April/May 2004

FIRREA
Ninth Circuit

Do FIRREA claims procedures apply to claims by a debtor as well as a creditor of a failed bank?

The Ninth Circuit held that debtors, as well as creditors, must comply with the FIRREA administrative procedures of a failed banking institution. McCarthy v. F.D.I.C., 348 F.3d 1075 (9th Cir. 2003).

The Office of Thrift Supervision (OTS) closed Superior Bank for insolvency, under-capitalization, and predatory loan practices. The FDIC, in its capacity as receiver, took possession and control of Superior’s assets. The OTS chartered a new institution, (New Superior), and appointed the FDIC as its conservator. The FDIC transferred the assets of Superior to New Superior. According to the debtor McCarthy’s complaint, the FDIC permitted Alliance, a division of Superior, to continue servicing, soliciting and placing loans without disclosing that it was under receivership. McCarthy’s, obtained a pre-approved loan commitment from Alliance. Later, Alliance structured a new loan, this time at a higher rate of interest.

McCarthy filed suit in federal district court alleging that he was coerced into accepting the new loan because it was offered on a “take-it-or-leave-it” basis and that he would not have executed this loan had he known of Superior’s closure and the FDIC’s receivership. His complaint sought a declaration that the FDIC, Superior and Alliance violated their fiduciary duties and damaged McCarthy in the amount of $50,400, that this sum should be offset against his loan with Superior, and that his interest rate should be modified.

The district court held that it lacked subject matter jurisdiction, because McCarthy failed to exhaust his claims pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), 12 U.S.C. § 1821(d)(13)(D). McCarthy argued that he was not required to exhaust, because he was a debtor, not a creditor, of the bank, and because his claims arise out of post-receivership conduct of the FDIC. The Ninth Circuit agreed with the district court that FIRREA’s exhaustion requirement applies to bank debtors, as well as creditors, and to claims that arise out of acts by the receiver, as well as by the failed institution. Accordingly, the Ninth Circuit affirmed.

FIRREA constrains judicial review as follows:

Except as otherwise provided in this subsection, no court shall have jurisdiction over--

(i) any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets of any depository institution for which the Corporation [FDIC] has been appointed receiver, including assets which the Corporation may acquire from itself as such receiver; or

(ii) any claim relating to any act or omission of such institution or the Corporation as receiver.

12 U.S.C. § 1821(d)(13)(D).

The phrase “except as otherwise provided in this subsection” refers to a provision that allows jurisdiction after the administrative claims process has been completed. See 12 U.S.C. § 1821(d)(6)(a).

McCarthy opposed the dismissal on the ground that claims by debtors of a failed institution fall outside the claims process that FIRREA establishes for creditors, as do post-receivership acts of the receiver. In rejecting this argument, the Ninth Circuit noted that the text of § 1821(d)(13)(D) plainly states that any claim or action that asserts a right to assets of a failed institution is subject to exhaustion. There is no limitation to creditors, or exclusion of debtors, and that is controlling. Even though McCarthy asks that the payment be awarded by way of “offset” against the balance due on his loan from Superior, it is a payment nonetheless.

The Ninth Circuit cited other circuits that have uniformly held that debtors’ actions are subject to FIRREA exhaustion. McCarthy further contended that even if debtors in general are required to exhaust, he does not need to exhaust his claims, because they stem from conduct by the FDIC after its appointment as receiver. The Ninth Circuit stated that most circuit courts to consider this issue have determined that post-appointment claims against the FDIC are subject to FIRREA exhaustion.

Bankruptcy
Supreme Court

Is the time limit for objecting to a debtor’s discharge jurisdictional?

The Supreme Court held that the time limit for objecting to a debtor’s discharge is not jurisdictional. Kontrick v. Ryan, 124 S.Ct. 906 (2004). The Syllabus of the case is as follows:

SYLLABUS
A creditor in Chapter 7 liquidation proceedings has “60 days after the first date set for the meeting of creditors” to file a complaint objecting to the debtor’s discharge. Fed. Rule Bkrtcy. Proc. 4004(a). The bankruptcy court may extend that period “for cause” on motion “filed before the time has expired.” Fed. Rule Bkrtcy. Proc. 4004(b). Reinforcing Rule 4004(b)’s restriction on extension of the Rule 4004(a) deadline, Rule 9006(b)(3) allows enlargement of “the time for taking action” under Rule 4004(a) “only to the extent and under the conditions stated in [that rule],” i.e., only as permitted by Rule 4004(b).

On April 4, 1997, petitioner Kontrick filed a Chapter 7 bank-ruptcy petition. After gaining three successive time extensions from the Bankruptcy Court, respondent Ryan, Kontrick’s creditor, filed a complaint on January 13, 1998, objecting to Kontrick’s discharge. Ryan alleged that Kontrick had transferred property, within one year of filing his petition, with the intent to defraud creditors, and therefore did not qualify for discharge under 11 U.S.C. §§ 727(a)(2)-(5). Ryan filed an amended complaint on May 6, 1998, with leave of court, but without seeking or gaining a court-approved time extension. The amended complaint alleged with particularity that Kontrick had fraudulently transferred money to his wife, first by removing his own name from the family’s once-joint checking account, then by continuing regularly to deposit his salary checks into the account, from which his wife routinely paid family expenses (the “family-account” claim). Kontrick’s June 10, 1998, answer to the amended complaint did not raise the untimeliness of the family-account claim; on the merits, the answer admitted the transfers to the family account but denied that Kontrick had violated § 727(a)(2)(A). In response to Ryan’s summary judgment motion, which appended a statement of material facts, Kontrick cross-moved to strike portions of Ryan’s summary judg-ment filings, but did not ask the court to strike the amended complaint’s family-account allegations. On February 25, 2000, the Bankruptcy Court awarded Ryan summary judgment on the family-account claim, concluding that Kontrick was not entitled to discharge because his transfers to the family account were made with intent to defraud at least creditor Ryan. Kontrick then moved for reconsideration. For the first time, Kontrick urged that the court was powerless to adjudicate the family- account claim. The amended complaint containing that claim, Kontrick observed, was untimely under Rules 4004(a) and (b) and 9006(b)(3). Those rules, Kontrick maintained, establish a mandatory, unalterable time limit of the kind Kontrick called “jurisdictional.” The Bankruptcy Court denied reconsideration and entered final judgment, holding that Rule 4004’s complaint-filing time instructions are not “jurisdictional,” and that Kontrick had waived the right to assert the untimeliness of the amended complaint by failing squarely to raise the point before the court reached the merits of Ryan’s objections to discharge. The District Court sustained the denial of discharge, and the Seventh Circuit affirmed. Both courts relied on decisions of sister Circuits holding that the timeliness provisions at issue are not “jurisdictional.”

Held: A debtor forfeits the right to rely on Rule 4004 if the debtor does not raise the Rule’s time limitation before the bank-ruptcy court reaches the merits of the creditor’s objection to discharge. Pp. 914-918.

(a) Only Congress may determine a lower federal court’s subject-matter jurisdiction. U.S. Const., Art. III, § 1. Congress did so, as pertinent here, by instructing that “objections to discharges” are “[c]ore proceedings” within the bankruptcy courts’ jurisdiction. 28 U.S.C. § 157(b)(2)(J). Congress did not build time constraints into that statutory authorization. Rather, the time constraints applicable to objections to discharge are contained in Bankruptcy Rules prescribed pursuant to § 2075. Such rules “do not create or withdraw federal jurisdiction.” Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365, 370, 98 S.Ct. 2396, 57 L.Ed.2d 274. As Bankruptcy Rule 9030 states, the Bankruptcy Rules “shall not be construed to extend or limit the jurisdiction of the courts.” The filing deadlines prescribed in Rules 4004 and 9006(b)(3) are claim-processing rules that do not delineate what cases bankruptcy courts are competent to adjudicate. Although Kontrick now concedes that those Rules are not properly labeled “jurisdictional” in the sense of describing a court’s subject-matter jurisdiction, he maintains that the Rules have the same import as provisions governing subject-matter jurisdiction. A litigant generally may raise a court’s lack of subject-matter jurisdiction at any time in the same civil action. Mansfield, C. & L.M.R. Co. v. Swan, 111 U.S. 379, 382, 4 S.Ct. 510, 28 L.Ed. 462. Similarly, Kontrick urges, a debtor may challenge a creditor’s objection to discharge as untimely under Rules 4004 and 9006(b)(3) at any time in the proceedings, even initially on appeal or certiorari. The equation Kontrick advances overlooks the critical difference between a rule governing subject-matter jurisdiction and an inflexible claim-processing rule. Characteristically, a court’s subject-matter jurisdiction cannot be expanded to account for the parties’ litigation conduct; a claim-processing rule, on the other hand, even if unalterable on a party’s application, can nonetheless be forfeited if the party asserting the rule waits too long to raise the point. Pp. 914-916.

(b) No reasonable construction of complaint-processing rules would allow a litigant situated as Kontrick is to defeat a claim, as filed too late, after the party has litigated and lost the case on the merits. The relevant claim- processing rules in this case, Bankruptcy Rules 4004(a) and (b) and 9006(b)(3), include, among their primary purposes, affording the debtor an affirmative defense to a complaint filed outside the Rules 4004(a) and (b) time limits. It is uncontested that Ryan filed his complaint objecting to Kontrick’s discharge outside those limits. Kontrick urges that nothing occurring thereafter counts, for the Rules’ time prescriptions are unalterable, allowing no recourse to equitable exceptions. This case, however, involves no issue of equitable tolling or any other equity-based exception. Neither at the time Ryan filed the amended complaint containing the family-account claim nor anytime thereafter did he assert circumstances--equitable or otherwise-- qualifying him for a time extension. The sole question is whether Kontrick forfeited his right to assert the untimeliness of Ryan’s amended complaint by failing to raise the issue until after that complaint was adjudicated on the merits. In other words, how long did the affirmative defense Rules 4004(a) and (b) and 9006(b)(3) afforded Kontrick linger in the proceedings? The Seventh Circuit followed the proper path on this key question. It noted that time bars generally must be raised in an answer or responsive pleading. See Fed. Rule Civ. Proc. 8(c) (made applicable to bankruptcy court adversary proceedings by Fed. Rule Bkrtcy. Proc. 7008(a)). An answer may be amended to include an inadvertently omitted affirmative defense, and even after the time to amend “of course” has passed, “leave [to amend] shall be freely given when justice so requires.” Fed. Rule Civ. Proc. 15(a) (made applicable to adversary proceedings by Fed. Rule Bkrtcy. Proc. 7015). Kontrick not only failed to assert the time constraints of Rules 4004(a) and (b) and 9006(b)(3) in a pleading or amended pleading responsive to Ryan’s amended complaint. In addition, Kontrick moved to delete certain items from Ryan’s summary judgment filings, but, even that far into the litigation, he did not ask the Bankruptcy Court to strike the family-account claim. Ordinarily, a defense is lost if it is not included in the answer or amended answer. See Fed. Rule Bkrtcy. Proc. 7012(b) (Fed. Rules Civ. Proc. 12(b)-(h) apply in adversary proceedings). Rules 12(h)(2) and (3) prolong the life of certain defenses, but time prescriptions are not among them. Even if a defense based on Bankruptcy Rule 4004 could be equated to “failure to state a claim upon which relief can be granted,” the issue could be raised, at the latest, “at the trial on the merits.” Fed. Rule Civ. Proc. 12(h)(2). Only lack of subject- matter jurisdiction is preserved post-trial. Fed. Rule Civ. Proc. 12(h)(3). Kontrick’s resistance to the family-account claim is not of that order. Pp. 916-918.

295 F.3d 724, affirmed.

GINSBURG, J., delivered the opinion for a unanimous Court.

Seventh Circuit

Can chapter 11 debtor immediately pay unsecured-creditor vendors that debtor deems critical?

The Seventh Circuit Court of Appeals affirmed the District Court’s reversal of the Bankruptcy Court’s pre-reorganization “critical vendors” preferential transfer order. In re Kmart Corporation, — F.3d —, 343520 (7th Cir. 2004).

Kmart Corporation and certain of its domestic subsidiaries and affiliates, debtors and debtors-in-possession filed a voluntary petition for reorganization pursuant to chapter 11 of the United States Bankruptcy Code. As part of its “first day motions” filed on that date, Kmart sought authority to pay $327 million prepetition obligations to certain “critical vendors.” Kmart contended that these payments were necessary to maintain relationships essential to its continued operation and reorganization, and it invoked the “doctrine of necessity” and 11 U.S.C. § 105(a) for the bankruptcy court’s authority to permit these payments. The biggest percentage of votes to reject Kmart’s plan of reorganization came from a group owed money from supply deals or leases. That group had claims against Kmart totaling just under $3.9 billion. Creditors representing a quarter of that amount voted to reject the plan.¹ Kmart alleged it could not stay in business without the good will of the vendors.

The doctrine of necessity is not codified anywhere in the Bankruptcy Code. The bankruptcy court held a hearing on these motions, heard evidence, and granted the motions over objections. Bankruptcy Court Judge Sonderby allowed Kmart to pay $327 million in pre-bankruptcy debt to “critical vendors.”² On April 1, 2003, the District Court reversed. Capital Factors, Inc. v. Kmart Corporation.³ This case raises the “Doctrine of Necessity” or “Necessity of Payment Rule.” See 2 William L. Norton, Jr., Norton Bankr.L. & Prac.2d § 42:11 (Supp.2002); Russell A. Eisenberg & Frances F. Gecker, The Doctrine of Necessity and Its Parameters, 73 Marq. L.Rev. 1, 6 (1989) for a discussion of the doctrine’s history.

Seventh Circuit Affirmation of Reversal of Critical Vendor’s Order

The theory behind the critical vendor’s request is that some suppliers may be unwilling to do business with a customer that is behind in payment, and, if it cannot obtain the merchandise that its own customers have come to expect, a firm such as Kmart may be unable to carry on, injuring all of its creditors. Full payment to critical vendors thus could in principle make even the disfavored creditors better off: they may not be paid in full, but they will receive a greater portion of their claims than they would if the critical vendors cut off supplies and the business shut down. The Court of Appeals held that the debtor must prove, and not just allege, two things: that, but for immediate full payment, vendors would cease dealing; and that the business will gain enough from continued transactions with the favored vendors to provide some residual benefit to the remaining, disfavored creditors, or at least leave them no worse off. However, the Bankruptcy Judge entered a critical-vendors order just as Kmart proposed it, without notifying any disfavored creditors, without receiving any pertinent evidence, and without making any finding of fact that the disfavored creditors would gain or come out even. The bankruptcy court’s order declared that the relief Kmart requested--open-ended permission to pay any debt to any vendor it deemed “critical” in the exercise of unilateral discretion, provided that the vendor agreed to furnish goods on “customary trade terms” for the next two years--was “in the best interests of the Debtors, their estates and their creditors”. The order did not explain why, nor did it contain any legal analysis, though it did cite 11 U.S.C. § 105(a).

The appellant creditors treated as “critical vendors,” insisted that, by the time the District Court reversed the order, it was too late. The appellants alleged that money had changed hands and, cannot be refunded. The Court of Appeals noted that reversing preferential transfers is an ordinary feature of bankruptcy practice, often continuing under a confirmed plan of reorganization. See Mellon Bank, N.A. v. Dick Corp., 351 F.3d 290 (7th Cir.2003). If the orders in question are invalid, then the critical vendors have received preferences that Kmart is entitled to recoup for the benefit of all creditors. Further, nothing comparable anywhere in the Code covers payments made to pre-existing, unsecured creditors, whether or not the debtor calls them “critical.”

Section 105(a)allows a bankruptcy court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of” the Code. According to the Court, this does not create discretion to set aside the Code’s rules about priority and distribution; the power conferred by § 105(a) is one to implement rather than override. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988); In re Fesco Plastics Corp., 996 F.2d 152, 154 (7th Cir.1993). Cf. United States v. Noland, 517 U.S. 535, 542, 116 S.Ct. 1524, 134 L.Ed.2d 748 (1996). Every circuit that has considered the question has held that this statute does not allow a bankruptcy judge to authorize full payment of any unsecured debt, unless all unsecured creditors in the class are paid in full. See In re Oxford Management Inc., 4 F.3d 1329 (5th Cir.1993); Official Committee of Equity Security Holders v. Mabey, 832 F.2d 299 (4th Cir.1987); In re B & W Enterprises, Inc., 713 F.2d 534 (9th Cir.1983).

Ninth Circuit

Is the scope of federal preemption in reorganization plan limited to matters related to debtor’s financial condition?

A panel of the 9th Circuit held that Pacific Gas & Electric Co.’s reorganization plan may not broadly preempt all non-bankruptcy law that would otherwise apply to restructuring transactions. In an interlocutory ruling, the panel said the Bankruptcy Code authorized express preemption only with respect to laws “relating to financial condition.” Pacific Gas & Electric Co. et al. v. State of California et al., 350 F.3d 932 (9th Cir. 2003).

The Plan contains a proposal for the disaggregation of PG & E into four new corporations, each of which would be owned by PG & E’s parent corporation. However, under the Plan, three of the four corporations would no longer be subject to the California Public Utility Commission (“CPUC”) after the proposed disaggregation. The state of California, the CPUC and others objected to the Plan, because of the conflict with state law. The California parties said the plan directly conflicted with the Public Utilities Code § 377, which prohibits a public utility from disposing of any generation facilities before Jan. 1, 2006. Also, there were potential conflicts with environmental laws. PG&E says the plan, pursuant to Section 1123(a) of the Bankruptcy Code, would preempt “other-wise applicable non-bankruptcy law.”

The issue presented is the extent to which a reorganization plan proposed under 11 U.S.C. § 1123(a)(5) preempts otherwise applicable nonbankruptcy law. Section 1123(a) was enacted as part of the Bankruptcy Code in 1978. Section 1123(a)(5) provides, in part, “[n]otwithstanding any otherwise applicable nonbankruptcy law a [reorganization] plan shall ... provide adequate means for the plan’s implement-ation[.]” The “notwithstanding” clause was added to § 1123(a) by amendment in 1984. Section 1142(a) was also enacted as part of the Bankruptcy Code in 1978. That section prescribes duties associated with the implemen-ation of an approved reorganization plan under chapter 11. Section 1142(a) provides, “[n]otwithstanding any otherwise applicable nonbankruptcy law, rule, or regulation relating to financial condition, the debtor and any entity organized or to be organized for the purpose of carrying out the plan shall carry out the [reorganization] plan and shall comply with any orders of the court.” (Emphasis added). Thus the issue is whether under 11 U.S.C. § 1123(a)(5) the preemption of state law is also limited to otherwise “applicable nonbankruptcy law, rule, or regulation relating to financial condition” (Emphasis added) as provided in section 1142(a).

The position of the debtor PG & E was that the preemption of state law is broad and is governed by 11 U.S.C. § 1123(a)(5) and is illustrated by the debtor’s Disclosure Statement:

Section 1123(a) of the Bankruptcy Code preempts any otherwise applicable non-bankruptcy law that may be contrary to its provisions. Accordingly, a plan may contain certain provisions that would not normally be permitted under non- bankruptcy law. For example, section 1123(a)(5) of the Bankruptcy Code authorizes, among other things, the sale or transfer of assets by the Debtor without the consent of the State or the California Public Utilities Commission (the “CPUC”).

The Ninth Circuit rejected the argument that § 1123(a) provided for broad preemption.

The 1984 amendment to §1123(a) added the introductory “notwithstanding” clause. The Ninth Circuit acknowledged that the “notwithstanding” clause indicated some form of express preemption, but ruled that it was one that was extremely limited in scope. The Ninth Circuit focused on the scant legislative history of the amend-ments to §1123, which included such elements as floor statements on failed technical corrections bills in the early ‘80s to divine congressional purpose, rather than on the wording used in the amend-ment. The Ninth Circuit, citing a general presumption against preemption, found that Congress did not intend to make a substantive change by the 1984 amendments to §1123(a), because it could find no clear indication of such intent in the legislative history. 350 F.3d at 943.

Debtors also argued that the scope of preemption should be governed by § 1123(a) independently of section 1142(a). In rejecting this argument, the Ninth Circuit noted that sections 1123(a) and 1142(a) were enacted at the same time, as part of the 1978 Bankruptcy Code. Both sections are directly concerned with the contents and implementation of a reor-ganization plan under chapter 11. Section 1123(a) specifies what a confirmable plan must do. Among other things, under § 1123(a)(5) it must “provide for adequate means for the plan’s implementation.” Section 1142(a) in turn describes the duty of an entity charged with implementing a confirmed plan. As enacted in 1978, § 1142(a) contained an express preemption clause providing that those charged with implementing a confirmed plan could perform that duty “notwithstanding any otherwise applicable nonbankruptcy law, rule, or regulation relating to financial condition.” The Court concluded:

It makes perfect sense that the express preemptive scope of what must be included in a confirmable plan, specified in § 1123(a), would be the same as the express preemptive scope of what is actually included in a confirmed plan, specified in § 1142(a). It also makes perfect sense that the express preemptive scope of what must be in a confirmable and confirmed plan would be laws “relating to financial condition.” 350 F.3d 932 at 947-8.

The Ninth Circuit’s decision had no impact on the PG&E case, as the reorgan-ization plan and disclosure statement it addressed were abandoned by PG&E five months before the appeal was decided.⁴

Outside the Ninth Circuit, debtors will press for a broader standard of express preemption under § 1123, but they should be prepared to address the policy questions inherent it trying to reconcile federal bankruptcy law and competing state regulation.⁵

Third Circuit

Can a bankruptcy court impose a cap on fees on a professional’s retention and require one committee’s professional to rely on information gathered by another?

The Third Circuit held that a bankruptcy court can impose a cap on fees on a profes-sional’s retention and can require one com-mittee’s professional to rely on information gathered by another. In re Federal-Mogul-Global, Inc., 348 F.3d 390 (3d Cir. 2003).

The Bankruptcy Court’s order granted the Equity Committee’s application to retain Deloitte & Touche LLP (“D & T”) to give the Committee financial advice in connection with the Debtors’ reorganization, but the order limited the amount that D & T could charge the Debtors’ estates for its services to $30,000 per month. In capping D & T’s fees, the Bankruptcy Court expressed a belief that the debtor was likely insolvent and that the appointment of the Equity Committee might not have been justified. In addition, the Bankruptcy Court relied on its belief that the Debtors’ financial advisors had already compiled a significant amount of financial data that could be made available to the Committee and that there was consequently no need for the Equity Committee’s advisors to duplicate that research.

The Equity Committee challenged the portion of the order limiting D & T’s compensation on two grounds. First, the Committee contended that the cap on D & T’s fees was not authorized under 11 U.S.C. § 328(a) and was unsupported by the evidence before the Bankruptcy Court. Second, the Committee maintained that 11 U.S.C. § 1103(b) prohibited the Bankruptcy Court from directing the Committee to rely on financial data compiled by the Debtors’ advisors. The Third Circuit held (1) that 11 U.S.C. § 328(a) authorizes Bankruptcy Courts to devise and impose caps on the compensation of financial advisors retained in connection with chapter 11 proceedings; and (2) that 11 U.S.C. § 1103(b) does not prohibit a Bankruptcy Court from instructing a financial advisor to an equity security holders’ committee to rely on data previously compiled by professionals retained by the debtors in a reorganization proceeding. However, the Court found that the record contains insufficient information to permit the Court to determine the factual basis for the cap. Accordingly, the Court vacated the Bankruptcy Court’s order and remanded the case for further proceedings.

Seventh Circuit

Are prepetition debts for legal fees dischargeable?

The Seventh Circuit Court of Appeals held that retainers agreed to by chapter 7 debtors and their bankruptcy attorneys, which covered the legal services entailed in preparing and prosecuting debtors’ bankruptcy proceedings, constituted prepetition, liquidated debt for discharge purposes. Bankr.Code, 11 U.S.C.A. § 727(b). Bethea v. Robert J. Adams & Associates, 352F.3d 1125 (7th Cir. 2003).

Debtors in bankruptcy hired lawyers before filing their petitions. Each agreed to a retainer that would cover the legal services entailed in preparing and prosecuting the proceedings. Unlike most retainers, however, these were to be paid over time--some installments before the petition was filed, others thereafter. The lawyers per-formed as promised: all debtors received their discharges, and the cases were closed. When the lawyers continued to collect the unpaid installments, the debtors (with the assistance of new counsel) commenced adversary proceedings in which they asked the bankruptcy court to hold their former lawyers in contempt for violating the injunctions implementing the discharges. See 11 U.S.C. § 524.

The Bankruptcy Judge concluded that attorneys’ fees “reasonable” under 11 U.S.C. § 329(b) are not discharged. Section 329, which deals directly with attorneys’ compensation, supersedes the more general reach of 11 U.S.C. § 727, the discharge provision, the judge held, reasoning that any other conclusion would leave no work for § 329(b) to do. The bankruptcy court thought that § 329(b) must be the only device for controlling debtors’ legal fees. The debtors concede that the fees they had promised to pay their ex-attorneys are reasonable, so the Judge dismissed the adversary proceedings. The district judge affirmed.
In reversing, the Seventh Circuit agreed with In re Biggar, 110 F.3d 685 (9th Cir.1997), that pre-petition debts for legal fees are subject to discharge under § 727. The Court also declined to follow the Ninth Circuit In re Hines decision, under which the portion of the retainer reflecting work done during the bankruptcy is immune from discharge, even if the portion of the retainer reflecting pre-filing work is discharged. In re Hines, 147 F.3d 1185 (9th Cir.1998), adopted that position, limiting Biggar to fees for pre-filing work.

Eighth Circuit BAP

Is an order denying chapter 13 plan confirmation appealable?

The Eighth Circuit BAP dismissed an appeal from an order denying confirmation of a chapter 13 plan for lack of jurisdiction, because the order was not appealable. In re McConnell, 2003 WL 23025615 (8th Cir. BAP 2003).

The BAP dismissed an appeal from the denial of confirmation of the chapter 13 plan proposed by debtors McConnell, because it impermissibly modified the secured claim of NWA Credit Union. The bankruptcy court determined that the claim was protected against modification under 11 U.S.C. § 1322(b)(2) as a mortgage secured solely by the McConnells’ principal residence.

In the Eighth Circuit, a bankruptcy court’s order denying confirmation of a chapter 13 plan--without dismissing the case--is not a final order for purposes of appeal within the meaning of 28 U.S.C. § 158(a)(1) and (d). Groves, 39 F.3d at 214; Moix-McNutt v. Coop (In re Moix-McNutt), 212 B.R. 953, 953 (8th Cir. BAP 1997). The Eighth Circuit has defined a final order for the purposes of 28 U.S.C. § 158(a)(1) and (d) as one in which: (1) the order leaves the bankruptcy court with nothing to do but to execute the order; (2) delay in obtaining review would prevent the aggrieved party from obtaining effective relief; and (3) a later reversal on that issue would require recommencement of the entire proceeding. First National Bank v. Allen, 118 F.3d 1289, 1293 (8th Cir.1997); Safeco Ins. Co. of Am. v. ADM/Farmland, Inc. (In re Farmland Indus., Inc.), 296 B.R. 793, 800 (8th Cir. BAP 2003).

The BAP pointed that the McConnells’ bankruptcy case is still pending and there are numerous options open to them. The Debtors could propose an amended or modified Plan under section 1323. They could seek to convert the case pursuant to section 1307(a), they could seek a hardship discharge pursuant to section 1328(b), or the bankruptcy court could dismiss or convert the case pursuant to section 1307(b) or (c). Thus, the bankruptcy court still has functions to perform after denying plan confirmation. Pleasant Woods Associates Ltd. P’ship v. Simmons First Nat’l Bank (In re Pleasant Woods Associates Ltd. P’ship), 2 F.3d 837, 838 (8th Cir.1993) (“the bankruptcy court has remaining tasks that are not purely mechanical or ministerial, such as considering any amended plan that may be proposed, or determining how to dispose of the case if no confirmable amended plan is proposed.”). Because a denial of confirmation of a chapter 13 plan is not a final order, the BAP concluded that it lacked jurisdiction to hear this appeal.

The Eighth Circuit is not alone in holding a bankruptcy court’s order denying confirmation to a chapter 13 plan is not a final order. See, e.g., Lievsay v. Western Financial Savings Bank (In re Lievsay), 118 F.3d 661, 662 (9th Cir.1997) (chapter 11), cert. denied 522 U.S. 1149, 118 S.Ct. 1168, 140 L.Ed.2d 178 (1998); Simons v. Federal Deposit Insurance Corp. (In re Simons), 908 F.2d 643, 644-45 (10th Cir.1990) (chapter 13); Maiorino v. Branford Savings Bank, 691 F.2d 89, 91 (2nd Cir.1982) (chapter 13); In re Massey, 21 Fed.Appx. 113, (4th Cir.2001) (unpub.) (Chapter 13); Jefferson Financial Services v. Hance (In re Hance), 2000 WL 1478390, 2000 U.S.App. LEXIS 25468 (6th Cir.2000) (unpub.) (chapter 13).

Not all courts have found that a debtor still has access to effective relief on a later appeal when a bankruptcy court enters an order denying plan confirmation. See Bartee v. Tara Colony Homeowners Ass’n (In re Bartee), 212 F.3d 277, 283 (5th Cir.2000).

Footnotes
1 Mike Robinson, Kmart wins round against disgruntled creditors, 4/14/03 APWIRES 21:46:00 (April 14, 2003).
2 Mike Robinson, Kmart wins round against disgruntled creditors, 4/14/03 APWIRES 21:46:00 (April 14, 2003).
3 Capital Factors, Inc. v. Kmart Corporation, — B.R. —, 2003 WL 1868753 (N.D. Ill. 2003)(NO. 02 C 1264, 02 C 2088, 02 C 1265, 02 C 2086).
4 Daniel J. Carragher, The Narrowing Preemptive Power of Chapter 11, 23-Feb Am. Bankr. Inst. J. 32 (2004).
5 Id.

Mr. Dunaway, professor emeritus, is also Section Editor for the School of Law at Pepperdine University.