburg, Florida. Most of Moody Jr., J., 533 B.R. 337, reversed bankruptcy court's orders, Bayou Shores' patients are on Medicare or Medicaid, and and debtor appealed. over ninety percent of its revenue is derived from Medicare and Medicaid patients. It receives compensation for Medicare and Medicaid services through provider Holdings: The Court of Appeals, Clevenger, Circuit Judge, agreements entered into with the federal and state held that: governments. Bayou Shores' entitlement to participate in the provider agreements depends on its continued [1] bankruptcy court lacked jurisdiction to enjoin compliance with qualification requirements for such Secretary from terminating debtor's provider agreements; facilities that are established by the Secretary of the Department of Health and Human Services. After an [2] Secretary's challenge to bankruptcy court's orders wasnot unchallenged exercise of her statutory oversight authority, moot; and the Secretary determined that Bayou Shores was not in substantial compliance with the Medicare program [3] debtor's challenge to Secretary's termination aroseunder participation requirements, and that conditions in its facility Medicare. constituted an immediate jeopardy to residents' health and safety. By letter dated July 22, 2014, the Secretary notified Bayou Shores that its Medicare provider agreement “will Affirmed. be terminated at 11:59 pm on August 3, 2014.” The termination of Bayou Shores' Medicare provider agreement Appeal from the United States District Court for the Middle triggered the termination of its Medicaid provider District of Florida. D.C. Docket Nos. 8:14bk-09521-MGW; agreement as well. 8:14-cv-02816-JSM. To avoid the consequences of termination of its provider Attorneys and Law Firms agreements, Bayou Shores sought protection in the United States Bankruptcy Court for the Middle District of Florida. Jeffrey A. Clair, U.S. Department of Justice, Arthur Lee Rejecting the jurisdictional challenge from the Secretary, the Bentley, III, U.S. Attorney's Office, Christopher J. Emden, bankruptcy court assumed authority over the Medicare and

Medicaid provider agreements as part of the debtor's estate, and Medicaid patients. To be eligible for the enjoined the Secretary from terminating the provider Medicare/Medicaid program, Bayou Shores entered into so- agreements, determined for itself that Bayou Shores was called “provider agreements” with the federal and Florida qualified to participate in the provider agreements, required the state governments, respectively, which provide Secretary to maintain the stream of monetary benefit under the reimbursement to Bayou Shores for the provision of medical agreements, reorganized the debtor's estate, and finally issued services to Bayou Shores' Medicare/ Medicaid patients. As its Confirmation Order on December 31, 2014. a condition of payment under these agreements Bayou Shores must comply with certain regulatory requirements On appeal, in a June 26, 2015, Order, the United States District pertaining to skilled nursing facilities.2 The Plaintiffs in this Court for the Middle District of Florida upheld the Secretary's case are the government agencies primarily tasked with jurisdictional challenge and reversed the Confirmation Order monitoring Bayou Shores' compliance with these with respect to the assumption of the debtor's Medicare and regulations: the Florida Agency for Health Care Medicaid provider agreements. See In re Bayou Shores SNF, Administration (“AHCA”) and the United States LLC, 533 B.R. 337, 343 (M.D. Fla. 2015). Department of Health and Human Services (“HHS”) (collectively, “the Government”). AHCA is responsible for Bayou Shores timely appeals the decision of the district court. conducting surveys of skilled nursing facilities in Florida The appeal turns on the jurisdictional question. From the Social and administering the state's Medicaid program. HHS Security Amendments of 1939 until 1984, it is undisputed that administers Medicare nationally, and uses AHCA's surveys bankruptcy courts lacked jurisdiction over Medicare claims. to decide whether skilled nursing facilities in Florida are The statute barring such jurisdiction was finally recodified in compliant with the regulations, and if not, what remedial 1984 to reflect an earlier recodification of the Judicial Code. In action to take. When conditions at a skilled nursing facility cases involving the interpretation of statutory language pose immediate jeopardy to the health or safety of the changed in a recodification, it has long been established that no facility's patients, the law requires the Secretary to select change in the previous recodified law is recognized unless 3 Congress's intention to make a substantive change is “clearly and execute an appropriate remedy. expressed.” United States v. Ryder, 110 U.S. 729, 740, 4 S.Ct. 196, 28 L.Ed. 308 (1884). Now the central question is whether On February 10, 2014, AHCA conducted such a survey at the statutory revision in this case demonstrated Congress's clear Bayou Shores' skilled nursing facility. As a result of the intention to vest the bankruptcy courts with jurisdiction over survey, AHCA reported to HHS that Bayou Shores was not Medicare claims. We think it is abundantly clear that Congress compliant with the relevant regulations. The survey noted expressed no such intention. a number of problems including failing to correctly track residents' “Do Not Resuscitate” orders, poor patient *2 Therefore, after careful review of the record and the parties' hygiene, and unsecured expired medications. AHCA briefs, and with the benefit of oral argument, and for the reasons determined that at least some of these deficiencies posed a 4 set forth below, we affirm the district court's Order. threat of immediate jeopardy to Bayou Shores' patients.

Bayou Shores was given an opportunity to remedy these I. BACKGROUND deficiencies. In a follow-up survey on March 20, 2014, The relevant facts of this case are generally undisputed and ably AHCA again found a number of deficiencies. These set out by the district court in the opinion below. included Bayou Shores placing a “known sexual offender” in a room with a disabled patient without informing that See In re Bayou Shores SNF, LLC, 533 B.R. 337, 338–40 (M.D. patient, and subsequently failing to appropriately handle an Fla. 2015). A brief summary follows. alleged sexual assault by the “known sexual offender” reported by the disabled patient. As with the previous A. Bayou Shores' “Skilled Nursing Facility”As noted above, survey, AHCA found that at least some of these deficiencies posed a threat of immediate jeopardy to Bayou Bayou Shores operates a “skilled nursing facility”1 in St. Shores' patients. Bayou Shores was again given the Petersburg, Florida, and approximately ninety percent of opportunity to remedy the deficiencies. Bayou Shores' revenue is derived from caring for Medicare

*3 The proverbial “last straw” was a final survey on July 11, the bankruptcy court heard testimony from doctors, 2014, in which further deficiencies were identified, including patients, and other Bayou Shores witnesses. Concluding allowing a mentally impaired resident to leave the facility that in its view Bayou Shores' patients did not appear to be unaccompanied on a hot Florida day (he was later found at a in any immediate jeopardy, the bankruptcy court issued an bus station). AHCA again determined that at least some of these order on September 5, 2014 that (among other things) deficiencies placed Bayou Shores' residents in immediate forbade HHS and AHCA from terminating Bayou Shores' jeopardy. After the third finding of non-compliance, HHS sent provider agreements. Bayou Shores a letter on July 22, 2014 notifying Bayou Shores that its non-compliance posed an “immediate jeopardy to *4 After further proceedings, on December 31, 2014 the [Bayou Shores'] residents' health and safety,” and that HHS was bankruptcy court issued its Confirmation Order. See In re exercising its regulatory discretion to terminate Bayou Shores' Bayou Shores SNF, LLC, 525 B.R. 160 (Bankr. M.D. Fla. Medicare provider agreement. HHS's letter stated that the 2014). In the Confirmation Order, the bankruptcy court “Medicare provider agreement will be terminated at 11:59 pm again stated its belief that jurisdiction was proper under 28 on August 3, 2014.”5 The termination of Bayou Shores' U.S.C § 1334, and rejected HHS and AHCA's argument Medicare provider agreement triggered the termination of that the same 42 U.S.C. § 405(h) bar applied to the bankruptcy court as applied to the district court. The Bayou Shores' Medicaid provider agreement.6 bankruptcy court reasoned that the plain language of § 405(h), which refers only to 28 U.S.C §§ 1331 and 1346, B. Bankruptcy Court Proceedings did not prevent the bankruptcy court from exercising Two days before this looming deadline, on August 1, 2014, jurisdiction over the assumption of the provider agreements Bayou Shores sought emergency injunctive relief from the U.S. under § 1334. Id. at 166. The bankruptcy court further District Court for the Middle District of Florida to prevent the concluded that because Bayou Shores appeared to have termination of the provider agreements. The district court remedied the deficiencies it was originally cited for, Bayou initially granted Bayou Shores' request for a temporary Shores had provided adequate assurances of future restraining order. However, on motion of HHS, the district performance under the provider agreements, and thus was court dismissed Bayou Shores' complaint for lack of subject eligible to assume them. Finding the remainder of the matter jurisdiction. On August 15, 2014, the court found that statutory requirements fulfilled, the bankruptcy court Bayou Shores had not exhausted its administrative remedies, confirmed Bayou Shore's Chapter 11 plan. The bankruptcy and thus Medicare's jurisdictional bar (42 U.S.C. § 405(h)) court also ordered the dissolution of the automatic stay and prevented the district court from exercising jurisdiction over preliminary injunction.8 the termination of the provider agreements. See Bayou Shores SNF, LLC v. Burwell, No. 8:14–CV–1849– T–33MAP, 2014 WL 4059900,*6–8 (M.D. Fla. Aug. 15, 2014). Approximately C. District Court Proceedings an hour after issuance of the district court's order, Bayou Shores HHS and AHCA separately appealed both the bankruptcy filed a Voluntary Petition for Chapter 11 bankruptcy, and court's September 5, 2014 Order, and the Confirmation sought an emergency injunction from the bankruptcy court Order. The appeals were consolidated by the district court. preventing HHS and AHCA from terminating the provider As they had argued to the bankruptcy court, HHS and agreements. The Government, at each opportunity, challenged AHCA asserted to the district court that 42 U.S.C. § 405(h) the bankruptcy court's jurisdiction to order assumption of the denied the bankruptcy court jurisdiction over the provider provider agreements. agreements. The district court agreed. While acknowledging that the bankruptcy court's reading of § On August 25, 2014, the bankruptcy court issued the 405(h) was an issue that the Eleventh Circuit had not preliminary injunction sought by Bayou Shores. The squarely addressed, the district court noted that the majority bankruptcy court reasoned that it had jurisdiction pursuant of other circuit courts addressing the issue “have examined Congress' intent when it enacted the jurisdictional bar and to 28 U.S.C. § 1334,7 the provider agreements were concluded that the omission of section 1334 and other property of the estate, and an automatic stay preventing jurisdictional grants (like section 1332) was inconsistent HHS and AHCA from terminating the agreements was thus with that intent.” In re Bayou Shores, 533 B.R. at 342. The proper. At a subsequent evidentiary hearing on August 26, district court reviewed the relevant statutory language and

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 140 In re Bayou Shores SNF, LLC, --- F.3d ---- (2016) legislative history, as well as decisions from other courts argues that the lack of a reference to § 1334 is merely a examining the same. In particular, the district court noted result of a codification error, and that properly construed that the absence of § 1334 in the recodified 42 U.S.C. § the statute requires exhaustion of administrative remedies 405(h) appeared to be the result of a codification error. before bringing a Medicare claim before any district court. Based on that analysis, the district court held that it “respectfully disagree[d] [with the bankruptcy court] and Because we conclude that the lack of a reference to § 1334 align[ed] itself with the majority view” in finding that § in § 405(h) is the result of a codification error, we agree 405(h) must be understood to bar jurisdiction under § 1334. with the Government that the bankruptcy court lacked Id. at 343. jurisdiction over the termination of the provider agreements. To see why, we turn first to an examination of Because it was undisputed that Bayou Shores had yet to the history of § 405(h). exhaust its administrative remedies, and “no other independent basis for jurisdiction existed to enjoin and order the assumption of the Medicare and Medicaid provider A. Legislative history of § 405(h) agreements,” the district court reversed the orders of the The relevant text of the 42 U.S.C. § 405(h) currently reads bankruptcy court (with respect to the provider agreements). (emphasis added): Id. (h) Finality of Commissioner's decision

The district court also noted that a hotly contested issue on The findings and decision of the Commissioner of Social appeal was “the exact timing of any termination of the Security after a hearing shall be binding upon all provider agreements.” Id. However, the district court found individuals who were parties to such hearing. No that it did not need to resolve that issue, because the timing findings of fact or decision of the Commissioner of was irrelevant to whether or not the bankruptcy court lacked Social Security shall be reviewed by any person, jurisdiction to hear the case in the first place. Id.9 tribunal, or governmental agency except as herein provided. No action against the United States, the Bayou Shores timely appealed the district court's order. Commissioner of Social Security, or any officer or employee thereof shall be brought under section 1331 or 1346 of Title 28 to recover on any claim arising under II. STANDARD OF REVIEW this subchapter.10 *5 [1] [2] In a bankruptcy case, this Court sits as a second court of review and thus examines independently the factual and Bayou Shores argues that the third sentence of § 405(h) legal determinations of the bankruptcy court and employs the forbids only an “action” brought under “section 1331 [i.e. same standards of review as the district court. See Brown v. federal question jurisdiction] or 1346 [i.e. suits against the Gore (In re Brown), 742 F.3d 1309, 1315 (11th Cir. 2014). We federal government] of Title 28.” Because Bayou Shores' review the bankruptcy court's factual findings for clear error action was brought under section 1334 of Title 28 and its legal conclusions de novo. Id. The district court's legal (i.e. bankruptcy jurisdiction), Bayou Shores argues that § determinations are also reviewed de novo. See Dionne v. 405(h) does not apply. To understand why Bayou Shores is incorrect however requires a thorough examination of the Simmons (In re Simmons), 200 F.3d 738, 741 (11th Cir. 2000). history of § 405(h), which reveals that the issue is not as straightforward as Bayou Shores suggests. III. BANKRUPTCY COURT JURISDICTION OVER MEDICARE CLAIMS The original text of § 405(h) when passed in 1939 was largely The primary dispute in this case is purely legal: does 42 the same as it is today, with the crucial difference for this case U.S.C. § 405(h) bar a bankruptcy court from exercising 28 emphasized below: U.S.C. § 1334 jurisdiction over claims that arise under the (h) The findings and decision of the Medicare Act? Bayou Shores' primary argument is that the Board after a hearing shall be binding plain text of § 405(h) precludes district court jurisdiction upon all individuals who were parties to under 28 U.S.C. §§ 1331 and 1346 only. The Government such hearing. No findings of fact or

decision of the Board shall be reviewed By 1976 (after the Weinberger decision), the Office of the by any person, tribunal, or Law Revision Counsel appears to have recognized the governmental agency except as herein error.12 In the edition of the U.S. Code published that year, provided. No action against the United the revisers substituted the phrase “section 24 of the States, the Board, or any officer or Judicial Code of the United States” in § 405(h) with the employee thereof shall be brought under now current language, “sections 1331 or 1346 of title 28.” section 24 of the Judicial Code of the A “Codification” note included in the 1976 revision United States to recover on any claim indicates the following about the change: arising under this title. In subsec. (h), “sections 1331 or 1346 of title 28” was *6 See Social Security Amendments of 1939, Pub. L. No. 76– substituted for “section 24 of the Judicial Code of the 379, 53 Stat. 1360 (1939) (emphasis added). In 1939, “section United States” on authority of act June 25, 1948, ch. 646, 24 of the Judicial Code” defined the original jurisdiction 62 Stat. 869, section 1 of which enacted Title 28, granted to district courts, including jurisdiction over Judiciary and Judicial Procedure. Prior to the enactment bankruptcy claims (see Judicial Code, Pub. L. No. 61–475, 36 of Title 28, section 24 of the Judicial Code was classified Stat. 1087, § 24(19) (1911)), diversity and federal question to section 41 of Title 28. claims (id. at § 24(1)), and claims against the United States (id. at § 24(20)). With few exceptions then, section 24 of the See 42 U.S.C. § 405 (1976). The revisers expanded Judicial Code originally “contained all of that title's grants of somewhat on this note in the 1982 version of the code jurisdiction to United States district courts, save for several (added text emphasized): specialpurpose jurisdictional grants of no relevance to the constitutionality of [Medicare] statutes.” See Weinberger v. In subsec. (h), “sections 1331 or 1346 of title 28” was Salfi, 422 U.S. 749, 756, n. 3, 95 S.Ct. 2457, 45 L.Ed.2d 522 substituted for “section 24 of the Judicial Code of the (1975). It is thus undisputed that under the original text of § United States” on authority of act June 25, 1948, ch. 646, 405(h), bankruptcy court jurisdiction over Medicare claims was 62 Stat. 869, section 1 of which enacted Title 28, barred. Judiciary and Judicial Procedure. Prior to the enactment of Title 28, section 24 of the Judicial Code was classified In 1948, however, Congress recodified section 24 of the to section 41 of Title 28. Jurisdictional provisions previously covered by section 41 of Title 28 are covered 11 Judicial Code under title 28 of the U.S. Code. As part of that by sections 1331 to 1348, 1350 to 1357, 1359, 1397, revision, Congress split the district courts' jurisdictional grants 1399, 2361, 2401, and 2402 of Title 28. into multiple sections under Title 28. See U.S. Code, Title 28, Pub. L. No. 80–773, 62 Stat. 869 (1948). Among other things, *7 See 42 U.S.C. § 405 (1982). federal question jurisdiction was re-codified to 28 U.S.C. § 1331, diversity jurisdiction to § 1332, suits against the A year later, H.R. 3805, the “Technical Corrections Act of government to § 1346, and bankruptcy jurisdiction to § 1334. 1983” was introduced to the floor of the House. 129 Cong. See id. at Ch. 85, §§ 1331-1359 (“District Courts; Jurisdiction”). Rec. 23,439 (1983) (statement of Rep. Rostenkowski). A report on the bill describes its derivation and purpose as After the 1948 re-codification however, the text of § 405(h) follows: continued to incorrectly refer to “section 24 of the Judicial The technical amendments made by the Code” for approximately the next thirty years. Indeed, the Technical Corrections Act of 1983 are Supreme Court noted this issue in its 1975 Salfi decision. intended to clarify and conform various The text in the body of the Court's opinion replaced the provisions adopted by the acts listed reference in § 405(h) to “section 24 of the Judicial Code” above. The bill is based on a review by with “[§ 1331 et seq.] of Title 28.” See Salfi, 422 U.S. at the staffs of the Joint Committee on 756, 95 S.Ct. 2457. A footnote in the opinion Taxation and the Committee on Ways acknowledged the apparent error created by the 1948 and Means, taking into account the Judicial Code recodification. See id. at n. 3. comments submitted to the Congress

that concerned changes that would be the original legislation.” 129 Cong. Rec. 23321, 23440 technical in nature. The bill was (1983). H.R. 3805 did not contain any provisions relating developed with the assistance of the to the jurisdiction of bankruptcy courts. Treasury Department, the Social Security Administration, and the Health *8 Although H.R. 3805 did not become law, in 1984 it was Care Financing Administration. merged into another bill, H.R. 4170, which Congress passed as The Deficit Reduction Act of 1984, Pub. L. No. See STAFF OF J. COMM. ON TAXATION, 98th 16 CONG., DESCRIPTION OF H.R. 3805 (TECHNICAL 98–369, 98 Stat. 494 (1984) (hereinafter, the “DRA”). CORRECTIONS ACT OF 1983), at 1 (J. Comm. Print 1983) As noted in the bill itself, the general purpose of the DRA (“H.R. 3805 Rept.”). was “to provide for tax reform, and for deficit reduction.” See 98 Stat. at 494. The DRA did not contain any provisions Among the numerous “technical amendments” was an relating to the scope of bankruptcy court jurisdiction. amendment to § 405(h), proposing to enact the prior codification into positive law: The amendment to § 405(h) is located in “DIVISON V— SPENDING REDUCTION ACT OF 1984”, “TITLE VI — (D) Section 205(h) of such Act is amended by striking out OASDI, SSI, AFDC, AND OTHER PROGRAMS,” “Section 24 of the Judicial Code of the United States” and “Subtitle D—Technical Corrections,” “Sec. 2663. Other inserting in lieu thereof “section 1331 or 1346 of title 28, technical corrections in the Social Security Act and related United States Code,”. provisions.” Consistent with the 1976 and 1982 codification (and the amendment originally proposed in See Technical Corrections Act of 1983: Hearing on H.R. 3805 H.R. 3805), section 2663(a)(4)(D) ordered that “Section Before the H. Comm. on Ways and Means, 98th Cong. 205(h) of [the Social Security Act] is amended by striking 79 (1984) (draft text of H.R. 3805).13 That section of the act, out ‘section 24 of the Judicial Code of the United States' titled “Sec. 403. Other Technical Corrections in [old age, and inserting in lieu thereof ‘section 1331 or 1346 of title survivors, and disability insurance] Provisions,”14 was 28, United States Code,’.” See 98 Stat. at 1162. Section 2664 of the DRA further requires that “[e]xcept to the followed by this in “Sec. 404. Effective Dates”: extent otherwise specifically provided in this subtitle, the (b)(1) Except to the extent otherwise amendments made by section 2663 shall be effective on the specifically provided in this title, the date of the enactment of this Act; but none of such amendments made by section 403 amendments shall be construed as changing or affecting shall be effective on the date of any right, liability, status, or interpretation which existed enactment of this Act; but none of (under the provisions of law involved) before that date.” such amendments shall be construed See id. at 1171–72. as changing or affecting any right, liability, status, or interpretation The House committee report on the DRA explains the reasons which existed (under the provisions of for the “technical corrections” of certain sections in the bill, but law involved) before that date. does not specifically address the amendments to § 405(h). The report generally states that the “bill makes certain corrections See id. at 89–90 (emphasis added). The legislative history of spelling, punctuation, cross-references and other clerical of H.R. 3805 appears to characterize this and other amendments to the Social Security Act and related provisions “technical corrections” as “certain corrections of spelling, in the Internal Revenue Code.” See H.R. Rep. No. 98-432, pt. punctuation, and cross-references in title XVIII of the 2, at 1663 (1984). Nothing in the report or elsewhere in the Social Security Act and in cross-references to the Internal legislative history, in so far as we have been able to determine, Revenue Code.” See H.R. 3805 Rept. at 37.15 Moreover, expresses any intention to change the jurisdiction of bankruptcy courts, let alone to grant bankruptcy courts parallel the bill's sponsor, Rep. Dan Rostenkowski, noted when the authority with HHS over Medicare claims. bill was introduced: “I would like to emphasize that this bill intends simply to correct technical errors and to better reflect the policies established by the Congress in enacting

It thus appears that the current text of § 405(h) is the result of resection (BCBR).” Id. at 604–05, 104 S.Ct. 2013. The the Office of the Law Revision Counsel's mistaken focus of the case was whether the plaintiff's claims “arose” codification, an error enacted into positive law by the DRA. under the Medicare Act. See e.g. id. at 612–613, 104 S.Ct. While the Supreme Court has yet to speak on this precise issue, 2013. But in characterizing § 405(h) and its own holding in the Court has had reason to interpret § 405(h) in a number of Salfi, the Court held that “[t]he third sentence of 42 U.S.C. cases that are helpful in resolving the current dispute. We thus § 405(h), made applicable to the Medicare Act by 42 U.S.C. turn to an examination of those cases before turning back to the § 1395ii, provides that § 405(g), to the exclusion of 28 codification issue. U.S.C. § 1331, is the sole avenue for judicial review for all ‘claim[s] arising under’ the Medicare Act.” Id. at 614–15, 104 S.Ct. 2013. B. Supreme Court cases interpreting § 405(h) The earliest relevant Supreme Court decision, Salfi, was decided prior to Perhaps most instructive is a more recent case, decided long the DRA amendment to § after the 1984 DRA amendments to § 405(h), Shalala v. 405(h). In Salfi the plaintiff brought suit to challenge the Social Illinois Council on Long Term Care, Inc., 529 U.S. 1, 120 Security Administration's “duration-ofrelationship S.Ct. 1084, 146 L.Ed.2d 1 (2000). The plaintiffs in Illinois requirements” as unconstitutional. 422 U.S. at 752–53, 95 S.Ct. Council were an association of nursing homes challenging 2457. The district court exercised jurisdiction over the case the legality and constitutionality of certain Medicare- pursuant to 28 U.S.C. § 1331. Id. at 755, 95 S.Ct. 2457. While related regulations. Id. at 5, 120 S.Ct. 1084. As in Ringer, deciding the constitutional question against the plaintiff, more the key issue in Illinois Council was whether the plaintiff's relevant for our purposes is the Court's analysis of the “serious claims “arose” under the Medicare Act (and were thus question as to whether the District Court had jurisdiction over subject to the § 405(h) jurisdictional bar). Id. at 9–10, 120 this suit” to begin with. See Salfi, Id. at 756, 95 S.Ct. 2457. S.Ct. 108.

*9 In examining the requirements of § 405(h), the Court found However, in explaining the application of § 405(h) to the that the third sentence, “No action against the United States, the case, the Court again emphasized that the effect of § 405(h) Secretary, or any officer or employee thereof shall be brought was to reach beyond normal principles of “administrative under (§ 1331 et seq.) of Title 28 to recover on any claim arising exhaustion” and “ripeness,” and prevent even the under (Title II of the Social application of normal exceptions to those doctrines. Id. at Security Act)”17 should be read as more than merely a 12, 120 S.Ct. 1084. The Court held that § 405(h) “demands the ‘channeling’ of virtually all legal attacks through the “codified requirement of administrative exhaustion” because agency.” Id. at 13, 120 S.Ct. 1084 (emphasis added). the first two sentences of § 405(h) already require Moreover, the Court explained the balancing policy administrative exhaustion. Id. at 757, 95 S.Ct. 2457.18 Those interests inherent in such a scheme: first two sentences prevent review of any decision of the Secretary other than as set out in § 405(g), which prescribes [I]t assures the agency greater “typical requirements for review of matters before an opportunity to apply, interpret, or revise administrative agency, including administrative exhaustion.” policies, regulations, or statutes without Id. at 758, 95 S.Ct. 2457. The Court thus explained that the possibly premature interference by third sentence of § 405(h) acted to bar actions under § 1331, different individual courts applying even where administrative remedies had been exhausted. Id. at “ripeness” and “exhaustion” exceptions 757, 95 S.Ct. 2457. case by case. But this assurance comes at a price, namely, occasional Somewhat less than a decade later, the Court again individual, delay-related hardship. In considered § 405(h) again in Heckler v. Ringer, 466 U.S. the context of a massive, complex health 602, 104 S.Ct. 2013, 80 L.Ed.2d 622 (1984). In Ringer, the and safety program such as Medicare, underlying factual dispute involved “challenges to the embodied in hundreds of pages of policy of the Secretary of Health and Human Services statutes and thousands of pages of often (Secretary) as to the payment of Medicare benefits for a interrelated regulations, any of which surgical procedure known as bilateral carotid body may become the subject of a legal

challenge in any of several different appears to bar “actions brought pursuant to federal question courts, paying this price may seem jurisdiction and actions brought against the United States justified. but appears to permit actions brought pursuant to diversity jurisdiction.” See id. at 488. However, the Seventh Circuit *10 Id. at 13, 120 S.Ct. 1084. As the Court noted, whatever then analyzed the codification history described supra, one may think of such a policy, it was clearly that chosen by holding that in § 2664(b) of the DRA Congress had “clearly 19 Congress in creating § 405(h). expressed” its intent not to substantively change the scope of § 405(h). Id. at 489. Thus, because the statute prior to A few salient points about § 405(h) are thus clear from the amendment had clearly barred diversity jurisdiction, the relevant Supreme Court cases. Salfi makes clear that the first revised statute continued to bar diversity jurisdiction. Id. two sentences of § 405(h) require standard administrative exhaustion of remedies prior to bringing Medicare claims Both the Third and Eighth circuits have subsequently before a district court. See Salfi, 422 U.S. at 757, 95 S.Ct. 2457. adopted the holding and analysis of Bodimetric. See Moreover, § 405(h) “demands the ‘channeling’ of virtually all Nichole Med. Equip. & Supply, Inc. v. TriCenturion, Inc., legal attacks through the agency,” making § 405(g) the “sole 694 F.3d 340, 346–47 (3d Cir. 2012); Midland Psychiatric avenue for judicial review for all ‘claim[s] arising under’ the Associates, Inc. v. United States, 145 F.3d 1000, 1004 (8th Medicare Act.” See Illinois Council, 529 U.S. at 13, 120 S.Ct. Cir. 1998). An earlier Third Circuit case, In re Univ. Med. 1084; Ringer, 466 U.S. at 615–14, 104 S.Ct. 2013. However, Ctr., Inc., 973 F.2d 1065, 1073–74 (3d Cir. 1992), appears we must acknowledge a common thread running through all to suggest (but not hold) that § 405(h) may not apply to three cases: each involved a suit brought under 28 U.S.C. § bankruptcy courts. However, that case involved a claim that 1331, a jurisdictional grant that all parties agree was barred by HHS had violated an automatic bankruptcy stay. The § 405(h) prior to the 1984 amendments and continues to be court's opinion hinged on its holding that such a claim did barred after the amendments.20 Thus, none of these cases not “arise” under the Medicare act. Id. at 1073,. In Nichole answers the question before us, namely, does § 405(h) bar Med. Equip., the Third Circuit explicitly adopted jurisdiction under § 1334? To further examine the question, we Bodimetric, noting that “Congress clearly prohibited turn to the decisions of our sister circuits. federal courts from exercising subject matter jurisdiction or diversity jurisdiction over claims arising under the [Medicare] Act.” See 694 F.3d at 347. C. Courts split over the application of § 405(h) to district courts Several circuits have thus addressed the question of whether § The decisions of our sister circuits (and the lower courts) 405(h) bars districts court jurisdiction other than pursuant only fall into two categories. The first group of cases holds that to §§ 1331 and 1346. Those circuits read the history of § 405(h) the jurisdictional bar of § 405(h) applies to cases brought to conclude that the codification error acts to carry forward the under § 1332 jurisdiction (i.e. diversity jurisdiction), original § 405(h)'s jurisdictional restrictions.21 notwithstanding the fact that § 1332 (like § 1334) is not mentioned in the statute. The second group of cases directly considers whether § 1334 jurisdiction can lie in the face of § 405(h). 2. Cases holding that § 405(h) does not bar § 1334 jurisdiction

The second category of cases come first from the Ninth 1. Cases holding that § 405(h) bars Circuit and begin with In re Town & Country Home Nursing jurisdiction Servs., 963 F.2d 1146 (9th Cir. 1991). The court there was asked to determine if the failure to exhaust administrative *11 The primary case among the first category of § 1332 remedies precluded a bankruptcy court from exercising decisions is from the Seventh Circuit in Bodimetric Health jurisdiction over state law tort and contract claims “arising out Servs., Inc. v. Aetna Life & Cas., 903 F.2d 480 (7th Cir. of the government's setoff of Medicare overpayments.” Id. at 1990). In determining whether a review of plaintiff's claims 1154. The Ninth Circuit held that “Section 405(h) only bars in a district court was precluded by § 405(h), the Seventh actions under 28 U.S.C. §§ 1331 and 1346; it in no way Circuit noted the “curious” fact that § 405(h) on its face prohibits an assertion of jurisdiction under section 1334.” Id. at

1155. The Ninth Circuit appears to have placed great weight on However, the Ninth Circuit is alone among circuit court “section 1334's broad jurisdictional grant over all matters decisions in reading § 405(h) to permit bankruptcy court conceivably having an effect on the bankruptcy estate.” Id. jurisdiction over Medicare claims under § 1334. Many However, the court did not discuss or analyze the legislative lower courts have also considered the issue of § 1334 history relied on in the Bodimetric line of cases. jurisdiction. These lower courts have split, with some assuming jurisdiction,22 and others deciding jurisdiction *12 A later Ninth Circuit case, Kaiser v. Blue Cross of was barred.23 Case going both ways have recognized and California, 347 F.3d 1107, 1114 (9th Cir. 2003), cites favorably analyzed the codification error that led to the present to both Bodimetric and Midland Psychiatric for what those omission of § 1334 from the text of § 405(h). Compare e.g. cases say about a claim that “arises under Medicare.” It appears In re Nurses' Registry & Home Health Corp., 533 B.R. 590, that the court in Kaiser assumed that the plaintiffs were 593–97 (Bankr. E.D. Ky. 2015) (assuming jurisdiction proceeding under federalquestion jurisdiction (which is under § 1334) to In re St. Johns Home Health Agency, Inc., indisputably precluded by § 405(h)), and thus the only relevant 173 B.R. 238, 245–46 (Bankr. S.D. Fla. 1994) (holding that question was whether their claims “arose” under Medicare. But § 1334 jurisdiction is barred). in a dicta discussion of whether there had been a waiver of sovereign immunity, the court noted that “11 U.S.C. § 106(a), *13 We also note some limited scholarship addressing this which refers to waivers of sovereign immunity in bankruptcy issue as well. Articles written by members of the proceedings, could not apply since any consideration of claims bankruptcy bar argue that under the “plain meaning” against the government in [debtor]'s bankruptcy would likely doctrine, bankruptcy courts' § 1334 jurisdiction is not require consideration of the merits of the Medicare claims, barred by § 405(h). See Samuel R. Maizel & Michael B. again invoking 42 U.S.C. § 405(g).” Id. at 1117. Thus, Kaiser Potere, Killing the Patient to Cure the Disease: Medicare's at least hints that the court would have come to the opposite Jurisdictional Bar Does Not Apply to Bankruptcy Courts, conclusion of In re Town & Country, i.e. by holding that 32 Emory Bankr. Dev. J. 19, 66 (2015); Peter R. Roest, bankruptcy jurisdiction could not trump the exhaustion Recovery of Medicare and Medicaid Overpayments in requirements of §§ 405(g) and (h). Bankruptcy, 10 Annals Health L. 1, 1 (2001). Conversely, an article written by current and former counsel for HHS argues A more recent Ninth Circuit decision, Do Sung Uhm v. that, based on the legislative history, the amended § 405(h) Humana, Inc., 620 F.3d 1134 (9th Cir. 2010) attempted to should have the same effect as the prior version, i.e. barring address what it characterized as a possible conflict between bankruptcy court jurisdiction. See John Aloysius Cogan Jr. & Kaiser and In re Town & Country. The Do Sung Uhm court Rodney A. Johnson, Administrative Channeling Under the cites Kaiser for the proposition that “[j]urisdiction over Medicare Act Clarified: Illinois Council, Section 405(h), and cases ‘arising under’ Medicare exists only under 42 U.S.C. the Application of Congressional Intent, 9 Annals Health L. § 405(g), which requires an agency decision in advance of 125, 125 (2000). judicial review.” Id. at 1140–41. In a footnote though, the court acknowledges the tension between Kaiser's broad reading of § 405(h) and In re Town & Country's more narrow reading, but reconciles the two on the grounds that 3. Mandamus jurisdiction and § 405(h) In re Town & Country relied on the “special status” of bankruptcy court jurisdiction over bankruptcy issues. Id. at We note in passing a related issue: whether § 405(h) bars 1141 n. 11. The court concludes that In re Town & mandamus jurisdiction exercised pursuant to 28 U.S.C. § 1361. Country's reading of 42 U.S.C. § 405(h) applies “only to As noted supra, n. 20, this circuit has not decided that issue. actions brought under § 1334, while not bearing on the See Lifestar Ambulance Serv., Inc. v. United States, 365 F.3d relationship between § 405(h) and other jurisdictional 1293, 1295 n. 3 (11th Cir. 2004). The Supreme Court has also provisions such as § 1332.” Id. The Ninth Circuit thus joins repeatedly declined to decide whether mandamus jurisdiction the other circuit courts in unanimously opining that § is prohibited by § 405(h). See e.g. Your Home Visiting Nurse 405(h) bars diversity jurisdiction under § 1332, Servs., Inc. v. Shalala, notwithstanding the omission of § 1332 from the text of § 525 U.S. 449, 456 n. 3, 119 S.Ct. 930, 142 L.Ed.2d 919 (1999). 405(h). However, the great weight of authority from other circuits has almost uniformly found that § 405(h) does not necessarily

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 146 In re Bayou Shores SNF, LLC, --- F.3d ---- (2016) deprive district courts of mandamus jurisdiction over Medicare [4] Bayou Shores' primary argument, and the primary claims.24 argument of courts holding that § 1334 jurisdiction is not barred § 405(h), is relatively straightforward: the text of the Superficially at least, there is some commonality between the third sentence of § 405(h) does not mention § 1334, and thus, issue in those cases regarding § 1361, and the issue in our case under the “plain meaning” of the statute § 1334 jurisdiction involving § 1334, because both jurisdictional provisions are not is not barred by § 405(h). Bayou Shores is certainly correct listed in the text of § 405(h). The commonality is just that that “when [a] statute's language is plain, the sole function though, superficial. As Judge Friendly of the Second Circuit of the courts—at least where the disposition required by the accurately explained, when § 405(h) was passed in 1939, text is not absurd—is to enforce it according to its terms.” mandamus jurisdiction was not one of the jurisdictional Lamie v. U.S. Tr., 540 U.S. 526, 534, 124 S.Ct. 1023, 157 provisions contained in Section 24 of the Judicial Code. See L.Ed.2d 1024 (2004) (internal quotation marks and citations Ellis v. Blum, 643 removed); see also Owner–Operator Indep. Drivers Ass'n, Inc. v. Landstar Sys., Inc., 622 F.3d 1307, 1327 (11th Cir. 25 F.2d 68, 81 (2d Cir. 1981). Thus, unlike § 1334, there is no 2010) (holding that “[t]here is no reason for this Court to argument to be made that the codification of section 24 into rewrite a statute because of an alleged scrivener error unless Title 28 had any impact on the availability of mandamus relief a literal interpretation would lead to an absurd result.”) under § 1361. See id.; see also Ganem v. Heckler, 746 F.2d 844, 851 (D.C. Cir. 1984) (noting that absence of § 1361 was [5] But that is not the end of the analysis because this unrelated to codification error because even in original version case is governed by a particular canon in statutory of § 405(h), § 24 of the Judicial Code did not include District construction regarding the codification of law, i.e. the of Columbia's common law jurisdiction to issue mandamus process of converting and organizing the Statues at Large writs). into the U.S. Code. Since virtually the founding of the Republic, it has been recognized that when legislatures *14 However, the issue of whether a district court can exercise codify the law, courts should presume that no substantive mandamus jurisdiction related to Medicare claims, change was intended absent a clear indication otherwise. For notwithstanding the § 405(h) bar, is neither in front of the court, example, in the oldest case we have been able to locate,26 nor necessary to resolve the current dispute. As previously, we Taylor v. Delancy, 2 Cai. Cas. 143, 151 (N.Y. Sup. Ct. thus decline to decide the issue. See Lifestar Ambulance Serv., 365 F.3d at 1295 n. 3. 1805), the New York Supreme Court of Judicature27 held “that where the law, antecedently to the revision was settled, either by clear expressions in the statutes, or adjudications on them, D. The Bankruptcy Court Lacked Jurisdiction Under § the mere change of phraseology shall not be deemed or 405(h) construed a change of the law, unless such phraseology [3] With that considerable background in mind, we evidently purports an intention in the legislature to work a turn now to the issue in this case: did 42 U.S.C. § 405(h) bar change.” the bankruptcy court below from taking jurisdiction over Bayou Shore's Medicare provider agreement under 28 *15 The Supreme Court appears to have recognized the canon U.S.C. § 1334? Because we are persuaded that the 1984 at least as early as Stewart v. Kahn, 78 U.S. 493, 502, 11 Wall. amendments to § 405(h) were a codification and not a 493, 20 L.Ed. 176 (1870), where the Court held that “[a] change substantive change, we align ourselves with the Seventh, of language in a revised statute will not change the law from Eighth, and Third Circuits and hold that § 405(h) bars § 1334 what it was before, unless it be apparent that such was the jurisdiction over claims that “arise under [the intention of the legislature.” The Court reiterated the principle Medicare Act].” in United States v. Ryder, 110 U.S. 729, 740, 4 S.Ct. 196, 28 L.Ed. 308 (1884), holding that “[i]t will not be inferred that the legislature, in revising and consolidating the laws, intended to 1. The Deficit Reduction Act of 1984 change their policy, unless such intention be clearly amendment to § 405(h) was a codification expressed.” This canon of statutory construction has remained and did not substantively change the law. undisturbed since that time. See e.g. McDonald v. Hovey, 110 U.S. 619, 629, 4 S.Ct. 142, 28 L.Ed. 269 (1884); Logan v.

United States, 144 U.S. 263, 302, 12 S.Ct. 617, 36 L.Ed. 429 1026 (1942), the Court had already determined that the (1892), abrogated on other grounds, Witherspoon v. State of more specific patent venue provisions in the old Judicial Ill., 391 U.S. 510, 88 S.Ct. 1770, 20 L.Ed.2d 776 (1968); Code of 1911 trumped more general venue provisions for Holmgren v. United States, 217 U.S. 509, 520, 30 S.Ct. 588, 54 civil suits.29 The only issue therefore was whether the 1948 L.Ed. 861 (1910); Anderson v. Pac. Coast S.S. Co., 225 U.S. recodification (which recodified § 48 of the Judicial Code 187, 199, 32 S.Ct. 626, 56 L.Ed. 1047 (1912); United States v. to 28 U.S.C. § 1400(b)) had substantively changed the Sischo, 262 U.S. 165, 168–69, 43 S.Ct. 511, 67 L.Ed. 925 patent venue statute. Fourco Glass, 353 U.S. at 225, 77 (1923); Hale v. Iowa State Bd. of Assessment & Review, 302 S.Ct. 787. Noting that neither the legislative history, nor the U.S. 95, 102, 58 S.Ct. 102, 82 L.Ed. 72 (1937); Fourco Reviser's Notes, indicated that any substantive change was Glass Co. v. Transmirra Products Corp., 353 U.S. 222, 227, 77 intended, the Court reasoned that “[t]he change of S.Ct. 787, 1 L.Ed.2d 786 (1957); United States v. FMC Corp., arrangement, which placed portions of what was originally 84 S.Ct. 4, 7, 11 L.Ed.2d 20 (Goldberg, Circuit Justice 1963); a single section in two separated sections cannot be United States v. Welden, 377 U.S. 95, 98 n. 4, 84 S.Ct. 1082, regarded as altering the scope and purpose of the 12 L.Ed.2d 152 (1964); Tidewater Oil Co. v. enactment. For it will not be inferred that Congress, in United States, 409 U.S. 151, 162, 93 S.Ct. 408, 34 L.Ed.2d 375 revising and consolidating the laws, intended to change (1972); Cass v. United States, 417 U.S. 72, 82, 94 S.Ct. 2167, their effect, unless such intention is clearly expressed.” Id. 40 L.Ed.2d 668 (1974); Aberdeen & Rockfish R. Co. v. Students at 227, 77 S.Ct. 787 (internal quotation marks and citations Challenging Regulatory Agency Procedures omitted) (quoting from Anderson v. Pac. Coast S.S. Co., (S.C.R.A.P.), 422 U.S. 289, 309 n. 12, 95 S.Ct. 2336, 45 225 U.S. 187, 198, 32 S.Ct. 626, 56 L.Ed. 1047 (1912)). L.Ed.2d 191 (1975); Muniz v. Hoffman, 422 U.S. 454, 470, 95 The Court thus held that no substantive change to 28 U.S.C. S.Ct. 2178, 45 L.Ed.2d 319 (1975); Fulman v. United States, § 1400(b) had occurred during the 1948 recodification and 434 U.S. 528, 538, 98 S.Ct. 841, 55 L.Ed.2d 1 (1978); Walters the result in Stonite Products dictated the outcome of the v. Nat'l Ass'n of Radiation Survivors, 473 case. Id. at 227-28, 77 S.Ct. 787. U.S. 305, 318, 105 S.Ct. 3180, 87 L.Ed.2d 220 (1985); Finley v. United States, 490 U.S. 545, 554, 109 S.Ct. 2003, 104 *16 Similarly, in Tidewater Oil Co. v. United States, 409 U.S. L.Ed.2d 593 (1989); Ankenbrandt v. Richards, 504 U.S. 689, 151, 162, 93 S.Ct. 408, 34 L.Ed.2d 375 (1972), the Court 700, 112 S.Ct. 2206, 119 L.Ed.2d 468 (1992); Keene Corp. v. rejected the argument that the 1948 Judicial Code revisions United States, 508 U.S. 200, 209, 113 S.Ct. 2035, 124 L.Ed.2d substantively changed the existing law concerning appellate 118 (1993); Scheidler v. Nat'l Org. for Women, Inc., 547 U.S. court jurisdiction over interlocutory appeals in Government 9, 20, 126 S.Ct. 1264, 164 L.Ed.2d 10 (2006); John R. Sand & Gravel Co. v. United States, 552 U.S. 130, 136, 128 S.Ct. 750, civil antitrust cases. The 1948 revision to 28 U.S.C. § 169 L.Ed.2d 591 (2008). 1292(a)(1) allowed interlocutory appeals of district court order to the courts of appeals, “except where a direct review may be As it happens, a number of these cases from the 20th had in the Supreme Court.” Id. Under then-existing law, century arise from an event that directly touches on the appellate courts had no jurisdiction over any appeals in issues in our case: the 1948 recodification of the Judicial Government civil antitrust cases (which were appealed directly to the Supreme Court), and interlocutory appeals to the Code.28 Supreme Court in Government civil antitrust cases were not permitted. Id. at 154–56, 160, 93 S.Ct. 408. The Court thus In one of the earlier cases to examine the 1948 reasoned that a possible interpretation of the new language recodification, Fourco Glass Co. v. Transmirra Products added by the 1948 revisions, “except where a direct review may Corp., 353 U.S. 222, 77 S.Ct. 787, 1 L.Ed.2d 786 (1957), be had in the Supreme Court,” was that appellate court the Court considered whether the recodification had jurisdiction over interlocutory appeals in Government civil substantively changed venue rules in patent cases. The anti-trust cases was now available (contrary to prior law) issue was whether or not the specific patent venue statute, because “direct review” in the Supreme Court of an 28 U.S.C. § 1400(b) was supplemented by the more general interlocutory appeal could not “be had.” Id. at 162, 93 S.Ct. (and more expansive) civil suit venue statute, 28 U.S.C. § 408. 1391. Id. at 222, 77 S.Ct. 787. The Court first noted that in a pre-1948 recodification case, Stonite Products Co. v. Melvin Lloyd Co., 315 U.S. 561, 62 S.Ct. 780, 86 L.Ed.

Citing to Fourco Glass, the Court rejected that interpretation expressed some incredulity at the proposition that the major because no such change to existing law had been “clearly policy change petitioners argued for could be effected by expressed” by the 1948 revisions. “To the contrary, the Congress without any mention of it in any of the legislative Revisers' Notes fail to reveal any intention to expand the scope history or notes: of the pre-existing jurisdiction of the courts of appeals over interlocutory appeals; the new § 1292 is described merely as a *17 In view of the express consolidation of a number of previously separate code disavowals in the House and Senate provisions—including the general interlocutory appeals Reports on the revisions of both the provision—‘with necessary changes in phraseology to effect Criminal Code and the Judicial the consolidation.’ ” Id. at 162–63, 93 S.Ct. 408. The Court thus Code, it would seem difficult at best concluded that the 1948 revisions did not substantively expand to argue that a change in the the jurisdiction of appellate courts. Id. at 163, 93 S.Ct. 408. substantive law could nevertheless be effected by a change in the Muniz v. Hoffman, 422 U.S. 454, 456–57, 95 S.Ct. 2178, 45 language of a statute without any L.Ed.2d 319 (1975) arose out of a labor dispute between the indication in the Revisers' Note of San Francisco Typographical Union and a local daily that change. It is not tenable to argue newspaper, in which the union and its officers had been cited that the Revisers' Note to § 3692, for criminal contempt in violating certain court orders and although it explained in detail what subsequently denied a jury trial in the criminal contempt words were deleted from and added proceedings. A key issue in the case was whether the Wagner to what had been § 11 of the Norris- LaGuardia Act, simply did not and Taft-Hartley Acts,30 which authorized courts to grant bother to explain at all, much less in certain injunctions, permitted jury trials to those found in detail, that an admittedly substantial contempt of the injunctions. Id. at 461, 95 S.Ct. 2178. The right was being conferred on parties appeared to agree that prior to the 1948 revisions of the potential contemnors that had been 31 Criminal Code, a contemnor had no right to a jury trial in rejected in the defeat of the Ball contempt actions to enforce injunctions issued under the amendment the previous year and Wagner and Taft-Hartley Acts, notwithstanding the jury that, historically, contemnors had requirements in § 11 of the earlier passed Norris-LaGuardia never enjoyed. Act.32 Petitioners argued however that in recodifying § 11 of See id. at 472, 95 S.Ct. 2178. Norris-LaGuardia as 18 U.S.C. § 3692 in 1948, Congress had overruled its prior policy of not permitting jury trials in Finley v. United States, 490 U.S. 545, 553–54, 109 S.Ct. 2003, contempt actions to enforce injunctions issued under the 104 L.Ed.2d 593 (1989), involved a question of whether the Wagner and Taft-Hartley Acts. Id. at 467, 95 S.Ct. 2178. 1948 recodification of the Judicial Code substantively created new “pendent-party” jurisdiction when it recodified the Federal The Court rejected this argument, holding that “[w]e cannot Tort Claims Act, 28 U.S.C. accept the proposition that Congress, without expressly so providing, intended in § 3692 to change the rules for § 1346(b) (the “FTCA”).33 Writing for the Court, Justice Scalia enforcing injunctions,” which rules existed when § 11 was rejected that argument, holding that “[u]nder established originally passed. See Muniz, 422 U.S. at 468, 95 S.Ct. canons of statutory construction, it will not be inferred that 2178. The Court examined the legislative history of the Congress, in revising and consolidating the laws, intended to recodification and the Reviser's Notes, which consistently change their effect unless such intention is clearly expressed.” expressed that no substantive change was intended by the Id. at 554, 109 S.Ct. 2003 (internal quotation marks omitted) revision. Id. at 467–469, 95 S.Ct. 2178. Citing Fourco (quoting from Anderson v. Pac. Coast S.S. Co., 225 U.S. 187, Glass, the Court reiterated the longstanding rule that “[n]o 199, 32 S.Ct. 626, 56 L.Ed. 1047 (1912) and citing to United changes of law or policy ... are to be presumed from States v. Ryder, 110 U.S. 729, 740, 4 S.Ct. 196, 28 L.Ed. 308 changes of language in the revision unless an intent to make (1884)). Finding “no suggestion, much less a clear expression, such changes is clearly expressed.” Id. at 472, 95 S.Ct. 2178 that the minor rewording at issue here imported a substantive (internal quotation marks omitted). The Court thus change,” the Court held that the pre-codification interpretation

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 149 In re Bayou Shores SNF, LLC, --- F.3d ---- (2016) of the statute continued to hold (i.e. no “pendent-party” explained in detail what words were deleted ... and added jurisdiction under the FTCA). Id. at 554–56, 109 S.Ct. 2003. ..., simply did not bother to explain at all, much less in detail, that an admittedly substantial right was being Finally, our own court has recently applied this canon in conferred ...”). Koch Foods, Inc. v. Sec'y, U.S. Dep't of Labor, 712 F.3d 476 (11th Cir. 2013). There we held that certain amendments to 49 *18 Moreover we do not find it significant, contrary to U.S.C. § 31105 enacted by the Revision of Title 49, United Bayou Shores' suggestion, that Congress enacted the error States Code Annotated, “Transportation”, Pub. L. No. 103– into positive law when it passed the DRA in 1984. There is 272, 108 Stat. 745 (1994) were simply revisions and no evidence in the DRA that Congress “clearly expressed” codifications, and thus did not change the pre-amendment an intention to reverse decades of Medicare and Social scope of the law. Koch Foods, 712 F.3d at 485. We noted in Security Act policy and give bankruptcy courts parallel Koch Foods that (much like § 2664(b) of the DRA amendments jurisdiction with HHS to adjudicate Medicare claims (and here) the recodification statute cautioned that the revisions and parallel jurisdiction with the Social Security Administration codifications were enacted “without substantive change,” and to adjudicate Social Security claims). Again, if Congress that the legislative history (like the legislative history of the intended such an important expansion of bankruptcy court DRA here) emphasized that the changes were not substantive. jurisdiction to be enacted in a recodification, one would Id. The interpretive canon used in Koch Foods is the one we expect to find some indication in the statute or legislative use in this case: “As the Supreme Court has observed, ‘it will history stating as much. See Tidewater Oil, 409 U.S. at not be inferred that Congress, in revising and consolidating the 162–63, 93 S.Ct. 408 (finding no indication in Reviser's laws, intended to change their effect unless such intention is Notes or legislative history that Congress intended clearly expressed.’ ” Id. at 486 (quoting from Finley, 490 U.S. recodification to expand federal appellate court at 554, 109 S.Ct. 2003). jurisdiction). Bayou Shores points to no such indication, nor are we able to find one. We turn then to applying the recodification canon of statutory construction to our case. It is clear that the Office To the contrary, the statute itself tells us that the amendment in of the Law Revision Counsel made an error in revising § question is not to be interpreted as making any substantive 405(h) in 1976 (and again in 1982). Rather than include the change to the law: “none of such amendments shall be full range of jurisdictional grants that were clearly construed as changing or affecting any right, liability, status, or forbidden under the prior law,34 the Law Revision Counsel interpretation which existed (under the provisions of law (who it must be recalled has no authority to pass laws or involved) before that date.” See DRA, § 2664(b); see also Koch Foods, 712 F.3d at 485 (noting that the statute “expressly states alter the jurisdiction of federal district courts)35 mistakenly that no substantive change is intended by the revisions to the decided to update the cross-reference only to § 1346 and § language”).36 The legislative history of the bill similarly 1331 of the new Title 28. We find no indication whatsoever, let alone a “clear indication,” in the Law Revision emphasizes that the amendments in § 2663 (including the Counsel's Codification note that the revisers intended or amendment to § 405(h)) were not intended to be substantive. were suggesting an expansion of district court jurisdiction See H.R. Rep. No. 98-432, pt. 2, at 1663 (1984) (noting that the to review Medicare and Social Security claims, thereby bill “makes certain corrections of spelling, punctuation, cross- reversing forty years of Congressional policy. On the references and other clerical amendments to the Social Security contrary, the title of the note (“Codification”) and its Act and related provisions in the Internal Revenue Code”). contents indicate that the change was a mere codification Rep. Dan Rostenkowski (the original sponsor of H.R. 3805, (i.e. updating the cross-reference to “section 24 of the containing the “technical corrections” that were merged into Judicial code” to its new location in Title 28 of the U.S. the DRA) “emphasize[d] that this bill intends simply to correct Code), and not a substantive change. One would expect that technical errors and to better reflect the policies established by if the revisers intended the kind of fundamental change in the Congress in enacting the original legislation.” 129 Cong. policy and expansion of the jurisdiction of bankruptcy Rec. 23321, 23440 (1983). courts that Bayou Shores suggests, it would merit some mention. See Muniz, 422 U.S. at 472, 95 S.Ct. 2178 (“It is Per long standing Supreme Court precedent, we “will not ... not tenable to argue that the Revisers' Note ..., although it infer[ ] that the legislature, in revising and consolidating [§

405(h) ] intended to change their policy, unless such intention Second, Bayou Shores points to § 2663(a)(15)(C), and be clearly expressed.” See United States v. Ryder, 110 U.S. 729, characterizes it as denying certain benefits to college 740, 4 S.Ct. 196, 28 L.Ed. 308 (1884). Here, we find no clear students that they otherwise would have received under the expression of any intent to change Congressional policy with prior version of the statute. Appellant's Reply Br. at 5. The respect to bankruptcy court jurisdiction over Medicare claims. relevant text of the amendment orders that “(C) Section To the contrary, the statute and legislative history detailed 222(b)(4) of such Act is amended by striking out ‘full-time above expresses an intent not to substantively amend § student’ and inserting in lieu thereof ‘fulltime elementary 405(h).37 or secondary school student’.” See DRA at § 2663(a)(15)(C). A close reading of the legislative history In reply, Bayou Shores attempts to downplay the mandate of § suggests that Bayou Shores is mistaken about this provision 2664(b) in the DRA by arguing that despite the statute's as well. Section 222(b)(4) of the Social Security Act command that the amendments are not to be interpreted as (codified at 42 U.S.C. § 422) was added by substantive, certain of the amendments were in fact Congress in 1965.40 At the time § 222(b)(4) was added to the substantive. See Appellant's Reply Br. at 2-9. We are not larger section, the term “full-time student” was persuaded by this argument. As an initial matter, Bayou Shores essentially asks us to ignore § 2664(b) and Congress's “as defined and determined under section 202(d).”41 command that the amendments are not substantive, which we Turning then to Section 202(d), that section was amended are clearly not free to do. In Muniz the Supreme Court indicated in 1981 (prior to the DRA in 1984) in a section titled that “[t]he nature of the revision process itself requires the “Elimination of child's insurance benefits in the case of courts, including this Court, to give particular force to the many children age 18 through 22 who attend postsecondary express disavowals in the House and Senate Reports of any schools.”42 The 1981 amendment makes clear that “full intent to effect substantive changes in the law.” See Muniz, 422 time student” was to be defined as elementary and U.S. at 472 n. 11, 95 S.Ct. 2178. Here we think it most highschool students, not college students.43 A Senate reasonable to give force to Congress's express disavowals in the DRA itself and in the legislative history “of any intent to report issued the following year noted that under the prior effect substantive changes in the law.” law children beneficiaries could receive benefits until they were 22 as long as they were in school, while the 1981 *19 Moreover, the two examples that Bayou Shores cites amendments eliminated those benefits for anyone over as “substantive” amendments in § 2663 of the DRA are, on 18 attending post-secondary schooling.44 It thus appears that closer review, at least arguably nonsubstantive. First, the 1984 amendment in the DRA referenced by Bayou Shores Bayou Shores argues that § 2663(e)(3) of the DRA was a “technical correction” because it simply updated § expanded criminal liability for impersonating certain 222(b)(4) of the statute to be consistent with the definitions in persons in order to obtain information about their Social the earlier amended § 202(d). Security benefits. Appellant's Reply Br. at 3-4. The language in § 2663(e)(3) orders that “Section 1107(b) of *20 Finally, even if we assume for the sake of argument that [the Social Security Act] is amended by striking out ‘former Bayou Shores has correctly identified two substantive changes wife divorced,’ each place it appears and inserting in lieu in § 2663, the examples Bayou Shores relies on are minor thereof ‘divorced wife, divorced husband, surviving substantive amendments at best, compared to the massive shift divorced wife, surviving divorced husband, surviving in policy that giving bankruptcy courts parallel authority to divorced mother, surviving divorced father,’.” The House adjudicate Medicare disputes would represent. This is akin to committee report on the bill indicates that this amendment finding a few hidden firecrackers in the bill and thus inferring was intended to bring Section 1107(b) into conformity with the presence of an atomic bomb. In other words, the presence an earlier amendment eliminating gender-based of two minor substantive changes in § 2663 (assuming they are 38 distinctions in the Social Security Act. Thus, arguably the substantive), can hardly justify interpreting the amendment to earlier amendment had already eliminated gender § 405(h) as enacting a significant change in Congressional distinctions in Section 1107(b), and the DRA amendments policy by creating bankruptcy court jurisdiction over Medicare merely revised the text of Section 1107(b) to correctly claims. reflect those earlier amendments.39

Therefore, we conclude that because the previous version of § Importantly, the Court rejected MCorp's broad reading of 405(h) precluded bankruptcy court review of Medicare claims 28 U.S.C. § 1334(b), holding that “[s]ection 1334(b) under § 1334, so too must the newly revised § 405(h) bar such concerns the allocation of jurisdiction between bankruptcy actions. courts and other ‘courts,’ and, of course, an administrative agency such as the Board is not a ‘court.’ ” Id. at 41–42, 112 S.Ct. 459. That is precisely the situation here: Bayou Shores' provider agreement was terminated by the Centers 2. § 1334 does not give bankruptcy courts special jurisdiction over Medicare claims for Medicare & Medicaid Services (“CMS”), which is an administrative agency within HHS and not a “court.” Thus, In light of the above explanation, this Court is constrained to § 1334(b) does not concern the allocation of jurisdiction disagree with the Ninth Circuit's In re Town & Country between the bankruptcy court and HHS, and cannot trump opinion, and thus holds that § 405(h) bars a bankruptcy court the § acting pursuant to § 1334 from exercising jurisdiction over 405(h) jurisdictional bar. Medicare claims. However, both the Ninth Circuit in Do Sung Uhm v. Humana, Inc., 620 F.3d 1134 (9th Cir. 2010) and Bayou *21 Bayou Shores raises an additional argument relating to the Shores here argue that § 1334 has a “special status” that is 1984 amendments to § 1334. Bayou Shores points out that the different and distinct from other jurisdictional provisions (such Bankruptcy Amendments and Federal Judgeship Act of 1984, as § 1332).45 In particular, Bayou Shores argues that the text of Pub. L. No. 98– 353, 98 Stat 333(July 10, 1984) (the § 1334(b) itself defines the expansive nature of bankruptcy “Bankruptcy Act”) was passed only eight days prior to passage court jurisdiction: “notwithstanding any Act of Congress that of the DRA, and among other things significantly enlarged the 47 confers exclusive jurisdiction on a court or courts other than the scope of bankruptcy court jurisdiction. According to Bayou district courts, the district courts shall have original but not Shores, because “28 U.S.C. § 1334 was enacted first, and 42 exclusive jurisdiction of all civil proceedings arising under title U.S.C. § 405(h) was enacted days later,” Congress's failure to 11.” See 28 U.S.C. § 1334(b). However, we read the Supreme include § 1334 in § 405(h) indicates a positive intent to expand Court's opinion in Bd. of Governors of Fed. Reserve Sys. v. the scope of bankruptcy court jurisdiction. Appellant's Br. at MCorp Fin., Inc., 502 U.S. 32, 112 S.Ct. 459, 116 L.Ed.2d 358 45. We disagree. See N. L. R. B. v. Plasterers' Local Union No. (1991) as effectively foreclosing that argument. 79, Operative Plasterers' & Cement Masons' Int'l Ass'n, AFL– CIO, 404 U.S. 116, 129–30, 92 S.Ct. 360, 30 L.Ed.2d 312 In MCorp Fin., the Court held that bankruptcy law's (1971) (“The Court has frequently cautioned that it is at best automatic stay provision (11 U.S.C. § 362) could not stay treacherous to find in Congressional silence alone the adoption an administrative proceeding by the Board of Governors of of a controlling rule of law.”) (quotation marks omitted). the Federal Reserve System against MCorp Financial. The Court first found that the administrative proceeding fell As an initial matter, reading too much into the significance of squarely into the exception in § 362 for proceedings to the timing of the passage of these acts is at best speculative, enforce a “governmental unit's police or regulatory power.” particularly since the DRA had nothing to do with bankruptcy Id. at 39–40, 112 S.Ct. 459.46 The Court rejected MCorp court jurisdiction, nor does Bayou Shores point to any evidence Financial's argument that for the exception to apply, the suggesting that Congress had the Bankruptcy Act in mind when 48 bankruptcy court would need to determine in the first passing the DRA. Moreover Bayou Shores' timing argument instance whether the exercise of regulatory power was also cuts the opposite way: one would equally expect that if legitimate; the Court held that such a reading “would Congress were inclined to expand the jurisdiction of require bankruptcy courts to scrutinize the validity of every bankruptcy courts to include hearing Medicare and Social administrative or enforcement action brought against a Security claims, it would have done that in the Bankruptcy Act bankrupt entity,” and that “[s]uch a reading is problematic, that it had just passed, rather than burying it as a “Technical both because it conflicts with the broad discretion Congress Correction” in a bill wholly unrelated to bankruptcy courts (i.e. has expressly granted many administrative entities and the DRA). because it is inconsistent with the limited authority Congress has vested in bankruptcy courts.” Id. at 40, 112 S.Ct. 459 (emphasis added).

3. Barring bankruptcy court jurisdiction is consistent decisions (see e.g. In re Bayou Shores SNF, 525 B.R. at with Congressional Medicare policy 168), that is effectively what the bankruptcy court did. After holding an evidentiary hearing on the conditions at The bankruptcy court also relied on what was essentially a Bayou Shores' facility, the bankruptcy court apparently policy argument about the wisdom of allowing a bankruptcy decided that the three deficiencies Bayou Shores was cited court rather than HHS to adjudicate Medicare claims: for were not particularly serious. Id. at 163. The court also Consider the following hypothetical: a decided that Bayou Shores had corrected each of the debtor that operates a skilled nursing deficiencies it was cited for and provided adequate facility has its Medicare provider assurances that it would be in compliance with the agreement terminated because it was Medicare regulations in the future. Id. at 170–171. improperly cited for noncompliance. Notwithstanding HHS's determination to the contrary, the The debtor immediately appeals the bankruptcy court deemed the health and safety of Bayou finding of noncompliance. But because Shores' patients free of immediate jeopardy. The practical CMS stops payment for Medicare outcome of the bankruptcy court's decision was thus a residents, the debtor is forced to file for reversal of HHS's decision: the bankruptcy court rolled bankruptcy. If the Court were to adopt back the termination, gave Bayou Shores back its provider HHS's view, the debtor in that agreements, and effectively prevented HHS from hypothetical scenario could never terminating Bayou Shores from the Medicare/ Medicaid assume its Medicare provider agreement program for its repeated deficiencies. That was functionally since it is highly unlikely the appeals a decision on the merits of the underlying HHS decision, process will be complete before the and an interference with HHS's role in deciding who is 51 debtor files for bankruptcy. eligible to participate in Medicare/ Medicaid.

The Government for its part disputes the bankruptcy court's See In re Bayou Shores, 525 B.R. at 169.49 In other words, version of the facts. With respect to the three violations, the unless the bankruptcy court can take jurisdiction over the picture painted by the Government suggests far more serious provider agreements, Bayou Shores would cease to exist as issues with the care provided by Bayou Shores to its patients. a going concern long before the HHS administrative Federal Appellee Br. appeals process could complete.50 at 14-16; State Appellee's Br. at 3-4.52 Moreover, the *22 While we are not unsympathetic to this argument, the Government argues that simply coming back into compliance choice of whether the bankruptcy court or HHS is best after each violation was not the issue. Rather, terminating positioned to adjudicate Medicare claims is a policy repeat offenders like Bayou Shores was a key part of decision that the bankruptcy court was not empowered to Congress's overhaul of nursing home regulations, and was make. As explained at length above, § 405(h) and (g) intended to stop “instances in which substandard providers had restricts the role of district courts to a limited review of final avoided termination from Medicare by claiming that they had HHS decisions, thus reflecting Congressional policy to let cured serious violations of safety standards, only to lapse back HHS adjudicate those claims in the first instance. The into noncompliance after the threat of administrative sanction Supreme Court explained in Illinois Council that the review was removed.” Federal Appellee's Br. at 50-51. provisions of § 405(h) and (g) give HHS a greater opportunity to “apply, interpret, or revise policies, *23 In any event, we do not need to decide whose version of regulations, or statutes without possibly premature the facts is correct, nor do we need decide whether the interference by different individual courts.” See 529 U.S. at bankruptcy court's decision on the merits of HHS's action was 13, 120 S.Ct. 1084. correct. HHS, not the bankruptcy court, has been charged by Congress with administering the Medicare Act and regulating Indeed, the bankruptcy court's actions here illustrate the Medicare providers. Indeed, the bankruptcy court's action here kind of “premature interference” that Illinois Council had stymied the direct statutory mandate from Congress to HHS to in mind. While the bankruptcy court went to great length to take appropriate action (including potentially terminating a deny that it was reviewing the merits of HHS's findings or provider agreement) when, as here, a survey determines that a

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 153 In re Bayou Shores SNF, LLC, --- F.3d ---- (2016) nursing home's condition “immediately jeopardize[s] the health Shores has also not shown that any exception to standard or safety of its residents.” See 42 U.S.C. § 1395i– administrative exhaustion principles should apply here. See McCarthy v. Madigan, 503 U.S. 140, 146–149, 112 S.Ct. 3(h)(2).53 And though charged with broad jurisdiction to deal 1081, 117 L.Ed.2d 291 (1992) (explaining the “three broad with issues related to a debtor's bankruptcy estate, bankruptcy sets of circumstances” in which exceptions to courts generally lack the institutional competence or technical administrative exhaustion may apply). expertise of HHS to oversee the health and welfare of nursing home patients or to interpret and administer a “massive, Thus, even if we were to assume that § 405(h) does not bar complex health and safety program such as Medicare.” See jurisdiction under § 1334, the bankruptcy court erred by not Illinois Council, 529 U.S. at 13, 120 S.Ct. 1084. Or at least, that dismissing Bayou Shores' claim for failure to exhaust Bayou is the judgment of Congress we derive from the enactment of § Shores' administrative remedies first. 405(h) in 1939 (and the recodification in 1984).

IV. OTHER ARGUMENTS Bayou Shores raises a number of other issues that it contends 4. § 405(h) clearly requires administrative exhaustion warrant reversal of the district court's Order. For the reasons Finally, while much of the above dispute concerns the third below, we do not find these arguments persuasive. sentence of § 405(h) and whether it completely bars bankruptcy jurisdiction under § 1334, we do not overlook A. Mootness the effect of the first two sentences as well. The bankruptcy *24 [6] Bayou Shores argues that this dispute is either court dismissed the second sentence as merely limiting “the constitutionally moot or equitably moot. With respect to ability of federal courts to review the findings of fact or an constitutional mootness, Bayou Shores contends that because agency decision.” In re Bayou Shores SNF, 525 B.R. at 167. the bankruptcy court's injunction and automatic stay have Though correct in a minimalist sense, we think that is an been dissolved, no live controversy between the parties overly narrow understanding of the statute. The Supreme remains. The Government contends that at least two live Court made clear in Salfi that the first two sentences of § issues remain. First, the bankruptcy court's stay and injunction 405(h) “assure that administrative exhaustion will be (even if now dissolved) prevented the Government from required” and “prevent review of decisions of the Secretary stopping payments to Bayou Shores during the pendency of save as provided in the Act, which provision is made in § the bankruptcy case. The Government argues that it intends to 405(g).” 422 U.S. at 757, 95 S.Ct. 2457. The third sentence, seek recoupment of these payments if the bankruptcy court's according to the Court in Salfi, means that no action may orders are found to be invalid. Second, contrary to Bayou be brought pursuant to any jurisdiction other than § 405(g), Shores' contention that the injunction and stay have dissolved, even where administrative remedies have been exhausted. the Government contends that the bankruptcy court's Id.; see also Illinois Council, 529 U.S. at 13, 120 S.Ct. Confirmation Order continues to indefinitely enjoin the 1084. Government from terminating the provider agreements.54 Bayou Shores does not dispute that its claims have not been administratively exhausted; in fact, as of the date of the oral [7] [8] A case is constitutionally moot when “when the issues argument, Bayou Shores' administrative appeal was still presented are no longer ‘live’ or the parties lack a legally pending in front of an administrative law judge at HHS. See cognizable interest in the outcome.” Powell v. McCormack, 395 Oral Argument, March 29, 2016. Putting aside the U.S. 486, 496, 89 S.Ct. 1944, 23 L.Ed.2d 491 (1969). Put jurisdictional question then, neither Bayou Shores nor the another way, “[a] case is moot when it no longer presents a live bankruptcy court has explained why standard principles of controversy with respect to which the court can give administrative exhaustion should not prevent a district meaningful relief.” Florida Ass'n of Rehab. Facilities, Inc. v. court from hearing Bayou Shores' case. See e.g. In re State of Fla. Dep't of Health & Rehab. Servs., 225 F.3d 1208, Rodriquez, No. 09–93431–JB, 2010 WL 2035733, at *3–5 1216–17 (11th Cir. 2000) (internal quotations and citations (Bankr. N.D. Ga. Mar. 23, 2010) (relying on § 405(g) and omitted). Here, a holding that the bankruptcy court lacked (h) to hold that bankruptcy court would not entertain non- subject matter jurisdiction would allow the Government to go administratively exhausted Social Security claims). Bayou forward with its efforts to terminate Bayou Shores from the

Medicare/Medicaid program, as well as allow the Government characterized this threshold inquiry as “inflexible and to try and recover payments made to Bayou Shores since the without exception.” See id. at 94–95, 118 filing of the bankruptcy court action.55 Meaningful relief is thus available, and this case is not constitutionally moot. S.Ct. 1003 (quoting from Mansfield, C. & L.M.R. Co. v. Swan, 111 U.S. 379, 382, 4 S.Ct. 510, 28 L.Ed. 462 (1884)). [9] [10] Bayou Shores argues alternatively that the case is equitably moot because its Chapter 11 plan has been Thus, even assuming for the sake of argument that Bayou substantially consummated. Equitable mootness is a Shores is correct that this situation justifies the application of discretionary doctrine that permits courts sitting in bankruptcy equitable mootness, the absence of jurisdiction precludes the appeals to dismiss challenges (typically to confirmation plans) exercise of that discretionary authority. Our only role here is when effective relief would be impossible. See In re Nica to correct the bankruptcy court's error by affirming the district 56 Holdings, Inc., 810 F.3d 781, 786 (11th Cir. 2015). Central to court's Order. a finding of mootness is a determination by an appellate court that it cannot grant effective judicial relief. Id. (quoting from B. Bayou Shores' claims “arise” under the Medicare Act First Union Real Estate Equity & Mortg. Invs. v. Club Assocs. [14] Bayou Shores additionally argues that its claims do not (In re Club Assocs.), 956 F.2d 1065, 1069 (11th Cir.1992)). “arise” under the Medicare Act, and thus are not subject to the The equitable mootness doctrine seeks to avoid an appellate § 405(h) jurisdictional bar. According to Bayou Shores, decision that “would knock the props out from under the “[n]either the September 5 Order nor the Confirmation Orders authorization for every transaction that has taken place and had anything to do with recovering a claim (a right to payment) create an unmanageable, uncontrollable situation for the arising under the Medicare Act.” Appellant's Br. at 58. Bankruptcy Court.” Id. at 787 (citing Miami Ctr., Ltd. P'ship v. Bank of NY, 838 F.2d 1547, 1555 (11th Cir.1988)). Bayou Shores' position however has already been rejected by the Supreme Court. In Illinois Council the Court rejected the *25 [11] [12] [13] Here however, we are reviewing argument that claims “arising under” the Medicare Act were whether the district court was correct in dismissing for lack limited to monetary claims: of subject matter jurisdiction. “Subject-matter jurisdiction properly comprehended ... refers to a tribunal's power to Nor can we accept a distinction that hear a case, a matter that can never be forfeited or waived.” limits the scope of § 405(h) to claims See Union Pac. R. Co. v. Bhd. of Locomotive Engineers & for monetary benefits. Claims for Trainmen Gen. Comm. of Adjustment, Cent. Region, 558 money, claims for other benefits, U.S. 67, 81, 130, 130 S.Ct. 584, 175 L.Ed.2d 428 (2009) claims of program eligibility, and (internal quotation marks omitted; citations omitted; claims that contest a sanction or emphasis added). Because we agree with the district court remedy may all similarly rest upon that the bankruptcy court lacked subject matter jurisdiction individual fact-related circumstances, over the assumption of Bayou Shores' provider agreements, may all similarly dispute agency policy that must end the inquiry. When the lower court “lack[s] determinations, or may all similarly jurisdiction, we have jurisdiction on appeal, not of the involve the application, interpretation, merits but merely for the purpose of correcting the error of or constitutionality of interrelated the lower court in entertaining the suit.” See Bender v. regulations or statutory provisions. Williamsport Area Sch. Dist., 475 U.S. 534, 541, 106 S.Ct. There is no reason to distinguish 1326, 89 L.Ed.2d 501 (1986). “Without jurisdiction the among them in terms of the language court cannot proceed at all in any cause. Jurisdiction is or in terms of the purposes of § 405(h) power to declare the law, and when it ceases to exist, the ... Nor for similar reasons can we here only function remaining to the court is that of announcing limit those provisions to claims that the fact and dismissing the cause.” Steel Co. v. Citizens for involve “amounts.” a Better Env't, 523 U.S. 83, 94, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998). The Supreme Court in Steel Co. *26 Id. at 14, 120 S.Ct. 1084 (emphasis added).

Here, the determination of whether Bayou Shores is F.3d at 366–67. Indeed, it can hardly be said that Bayou allowed to keep its provider agreements could be Shores has a separate Medicaid claim, notwithstanding the characterized as either a “claim[ ] of program eligibility” two separate provider agreements: the sole reason for (i.e. whether Bayou Shore is eligible to participate in termination of Bayou Shores' Medicaid provider agreement Medicare) or a “claim[ ] that contest[s] a sanction or was the termination of its Medicare provider agreement for remedy” (i.e. the sanction of terminating Bayou Shores Bayou Shores' failure to comply with Medicare laws and from the Medicare program). In either case, the Supreme regulations. Allowing Bayou Shores to go forward with Court made clear in Illinois Council that Bayou Shores' only its Medicaid claims would thus put the bankruptcy claims fall within the ambit of § 405(h)'s “claim[s] arising court in the untenable position of adjudicating a dispute under” the Medicare Act. fundamentally about Medicare laws and regulations (i.e. whether Bayou Shores was in compliance with the relevant Medicare laws and regulations), despite being barred from C. Bayou Shores' Medicaid claims rise and fall with its adjudicating Bayou Shores' Medicare claims. See Rhode Medicare claims Island Hosp. v. Califano, 585 F.2d 1153, 1162 (1st Cir. The parties also dispute whether the termination of Bayou 1978) (“Were we to assume § 1331 jurisdiction over the Shores' Medicare provider agreement resulted in the Hospital's Medicaid claim we would find ourselves in the termination of Bayou Shores' Medicaid provider peculiar posture of hearing a case that consists entirely of a agreement. In its briefing, Bayou Shores contends that challenge to the limits promulgated under [the Medicare AHCA failed to use the required procedures under Florida Act], when we are expressly barred by [the Medicare Act] state law to terminate a Medicaid agreement. The from entertaining that challenge at this time.”). Government argues that Medicaid agreements terminate by operation of law when Medicare agreements terminate. See *27 Accordingly, Bayou Shores “cannot avoid the Medicare 42 U.S.C. § 1396a(a)(39). Act's administrative channeling requirement simply because as a dual Medicare and Medicaid provider, its claims also fall Without resolving this dispute, we note that the only issue under Medicaid Act.” Cathedral Rock, necessary to decide is whether the bankruptcy court was 57 barred by § 405(h) from taking jurisdiction over Bayou 223 F.3d at 367. Shores' Medicaid provider agreements. Courts have held that the Medicare and Medicaid statutory and regulatory D. Termination of the provider agreements On appeal, the provisions “provide that when a dually certified facility parties continue to dispute whether the provider agreements challenges a determination that it is not in substantial in question terminated before or after the filing of Bayou compliance with the common Medicaid and Medicare Shores' bankruptcy petition. Because we have determined regulations and a termination of its participation in both that the bankruptcy court lacked jurisdiction over the programs, the facility must seek review of this termination of the provider agreements, we decline to rule determination through the Medicare administrative appeals on the issue of whether or not the agreements terminated procedure.” Cathedral Rock of N. Coll. Hill, Inc. v. Shalala, prior to the filing of the bankruptcy petition. 223 F.3d 354, 366 (6th Cir. 2000); see also Michigan Ass'n of Homes & Servs. for Aging, Inc. v. Shalala, 127 F.3d 496, 503 (6th Cir. 1997) (“The Medicaid Act's inclusion of § V. Conclusion 405(g) is clear textual support for the proposition that We agree with the district court that the bankruptcy court Congress intended the exhaustion of administrative erred as a matter of law when it exercised subject matter remedies to apply in cases [involving dual jurisdiction over the provider agreements in this case. The Medicare/Medicaid providers]”); Health Equity Res. bankruptcy court was without § 1334 jurisdiction under the Urbana, Inc. v. Sullivan, 927 F.2d 963, 967 (7th Cir. 1991). § 405(h) bar to issue orders enjoining the termination of the provider agreements and to further order the assumption of Bayou Shores cannot avoid the jurisdictional bar in § the provider agreements. 405(h) by attempting to re-characterize its claim to the Medicaid provider agreement as separate from its claim to Thus, finding no reversible error in the district court's June 26, the Medicare provider agreement. See Cathedral Rock, 223 2015, Order (In re Bayou Shores, 533 B.R. at 343) we

AFFIRM. All Citations

--- F.3d ----, 2016 WL 3675462

Footnotes * Honorable Raymond C. Clevenger, III, United States Circuit Judge for the Federal Circuit, sitting by designation. 1 A “skilled nursing facility” is statutorily defined at 42 U.S.C. § 1395i– 3(a). 2 See e.g. 42 C.F.R. Part 483, Subsection B. 3 The Secretary of HHS's duty to take remedial action in the face of immediate jeopardy to a facility's patients is explained in 42 U.S.C. § 1395i–3(h)(2), where Congress specified that the Secretary “shall” take remedial action in response to immediate jeopardy. See 42 U.S.C. § 1395i–3(h)(2)(A)–(B) (statutorily defined remedies include termination from program, denial of payments, civil monetary penalties, and appointment of temporary management); see also id. at (f) (1) (“It is the duty and responsibility of the Secretary to assure that requirements which govern the provision of care in skilled nursing facilities under this subchapter, and the enforcement of such requirements, are adequate to protect the health, safety, welfare, and rights of residents and to promote the effective and efficient use of public moneys.”). 4 Immediate jeopardy exists if the nursing home's noncompliance has caused or is likely to cause “serious injury, harm, impairment or death to a resident.” 42 C.F.R. § 488.301. The regulation only requires that the nursing home's noncompliance is likely to cause harm to “a resident.” Though correctly quoting the regulation, the bankruptcy court appears to have incorrectly believed that actual harm is required for a finding of “immediate jeopardy.” See In re Bayou Shores SNF, LLC, 525 B.R. 160, 163 (Bankr. M.D. Fla. 2014). However, actual harm is not a prerequisite for a finding of immediate jeopardy. 5 The statute permits HHS to terminate a provider agreement in light of a finding of immediate jeopardy without a pretermination hearing for the provider. See 42 U.S.C. § 1395i–3(h)(2)(a); see also Cathedral Rock of N. Coll. Hill, Inc. v. Shalala, 223 F.3d 354, 366 (6th Cir. 2000) (no pre-termination hearing required under Due Process Clause); Northlake Cmty. Hosp. v. United States, 654 F.2d 1234, 1241–43 (7th Cir. 1981) (same). 6 Though Bayou Shores disputes whether Florida has followed the correct procedure to “finalize” the termination of their Medicaid provider agreement, Bayou Shores does not appear to dispute that such termination will be the end result of the termination of the Medicare provider agreement. See e.g. 42 U.S.C. § 1396a(a)(39); Fla. Stat. § 409.913(14); see also Livingston Care Ctr., Inc. v. United States, 934 F.2d 719, 720 (6th Cir. 1991) (“The Secretary of Health and Human Services's termination of the plaintiffs' Medicare

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 157 In re Bayou Shores SNF, LLC, --- F.3d ---- (2016) certification automatically triggered termination of plaintiffs' Medicaid certification as well”). 7 28 U.S.C. § 1334, titled “Bankruptcy cases and proceedings,” generally defines the original and exclusive jurisdiction of district courts over bankruptcy proceedings. 8 See Bankr. ECF No. 285 at 12-13 (ordering that “all injunctions and stays previously provided for in this case pursuant to sections 105 and/or 362 of the Bankruptcy Code shall remain in full force and effect until the Effective Date.”). As explained further infra, the parties dispute what effect this dissolution has on the issues in this case. 9 The Government argues that the provider agreements terminated prior to Bayou Shores filing their bankruptcy petition, thus depriving the bankruptcy court of jurisdiction over the provider agreements. Bayou Shores (for various reasons) contests that argument. For reasons we explain below, we do not find it necessary to resolve this dispute. 10 § 405(h) applies to Medicare via 42 U.S.C. § 1395ii, which states that “any reference therein to the Commissioner of Social Security or the Social Security Administration shall be considered a reference to the Secretary or the Department of Health and Human Services, respectively.” 11 Codification refers generally to the process of arranging and organizing the Statutes at Large into the U.S. Code. See generally Proceedings of the Fifty-First Annual Meeting of the American Association of Law Libraries, Fifth General Session, 51 Law Libr. J. 388 (1958) (remarks of Dr. Charles Zinn, Law Revision Counsel, explaining the process of codification); see also William W. Barron, The Judicial Code, 8 F.R.D. 439 (1949) (the “Chief Reviser, Title 28, U.S. Code, Judiciary and Judicial Procedure, and Title 18, U.S. Code, Crime and Criminal Procedure” explaining generally the 1948 Judicial Code revisions). 12 The Office of the Law Revision Counsel, created in 1974, is a body within the U.S. House of Representatives whose principal purpose is to codify the laws of the U.S. and periodically publish updates to the U.S. Code. See 2 U.S.C. §§ 285 et. seq. 13 The U.S. Code is not necessarily “positive law.” Rather, the text of the U.S. Code is prima facie evidence of the law of the United States; where the code conflicts with the Statutes at Large however, the Statutes at Large trump. See U.S. Nat. Bank of Oregon v. Indep. Ins. Agents of Am., Inc., 508 U.S. 439, 448, 113 S.Ct. 2173, 124 L.Ed.2d 402 (1993). Additionally, some parts of the code have been enacted into positive law; when this happens, the text of the code becomes evidence of the law. See id. at 448 n. 3, 113 S.Ct. 2173 (citing to 1 U.S.C. § 204(a)); see generally Alice I. Youmans, et. al., Questions & Answers, 78 Law. Libr. J. 585, 590 (1986) (explaining the relationship between the U.S. Code, Statutes at Large, and positive law). 14 See e.g. H.R. 3805 Rept. at 20.

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 158 In re Bayou Shores SNF, LLC, --- F.3d ---- (2016) 15 The report similarly notes that where no descriptions are provided, the amendments are “clerical in nature.” Id. at 1. 16 See H.R. Rep. No. 98-432, pt. 2, at 1027 (1984) (explaining that “Title VI—Technical Corrections” of H.R. 4170 originated as the amended H.R. 3805). 17 As noted previously, the third sentence of § 405(h) at the time incorrectly referred to title 24 of the Judicial Code, and the Court's opinion inserted the correct cross-reference to the relevant section of Title 28 of the U.S. Code. See id. at 756 n. 3, 95 S.Ct. 2457. While surely strong evidence of how the Supreme Court reads § 405(h), Salfi did not raise the interpretive issue at the heart of this case, and thus does not dispose of the issue. 18 The first two sentences read: “The findings and decisions of the Secretary after a hearing shall be binding upon all individuals who were parties to such hearing. No findings of fact or decision of the Secretary shall be reviewed by any person, tribunal, or governmental agency except as herein provided.” 42 U.S.C. § 405(h). 19 See id. at 13, 120 S.Ct. 1084 (noting that “[i]n any event, such was the judgment of Congress as understood in Salfi and Ringer”). 20 Similarly, to the extent our Court has addressed the reach of the jurisdictional bar of § 405(h) since the 1984 DRA amendments, it appears that the cases have been § 1331 cases. See e.g. Dial v. Healthspring of Alabama, Inc., 541 F.3d 1044, 1047–48 (11th Cir. 2008); Cochran v. U.S. Health Care Fin. Admin., 291 F.3d 775, 778– 79 (11th Cir. 2002); United States v. Blue Cross & Blue Shield of Alabama, Inc., 156 F.3d 1098, 1101 (11th Cir. 1998); Am. Acad. of Dermatology v. Dep't of Health & Human Servs., 118 F.3d 1495, 1499 n. 8 (11th Cir. 1997); Am. Fed'n of Home Health Agencies, Inc. v. Heckler, 754 F.2d 896, 897–98 (11th Cir. 1984). Both parties cite and discuss V.N.A. of Greater Tift Cty., Inc. v. Heckler, 711 F.2d 1020 (11th Cir. 1983). Though V.N.A. was decided before the 1984 amendments, it appears the Court in that case cited to the Law Revision Counsel's 1976 (or 1982) re-codified version of the statute in its opinion. See V.N.A., 711 F.2d at 1024. In a footnote of the opinion, the Court notes that “[t]here can be no question that § 405(h) fully applies to the present case, because the district court's jurisdiction is founded on 28 U.S.C. § 1331.” Id. at n. 5. We also note Lifestar Ambulance Serv., Inc. v. United States, 365 F.3d 1293, 1295 n. 3 (11th Cir. 2004), in which this Court assumed, but did not decide, that mandamus jurisdiction under § 1361 was not barred under § 405(h). These cases do not address the issue of whether actions brought under § 1334 are barred by § 405(h). 21 Although not squarely deciding the issue, a number of other circuit court decisions have suggested that § 405(h) bars jurisdictions other than pursuant to only §§ 1331 and 1346. See BP Care, Inc. v. Thompson, 398 F.3d 503, 515 n. 11 (6th Cir. 2005) (citing favorably to Bodimetric analysis); St. Vincent's Med. Ctr. v. United States, 32 F.3d 548, 550 (Fed. Cir. 1994) (holding that Court of Federal claims jurisdiction barred by § 405(h)). The First Circuit has recognized the

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 159 In re Bayou Shores SNF, LLC, --- F.3d ---- (2016) issue, but declined to address it. See In re Ludlow Hosp. Soc., Inc., 124 F.3d 22, 25 n. 7 (1st Cir. 1997) (recognizing, but avoiding, § 405(h) jurisdictional issue by deciding case on merits). 22 See e.g. In re Nurses' Registry & Home Health Corp., 533 B.R. 590, 593–97 (Bankr. E.D. Ky. 2015); In re Slater Health Ctr., Inc., 294 B.R. 423, 428 (Bankr. D.R.I. 2003), vacated in part, 306 B.R. 20 (D.R.I. 2004), aff'd, 398 F.3d 98 (1st Cir. 2005); In re Healthback, L.L.C., 226 B.R. 464, 472–74 (Bankr. W.D. Okla. 1998), vacated, In re HealthBack, L.L.C., Case No. 97–22616–BH, 1999 WL 35012949 (Bankr. W.D. Okla. May 28, 1999); First Am. Health Care of Georgia Inc. v. Dep't of Health & Human Servs., 208 B.R. 985, 988–90 (Bankr. S.D. Ga. 1996), vacated and superseded sub nom., First Am. Health Care of Georgia, Inc. v. U.S. Dep't of Health & Human Servs., Case No. 96–2007, 1996 WL 282149 (Bankr. S.D. Ga. Mar. 11, 1996); In re Healthmaster Home Health Care, Inc., Case No. 95–10548, 1995 WL 928920, at *1 (Bankr. S.D. Ga. Apr. 13, 1995); In re Shelby Cty. Healthcare Servs. of AL, Inc., 80 B.R. 555, 557–60 (Bankr. N.D. Ga. 1987). 23 Excel Home Care, Inc. v. U.S. Dep't of Health & Human Servs., 316 B.R. 565, 572–574 (D. Mass. 2004); In re Hodges, 364 B.R. 304, 305–06 (Bankr. N.D. Ill. 2007); In re House of Mercy, Inc., 353 B.R. 867, 869–73 (Bankr. W.D. La. 2006); In re Fluellen, Case No. 05– 40336, 2006 WL 687160, at *1 (Bankr. S.D.N.Y. Mar. 13, 2006); U.S., Dep't of Health & Human Servs. v. James, 256 B.R. 479, 481–82 (W.D. Ky. 2000); In re Hosp. Staffing Servs., Inc., 258 B.R. 53, 57– 58 (S.D. Fla. 2000); In re Mid–Delta Health Sys., Inc., 251 B.R. 811, 814–15 (Bankr. N.D. Miss. 1999); In re Tri Cty. Home Health Servs., Inc., 230 B.R. 106, 108 n. 1 (Bankr. W.D. Tenn. 1999); In re S. Inst. for Treatment & Evaluation, Inc., 217 B.R. 962, 965 (Bankr. S.D. Fla. 1998); In re Home Comp Care, Inc., 221 B.R. 202, 206 (N.D. Ill. 1998); In re AHN Homecare, LLC, 222 B.R. 804, 807–10 (Bankr. N.D. Tex. 1998); In re Orthotic Ctr., Inc., 193 B.R. 832, 835 (N.D. Ohio 1996); In re St. Johns Home Health Agency, Inc., 173 B.R. 238, 245– 46 (Bankr. S.D. Fla. 1994); In re Upsher Labs., Inc., 135 B.R. 117, 117–20 (Bankr. W.D. Mo. 1991); In re St. Mary Hosp., 123 B.R. 14, 16–18 (E.D. Pa. 1991). 24 See e.g. Randall D. Wolcott, M.D., P.A. v. Sebelius, 635 F.3d 757, 766 (5th Cir. 2011); Cordoba v. Massanari, 256 F.3d 1044, 1047 (10th Cir. 2001); Buchanan v. Apfel, 249 F.3d 485, 491–92 (6th Cir. 2001); Briggs v. Sullivan, 886 F.2d 1132, 1142 (9th Cir. 1989); Burnett v. Bowen, 830 F.2d 731, 738 (7th Cir. 1987); Ganem v. Heckler, 746 F.2d 844, 851–52 (D.C. Cir. 1984); Kuehner v. Schweiker, 717 F.2d 813, 819 (3d Cir. 1983), judgment vacated sub. nom. on other grounds, Heckler v. Kuehner, 469 U.S. 977, 105 S.Ct. 376, 83 L.Ed.2d 312 (1984); Belles v. Schweiker, 720 F.2d 509, 513 (8th Cir. 1983); Ellis v. Blum, 643 F.2d 68, 81 (2d Cir. 1981). 25 In fact, at that time only district courts in the District of Columbia could exercise mandamus jurisdiction, pursuant to an uncodified grant of authority dating back to the early nineteenth century and the District of Columbia's adoption of Maryland law. See id. District courts

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 160 In re Bayou Shores SNF, LLC, --- F.3d ---- (2016) elsewhere in the country were granted mandamus jurisdiction explicitly when Congress passed the Mandamus and Venue Act, Pub. L. No. 87–748, 76 Stat. 744 (1962). Judge Friendly reasoned that Congress likely did not intend to bar District of Columbia courts' mandamus jurisdiction when it passed § 405(h) because that uncodified jurisdiction was not specifically excluded, and Congress similarly did not intend mandamus jurisdiction to suddenly become subject to § 405(h) when mandamus jurisdiction was extended to other courts in 1962. See Ellis, 643 F.2d at 81. 26 The difficulties inherent in codifying and organizing the law are older still, and plagued even the earliest democracy. Aristotle notes that after the Athenian statesmen Solon “had organized the [Athenian] constitution in the manner stated, people kept coming to him and worrying him about his laws, criticizing some points and asking questions about others,” causing him to leave Greece for Egypt for the next ten years. See ARISTOTLE, THE ATHENIAN CONSTITUTION, Ch. 11 (H. Rackham trans., Cambridge, MA, Harvard University Press 1952). 27 The Supreme Court of Judicature was the “highest common-law” state court in New York at that time. See William J. Jenack Estate Appraisers & Auctioneers, Inc. v. Rabizadeh, 22 N.Y.3d 470, 478, 982 N.Y.S.2d 813, 5 N.E.3d 976 (2013). 28 The 1948 recodification moved “section 24 of the Judicial Code” to Title 28 of the U.S. Code, but 42 U.S.C. § 405(h) continued to refer to “section 24 of the Judicial Code” until the DRA amendment in 1984. 29 Compare Judicial Code, Pub. L. No. 61–475, 36 Stat. 1087, § 48 (1911) with id. at § 52. 30 National Labor Relations Act, Pub. L. No. 74–198, 49 Stat. 449 (1935) (the “Wagner Act”); Labor Management Relations Act, Pub. L. No. 80–101, 61 Stat. 136 (1947) (the “Taft-Harley Act”). 31 As the Court notes, the 1948 revision to the Criminal Code followed a “parallel course” to the revision to the Judicial Code, and was prepared by the same staff of experts. See Muniz, 422 U.S. at 470 n. 10, 95 S.Ct. 2178. 32 Injunctions in Labor Disputes, Pub. L. No. 72–65, 47 Stat. 70 (1932) (the “Norris-LaGuardia Act”). § 11 of the NorrisLaGuardia Act provided jury trials in certain contempt actions, but unquestionably did not provide a jury right in contempt actions arising out of injunctions issued pursuant to the Wagner or Taft-Harley Acts. See Muniz, 422 U.S. at 462-463, 95 S.Ct. 2178. 33 “Pendent-party” jurisdiction is “jurisdiction over parties not named in any claim that is independently cognizable by [a] federal court.” See Finley, 490 U.S. at 549, 109 S.Ct. 2003. As opposed to “pendent- claim” jurisdiction, which is “jurisdiction over nonfederal claims between parties litigating other matters properly before the court.” Id. at 548, 109 S.Ct. 2003. 34 I.e. each district court jurisdictional grant listed in Section 24 of the Judicial Code of 1911. © 2016 Thomson Reuters. No claim to original U.S. Government Works. 161 In re Bayou Shores SNF, LLC, --- F.3d ---- (2016) 35 See e.g. N. Dakota v. United States, 460 U.S. 300, 311 n. 13, 103 S.Ct. 1095, 75 L.Ed.2d 77 (1983) (noting that the editorial decisions made by a codifier without the approval of Congress should be given no weight in interpreting a statute). 36 The bankruptcy court referred to § 2664(b) as “legislative history.” See In re Bayou Shores, 525 B.R. at 167. Strictly speaking, that is not correct. “Legislative history” refers to “proceedings leading to the enactment of a statute, including hearings, committee reports, and floor debates.” Black's Law Dictionary (10th ed. 2014). Conversely, § 2664(b) of the DRA is positive law: it is part of a statute that was passed by Congress and signed into law by the President. 37 The Seventh Circuit's Bodimetric decision (and thus the decisions of the Third and Eighth Circuits adopting Bodimetric) recognized and correctly applied this recodification canon of statutory interpretation. See Bodimetric, 903 F.2d at 489 (citing to Muniz and U.S. v. Ryder). Conversely, the cases holding that § 405(h) does not bar jurisdiction under § 1334 do not appear to have recognized the existence of the canon, let alone analyzed whether it applies to this issue. It is clear that in ignoring a canon of statutory construction that courts have been applying for more than a century, these latter courts erred. 38 See H.R. Rep. No. 98-432, pt. 2, at 1659 (1984) (“While the Social Security Amendments of 1983 sought to eliminate all gender-based distinctions in the Social Security Act, this gender-based distinction was not eliminated by those amendments. In order to assure that the Social Security Act provides the same penalty for fraud regardless of sex, the bill provides that the penalty for fraud would also apply to an individual who falsely represents that he is the divorced husband of a worker or beneficiary.”) 39 Even assuming Bayou Shores is correct that this provision substantively changed existing law, it would not change the result in this case. The House report indicates the “clear intent” behind the amendment to Section 1107(b) (whether substantive or not), whereas nothing in the legislative history indicates a “clear intent” to change the jurisdiction of bankruptcy courts with the amendment to § 405(h). Thus, the amendment to Section 1107(b) is not analogous to the amendment to § 405(h). It is certainly possible that Congress intended to make substantive amendments in the codification and revision section of the DRA. However, under United States v. Ryder and its progeny we require some indication that a substantive change in the revision was intended. See e.g. Ex parte Collett, 337 U.S. 55, 65–71, 69 S.Ct. 944, 93 L.Ed. 1207 (1949), (explaining that reviser's notes and legislative history made clear that addition of 28 U.S.C. § 1404(a), which made forum non coveniens transfers available in any district court civil action, was a substantive amendment enacted by the 1948 Judicial Code revision). 40 See Social Security Amendments of 1965, Pub. L. No. 89–97, 79 Stat. 286 at § 306(14) (1965).

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 162 In re Bayou Shores SNF, LLC, --- F.3d ---- (2016) 41 Section 202 of the Social Security Act is codified at 42 U.S.C. § 402. The current statute continues to refer to section 202 for its definition of “full-time elementary or secondary school student.” 42 See Omnibus Budget Reconciliation Act of 1981, Pub. L. No. 97–35, 95 Stat. 357 at § 2210 (1981). 43 See id. (“SEC. 2210. (a)(1) Section 202(d) of the Social Security Act is amended ... by striking out ‘full-time student’ each place it appears and inserting in lieu thereof ‘full-time elementary or secondary school student’.”) 44 See S. Rep. No. 97-314, Vol. I, at 106 (1982). 45 See e.g. Appellant's Reply Br. at 9-12. 46 The parties dispute a similar question on appeal. However, our decision that the bankruptcy court lacked subject matter jurisdiction over the provider agreements renders moot the question of whether HHS's actions fall in § 362's exceptions. We thus decline to decide that issue. 47 The Bankruptcy Act added subsection 1334(b), discussed supra. See Bankruptcy Act at § 101(a). 48 Approximately forty-some public laws were passed by Congress in July of 1984. See https://www.congress.gov/publiclaws/98th- congress. We are skeptical of the suggestion that the temporal proximity between any one of these laws and the Bankruptcy Act, standing alone, has any particular significance in interpreting any of these laws. 49 See also Samuel R. Maizel & Michael B. Potere, Killing the Patient to Cure the Disease: Medicare's Jurisdictional Bar Does Not Apply to Bankruptcy Courts, 32 Emory Bankr. Dev. J. 19, 27-29 (2015) (noting that because of the length of the HHS appeals process, a hospital could be faced with the “fatal dilemma” of being put out of business before being able to challenge an adverse HHS decision); but see Oakland Med. Grp., P.C. v. Sec'y of Health & Human Servs., Health Care Fin. Admin., 298 F.3d 507, 511 (6th Cir. 2002) (“[T]he government has a strong interest in expediting providertermination procedures because: (1) the Secretary's responsibility for insuring the safety and care of elderly and disabled Medicare patients is of primary importance, and (2) the government has a strong interest in minimizing the expenses of administering the Medicare program.”) (internal quotation marks and citations omitted); Northlake Cmty. Hosp. v. United States, 654 F.2d 1234, 1242 (7th Cir. 1981) (explaining that “a provider's financial need to be subsidized for the care of its Medicare patients is only incidental to the purpose and design of the (Medicare) program.”) (internal quotation marks and citations omitted). 50 This assumes of course that Bayou Shores will be successful in regaining the provider agreements in the administrative appeals process. That in turn is a dubious proposition as an administrative law judge in that appeal has already granted summary judgment against Bayou Shores on the issue of the termination of the provider agreements. See Bankr. ECF No. 261-1, Administrative Law Judge Ruling on Motion for Partial Summary Judgement (Dec. 16, 2015). © 2016 Thomson Reuters. No claim to original U.S. Government Works. 163 In re Bayou Shores SNF, LLC, --- F.3d ---- (2016) 51 We have explained previously that where both parties to a Medicare claim dispute “engage in extensive discovery and presentation of their whole cases on the merits, the district court does exactly what [HHS] is expected to do,” and therefore “[i]t is simply not realistic to say that the district court in such a case does not address and decide the merits of the case.” V.N.A. of Greater Tift Cty., Inc. v. Heckler, 711 F.2d 1020, 1032 (11th Cir. 1983). Such a merits-review is contrary to the policy embodied by the Medicare Act's limited judicial review provisions. See id. 52 Most disturbingly perhaps, the bankruptcy court's opinion describes the result of the second incident somewhat innocuously: “[T]he patient with the history of abuse—who was in the facility for less than 24 hours—did not touch or otherwise harm the other resident.” In re Bayou Shores SNF, 525 B.R. at 163. But the Government contends that the “patient with the history of abuse” “sexually molest[ed]” his roommate during those 24 hours. Federal Appellee Br. at 14-16; State Appellee's Br. at 3-4. According to the underlying report, the roommate reported in an interview that the patient with the history of abuse “put his hand under the curtain and moved his hand on the sheet to about ¼ inch from my private parts.” See In re Bayou Shores, Bankr. ECF No. 42-2 at 17. 53 If the deficiencies immediately jeopardize the health and safety of a facility's residents, “the Secretary shall take immediate action to remove the jeopardy and correct the deficiencies through the remedy specified in subparagraph (B)(iii), or terminate the facility's participation under this subchapter and may provide, in addition, for one or more of the other remedies described in subparagraph (B).” 42 U.S.C. § 1395i–3(h)(2) (emphasis added). 54 For example, we note that the Confirmation Order contains the following: “Nothing set forth in the Amended Plan or this Order shall limit the power and authority of AHCA to take action related to the renewal or revocation of the Debtor's license necessary to protect public health, safety and welfare, provided however, that any such actions related to the renewal or revocation of the license may not be based upon the termination of the Medicare and Medicaid provider agreements that have been assumed by the Debtor.” In re Bayou Shores, Bankr. ECF No. 285 at 14. At oral argument, Bayou Shores conceded that this second issue was not constitutionally moot. 55 Bayou Shores argues that the Government has no claim to damages because the Government “would be required to pay for the care of Bayou's patients, if not at Bayou, somewhere, because the vast majority of Bayou's patients are indigent.” Appellant's Reply Br. at 28. That argument misses the mark though. The Government is not seeking to claw back the money merely to pocket the funds or to avoid paying for the care of Bayou Shores' patients. Rather, the Government (as required by statute) will not pay a facility such as Bayou Shores that fails to comply with health and safety regulations. In other words, while the Government may be required to pay for the

© 2016 Thomson Reuters. No claim to original U.S. Government Works. 164 In re Bayou Shores SNF, LLC, --- F.3d ---- (2016) care of Bayou Shores' patients, it reasonably wants to pay someone other than Bayou Shores for that service. 56 Of course, we are addressing only the issue of the bankruptcy court's authority to adjudicate Bayou Shores' claim to ownership of the provider agreements terminated by the Government. To the extent Bayou Shores has other property in its bankruptcy estate, nothing in this opinion addresses or reaches the bankruptcy court's actions with respect to that property. Further, while we do not rule on the equitable mootness issue, we note that the limited factual record in front of us suggests it would not be appropriate to do so in this situation. Although the Government did not obtain a stay, it appears from our review of the record that it was not for lack of trying. See In re Nica Holdings, 810 F.3d at 787 (“On this record, we cannot fault [appellant] for not getting a stay.”). Moreover, the simplicity of the transactions and amounts of money involved here appear more akin to the “simpler” transactions in In re Nica Holdings, 810 F.3d at 788 (no equitable mootness) than in the complex multi-million dollar transactions that justified equitable mootness in In re Club Assocs., 956 F.2d 1065 and Miami Ctr., Ltd. P'ship v. Bank of NY, 820 F.2d 376 (11th Cir.1987). Finally, the reliance interests of Bayou Shores' creditors, who we must presume understood they were lending money to a nursing home that the Government was attempting to shut down for violating health and safety regulations, also do not weigh much in favor of applying equitable mootness. 57 We do not need to decide here whether a different result would accrue in a case where a party presents only Medicaid claims to a bankruptcy court.

2016 WL 3611542 As the bankruptcy court noted, the underlying fraud claim This case was not selected for presents “a true ‘he-said-she-said’ factual dispute.” publication in West's Federal Reporter. Thompson insists Soderstrom misrepresented that her See Fed. Rule of Appellate Procedure 32.1 investment was needed to complete construction and build- generally governing citation of judicial out of the office space. Soderstrom denies making this decisions issued on or after Jan. 1, 2007. statement. After hearing live testimony from the parties and See also U.S. Ct. of App. 11th Cir. Rule 36-2. considering the parties' extensive evidentiary submissions the United States Court of Appeals, Eleventh bankruptcy court found Thompson to be more credible than Circuit. Soderstrom. Accordingly, the bankruptcy court found that In re: ROGER W. SODERSTROM, Soderstrom in fact made the alleged misrepresentation. We TANSEY M. SODERSTROM, Debtors, defer to the bankruptcy court's credibility determination and ROGER W. SODERSTROM, Plaintiff - Appellant, find no clear error. See Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985) (“Where there are two permissible v. views of the evidence, the factfinder's choice between them J. THOMPSON INVESTMENTS, LLC, cannot be clearly erroneous.”); In re T & B Gen. Contracting, JOAN THOMPSON, Defendants - Appellees. Inc., 833 F.2d 1455, 1458 (11th Cir. 1987) (“[D]ue regard No. 15-14922 shall be given to the opportunity of the bankruptcy court to | judge the credibility of witnesses.”). The testimony of Scott Date Filed: 07/06/2016 Buono on which Soderstrom relies is equivocal and fails to directly contradict Thompson's testimony. See Dist. Ct. Doc. Appeal from the United States District Court for the Middle 15-6 at 35 (“Q. Do you know if Roger Soderstrom made any District of Florida D.C. Docket Nos. 6:15cv-00187-ACC, representations? A. Not that I'm aware of. Not other than I 6:11-bkc-16036-KSJ think what's in -- in the operating agreement and the subscription agreement.” (emphasis added)). Even if Buono's Before WILSON, ROSENBAUM and BLACK, Circuit testimony contradicted Thompson's, because the bankruptcy Judges. court's finding of fact remains a permissible view of the evidence, it would not be clear error. See Anderson, 470 U.S. Opinion at 574.

PER CURIAM: We likewise find no error in the bankruptcy court's determination that Thompson justifiably relied upon *1 Roger W. Soderstrom appeals the district court's order Soderstrom's misrepresentation. While the parties' affirming the bankruptcy court's judgment in favor of J. subscription agreement and operating agreement together Thompson Investments, LLC and Joan Thompson for created a mechanism for Soderstrom to repay himself with $811,000 and the bankruptcy court's holding that the invested funds, the bankruptcy court correctly observed that judgment is not dischargeable pursuant to the fraud the parties' subscription agreement permitted repayment only exception, 11 U.S.C. § 523(a)(2)(A). Soderstrom contends to the extent the money was not needed for build-out. the bankruptcy court erred by finding justifiable reliance Because Soderstrom represented to Thompson that he needed notwithstanding allegedly contradictory information, by to and would use the investment to pay for construction and finding causation despite insufficient evidence, and by build-out of the office space, the contract provisions did not making an erroneous finding of fact regarding whether contradict Soderstrom's misrepresentation. Although it would Soderstrom actually made the allegedly fraudulent have been more prudent for Thompson to inquire further 1 representation. After review, we affirm. before making the investment, she was justified in relying upon Soderstrom's misrepresentation. See In re Vann, 67

F.3d 277, 283 (11th Cir. 1995) (“To constitute justifiable reliance, the plaintiff's conduct must not be so utterly unreasonable, in the light of the information apparent to him, that the law may properly say that his loss is his own responsibility. This conclusion, however, does not mean that the reliance must be objectively reasonable.” (internal citation and quotation marks omitted)).

*2 Finally, the bankruptcy court did not err in finding that Thompson's justifiable reliance on Soderstrom's misrepresentation proximately caused her loss. The finding that Thompson lost $811,000 is not challenged on appeal. The only causation dispute is whether Thompson would not have made the investment but for Soderstrom's misrepresentation. Thompson testified that had she known build-out was nearly complete and Soderstrom intended to pay himself, she would have perceived the investment to be a sinking ship and would have not invested. The bankruptcy court did not clearly err in crediting this testimony.2 See Anderson, 470 U.S. at 574. The fact that Soderstrom did not completely cash out of the business does not undermine the bankruptcy court's causation finding. Soderstrom invested approximately $1,050,000 between his two tiers of membership in the business and ultimately withdrew over $900,000, much of it from money that Thompson invested. Thompson's testimony does not suggest that she was any more likely to make the investment had Soderstrom told her he would use her investment to recoup most but not all of his investment, and the bankruptcy court could properly consider Soderstrom's paying himself with Thompson's investment to be the very thing she wished to avoid.

AFFIRMED.

All Citations

--- Fed.Appx. ----, 2016 WL 3611542

Footnotes

1 When reviewing a district court's affirmance of a bankruptcy court order, we review for clear error the bankruptcy court's findings of fact, and we review de novo the legal conclusions of both the bankruptcy court and the district court. In re Fisher Island Invs., Inc., 778 F.3d 1172, 1189 (11th Cir. 2015). 2 Soderstrom's contention that other testimony refutes causation lacks merit. The fact that Thompson conducted additional due diligence before investing and had other sources of information does not alter the causative effect Soderstrom's misrepresentation had on Thompson's decision to invest. See Sosa v. Alvarez-Machain, 542 U.S. 692, 704 (2004) (“[A] given proximate cause need not be, and frequently is not, the exclusive proximate cause of harm.”). The information to which Soderstrom refers would be probative of the justifiable reliance element but does not refute the bankruptcy court's causation finding. As discussed above, this information does not render Thompson's conduct “so utterly unreasonable ... that the law may properly say that [her] loss is [her] own responsibility.” In re Vann, 67 F.3d at 283