New Caesars District Court Opinion; Republic Airways at Risk; Radio Shack Gift Card Deal

Court Docket (Dist. Ct. S.D.N.Y.): New opinion issued today in BOKF, N.A. v. Caesars Entertainment Corporationand UMB Bank, N.A. v. Caesars Entertainment Corporation

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New opinion issued today in BOKF, N.A. v. Caesars Entertainment Corporation and UMB Bank, N.A. v. Caesars Entertainment Corporation

A copy of the opinion is embedded below.

Raw text of the opinion:

BOKF, N.A. (“BOKF”), as successor Indenture Trustee, and UMB
Bank, N.A. (“UMB”), as Indenture Trustee, bring these actions to enforce Caesars
Entertainment Corporation’s (“CEC”) guarantees of roughly $7 billion in notes
issued by Caesars Entertainment Operating Company (“CEOC”). Plaintiffs assert
that CEC’s guarantees became due and payable upon CEOC’s filing of a voluntary
petition for relief under chapter 11 of the Bankruptcy Code in the Northern District
of Illinois Bankruptcy Court on January 15, 2015. CEC, however, claims that
certain transactions entered into in May and August 2014 released its obligations
under the guarantees. Plaintiffs now move for partial summary judgment, seeking
a declaration that the purported release of CEC’s guarantees violates section
of the Trust Indenture Act of 1939 (the “TIA”).
For the following
reasons, plaintiffs’ motions are DENIED.
A. The Indentures
BOKF is the successor Indenture Trustee under the Indenture dated
See 15 U.S.C. §§ 77ppp(b) (“section 316(b)”).
See id. §§ 77aaa to 77bbbb.
April 16, 2010 (the “Indenture”), under which CEOC issued the 12.75% Second-
Priority Senior Secured Notes due 2018.
UMB is the Indenture Trustee under four
First Lien Indentures — dated June 10, 2009 (due 2017), February 14, 2012,
August 22, 2012 and February 15, 2013 (all three due in 2020) (together with the
BOKF Indenture, the “Indentures”) — that comprise approximately
$6,345,000,000 of CEOC’s recourse first lien bond debt (together with the 12.75%
Second Priority Senior Secured Notes, the “Notes”).
CEC, the parent company of
CEOC and a signatory to the Indentures as “Parent Guarantor,” irrevocably and
unconditionally guaranteed the obligations arising under the Indentures until
payment in full of all of the guarantee obligations (the “Guarantee”).
Indentures contain a release provision, providing that the Guarantee will terminate
See Plaintiff BOKF N.A.’s Statement of Undisputed Material Facts
Pursuant to Local Civil Rule 56.1 in Support of Its Motion for Partial Summary
Judgment (“BOKF 56.1”) ¶¶ 1, 3.
See Plaintiff UMB Bank, N.A.’s Statement of Undisputed Material
Facts Pursuant to Local Civil Rule 56.1 in Support of Its Motion for Partial
Summary Judgment (“UMB 56.1”) ¶ 1. The provisions of all indentures at issue
are identical in all material respects. I will therefore reference the indentures for
both plaintiffs as simply the “Indentures.” Additionally, most facts are identical in
both plaintiffs’ motions. I will therefore cite only to BOKF’s 56.1 statement unless
otherwise necessary.
See BOKF 56.1 ¶¶ 1, 6–9.
upon the occurrence of certain events.
The Indentures are qualified under and
governed by the TIA, and the Indentures state that if any provision of the
Indentures conflict with the TIA, the TIA controls.
In January 2008, Apollo Global Management, LLC, TPG Global,
LLC, and their respective affiliates and co-investors acquired CEC in a leveraged
buyout transaction for $30.7 billion, funded through the issuance of approximately
$24 billion in debt; approximately $19.7 billion of which was secured by liens on
substantially all of CEOC’s assets.

In its 2013 Annual Report, issued on March 17, 2014, CEC stated that
“[w]e do not expect that cash flow from operations will be sufficient to repay
CEOC’s indebtedness in the long-term and we will have to ultimately seek a
restructuring, amendment or refinancing of our debt, or if necessary, pursue
additional debt or equity offerings.”
Over the past several years, CEOC and CEC
have undertaken numerous transactions, including over forty-five asset sales and
See id. ¶ 14 (citing section 12.02(c) of the Indenture, reproduced in
full at page 19).
See id. ¶¶ 9–11 (citing sections 6.07 and 13.01 of the Indenture).
See id. ¶¶ 17–18.
Id. ¶ 22.
capital market transactions, in order to manage their debt.
These transactions
included moving certain CEOC assets to new affiliates formed in 2013 and early
In March 2014, CEC hired Blackstone Advisory Partners L.P. to
provide advice regarding certain financial and strategic alternatives for the
In an engagement letter dated August 12, 2014, but made effective as
of May 7, 2014, Blackstone agreed to provide financial advisory services to CEC
and its affiliates in connection with a possible restructuring of certain liabilities and
to assist in analyzing, structuring, negotiating, and effecting a restructuring.
C. The Guarantee Transactions
On May 6, 2014, CEC announced that CEOC planned to issue $1.75
billion in new “B-7” term loans (the “B-7 Transaction”) under the first lien credit
agreement and to use the net proceeds to refinance existing indebtedness maturing
in 2015 and existing term loans.
Also on May 6, 2014, CEC announced that in
connection with the B-7 Transaction, CEC sold five percent of CEOC’s common
See id. ¶ 26.
See id. ¶¶ 31–40.
See id. ¶ 29.
See id. ¶ 30.
See id. ¶¶ 42, 51–54.
stock to certain institutional investors (the “5% Stock Sale” and together with the
B-7 Transaction, the “May 2014 Transaction”). According to CEC, because
CEOC was no longer a wholly owned subsidiary, the Guarantee was automatically
terminated under section 12.02(c)(i) of the Indentures.
CEC stated that the B-7
Transaction lenders required the elimination of the Guarantee, and that the
elimination provided enhanced credit support for the B-7 Transaction.

On May 30, 2014, CEC authorized the CEOC Board to adopt a 2014
stock performance incentive plan, which enabled CEOC to grant shares of CEOC
stock to its directors and officers (the “6% Stock Transfer”), which was announced
on June 27, 2014.
Also on June 27, CEC asserted that its Guarantee of the Notes
had been released because CEOC elected to release the Guarantee under a separate
Indenture provision that permits such an election once CEC’s guarantee of all the
“Existing Notes,” as defined in the Indenture, had been released.
On August 12, 2014, CEC announced a private refinancing
transaction with certain holders of CEOC’s 2016 and 2017 Notes, whereby CEOC
See id. ¶ 44.
See id. ¶¶ 45–46.
See id. ¶¶ 56–58.
See id. ¶¶ 15–16, 59–60.
purchased the holders’ notes and the holders agreed to amend the indentures
governing the 2016 and 2017 Notes to include (a) a consent to the removal, and
acknowledgment of the termination, of the CEC guarantee within each indenture
and (b) a modification of the covenant restricting disposition of “substantially all”
of CEOC’s assets to measure future asset sales based on CEOC’s assets as of the
date of the amendment (the “August Unsecured Notes Transaction”).
After the
August Unsecured Notes Transaction closed, CEC announced that CEOC had
provided notice to the Indenture Trustees, as well as other trustees for other
secured notes, reaffirming its contention that CEC’s Guarantee had been released
at CEOC’s election, first announced in June 2014.
None of the noteholders represented by plaintiffs consented, or were
afforded the opportunity to consent, to the May 2014 Transaction, the 6% Stock
Transfer, or the August Unsecured Notes Transaction (collectively, the “Guarantee
In January 2015, CEOC and 172 of its subsidiaries filed voluntary
See id. ¶¶ 62–63.
See id. ¶¶ 64–65.
See id. ¶ 66; UMB 56.1 ¶ 64.
petitions under chapter 11 of the Bankruptcy Code.
Under the terms of CEOC’s
proposed reorganization plan, the noteholders cannot recover the principal and
interest due under the Indentures.
The bankruptcy filing was an immediate Event
of Default under the Indentures, and as a result, CEOC’s and CEC’s obligations
under the Notes became due and owing.
BOKF served CEC with a demand for
payment on February 18, 2015, and CEC responded that it was not subject to the
Summary judgment is appropriate “only where, construing all the
evidence in the light most favorable to the non-movant and drawing all reasonable
inferences in that party’s favor, there is ‘no genuine issue as to any material fact
and . . . the movant is entitled to judgment as a matter of law.’”
“A fact is
material if it might affect the outcome of the suit under the governing law, and an
See BOKF 56.1 ¶ 70.
See id. ¶¶ 79–80; UMB 56.1 ¶ 74.
See BOKF 56.1 ¶¶ 74–75; UMB 56.1 ¶¶ 70–71. CEC disputes that it
has any obligations under these Notes, as it asserts that the Guarantees have been
See BOKF 56.1 ¶¶ 76–77.
Rivera v. Rochester Genesee Reg’l Transp. Auth., 743 F.3d 11, 19 (2d
Cir. 2014) (quoting Fed. R. Civ. P. 56(c)) (some quotation marks omitted).
issue of fact is genuine if the evidence is such that a reasonable jury could return a
verdict for the nonmoving party.”
“[T]he moving party has the burden of showing that no genuine issue
of material fact exists and that the undisputed facts entitle [it] to judgment as a
matter of law.”
To defeat a motion for summary judgment, the non-moving party
must “do more than simply show that there is some metaphysical doubt as to the
material facts,”
and “may not rely on conclusory allegations or unsubstantiated
In deciding a motion for summary judgment, “[t]he role of the court is
not to resolve disputed issues of fact but to assess whether there are any factual
issues to be tried.”
“‘Credibility determinations, the weighing of the evidence,
and the drawing of legitimate inferences from the facts are jury functions, not those
Windsor v. United States, 699 F.3d 169, 192 (2d Cir. 2012), aff’d, 133
S. Ct. 2675 (2013) (quotations and alterations omitted).
Coollick v. Hughes, 699 F.3d 211, 219 (2d Cir. 2012) (citations
Brown v. Eli Lilly & Co., 654 F.3d 347, 358 (2d Cir. 2011) (quotation
marks and citations omitted).
Id. (quotation marks and citations omitted).
Cuff ex rel. B.C. v. Valley Cent. Sch. Dist., 677 F.3d 109, 119 (2d Cir.
of a judge.’”
A. The Trust Indenture Act
The TIA provides that instruments to which it applies must be issued
under an indenture that has been qualified by the Securities and Exchange
Commission (“SEC”).
The requirements of such indentures are “designed to
vindicate a federal policy of protecting investors.”
Section 316 of the TIA relates to collective action clauses. For
example, it is permissible for a majority of noteholders to direct the trustee to
exercise its powers under the indenture or for not less than seventy-five percent of
noteholders “to consent on behalf of the holders of all such indenture securities to
Barrows v. Seneca Foods Corp., 512 Fed. App’x 115, 117 (2d Cir.
2013) (quoting Redd v. New York Div. of Parole, 678 F.3d 166, 174 (2d Cir.
See generally 15 U.S.C. §§ 77eee-77ggg. “A ‘trust indenture’ is a
contract entered into between a corporation issuing bonds or debentures and a
trustee for the holders of the bonds or debentures, which, in general, delineates the
rights of the holders and the issuer.” Upic & Co. v. Kinder-Care Learning Ctrs.,
Inc., 793 F. Supp. 448, 450 (S.D.N.Y. 1992).
Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 85 F.3d 970, 974
(2d Cir. 1996) (explaining that the law was “enacted because previous abuses by
indenture trustees had adversely affected ‘the national public interest and the
interest of investors in notes, bonds[, and] debentures . . . .’”) (quoting 15 U.S.C. §
the postponement of any interest payment for a period not exceeding three years
from its due date.”
Section 316(a)’s terms are permissive — meaning an
indenture can expressly exclude such majority action.
However, section 316(b) is mandatory. It states that:
Notwithstanding any other provision of the indenture to be
qualified, the right of any holder of any indenture security to
receive payment of the principal of and interest on such indenture
security, on or after the respective due dates expressed in such
indenture security, or to institute suit for the enforcement of any
such payment on or after such respective dates, shall not be
impaired or affected without the consent of such holder, except as
to a postponement of an interest payment consented to as provided
in paragraph (2) of subsection (a) of this section, and except that
such indenture may contain provisions limiting or denying the
right of any such holder to institute any such suit, if and to the
extent that the institution or prosecution thereof or the entry of
judgment therein would, under applicable law, result in the
surrender, impairment, waiver, or loss of the lien of such
indenture upon any property subject to such lien.
Thus, section 316(b) acts to protect a bondholder’s right to receive payment of
both principal and interest.
Section 316(b) addressed earlier practices whereby majority
bondholders — often controlled by insiders — used collective or majority action
clauses to change the terms of an indenture, to the detriment of minority
15 U.S.C. § 77ppp(a).
Id. § 77ppp(b).
As a result of section 316(b), an issuer cannot — outside of
— alter its obligation to pay bonds without the consent of each
In this way, section “316(b) was designed to provide judicial
scrutiny of debt readjustment plans to ensure their equity.”
See MeehanCombs Global Credit Opportunities Funds, LP v. Caesars
Entertainment Corp. (“MeehanCombs”), Nos. 14 Civ. 7091, 14 Civ. 7937, 2015
WL 221055, at *3 n.31 (S.D.N.Y. Jan. 15 2015) (collecting cases).
See, e.g., In re Board of Directors of Telecom Argentina, S.A., 528
F.3d 162, 172 (2d Cir. 2008) (“‘[I]t is self-evident that Section 316(b) could not
have been intended to impair the capacity of a debtor and its creditors to restructure
debt in the context of bankruptcy,’ and ‘[t]he cases have uniformly recognized that
reorganization proceedings in Chapter 11 are not within the purview of TIA
Section 316(b).’”) (quoting In re Delta Air Lines, Inc., 370 B.R. 537, 550 (Bankr.
S.D.N.Y. 2007), aff’d, 374 B.R. 516 (S.D.N.Y. 2007)).
See In re Board of Directors of Multicanal S.A., 307 B.R. 384, 388-89
(Bankr. S.D.N.Y. 2004); Mark J. Roe, The Voting Prohibition in Bond Workouts,
97 Yale L.J. 232, 251 (1987) (“Only two events should change a company’s
obligation to pay its bonds. Either each affected bondholder would consent to the
alteration of the bond’s terms, or a judge would value the company to determine
that the firm was insolvent, eliminate the stockholders, and then reduce the express
obligation to the bondholders.”) (emphasis in original).
Brady v. UBS Financial Services, Inc., 538 F.3d 1319, 1325 (10th Cir.
2008) (citing S. Rep. No. 76-248, at 26 (1939)); see also id. (“In practice, the
provision tends to force recapitalizations into bankruptcy court because of the
difficulty of completing a consensual workout.”); George W. Shuster, Jr., The
Trust Indenture Act and International Debt Restructurings, 14 Am. Bankr. Inst. L.
Rev. 431, 433-37 (2006) (“Section 316(b) was adopted with a specific purpose in
mind — to prevent out-of-court debt restructurings from being forced upon
minority bondholders.”); Roe, The Voting Prohibition, 97 Yale L.J. at 251
(“Congress and the SEC were aware that the holdout problem would frustrate some
workouts, but the regulators wanted to impede workouts that took place outside of
B. Contract Interpretation
Under New York law, “[t]he court’s function in interpreting a contract
is to apply the meaning intended by the parties, as derived from the language of the
contract in question.”
“[T]he best evidence of what parties to a written agreement
intend is what they say in their writing. Thus, a written agreement that is complete,
clear and unambiguous on its face must be enforced according to the plain meaning
of its terms.”

“The question of whether a written contract is ambiguous is a question
of law for the court.”
“Contract language is unambiguous when it has a definite
and precise meaning, unattended by danger of misconception in the purport of the
contract itself, and concerning which there is no reasonable basis for a difference
of opinion.”
However, contract language is ambiguous if “the terms of the
contract could suggest more than one meaning when viewed objectively by a
regulatory and judicial control. The SEC wanted trust indenture legislation that
would bring contractual recapitalizations under the jurisdiction of the federal
bankruptcy court.”) (emphasis in original).
Marin v. Constitution Realty, LLC, 11 N.Y.S.3d 550, 558–59 (1st
Dep’t 2015) (internal citations, quotations, and alterations omitted).
Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569 (2002)
(internal citations and quotations omitted).
JA Apparel Corp. v. Abboud, 568 F.3d 390, 396 (2d Cir. 2009).
Revson v. Cinque & Cinque, P.C., 221 F.3d 59, 66 (2d Cir. 2000).
reasonably intelligent person who has examined the context of the entire integrated
agreement and who is cognizant of the customs, practices, usages and terminology
as generally understood in the particular trade or business.”
“Evidence outside
the four corners of the document as to what was really intended but unstated or
misstated is generally inadmissible to add to or vary the writing; evidence as to
custom and usage is considered, as needed, to show what the parties’ specialized
language is fairly presumed to have meant.”

A. Impairment Under the TIA
In MeehanCombs, I rejected CEC’s arguments that section 316(b)
protected only a noteholder’s legal right to receive payment when due. Rather, I
agreed with two other courts in this district that “when a company takes steps to
preclude any recovery by noteholders for payment of principal coupled with the
elimination of the guarantors for its debt, . . . such action . . . constitute[s] an
‘impairment’ . . . .”
I continue to adhere to the view that section 316(b) protects a
Law Debenture Trust Co. of New York v. Maverick Tube Corp., 595
F.3d 458, 466 (2d Cir. 2010).
Id. at 466–67.
Federated Strategic Income Fund v. Mechala Grp. Jamaica Ltd., No.
99 Civ. 10517, 1999 WL 993648, at *7 (S.D.N.Y. Nov. 2, 1999).
noteholder’s practical ability, as well as the legal right, to receive payment when
Specifically, I concluded, following the reasoning of two decisions from
this District, that section 316(b) protects more than simply “formal, explicit
modification of the legal right to receive payment” which would allow “a
sufficiently clever issuer to gut the Act’s protections.”
As explained in Federated
Strategic Income Fund:
By defendant’s elimination of the guarantors and the simultaneous
disposition of all meaningful assets, defendant will effectively
eliminate plaintiffs’ ability to recover and will remove a holder’s
“safety net” of a guarantor, which was obviously an investment
consideration from the outset. Taken together, these proposed
amendments could materially impair or affect a holder’s right to
sue. A holder who chooses to sue for payment at the date of
maturity will no longer, as a practical matter, be able to seek
recourse from either the assetless defendant or from the
discharged guarantors. It is beyond peradventure that when a
company takes steps to preclude any recovery by noteholders for
payment of principal coupled with the elimination of the
guarantors for its debt, that such action . . . constitute[s] an
“impairment” . . . [of] the right to sue for payment.
Accord Marblegate Asset Mgmt., LLC v. Education Mgmt. Corp.
(“Marblegate II”), No. 14 Civ. 8584, 2015 WL 3867643 (S.D.N.Y. June 23, 2015)
(reviewing legislative history to conclude that section 316(b) protects against
nonconsensual debt restructuring to protect a noteholder’s right to receive
Marblegate Asset Mgmt. v. Education Mgmt. Corp. (“Marblegate I”),
75 F. Supp. 3d 592, 613 (S.D.N.Y. 2014)
Federated Strategic Income Fund, 1999 WL 993648, at *7.
In MeehanCombs, I stated that “the Complaint’s plausible allegations
that the August 2014 Transaction stripped plaintiffs of the valuable CEC
Guarantees leaving them with an empty right to assert a payment default from an
insolvent issuer are sufficient to state a claim under section 316(b).”
however, I must decide several questions left open by MeehanCombs. Namely,
what must plaintiffs prove to demonstrate an impairment that violates section
316(b)? Plaintiffs contend that there are only two elements: “(i) an impairment of
a security holder’s right to receive payment (ii) without the holder’s consent.”

Thus, they assert that because the Guarantees were purportedly stripped without
their consent, CEC’s actions violated section 316(b).
CEC responds with several arguments. First, CEC contends that, in
order to violate section 316(b), the alleged impairment must be either: (1) an
amendment of a core term of the debt instrument or (2) a restructuring of the
noteholders’ debt. Second, CEC asserts that the impairment should be evaluated as
of the time of each transaction — that is, plaintiffs must prove that CEOC was
insolvent at the time the Guarantees were terminated, leaving the noteholders with
no ability to recover as of the time of the transaction. Related to this argument,
MeehanCombs, 2015 WL 221055, at *5.
Plaintiff BOKF N.A.’s Memorandum of Law in Support of Its Motion
for Partial Summary Judgment (“BOKF Mem.”) at 16–17.
CEC asserts that the Guarantees were never intended to provide credit support, and
therefore the release of a Guarantee that provided no real value to noteholders
cannot be an impairment. Finally, CEC argues that there are genuine disputes of
material fact as to whether the challenged transactions were, either individually or
collectively, a restructuring of the noteholders’ debt, and that CEC has been
prevented from pursuing discovery essential to its opposition.
As described more fully below, I conclude that in order to prove an
impairment under section 316(b), plaintiffs must prove either an amendment to a
core term of the debt instrument, or an out-of-court debt reorganization.
alleged impairment, however, must be evaluated as of the date that payment
becomes due, because it is only then that the bondholders’ right to payment has
been affected by certain actions and/or transactions undertaken by issuers or
1. The Nature of the Guarantee
I begin by addressing the nature of the Guarantee. CEC asserts that
The term “reorganization” has been defined as follows: “A process
designed to revive a financially troubled or bankrupt firm. A reorganization
involves the restatements of assets and liabilities, as well as holding talks with
creditors in order to make arrangements for maintaining repayments.
Reorganization is an attempt to extend the life of a company facing bankruptcy
through special arrangements and restructuring in order to minimize the possibility
of past situations reoccurring.” Reorganization Definition,, (last visited Aug. 26, 2015).
the noteholders cannot have been practically impaired by the release of the
Guarantee because the Guarantee was never intended to provide credit support for
the Notes. Rather, CEC contends that the Guarantee was included in the Indenture
only as a regulatory device to comply with Rule 3-10 of SEC Regulation S-X.
This regulation would allow CEOC to rely on CEC’s audited financials rather than
preparing and filing its own audited financial statements.
Plaintiffs respond that
the Guarantee language in the Indenture is unambiguous: it provides for an
unequivocal guarantee by CEC. Thus, any extrinsic evidence regarding the
purported intent of the Guarantee is inadmissable under New York law.
Section 12.01(a) of the Indenture spells out the terms of the
Each Guarantor hereby jointly and severably, irrevocably and
unconditionally guarantees . . . the full and punctual payment
when due, whether at Stated Maturity, by acceleration, by
redemption or otherwise, of all obligations of the Issuer under this
Indenture (including obligations to the Trustee) and the Notes,
whether for payment of principal of, premium, if any, or interest
on in respect of the Notes and all other monetary obligations of
the Issuer under this Indenture and the Notes . . . .
See Memorandum of Law of Caesars Entertainment Corporation in
Opposition to BOKF, N.A.’s Motion for Partial Summary Judgment (“Opp.
Mem.”) at 9–10 (citing 17 C.F.R. Part 210.3-10).
BOKF 56.1 ¶ 6 (emphasis added). The language in the UMB
Indenture is substantively identical. See UMB 56.1 ¶ 8.
Additionally, section 12.01(g) provides that “[e]ach Guarantor agrees that its Note
Guarantee shall remain in full force and effect until payment in full of all the
Guaranteed Obligations.”
The release of the Guarantee is governed by section
12.02(c) of the Indenture, which provides that CEC
shall be deemed to be released from all obligations . . . upon:
(i) the Issuer ceasing to be a Wholly Owned Subsidiary of
Harrah’s Entertainment;
(ii) the Issuer’s transfer of all or substantially all of its
assets to, or merger with, an entity that is not a Wholly Owned
Subsidiary of Harrah’s Entertainment in accordance with Section
5.01 and such transferee entity assumes the Issuer’s obligations
under this Indenture; and
(iii) the Issuer’s exercise of its legal defeasance option or
covenant defeasance option under Article VIII or if the Issuer’s
obligations under this Indenture are discharged in accordance with
the terms of this Indenture.
Finally, the Indenture provides that the TIA governs the Indenture and
controls in the event of an inconsistency between the TIA and the Indenture: “If
and to the extent that any provision of this Indenture limits, qualifies or conflicts
with the duties imposed by . . . Sections 310 to 318 of the TIA, inclusive, such
imposed duties . . . shall control.”
CEC contends that several provisions of the Indenture indicate that the
BOKF 56.1 ¶ 6; UMB 56.1 ¶ 10.
BOKF 56.1 ¶ 14; UMB 56.1 ¶ 15.
See BOKF 56.1 ¶ 11 (quoting section 13.01 of the Indenture).
Guarantee was not intended to provide credit support. First, it asserts that the
Guarantee could be released under any one of the three conditions listed above —
that is, CEC reads the release provisions disjunctively, rather than conjunctively, as
the “and” would suggest. As such, the Guarantee could be easily terminated by
unilateral action on CEC’s part. Relying on the release provisions of the Indenture
— as well as extrinsic evidence of third-party analyses of the release provisions —
CEC contends that the Guarantee was intended to be nothing more than a
“guarantee of convenience” to facilitate regulatory filings. Second, CEC argues
that it has been prevented from obtaining discovery as to, inter alia, whether the
noteholders believed the Guarantee provided genuine credit support. Thus, CEC
argues that there is a genuine dispute of material fact as to whether the release of
the Guarantee impaired the noteholders’ right to payment.
These arguments fail under the most basic rule of contract
construction — where the language of an agreement is unambiguous, courts must
enforce the agreement according to the agreement’s plain language: “‘[I]f the
agreement on its face is reasonably susceptible of only one meaning, a court is not
free to alter the contract to reflect its personal notions of fairness and equity.’”

Here, the language of the Guarantee is “clear, unequivocal and unambiguous” and
Law Debenture Trust Co., 595 F.3d at 468 (quoting Greenfield, 98
N.Y.2d at 569–70).
therefore must be “enforced according to its terms.”
The Indenture states that
CEC “irrevocably and unconditionally guarantees . . . the full and punctual
payment when due.”
Nothing in the remaining language of section 12.01(a) casts
any ambiguity upon the clear language indicating that the Guarantee is indeed one
that provides a promise of full payment in the event that CEOC was unable to
fulfill its payment obligations. Further, there is no indication from any other
section of the Indenture that the Guarantee was put in place merely to facilitate
regulatory filings. Thus, the plain language of the Guarantee section indicates that
it provided credit support.
Additionally, nothing in the release provisions creates an ambiguity.
Whether or not the release provisions are read conjunctively or disjunctively,
mere fact that CEC could be released from the Guarantee under certain
circumstances says little about the nature of the Guarantee itself. That is, simply
because a Guarantee may be easily terminated — assuming that CEC could
terminate it by unilateral action and by causing any one of three conditions to occur
— does not indicate that the Guarantee was something other than an
Bailey v. Fish & Neave, 8 N.Y.3d 523, 528 (2007).
BOKF 56.1 ¶ 6; UMB 56.1 ¶ 8.
The parties have not briefed this issue, and I need not decide the issue
“unconditional[] guarantee[] [of] . . . full and punctual payment when due.”
Finally, the Indenture also included a provision stating that any
obligations that arise under the TIA control in the event that any provision conflicts
with the TIA. Though I do not today decide this issue, there is no dispute that,
whatever the release provision allowed, it cannot provide CEC with a path to
impair noteholders’ rights under section 316(b). In other words, if, in taking
actions allowed under the release provision of the Indenture, CEC violated
noteholders’ rights to payment under section 316(b), then the release was invalid as
a matter of law. Moreover, the fact that plaintiffs consented to the provision by
agreeing to the Indenture is of no moment. Though all parties to the Indenture are
sophisticated — and no doubt were represented by sophisticated attorneys —
signatories to a contract cannot consent to violate the law.
That is, it is
undisputed that plaintiffs consented to a release provision, which is not, in and of
itself, a violation of the TIA. But plaintiffs could not have known, ex ante, the
transactions that would occur or whether those transactions would, in fact, violate
the TIA. If the transactions that triggered the release of the Guarantee — even
See, e.g., Kaiser-Frazer Corp. v. Otis & Co., 195 F.2d 838, 843 (2d
Cir. 1952) (“[I]t is clear that a contract which violates the laws of the United States
and contravenes the public policy as expressed in those laws is unenforceable.”).
assuming that they did not violate the terms of the Indenture — violate the TIA,
then plaintiffs’ consent to the release provision cannot be a consent to the
Guarantee Transactions.
CEC supports its argument with third-party analyst reports and expert
declarations that understand the Guarantee to merely facilitate financial reporting
obligations, and not to provide credit support. But in the face of an unambiguous
contract, this evidence is inadmissible. A court may only consider evidence of
custom and usage where “parties have used contract terms which are in common
use in a business or art and have a definite meaning understood by those who use
them, but which convey no meaning to those who are not initiated into the
mysteries of the craft . . . . Proof of custom and usage does not mean proof of the
parties’ subjective intent . . . .”
But there are no specialized terms used in the
Guarantee provision that would necessitate looking to extrinsic evidence of custom
and usage. Rather, CEC appears to argue that, while the language of the Indenture
unambiguously spells out a guarantee of credit support, the parties all understood
that the Guarantee was essentially meaningless. This is exactly the type of
extrinsic evidence of subjective intent that is inadmissible under New York law:
“‘[e]vidence outside the four corners of the document as to what was really
Law Debenture Trust Co., 595 F.3d at 466 (internal quotations
intended but unstated or misstated is generally inadmissible to add to or vary the
Finally, further discovery would not lead to admissible evidence that
could create a genuine issue of material fact. CEC seeks discovery relating to the
noteholders’ understanding of the Guarantee. As discussed above, such evidence
is inadmissable where the language of the contract is unambiguous.
2. Plaintiffs Must Prove Either an Amendment of a Core
Term of the Debt Instrument or an Out-of-Court Debt
Although I conclude that the Guarantee unambiguously provided
credit support, the mere release of the Guarantee, standing alone, does not prove an
impairment under section 316(b). Plaintiffs argue that the release of the Guarantee
without their consent is “the kind of transaction that Section 316(b) was designed
to prohibit.”
But this proposition sweeps too broadly. The case on which
plaintiffs rely for this proposition recognizes that a guarantee release clause could,
in some contexts, be invoked without violating section 316(b).
Although the
plain language of the TIA prohibits any impairment to a noteholder’s right to
Id. (quoting W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157, 162
BOKF Mem. at 20.
See Marblegate I, 75 F. Supp. 3d at 615–16.
payment, plaintiffs’ broad reading of the statute would allow “untrammeled
judicial intrusion into ordinary business practice.”
Thus the question remains as
to what plaintiffs must prove to establish an impairment.
The issue before Judge Failla in Marblegate II was whether a debt
restructuring violated section 316(b) when it did not modify any indenture term
explicitly governing the right to receive interest or principal on a certain date, yet
left bondholders no choice but to accept a modification of the terms of their
That is, if bondholders did not accept a modification, there would be no
formal alteration of the dissenting noteholders’ right to payment; however, the
transaction at issue was “unequivocally designed to ensure that they would receive
no payment if they dissented from the debt restructuring.”
Judge Failla
exhaustively reviewed the legislative history of section 316(b) to conclude that it
was designed to prevent a “nonconsensual majoritarian debt restructuring.”

Notably, Judge Failla did not need to go beyond that conclusion, because the facts
Id. at 614.
See Marblegate II, 2015 WL 3867643, at *3.
Id. at *2. Importantly, the transaction effected a restructuring of only
the debt of consenting noteholders. Dissenting noteholders retained their right to
payment under their indentures, but were left with no practical ability to receive
Id. at *11.
of that case left “little question that [the transaction at issue was] precisely the type
of debt reorganization that the Trust Indenture Act is designed to preclude.”
Here, all parties agree that no term of the Indenture was amended. It
is indisputable that if CEOC had unilaterally adjusted the amount of principal or
interest it would pay on a note, that would be an impairment under section 316(b).
Similarly, renegotiating a debt obligation with a majority of noteholders to the
detriment of a nonconsenting minority under the same indenture would be an
impairment. Here, however, neither of those straightforward violations of section
316(b) have occurred. Rather, plaintiffs argue that by allegedly exercising its
rights under the release provisions contained in the Indenture, CEC impaired
plaintiffs’ rights as prohibited by the TIA because it affected their practical ability
to receive payment on the Notes. By contrast, CEC argues that its actions were
permitted by the Indenture and did not violate the TIA, even if plaintiffs’ ability to
receive payment was indirectly affected. Therefore, this Court must interpret
section 316(b) to determine what actions, beyond the detrimental amendment of
core terms of an indenture, constitute an impairment under the TIA.
I begin with the plain language of section 316(b), which states that
“the right of any holder of any indenture security to receive payment of the
Id. at *12.
principal of and interest on such indenture security, on or after the respective due
dates . . . , or to institute suit for the enforcement of any such payment on or after
such respective dates, shall not be impaired or affected without the consent of such
holder . . . .”
The use of the disjunctive “or” lends support to the conclusion that
section 316(b) protects both the right to sue for payment as well as the substantive
right to receive such payment.
The legislative history of the section confirms this reading, and also
illuminates the broader purpose of section 316(b). A 1936 SEC report provided
the impetus for the TIA.
This report discussed the problems minority
bondholders faced, including reorganizations conducted outside the supervision of
a judicial or administrative process.
The TIA went through several iterations,
15 U.S.C.§ 77ppp(b) (emphasis added).
See Loughrin v. United States, 134 S. Ct. 2384, 2390 (2014) (“To read
the next clause, following the word ‘or,’ as somehow repeating that requirement,
even while using different words, is to disregard what ‘or’ customarily means. As
we have recognized, that term’s ordinary use is almost always disjunctive, that is,
the words it connects are to be given separate meanings.”) (internal quotations
See 15 U.S.C. § 77bbb(a).
See Securities and Exchange Commission, Report on the Study and
Investigation of the Work, Activities, Personnel and Functions of Protective and
Reorganization Committees, Part VI: Trustees Under Indentures 63–64, 150
accompanied by testimony and debate in the Senate and House. This testimony
indicated a concern with protecting minority bondholders’ rights against a majority
forcing a non-assenting minority into a debt-readjustment plan. The Senate’s
report in 1938, which largely reiterated the testimony of then-SEC Chairman
William O. Douglas, stated that the predecessor provision to section 316(b) would
prohibit provisions authorizing . . . a majority to force a non-
assenting security holder to accept a reduction or postponement of
his claim for principal . . . . Evasion of judicial scrutiny of the
fairness of debt-readjustment plans is prevented by this
prohibition . . . . This prohibition does not prevent the majority
from binding dissenters by other changes in the indenture or by a
waiver of other defaults, and the majority may of course consent
to alterations of its own rights.
The final version of the text of section 316(b) was significantly revised from
previous versions. The significant differences were (1) instead of providing
discretion to the SEC, the TIA set out mandatory indenture provisions; and (2) the
addition of the language providing for a right to receive payment in addition to the
right to institute suit.
However, the understanding of section 316(b) remained the
same: “Evasion of judicial scrutiny of the fairness of debt-readjustment plans is
prevented by this prohibition.”
S. Rep. No. 75-1619, at 19 (1938).
See Marblegate II, 2015 WL 3867643, at *9.
Id. (quoting 1939 House Hearings at 31).
Thus, the legislative history makes clear the purpose of the right
enunciated in section 316(b): to protect minority bondholders against debt
reorganizations resulting from a majority vote, outside of judicial supervision.
This reading tracks the plain language of the statute, giving effect to both clauses
— the right to institute suit, as well as the right to receive payment. It also
provides an important limitation on the right. Broadly understood, as plaintiffs
urge, the right enumerated in section 316(b) would prevent any corporate action
that had any effect on a noteholder’s ability to receive payment. An interpretation
of section 316(b) that requires plaintiffs to prove either an amendment to a core
term of the debt instrument or an out-of-court debt reorganization — in keeping
with the purpose underlying the provision — allows for corporate flexibility while
protecting minority bondholders against being “forced to relinquish claims outside
the formal mechanisms of debt restructuring.”
Taking this purpose into account, as well as the plain language of the
statute, I reject CEC’s contention that plaintiffs must establish a restructuring of
their particular debt. There is no question that, had CEC attempted to restructure
the plaintiffs’ debt by amending a core term of the Indenture without their consent,
that action would violate the TIA. But, as in Marblegate, an impairment may also
See id. at 12.
occur where a company restructures debt arising under other notes, in the context
of an out-of-court reorganization, leaving some noteholders with an unaltered
formal right to payment, but no practical ability to receive payment. For example,
it might be that taking on new debt, where the new investors require as a condition
of their investment that the rights of existing bondholders be altered — in other
words, the terms of the B-7 Transaction — constitutes an out-of-court
reorganization that impairs bondholders’ rights under the TIA.
3. There Is a Genuine Dispute of Material Fact as to Whether
the Guarantee Transactions Were an Out-of-Court
The remaining question is whether the Guarantee transactions were an
out-of-court reorganization. CEC asserts that plaintiffs must establish CEOC’s
insolvency at the time of each challenged transaction — that is, the transaction
must involve a termination of the Guarantee in the context of an insolvent issuer,
which would have the effect of a complete impairment of the noteholders’ right to
receive payment at the time of the transaction. The plain language of section
316(b) does not support CEC’s argument: “the right of any holder . . . to receive
payment . . . on or after the respective due dates . . . shall not be impaired . . . .”
Thus the statute measures impairment as of the date payment is due — the
language necessarily requires a court to examine whether, as of the due date, a
noteholder’s right to payment has been impaired.
Further, using CEC’s narrow
reading, a company could too easily skirt the requirements of section 316(b) by
stripping a guarantee in one transaction and then, in separate but related
transactions, effect a company-wide debt restructuring, leaving noteholders with
“an empty right to assert a payment default from an insolvent issuer.”

CEC notes that without a requirement that an issuer be insolvent at the
time of the transaction, ordinary corporate activities would potentially violate the
TIA. That is, if an issuer became insolvent at any point, earlier corporate activities
could support a claim under section 316(b) so long as the plaintiff alleges that
those earlier activities impaired the noteholders’ rights to receive payment. This
would expose “countless routine transactions that companies undertake without the
unanimous consent of their creditors — such as raising senior debt or other new
funds; exchange offers for existing debt; ordinary sales of assets; or new
investments — as potential violations of the TIA . . . .”
But examining the
transactions as a whole to determine whether they collectively constitute an
Of course, nothing would prevent a plaintiff seeking prospective,
declaratory relief from bringing an action and proving an impairment as of the time
of the transaction.
MeehanCombs, 2015 WL 221055, at *5.
Opp. Mem. at 26.
impermissible out-of-court reorganization in violation of the noteholders’ rights
under section 316(b) allows the Court to avoid defendants’ parade of horribles. A
routine transaction that, after examination with a full record, is unrelated to a a
reorganization but nevertheless resulted in a noteholder receiving a reduced
payment would not violate section 316(b).
To make the point crystal clear, I explain this reasoning in the context
of the instant lawsuits. At the time that CEC was released from the Guarantee —
and for the purposes of this motion only plaintiffs concede that the Guarantee has
been stripped – CEOC (the issuer) was not yet insolvent and was not yet unable to
pay on notes which (by the way) were not yet due to be paid. At that moment, it
cannot be said the plaintiffs rights were impaired because they could not know
whether CEOC would be in a stronger position to ultimately meet its obligations
under the Indentures as a result of the Guarantee Transactions than it would have
been otherwise. It is only at the time that payment was required — here CEOC’s
chapter 11 filing and its proposed reorganization plan — that plaintiffs’ rights
became impaired as a result of the stripping of the Guarantee. Thus, it is only as of
that moment in time that a court can evaluate whether the Guarantee stripping
violated the TIA because the action was taken as part of an out-of-court
reorganization without the consent of the plaintiff bondholders.
Nonetheless, under this standard, plaintiffs have not met their burden
of demonstrating that there is no genuine dispute of material fact as to whether the
Guarantee Transactions effected a nonconsensual debt restructuring. As discussed
above, the purported termination of the Guarantees must be in the context of a debt
reorganization. Thus, the transactions must be analyzed as a whole to determine if
the overall effect was to achieve a debt restructuring that impaired plaintiffs’ right
to payment.
In light of this, summary judgment is inappropriate at this stage
where, as here, there is a genuine dispute as to whether the challenged transactions,
either individually or collectively, were an out-of-court reorganization and the
record has not yet been fully developed. CEC raises questions as to whether the
transactions were “routine corporate transaction[s] . . . undertaken in an effort to
improve CEOC’s financial condition”
or whether the transactions were
undertaken as part of a plan to accomplish an out-of-court restructuring of all
CEOC debt.
With the benefit of full discovery, the factfinder may examine all
evidence related to these transactions to determine whether a restructuring occurred
Id. at 22.
To be clear, the Court is not importing an intent requirement into
section 316(b) where none exists. Rather, the evidence related to the transactions
must be examined to determine what the overall effect of the transactions was — a
debt restructuring or a series of routine corporate transactions.
— i.e., did the transactions involve the restatement of assets and liabilities, did
CEOC hold talks with creditors in order to make arrangements for maintaining
repayments, and did the transactions attempt to extend the life of a company facing
bankruptcy through special arrangements and resturucturing?
Nevertheless, only limited discovery is permitted to allow the parties
to develop the record with regard to these transactions. Defendants have requested
discovery related to (1) whether the challenged transactions were a restructuring;
(2) whether the noteholders’ prospects for recovery were adversely affected by the
challenged transactions; and (3) “whether the [noteholders] believed the Guarantee
provided genuine credit support.”
Defendants may pursue only the first and
second avenues of the requested discovery. As discussed above, the parties’
subjective intent or understanding of the Guarantee is irrelevant and inadmissible
in the face of unambiguous contractual language.
B. Certification Under 28 U.S.C. § 1292(b)
I am keenly aware that this Order addresses several questions of
unresolved law, and may have serious implications for corporate entities. I
therefore sua sponte certify this Order for an interlocutory appeal pursuant to 28
Id. at 34. I have reworded the requests articulated by CEC in their
Memorandum of Law because those requests are broader than the discovery I am
permitting, as stated above.
U.S.C. § 1292(b).
The Second Circuit has yet to address three threshold issues
that would be decisive for this litigation: First, what rights does section 316(b) of
the TIA protect? Does it protect noteholders’ practical rights to principal and
interest, as this Court and several others have held, or only their legal rights, as
other courts have concluded? Second, assuming that section 316(b) protects more
than a bare legal right, what is the appropriate standard to assess impairment?
Must plaintiffs show that a nonconsensual out-of-court restructuring occurred? If
so, must there be an amendment to the debt instrument itself? Third, as of when
(and how) should the impairment be evaluated? Must a court evaluate each
transaction separately at the time it was undertaken? Or is the impairment to be
evaluated as of the date for demand of payment? May a court consider multiple
transactions collectively?
It is a “basic tenet of federal law to delay appellate review until a final
judgment has been entered.”
However, a court, in its discretion, may certify an
interlocutory order for appeal if the order “[1] involves a controlling question of
law [2] as to which there is substantial ground for difference of opinion and [3] that
See Aurora Maritime Co. v. Abdullah Mohamed Fahem & Co., 85
F.3d 44 (2d Cir. 1996) (accepting interlocutory appeal certified by district court
sua sponte); Wisdom v. Intrepid Sea-Air Space Museum, 993 F.2d 5, 6–7 (2d Cir.
1993) (same).
Koehler v. Bank of Bermuda, Ltd., 101 F.3d 863, 865 (2d Cir. 1996).
an immediate appeal from the order may materially advance the ultimate
termination of the litigation.”
Interlocutory appeals are presumptively
disfavored, and are only warranted in “extraordinary cases where appellate review
might avoid protracted and expensive litigation . . . .”
This is the unusual case in which certification is appropriate. An
interlocutory appeal is in the interests of all parties, and will ensure judicial
economy. There are billions of dollars riding on this decision — BOKF and UMB
together seek more than $7 billion, which is “far in excess of CEC’s market
CEOC has already filed for bankruptcy, and — given the amount
at stake — a decision in plaintiffs’ favor would likely open the door to a
bankruptcy filing by CEC.
The question of the correct interpretation of section 316(b) is a
controlling issue of law. It is a “‘pure’ question of law that the reviewing court
could decide quickly and cleanly without having to study the record.”
28 U.S.C. § 1292(b).
Consub Delaware LLC v. Schahin Engenharia Limitada, 476 F. Supp.
2d 305, 309 (S.D.N.Y. 2007).
Opp. Mem. at 6.
In re Worldcom, Inc., No. M-47, 2003 WL 21498904, at *10
(S.D.N.Y. June 30, 2003).
controlling issue of law for the purposes of section 1292(b) includes not only those
issues that will resolve the action in its entirety, but those that are dispositive in
other respects, such as whether a claim exists as a matter of law.
The correct
construction of section 316(b) is dispositive in this respect, and is therefore a
controlling issue of law. Moreover, it will materially advance the ultimate
termination of the litigation. Understanding whether plaintiffs may assert a claim
under section 316(b) — and if so, what the correct standard for assessing an
impairment is — will enable the parties either to avoid a protracted and most likely
exorbitantly expensive trial entirely, or to avoid trying the same claim twice under
different standards.
Finally, the brewing circuit split and the range of views expressed by
district and bankruptcy courts indicate that there is substantial ground for
difference of opinion on the correct interpretation of section 316(b). As noted
above, three courts in this district have concluded that section 316(b) protects
noteholders’ practical right to payment.
Another court in this district, as well as
See 19 Moore’s Federal Practice § 203.31 (Matthew Bender 3d ed.
2013) (collecting Second Circuit cases).
See MeehanCombs, 2015 WL 221055, at *4–5; Marblegate I, 75 F.
Supp. 3d at 611–15; Federated Strategic Income Fund, 1999 WL 993648, at *7. A
notice of appeal has been filed in Marblegate II. As that case involves some of the
same legal issues, an appellate court may wish to consolidate the appeals. See
Notice of Appeal, Dkt. No. 80 in Marblegate Asset Management, LLC v.
courts elsewhere, have concluded that section 316(b) protects only noteholders’
legal rights.
Further, whether an impairment requires a nonconsenual out-of-
court restructuring, and the standard under which to evaluate the challenged
transaction, are questions that only this Court and Judge Failla have addressed.
These issues are almost certain to arise again, and without guidance from an
appellate court, the divide in the correct interpretation of section 316(b) will likely
only deepen. These issues are therefore appropriate for certification.
Nevertheless, I do not certify this Order for appeal as an alternative to
proceeding. The parties are expected to remain on schedule, and the Court is ready
to proceed, at the conclusion of discovery on September 30, with full summary
judgment or a bench trial. It may be that the contract interpretation issue related to
the release provision — which the parties have not briefed for this motion — will
be dispositive.
Education Mgmt. Corp., No. 14 Civ. 8584.
See In re Northwestern Corp., 313 B.R. 595, 600 (Bankr. D. Del.
2004) (“[Section 316(b)] applies to the holder’s legal rights and not the holder’s
practical rights to the principal and interest itself.”) (emphasis in original); Brady
v. UBS Financial Services, Inc., 538 F.3d 1319, 1326 n.9 (10th Cir. 2008) (quoting
Northwestern); YRC Worldwide Inc. v. Deutsche Bank Trust Co. Americas, No. 10
Civ. 2106, 2010 WL 2680336, at *7 (D. Kan. July 1, 2010) (following
Northwestern). See also UPIC & Co., 793 F. Supp. at 456 (noting that while
section 316(b) guarantees a “procedural” right to commence an action for
nonpayment, it does not “[a]ffect or alter the substance of a noteholder’s right to
– Appearances –
For Plaintiff BOKF, N.A.:
Mark Joachim, Esq.
Andrew Silfen, Esq.
Michael S. Cryan, Esq.
Arent Fox LLP (New York)
1675 Broadway
New York, NY 10019
(212) 484-3929
For Plaintiff UMB Bank, N.A.:
David A. Chrichlow, Sr., Esq.
Rebecca Kinburn, Esq.
Karen B. Dine, Esq.
Katten Muchin Rosenman, LLP
575 Madison Avenue
New York, NY 10022
For Defendant Caesars Entertainment Corporation:
Lewis R. Clayton, Esq.
Michael E. Gertzman, Esq.
Jonathan H. Hurwitz, Esq.
Ankush Khardori, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, NY 10019
(212) 373-3000
Eric Seiler, Esq.
Philippe Adler, Esq.
Jason Rubinstein, Esq.
Friedman Kaplan Seiler & Adelman LLP
7 Times Square
New York, NY 10036
(212) 833-1100

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No. 15 Civ. 0207 (BMC).

United States District Court, E.D. New York.

August 18, 2015.


BRIAN M. COGAN, District Judge.

This is an action by administrators of an ERISA pension fund and the Union that created the fund seeking unpaid pension contributions. All four corporate defendants are alleged to be signatories of or, in one case, a former signatory of a collective bargaining agreement that gave rise to pension contribution obligations; all four defendants are also alleged to be alter egos of each other.

Defendants have collectively advised the Court by letter that defendant Canal Asphalt, Inc. has filed for Chapter 11 relief in the Southern District of New York, and they assert that as a result of that, this action is stayed against all defendants pursuant to the Bankruptcy Code’s automatic stay, 11 U.S.C. § 362(a)(1). In response, I entered an Order noting that the automatic stay, by its terms, protects only debtors under the Bankruptcy Code, see id. (a bankruptcy petition “operates as a stay . . . of . . . the commencement or continuation . . . [of an] action or proceeding against the debtor . . .) (emphasis added), and since this action involves non-debtor defendants in addition to the debtor defendant, the action would continue against those nondebtor defendants. Defendants then submitted an additional letter, asserting that because the complaint contains an alter ego claim, the automatic stay applies to all defendants, both debtor and non-debtor. For this proposition, they cite In re Adler, 494 B.R. 43 (Bankr. E.D.N.Y. 2013) (“Adler II”), asserting that it is “directly on point.”

Adler II is not directly on point; its context is quite different, although it does contain dictum that supports defendants’ position. But in any event, I disagree with that dictum for the reasons set forth below.

Adler was an individual Chapter 7 case. Prior to the filing of the bankruptcy, creditors brought a state court action against Adler and five corporations which he controlled. The claim was against those corporations; Adler was alleged to be liable on the basis of his being their alter ego, and the corporations were alleged to be alter egos of each other. When Adler filed his Chapter 7 petition, the action was not stayed against the non-debtors. Rather, “the State Court severed and stayed the State Court Lawsuit against the Debtor individually, including the cause of action seeking to pierce the corporate veil. The lawsuit continued as against the Corporations only.” In re Adler, 467 B.R. 279, 283 (Bankr. E.D.N.Y. 2012) (“Adler I”). Apparently, neither the debtor nor the Chapter 7 Trustee took any action to prevent prosecution against Adler’s corporations. The corporations defaulted, and the creditors obtained judgment against them in state court. In the inquest on damages, the state court also found that the corporations were alter egos of each other.

The judgment creditors then sought to pursue their claims in Bankruptcy Court against Adler and the non-debtors, and objected to the dischargeabilty of Adler’s debt on the ground of fraud. Adler I constituted the Bankruptcy Court’s determination to pierce the corporations’ veil and hold Adler liable for their debt. Adler II, upon which defendants rely here, held that the debt was non-dischargeable.

Defendants point out that in the course of Adler II, the Bankruptcy Court noted that because it had held in Adler I that Adler was an alter ego of the corporations, the state courts’ entry of judgment against the corporations was a nullity. The Bankruptcy Court commented:

The first consequence of the Piercing Ruling arises under § 362(a)(1). As the Debtor and the alter ego Corporations were at all relevant times one and the same entity, the automatic stay in § 362(a)(1) foreclosed any judicial action against the Debtor and the Corporations alike upon the Debtor’s filing of his individual bankruptcy petition on July 28, 2004. Consequently, to the extent any prepetition judicial action against the Corporations continued into the post-petition period, that proceeding violated § 362(a)(1) and was void as a matter of law. Here, since the decision of the New York Supreme Court . . . finding the Corporations liable to the Plaintiffs for $2,025,849.97 was issued post-petition, it is such a nullity. Its findings regarding the Corporations’ liability therefore lack any legal effect.

Adler II, 494 B.R. at 53 . The Bankruptcy Court went on to conclude, nevertheless, that the corporations and Adler were liable as alter egos in the same amount as had been found by the state court.

The difficulty I have with the Bankruptcy Court’s dictum is twofold. First, it ignores the plain language of the statue, which provides that the automatic stay protects only the debtor, not non-debtor entities. Just because two entities are alter egos does not make them both debtors under the Bankruptcy Code. It simply means they are liable for each other’s debts. If the non-debtor entity wants that protection, it need only file its own petition.

Second, the Bankruptcy Court’s dictum makes the automatic stay into a provision that can only be applied with the benefit of hindsight. It allows extensive litigation in the nonbankruptcy court, and then invalidates everything that occurred even though the debtor made no effort to stop it. If the state court or the Bankruptcy Court had determined, for example, that the corporations were not alter egos, then the automatic stay would never have applied. Moreover, it is well established that non-bankruptcy courts have concurrent jurisdiction with the bankruptcy court to determine the scope of the automatic stay. See In re Baldwin-United Corp. Litig., 765 F.2d 343 (2d Cir. 1985) ; see also In re Colasuonno, 697 F.3d 164, 172 n.4 (2d Cir. 2012) . It follows from this that the state court in the instant case was free to determine, as it did, that the automatic stay did not protect the non-debtor corporations, and to thereupon proceed to judgment in its case. The state court in Adler was careful, as it should have been, in abstaining from deciding whether Adler was an alter ego of his corporations, leaving that issue for the Bankruptcy Court. But nothing in the Bankruptcy Code required the state court to extend the protection of the automatic stay to entities that might or might not be the debtor’s alter egos.

This is not to suggest that the Bankruptcy Court, either itself or on motion of the debtor or other party in interest, is unable to extend the protection of the automatic stay to non-debtor entities. As the Adler II court pointed out, “because it refers purely to actions against `the debtor,’ § 362(a)(1) stays are generally `limited to debtors and do not encompass non-bankrupt co-defendants.’ Notwithstanding this rule, if certain unusual circumstances arise during the pendency of a debtor’s bankruptcy case, a bankruptcy court may enjoin actions against third-parties.” Adler II, 494 B.R. at 57 (citation and quotation marks omitted). There are two ways that this typically occurs. First, it is common practice in bankruptcy court for the debtor or other party in interest to commence an adversary proceeding for an anti-suit injunction (see Bankruptcy Rule 7001(7)) against litigation outside bankruptcy court against non-debtor entities. See, e.g., In re Chateaugay Corp., Reomar, Inc., 93 B.R. 26 (S.D.N.Y. 1988) . Second, in confirming a plan of reorganization under Chapters 11 or 13, a Bankruptcy Court may authorize a provision that prevents litigation against specified non-debtor parties. See In re United Health Care Org., 210 B.R. 228 (S.D.N.Y. 1997) .

The rationale for either of these procedures is the same — the Bankruptcy Court makes specific findings that the antisuit injunction, whether obtained by adversary proceeding or in a plan of reorganization, is necessary to protect the debtor’s estate or to effectuate its reorganization. It is the protection of the debtor, not the non-debtors (who receive the benefit only collaterally) that furnishes the rationale for extending the automatic stay to include those non-debtors.

Whether the Bankruptcy Court can make these findings will vary on a case-by-case basis depending on the volume and type of creditors of both the debtor and the non-debtor. It could easily be the case, for example, that creditors of a Chapter 11 debtor are better off if separate creditors of an affiliated non-debtor are allowed to pursue their non-debtor defendant and have their claims satisfied from the non-debtor defendants; that will reduce the debt load on the Chapter 11 debtor, and allow a greater recovery for its separate creditors. In that situation, the Bankruptcy Court would likely see no reason to extend the automatic stay, whether pre-confirmation or as part of a Chapter 11 plan of reorganization. On the other hand, to give another example, if assets which should be available to satisfy claims of the debtor’s creditors have been moved to non-debtor entities, then it may be necessary to extend the automatic stay under 11 U.S.C. § 105 to protect the non-debtor entities, for not only may they be alter egos, but they may be holding the assets that should be used to satisfy all of the debtor’s creditors, not just the plaintiffs in the non-bankruptcy action. As a final example, which for all I know may be applicable here, if there is one super-dominant creditor that effectively holds all or almost all of the estate’s debt, the Bankruptcy Court might well not only decline to extend the stay to protect non-debtors, but it might dismiss or convert the Chapter 11 case to Chapter 7 as a bad faith filing because it is a two-party dispute. See In re HBA East, Inc., 87 B.R. 248 (Bankr. E.D.N.Y. 1988) .

The necessity of determining whether to extend the stay on a case by case basis is crucial. That is because the non-bankruptcy court neither has an interest in protecting, nor the practical ability to protect, the creditors of the debtor’s estate. In the case before me, for example, I do not know which, if any, of the foregoing examples apply. Plaintiffs in the case before me may be the only creditors of both the debtor and non-debtor defendants with no or limited business operations, in which case I doubt the Bankruptcy Court would extend the automatic stay to cover the non-debtors. Or it may be that plaintiffs here are trying to get a leg up on other creditors of the debtor by pursuing their alter ego claims against the non-debtors. I have neither the facts nor any procedure for obtaining the facts that would allow me to determine what is in the best interest of the debtor’s estate, i.e., the interests of all of its creditors collectively.

Nor, frankly, do I have any interest in making that determination. That is just not my problem. I have before me a pension fund claiming delinquent contributions and shifting of assets to avoid having to pay workers what they are owed. My only interest is in resolving that claim. If in doing so, it would prejudice other creditors of the debtor in a way that the Bankruptcy Court would consider unfair, it is for the Bankruptcy Court, upon motion of the debtor, to tell me so. (Obviously, it goes without saying that I would give effect to a §105 injunction if the Bankruptcy Court issues it.)

As is often the case within the rapid-fire world of bankruptcy, there are decisions, like Adler II, which conclude, without considering the situations set forth above, that the automatic stay protects non-debtors in various circumstances. Adler II cited one Second Circuit case, Queenie, Ltd. v. Nygard Int’l, 321 F.3d 282 (2d Cir. 2003), where the Court assumed the Bankruptcy Court’s role in protecting the creditors of the estate by extending the stay to a debtor’s wholly owned corporation. The debtor had filed his Chapter 11 petition after judgment was entered in the District Court, so the issue had never been addressed before the appeal. The Second Circuit concluded that “the stay applies to Queenie because it is wholly owned by Gardner, and adjudication of a claim against the corporation will have an immediate adverse economic impact on Gardner.” Id. at 288. Whatever may be said for this decision, it has no application here, for I have no way to conclude, even if it was within my purview to do so, that pursuit of the claims against the non-debtors would have either an immediate or an adverse effect on the debtor. That is for the Bankruptcy Court to determine.

Indeed, there are far more decisions that protect non-debtors only pursuant to an application for an injunction under 11 U.S.C. § 105. See In re United Health Care Org., 210 B.R. at 232-33 . Moreover, when a bankruptcy court determines that the automatic stay applies to non-debtor entities, even without issuing an injunction, it is effectively weighing the intra and inter-creditor interests that its unique position allows it to take into account. Such bankruptcy court decisions, like Adler II, are thus not very persuasive in instructing what a non-bankruptcy court should do, and I decline to act like a bankruptcy court here.

There are two other considerations that bear mention. First, although defendants focus on the complaint’s alter ego allegations, the complaint is not limited to or even dependent upon those allegations. Rather, the bulk of the complaint alleges that the non-debtor defendants have independent contractual liability under the various association and individual collective bargaining agreements. I see no argument why the automatic stay should apply to the primary liability of non-debtors. At most, the automatic stay could apply to the alter ego claims, but defendants have offered no reason why it should go beyond that.

Finally, defendants have additional procedures they can utilize if they believe these claims should be determined by the Bankruptcy Court. Not only may the debtor seek an injunction from the Bankruptcy Court under §105(a), but they may seek to transfer this case to the Southern District of New York for reference to the Bankruptcy Court. See 28 U.S.C. § § 1404(a), 1452.

In short, the automatic stay is automatic as applied to a debtor because that is what the statute says. As to non-debtors, it is relief that is available, but it is not automatic. This action shall therefore continue against the non-debtors under the schedule previously set unless the Bankruptcy Court orders otherwise.


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New Bankruptcy Opinion: IN THE MATTER OF WETDOG, LLC – Bankr. Court, SD Georgia, 2015

In the matter of: WETDOG, LLC, Chapter 11, Debtor.

No. 13-40601-EJC.

United States Bankruptcy Court, S.D. Georgia, Savannah Division.

August 14, 2015.


EDWARD J. COLEMAN, III, Bankruptcy Judge.

This case is before the Court on Wetdog, LLC’s (“Wetdog”) amended objection to Belle Resources, Ltd.’s (“Belle”) claim (dckt. 193); Wetdog’s motion in limine (dckt. 204); Belle’s Application of Oversecured Creditor for Allowance of Professional Fees and Costs (§ 506(b) Motion”) (dckt. 220); and Belle’s motion to strike (dckt. 236). The Court held a hearing on these matters on February 17, 2015.

Wetdog owns and operates the Foley House Inn, which is a nineteen-room bed and breakfast located in historic downtown Savannah, Georgia. Grant and Allisen Rogers each own 50% of Wetdog, and they personally guaranteed its debt to Belle. The Court confirmed Wetdog’s reorganization plan over Belle’s objections on September 8, 2014, and no party appealed the confirmation order.

According to Belle’s proof of claim and the confirmed plan, Belle has a $1,882,320.14 secured claim in Wetdog’s bankruptcy case. Belle’s claim is secured by a first-in-priority lien on real property worth $2,939,401.00 (according to the approved disclosure statement). Consequently, Belle was an oversecured creditor and entitled to add “interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement . . . under which such claim arose” to its secured claim under § 506(b) of Title 11 of the United States Code (“Bankruptcy Code”). Indeed, Belle’s proof of claim includes an addendum that purports to reserve its right to post-petition interest, attorney fees, and other charges and costs. (See Claim 3-1.) Nevertheless, prior to confirmation, Belle neither sought the allowance of such interest and reasonable fees, costs, and charges nor objected to Wetdog’s plan of reorganization based on the plan’s failure to provide for the payment of these amounts.

The main issue before the Court is whether Belle now, on motion filed over four months after plan confirmation, may increase the amount of its secured claim to compensate it for such interest and reasonable fees, costs, and charges. Regarding interest for the roughly seventeen-month period between the petition date and the order confirming Wetdog’s plan (“Pendency Period”), Belle asserts that it is entitled to the contractual default rate of around 13%. [1] Also, Belle seeks to add the following amounts to its secured claim: pre-confirmation attorneys’ fees and costs in the amount of $126,966.57, accountant and expert witness fees of $13,105.00, and engineering and expert witness fees of $12,500.00.

This dispute came to light after confirmation when Belle sent a spreadsheet to Wetdog showing the amount it claimed it was still owed after giving Wetdog credit for payments made during the bankruptcy case. In the spreadsheet Belle charged 18% interest [2] during the Pendency Period and added certain fees described above to the amount owing for work performed by lead counsel and local counsel on its behalf.

In response, Wetdog filed a claim objection, contending that Belle is barred from now asserting its entitlement to interest at the note’s default rate during the Pendency Period and is instead limited to the floating contract interest rate of LIBOR plus 4.25% (about 4.5% for the relevant period). Regarding the “reasonable fees, costs, or charges provided for under the agreement” under § 506(b), Wetdog asserts that Belle is now barred from claiming these amounts and that the majority of the fees were unreasonable in any event. After accounting for cash collateral payments it made to Belle during the case and Pendency Period interest that it agrees it owed, Wetdog contends that the outstanding balance of Belle’s secured claim was $1,770,586.27 as of the confirmation date. (Ex. D1-C.)

For its part, Belle filed a post-confirmation motion relying on § 506(b), which asks the Court to determine that the fees described above are part of the payoff balance of its lien. Belle asserts that the language in an addendum to its proof of claim adequately preserved its rights. In the end, Belle seeks a court order confirming its position that is was still owed $2,161,103.05 on the confirmation date. (Belle’s Br., dckt. 225, at 2.)


This Court has subject-matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a), and the Standing Order of Reference signed by then Chief Judge Anthony A. Alaimo on July 13, 1984. These matters are “core proceeding[s]” within the meaning of 28 U.S.C. § 157(b)(2)(B) and (K). See In re Amron Techs. Inc., 376 B.R. 49, 49 (Bankr. M.D. Ga. 2007) (Walker, J.) . No party, at any time during these proceedings, has questioned the Court’s authority to enter a final, binding judgment on the matters presented. See Universal Am. Mortg. Co. v. Bateman (In re Bateman), 331 F.3d 821 (11th Cir. 2003) . In accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rules”), the Court makes the following findings of fact and conclusions of law. [3]


To finance a portion of the acquisition price for the Foley House Inn, Wetdog borrowed $1,940,000.00 from Sterling Bank. In a letter dated March 26, 2013, Comerica Bank (as successor in interest to Sterling Bank) sent notice to Wetdog referencing § 13-1-11 of the Official Code of Georgia Annotated (“Georgia Code”), declaring that Wetdog was in default, and demanding full repayment within ten days. (Ex. D-6.) Before that ten-day period expired, Wetdog filed its Chapter 11 petition on April 5, 2013.

Soon thereafter, attorneys C. James McCallar Jr. and Tiffany E. Caron of the McCallar Law Firm were appointed counsel for the debtor in possession and have served in that capacity throughout this case. (Dckt. 17.)

On April 9, 2013, Wetdog moved for authorization to use Comerica Bank’s cash collateral, which was the rental income produced by the Foley House Inn. (Dckt. 6.) On April 24, 2013, the Court entered the first interim order on cash collateral (authorizing such use for a ninety-day period), which was consented to by Comerica Bank. The consent order provided for monthly adequate protection payments of $11,750.00 to Comerica Bank commencing on May 1, 2013 with payments “applied according to the original terms of the note.” (Dckt. 23, at 4.) On July 16, 2013, the Court entered a second interim order authorizing Wetdog to use Comerica Bank’s cash collateral for another ninety-day period, which was again consented to by Comerica Bank. (Dckt. 39.)

Comerica Bank sent two documents titled “Loan Payment Notice” to Wetdog during the bankruptcy case. The first notice has a “Bill Date” of April 28, 2013 and shows an “Accrual Rate” of interest of 4.5326%. (Ex. D-3.) The second notice has a “Bill Date” of June 27, 2013 and shows an “Accrual Rate” of 4.524%. (Ex. D-3.)

On August 6, 2013, which was the claims-bar date for non-governmental claims (dckt. 4), Comerica Bank filed a proof of claim. (Claim 3-1.) In the proof of claim, the bank asserted that the amount of its claim as of the petition date was $1,882,320.14. It also asserted that its claim was fully secured by the real estate comprising the Foley House Inn. An addendum to the proof claim provides in relevant part:

3. Debt Amount. As of the Petition Date, the Claimant holds a claim against the Debtor and its estate, in the aggregate amount of $1,882,335.58. [4] The claim consists, in part, of the following:

Unpaid Principal: $1,786,089.56
Accrued and Unpaid Interest: [$]89,195.58
Accrued and Unpaid Fees: [$]7,035.00
Attorney’s Fees:
TOTAL: $1,882,320.14

Plus all other fees, costs and other amounts due under the Loan documents.

4. Post-petition interest, attorneys’ fees and expenses. In accordance with Section 506(b) of the Bankruptcy Code, Claimant claims in addition to the foregoing amounts:

a. Post-petition interest at the maximum rate provided in the loan documents referred to in this schedule and/or by applicable law;

b. Post-petition attorneys’ fees as provided in the loan documents referred to in this schedule and/or by applicable law; plus

c. Other charges and costs incurred by Claimant in their case, including without limitation, as the same may be applicable or permitted under the applicable loan documents, late charges, late fees, non-sufficient funds fees, costs of appraisal and environmental studies and any advances made by Claimant, including without limitation, advances for taxes, assessments, deposits, insurance or other purposes attributed by Claimant as protection or preservation of the collateral, including interest on such advances, late charges, and costs.


(Claim 3-1, at 5-6.) Also, the promissory note attached to the proof of claim provides: “It is stipulated and agreed that reasonable attorney’s fees shall be FIFTEEN AND 00/100 PERCENT (15.00%) of all sums due hereunder unless any party pleads otherwise.” (Claim 3-1, at 12 (emphasis added) (footnote added).)

On August 29, 2013, a notice of transfer was filed showing that Comerica Bank had transferred its interest in the Wetdog note to Belle on August 13, 2013. (Dckt. 47.) The day before, on August 28, 2013, attorneys Kathleen Home and Margaret Puccini of Bouhan Falligant, LLP filed a notice of appearance on behalf of Belle. (Dckt. 46.) The Court granted Jeffrey L. Marks’s request to appear pro hac vice on October 17, 2013. (Dckt. 67.) Mr. Marks has served as Belle’s lead counsel throughout this case.

Wetdog filed its original plan and disclosure statement on August 30, 2013. The certificates of service attached to the plan and disclosure statement indicate that Bryan Timothy Glover (as counsel for Comerica Bank) as well as Kathleen Home and Maggie Puccini of Bouhan Falligant LLP were served. The disclosure statement provided that Belle’s secured claim was $1,882,320.14 and would be repaid with the following repayment terms: twenty-five year amortization at 4.25% and monthly payments of $10,197.25. (Dckt. 48, at 14.) The original plan provides with respect to Belle’s allowed secured claim:

The allowed claim of Belle Resources, Ltd., successor in interest to Comerica Bank (“Belle”) in the amount of $1,882,320.14 (Claim #3) is secured by a first priority lien on real property known as 14 & 16W. Hull Street, Savannah, GA 31401.

This claim shall be paid in full, with interest, as set forth below. Debtor shall make monthly payments to Belle in the amount of $10,197.25 for 300 months beginning on the first day of the month following the month during which the plan becomes effective and continuing on or before the same day of each consecutive month thereafter. The monthly payment represents principal and interest on $1,882,320.14 amortized over twenty-five (25) years at 4.25% interest. This creditor shall retain its existing liens. All terms of the existing loan documents between the parties are incorporated by reference herein and shall continue to apply except as expressly modified by this plan.

(Dckt. 49, at 4.)

On September 17, 2013, the Court entered the third interim cash collateral order, which authorized Wetdog’s use of Belle’s cash collateral. (Dckt. 57.) Belle consented to Wetdog’s use of cash collateral on the same terms as Comerica Bank. In the end, Belle consented to the extension of cash collateral use five more times, eventually extending the permitted time through plan confirmation. (Dckts. 84, 90, 108, 130, 175.) Wetdog made a total of $199,750.00 in cash collateral payments to Belle and its predecessor in interest during this case. (Hr’g Tr. 32.)

The Court held a hearing on the disclosure statement on October 9, 2013. Belle neither filed a written objection to the disclosure statement nor appeared at the October 9 hearing. On October 31, 2013, the Court entered an order approving the disclosure statement. (Dckt. 71.)

In January 2014, Belle sent a spreadsheet to Wetdog. (Ex. D-4.) The spreadsheet was prepared by Susan Galdenzi, an officer of Belle, and purports to show the calculation of interest on the Wetdog note from April 5, 2013 to December 31, 2013 and uses an interest rate of LIBOR plus 4.25%.

On January 27, 2014, Wetdog filed an amended reorganization plan (“Second Amended Plan”). The Second Amended Plan provides with respect to Belle’s secured claim:

The allowed claim of Belle Resources, Ltd., successor in interest to Comerica Bank (“Belle”) in the amount of $1,882,320.14 (Claim #3) is secured by a first priority lien on real property known as 14 & 16 W. Hull Street, Savannah, GA 31401.

This claim shall be paid in full, with interest, as set forth below. Debtor shall make monthly payments to Belle in the amount of $11,279.76 for 228 months beginning on the first day of the month following the month during which the plan becomes effective and continuing on or before the same day of each consecutive month thereafter. The monthly payment represents principal and interest on $1,882,320.14 amortized over twenty-five (25) years at 5.25% interest. The balance of the loan shall become due and payable on the date which is nineteen (19) years after the first payment due under this plan. This creditor shall retain its existing liens. All terms of the existing loan documents between the parties are incorporated by reference herein and shall continue to apply except as expressly modified by this plan.

(Dckt. 102, at 4.)

The Small Business Administration (“SBA”) holds a second-in-priority lien on the Foley House Inn. The Second Amended Plan, like the debtor’s previous proposed plans, provides for the bifurcation of the SBA’s $1,365,762.09 allowed claim into secured and unsecured portions based on the value of the Foley House Inn. Because the Foley House Inn’s value was determined to be $2,939,401.00 and the amount of Belle’s secured claim in the plan is $1,882,320.14, the Second Amended Plan provides that the SBA has a secured claim of $1,057,080.90. (Dckt. 102, at 5.)

On February 18, 2014, Guy G. Gebhardt, Acting United States Trustee for Region 21 (“U.S. Trustee”), filed an objection to the Second Amended Plan; however, that objection was withdrawn on April 1, 2014. (Dckts. 119, 154.) Belle filed its objection to the Second Amended Plan on February 21, 2014. (Dckt. 121) In the objection, Belle asserted that confirmation should be denied for three reasons: (1) the Second Amended Plan lacks good faith under Bankruptcy Code § 1129(a)(3); (2) the Second Amended Plan is not feasible under Bankruptcy Code § 11 29(a)(11); and (3) the Second Amended Plan violates the absolute priority rule of Bankruptcy Code § 1129(b)(2)(B)(ii). (Dckt. 122.)

On February 21, 2014, the parties filed a pre-trial stipulation. (Dckt. 126.) The parties stipulated that: “Debtor has been making adequate protection payments in the amount of $11,750.00 per month since this case was filed and has not been late or missed a single payment since then.” (Dekt. 126, at 3.) In Wetdog’s statement of the case in the pre-trial stipulation, Wetdog stated: “Due to the fact that the value of the property is shown to be almost $3,000,000 and the debt owing to Belle is now even lower than $1,882,320.14, after credit for post-petition payments, with over $1,000,000 in equity over and above its claim, there is no chance that Belle will become undersecured under any set of circumstances.” (Dckt. 126, at 3 (emphasis added).) In Belle’s statement of the case, Belle did not refute Wetdog’s assertion that its secured claim had been reduced through the payment of adequate protection payments and did not contend at that time that its claim was in fact increasing at a significant rate.

On February 26, 2014, the Court held the first confirmation hearing on the Second Amended Plan. Next, Wetdog amended the Second Amended Plan on March 11, 2014; however, it later withdrew that amendment. (Dckt. 137.) On March 13, 2014, Wetdog amended the Second Amended Plan for the last time. (Dckt. 138.) This amendment improved the treatment of the general unsecured claims class in order to garner the affirmative vote of that class for plan confirmation.

The confirmation hearing was concluded on April 2, 2014. At the close of that hearing, Belle withdrew its § 1129(a)(3) objection. (Dckt. 122-1, at 8.)

At the confirmation hearings, both Wetdog and Belle presented expert witnesses who testified about the financial projections they had prepared to support their respective positions on whether the Second Amended Plan was feasible. Notably, neither Belle’s expert witness nor Wetdog’s expert witness prepared projections for, or testified about, a scenario where Belle’s secured claim would be larger than the amount provided in the Second Amended Plan.

At a Chapter 13 confirmation hearing held on June 17, 2014 in the Rogers’ bankruptcy case, [5] Belle’s counsel, Mr. Marks, stated:

Now I may have given bad advice to my client, but I said in the Wetdog case do not charge the default interest rate. I’m [used to] my jurisdiction [where] we’re not allowed to do that. And Ms. Home corrected me and [said] down here you can do that. So I gave some bad advice on that.

(Ex. D-2, at 25.)

Back in Wetdog’s bankruptcy case, the Court confirmed the Second Amended Plan, with the corresponding plan amendments, on September 8, 2014. In re Wetdog, LLC, 518 B.R. 126 (Bankr. S.D. Ga. 2014) (Coleman, J.) .

On September 23, 2014, Belle sent another spreadsheet to Wetdog. (Ex. D-5; Hr’g Tr. 127, Feb. 9, 2015.) Like the spreadsheet provided in January 2014, this spreadsheet was also prepared by Susan Galdenzi. The spreadsheet purports to show the calculation of interest on the Wetdog note from April 5, 2013 to August 31, 2014 and uses an interest rate of 18%. The spreadsheet also shows attorneys’ fees and other professional fees being added over time as they were incurred by Belle.

On September 26, 2014, Wetdog filed an objection to Belle’s claim. (Dckts. 192.) Wetdog amended the objection on October 6, 2014. (Dckt. 193.) Belle filed a response to Wetdog’s amended objection on December 1, 2014. (Dckt. 203.)

On December 3, 2014, Wetdog filed a motion in limine to exclude certain evidence related to the application of the note’s default interest rate and allowance of Belle’s attorneys’ fees, to which Belle filed a response on December 11, 2014. (Dckts. 204, 211.) On December 16, 2014, the Court held a status conference. On January 29, 2015, Belle filed the § 506(b) Motion. (Dckt. 220.)

On January 7, 2015, Wetdog deposed Susan Galdenzi in her capacity as the representative of Belle. (Ex. D-7.) Ms. Galdenzi does the bookkeeping for Belle and makes entries related to the Wetdog note. She is involved with and has ownership interests in about twenty-five businesses. In its 2013 tax return, which was filed in September 2014 and signed by Ms. Galdenzi, Belle claimed interest income on the Wetdog note at the non-default contract rate of LIBOR plus 4.25%. (Ex. D-7, at 37, 81.)

On February 5, 2015, the parties stipulated to the following facts (among others):

30. According to the Court’s Opinion dated September 5, 2014, which confirms the Second Amended Plan of Reorganization filed by the Debtor as of September 8, 2014, “Belle holds a $1,882,320.14 secured claim.”

31. For purposes of the current action, Belle is an over-secured creditor in an amount of at least $500,000.00.


34. On November 17, 2014, Debtor filed its Expert Report prepared by its CPA, Bradley Lucas, detailing its calculation of the Belle debt as of confirmation of Debtor’s Plan (September 8, 2014).

35. On November 17, 2014, Belle filed its Expert Report prepared by its CPA, Austin York, detailing its calculation of the Belle debt as of confirmation of Debtor’s Plan (September 8, 2014).

36. On December 11, 2014, Belle filed its Amended Expert Report prepared by its CPA, Austin York, detailing its recalculation of the Belle debt as of confirmation of Debtor’s Plan (September 8, 2014).


41. The hourly rate being charged by Belle’s attorneys is reasonable.

(Dckt. 221.)

On February 9, 2015, the parties filed pre-hearing briefs. (Dckts. 225-26.) On February 19, 2015, the Court held a hearing on Wetdog’s claim objection and Belle’s § 506(b) Motion, after which the Court took the matters under advisement. Austin York, a CPA, gave expert testimony on Belle’s behalf. Bradley Lucas, also a CPA, gave expert testimony on Wetdog’s behalf. At the hearing Belle stipulated to the admissibility of seven exhibits tendered by Wetdog. (Hr’g Tr. 6-7.) One those exhibits is the full transcript of the deposition of Susan Galdenzi. (Ex. D-7.) Also, Wetdog stipulated to the admissibility of five exhibits tendered by Belle, which included Mr. York’s expert witness report and various bills and invoices relating to Belle’s employment of lawyers and experts. (Ex. Belle-A to Belle-E.)

For the reasons explained in Part IV below, I find that Scenario 1 from Bradley Lucas’s expert report best approximates the outstanding debt secured by Belle’s lien as of the date that the Second Amended Plan was confirmed. (See Ex. D-1C.) Wetdog agrees, and consequently the Court finds, that Belle is entitled to interest under § 506(b) on its secured claim during the Pendency Period, accruing at the contractual non-default rate of LIBOR plus 4.25%, except that no interest accrued for the first four months of that period. [6] (See dckt. 226, at 22.) Based on those assumptions and after taking into account the timing of Wetdog’s cash collateral payments, Mr. Lucas calculates that $88,016.13 of interest accrued and $199,750.00 of cash collateral payments were made during the Pendency Period. (See Ex. D-1C.) As a result, Belle’s secured claim of $1,882,320.14 as of the petition date was reduced to roughly [7] $1,770,586.27 by the confirmation date. (Hr’g Tr. 30.)

On March 2, 2015, the parties submitted post-hearing briefs. And finally, on March 10, 2015, Belle filed a motion to strike portions of Wetdog’s post-hearing brief. (Dckt. 236.)


Wetdog objects to the amount of Pendency Period interest Belle now claims and Belle’s attempt to add Pendency Period attorneys’ fees and expenses to its debt. The parties disagree about the proper Pendency Period interest rate to be applied to Belle’s claim. The Parties also disagree about whether and to what extent Belle is entitled to claim attorneys’ fees and expenses covering the Pendency Period.

In Wetdog’s pre-hearing brief, it asserts that Belle cannot charge the note’s default interest rate because (1) Belle’s counsel made a judicial admission that Belle was not charging default interest; (2) Belle is now estopped from charging default interest; and (3) Belle never sought court approval to charge default interest. According to Wetdog: “The interest rate to be applied to the Belle debt during the Pendency Period [should] be calculated based on the non-default contract rate of the 90-day LIBOR rate plus 4.25% from Belle’s acquisition of the Note through Confirmation of the Plan. For the first four months when Comerica Bank held the loan, no interest [should be] allowed.” (Dckt. 226, at 22.)

Regarding Belle’s claimed fees and expenses, Wetdog argues that Belle failed to file a Bankruptcy Rule 2016 application and obtain the Court’s approval before it added post-petition attorneys’ fees (and expert witness fees) to the amount of Wetdog’s outstanding debt. Wetdog further argues that a large portion of the fees incurred by Belle were unreasonable because the actions taken by Belle were unnecessary to protect its interest due to Belle’s initial equity cushion of over $1 million (at the outset of the bankruptcy case). (Dckt. 226.) At the February 19, 2015 hearing, Wetdog argued that the res judicata effect of plan confirmation barred Belle from charging § 506(b) fees and expenses.

In response, Belle argues that there is no time limit for seeking Pendency Period interest and reimbursable fees and expenses under § 506(b). Also, Belle contends that Texas law governs the note so it may lawfully charge the maximum legal rate under Texas law, which it alleges is about 13%. Additionally, Belle argues that the addendum to its proof of claim preserves its rights to collect post-petition amounts. (See Hr’g Tr. 144.)


The Court will first address the claim objection and the § 506(b) Motion. [8] To determine the amount and character of an oversecured creditor’s claim, the interplay of Bankruptcy Code §§ 502, 506(a), and 506(b) must be considered. Bankruptcy Code § 502 provides that if a claim objection is made, “the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount,” except to the extent that exceptions enumerated in § 502(b) apply. 11 U.S.C. § 502(b). Under this framework, pre-petition interest and fees are permitted to the extent allowed under applicable non-bankruptcy law as a part of the creditor’s allowed claim under § 502. Once a voluntary petition is filed, however, the general rule in bankruptcy cases is that creditors do not receive post-petition interest, fees, costs, and charges. See 11 U.S.C. § 506(b)(2) (disallowing claims for “unmatured interest”).

To determine the character of a creditor’s allowed claim, § 506(a) provides that it “is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property” . . . “and is an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.” 11 U.S.C. § 506(a). Section 506(b), in turn, provides an important exception for oversecured creditors to the general rule that creditors do not receive post-petition interest and fees:

(b) To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.

11 U.S.C. § 506(b); Southside LLC v. Sun Trust Bank (In re Southside, LLC), 520 B.R. 914, 920 (Bankr. N.D. Ga. 2014) (Murphy, J.) (“The Security Deed provides for attorneys’ fees incurred in bankruptcy proceedings; therefore, pursuant to § 506(b), SunTrust is allowed post-petition interest and reasonable attorneys’ fees up to the value of the property less SunTrust’s prepétition claim.” (footnote omitted)). [9]

A. The Pendency Period Interest Rate Is Limited to LIBOR Plus 4.25%

Based on a review of the caselaw, the majority rule appears to be that there is “a rebuttable presumption that the oversecured creditor is entitled to default interest at the contract rate subject to adjustment based on equitable considerations.” In re Partners LLC, 470 B.R. 126, 134 (Bankr. S.D.N.Y. 2012) (collecting cases). My colleague, Judge Lamar W. Davis Jr., has embraced another well-reasoned and perhaps equally substantial line of cases that holds interest is allowed at the contractual default rate (as long as that rate would be enforceable under applicable state law) without a reasonableness inquiry or an adjustment based on equitable concerns. In re Gillikin, No. 09-60178, 2011 WL 7704353, at *4 (Bankr. S.D. Ga. Mar. 3, 2011) (Davis, J.); In re Del-A-Rae, 448 B.R. 303, 305 (Bankr. S.D. Ga. 2011) (Davis, J.) (same). In this case, it is undisputed that Wetdog was in default when it filed its bankruptcy petition. Also, allowing interest at the contractual default rate would not exceed the amount by which Belle is oversecured. Nevertheless, as discussed in detail below, the resjudicata effect of plan confirmation now bars Belle from establishing its entitlement to interest at the default rate during the Pendency Period.

1. Res Judicata Effect of Plan Confirmation

In this case, there is a confirmed plan. “[T]he provisions of a confirmed plan bind the debtor . . . and any creditor, . . . whether or not the claim . . . of such creditor . . . is impaired under the plan and whether or not such creditor . . . has accepted the plan.” 11 U.S.C. § 1141(a). This Court’s order confirming Wetdog’s plan is a final judgment. United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 269 (2010) (citing Finova Capital Corp. v. Larson Pharmacy Inc. (In re Optical Techs., Inc.), 425 F.3d 1294, 1300 (11th Cir. 2005) ). “When the bankruptcy court confirms a plan, its terms become binding on debtor and creditor alike. Confirmation has preclusive effect, foreclosing relitigation of any issue actually litigated by the parties and any issue necessarily determined by the confirmation order.” Bullard v. Blue Hills Bank, 135 S. Ct. 1686, 1692 (2015) (emphasis added) (internal quotation marks omitted) (citations omitted).

The Eleventh Circuit has set forth the elements of claim preclusion as follows:

First, the prior judgment must be valid in that it was rendered by a court of competent jurisdiction and in accordance with the requirements of due process. Second, the judgment must be final and on the merits. Third, there must be identity of both parties or their privies. Fourth, the later proceeding must involve the same cause of action as involved in the earlier proceeding.

In re Optical Techs., 425 F.3d at 1300-01 (quoting Wallis v. Justice Oaks II, Ltd (In re Justice Oaks II, Ltd.), 898 F.2d 1544, 1550 (11th Cir. 1990) (citations omitted)).

The notice requirement of due process is satisfied because Belle (and/or its predecessor in interest) was scheduled as a creditor and served with a copy of the disclosure statement and all plans in this case. See In re Optical Techs., 425 F.3d at 1301 . Belle and Wetdog were both parties to the confirmation proceeding, [10] and Belle had “a full and fair opportunity” to raise any objections it may have had to the asserted amount of its total secured claim in the Second Amended Plan. Justice Oaks, 898 F.2d at 1550 . Through the plan confirmation process, the amount of Belle’s secured claim was actually and necessarily determined to be $1,882,320.14. In fact, as previously discussed, the amount of the secured portion of the SBA’s allowed claim was determined by subtracting the amount of Belle’s secured claim from the value of the Foley House Inn.

As a result, the Court finds that the elements for claim preclusion are met in this case. Belle cannot now assert its entitlement to a larger secured claim based on Pendency Period interest because Belle waived that objection when it failed to object to confirmation on that basis and then further failed to appeal the Court’s confirmation order on that ground. See In re Optical Techs., 425 F.3d at 1301 (citing Justice Oaks, 898 F.2d at 1552 ).

2. The Court Rejects Belle’s Argument that There Is No Deadline Under Section 506(b)

Belle argues that the Bankruptcy Code and Rules do not provide a time limit for filing a motion seeking the allowance of interest and reasonable, fees, costs, and charges under § 506(b). At first glance, this argument appears to have some merit. For instance, the Bankruptcy Rules provide a deadline for filing a proof of claim. See Fed. R. Bankr. P. 3002(c). Meanwhile, the Bankruptcy Rules do not provide a specific deadline for filing such a motion or otherwise establish what procedure should be followed to seek the allowance of a § 506(b) claim.

In support of its position that the deadline has passed, Wetdog cites In re Westbrook, 246 B.R. 412 (Bankr. N.D. Ala. 1999) (holding res judicata barred secured creditor from claiming entitlement to post-confirmation interest where Chapter 13 plan clearly did not provide for such interest and the creditor did not object to the plan based on 11 U.S.C. § 1325(a)(5)) and In re Gillikin, 2011 WL 7704353 (noting Pendency Period interest rates should have been determined at the disclosure statement stage).

The Court has neither found nor been presented with any controlling authority on the issue of whether a motion and court approval are required before Pendency Period interest under § 506(b) may be become an allowed portion of a secured creditor’s claim even if the debtor, as the plan proponent, and the oversecured creditor were to agree on the proper amount and that amount is provided for in the debtor’s plan. Where the debtor and oversecured creditor disagree, however, it appears to be the practice that the oversecured creditor will file a motion to establish its entitlement to such interest and fees, which the bankruptcy court will consider in conjunction with plan confirmation. See, e.g., Prudential Ins. Co. of Am. v. SW Bos, Hotel Venture, LLC (In re SW Bos. Hotel Venture, LLC), 748 F.3d 393, 400 (1st Cir. 2014) ; In re 431 Ponce De Leon, LLC, 515 B.R. 660, 696 n.32 (Bankr. N.D. Ga. 2014) (Ellis-Monro, J.) (“With respect to the § 506(b) claim, the Court advised the parties that it would, for purposes of confirmation, estimate [the oversecured creditor’s] 506(b) claim.”).

In this Court’s view, the Bankruptcy Rules do not need to provide a deadline for filing a § 506(b) claim because the total allowed amount of a secured creditor’s claim is an issue necessarily decided in the plan confirmation context. If the proposed plan’s treatment of an oversecured creditor’s claim does not compensate it for the allowed amount of its § 506(b) claim, then the plan would not be “fair and equitable” within the meaning of Bankruptcy Code § 1129(b)(2)(A)(i)(II) with respect to the class containing the oversecured creditor’s claim and, therefore, the plan would not be confirmable if the oversecured creditor voted to reject the plan. See 11 U.S.C. § 1129(a)(8), (b)(1).

3. The Addendum to Belle’s Proof of Claim Cannot Overcome the Res Judicata Effect of Plan Confirmation

Belle correctly points out that, due to the language in the addendum to its proof of claim stating that it was reserving its right to add post-petition interest and fees under the note, Wetdog should have expected that the amount of Belle’s secured claim would increase by the amount of its § 506(b) claim. However, as the Supreme Court of the United States directed:

[W]here the plain terms of a court order unambiguously apply, as they do here, they are entitled to their effect. See, e.g., Negrón-Almeda v. Santiago, 528 F.3d 15, 23 (1st Cir. 2008) (“[A] court must carry out and enforce an order that is clear and unambiguous on its face”); United States v. Spallone, 399 F.3d 415, 421 (2d Cir. 2005) (“[I]f a judgment is clear and unambiguous, a court must adopt, and give effect to, the plain meaning of the judgment” (internal quotation marks omitted)). If it is black-letter law that the terms of an unambiguous private contract must be enforced irrespective of the parties’ subjective intent, see 11 R. Lord, Williston on Contracts § 30:4 (4th ed. 1999), it is all the clearer that a court should enforce a court order, a public governmental act, according to its unambiguous terms.

Travelers Indemnity Co. v. Bailey, 557 U.S. 137, 150-51 (2009) . Here, the Second Amended Plan’s terms, which this Court confirmed, are clear that Belle’s secured claim is $1,882,320.14.

In support of its position that it adequately preserved its § 506(b) claim, Belle cites Fawcett v. United States (In re Fawcett), 758 F.2d 588 (11th Cir. 1985) and Clark v. Washington Mutual Home Loans (In re Clark), 299 B.R. 694 (Bankr. S.D. Ga. 2003) (Dalis, J.) .

Fawcett does not require a different result. In Fawcett, the Eleventh Circuit Court of Appeals affirmed the district court’s affirmance of a bankruptcy court order finding that the Internal Revenue Service (“I.R.S.”) was entitled to post-petition interest on its secured claim. The LR.S.’s proof of claim listed the unpaid taxes as a secured claim and stated: “For the purposes of section 506(b) of the Bankruptcy Code, post-petition interest may be payable.” Id. at 589. The debtor’s Chapter 13 plan provided that the I.R.S.’s claim would be “paid in full-100%” without further elaboration. Id. The debtor argued that the I.R.S. should have filed a more specific proof of claim or objected to plan confirmation if it wanted post-petition interest. Faulting the debtor for any ambiguity in the plan’s terms, however, the Eleventh Circuit held that “the I.R.S. put the debtor on notice that it would be claiming post-petition interest while the debtor failed to put the I.R.S. on notice that its claim would not be paid in full by the amount of the post-petition interest.” Id. at 591.

At first blush, Fawcett would appear to control the result in this case. Just as the I.R.S. in Fawcett provided notice of its intent to claim post-petition interest in its proof of claim, Belle’s proof of claim clearly provides notice that it reserves the right to seek interest and fees, costs, and charges under § 506(b). Also, similar to how the plan in Fawcett provided that that I.R.S. would be “paid in full,” Wetdog’s confirmed plan provides that Belle’s claim will be “paid in full, with interest.” The crucial distinction is that, in Fawcett, the debtor’s plan did not contain any language modifying the 100% guaranty. In contrast, Wetdog’s plan is clear that Belle will be paid in full by receiving payments whose present value equals $1,882,320.14, an amount that does not include any enhancement attributable to § 506(b).

Belle’s reliance on Clark is likewise unavailing. In Clark, the debtor filed an adversary proceeding after her plan was confirmed claiming that an oversecured creditor’s attempt to collect a higher payoff amount (based on attorney’s fees incurred post-petition) than the amount in its proof of claim violated Bankruptcy Code §§ 506 and 362. Because the bankruptcy court had not yet determined if the attorney’s fees demanded were reasonable, the court denied the parties cross-motions for summary judgment on those issues. Clark is distinguishable because the debtor in that case failed to raise the res judicata effect of plan confirmation and the proceeding was merely at the summary judgment stage.

Also, in IRT Partners, L.P. v. Winn-Dixie Stores, Inc. (In re Winn-Dixie Stores, Inc.), 639 F.3d 1053 (11th Cir. 2011), the Eleventh Circuit rejected a line of argument analogous to Belle’s position:

Appellants argue that their original claims contained language reserving the right to amend and supplement those claims. But such language cannot, as a matter of law, be construed to protect in perpetuity appellants’ right to amend their claims. Such a construction of this language would truly render illusory all finality achieved by a reorganization plan. We decline to give so broad an interpretation to appellants’ purported reservation of rights.

Id. at 1057.

4. Wetdog’s Estoppel Argument

Pointing to the passage of time and several documents supplied to Wetdog by Ms. Galdenzi through counsel, Wetdog argues that Belle is equitably estopped from charging interest at the contract’s default rate for the Pendency Period. The Court finds above that Belle is barred by the res judicata effect of Wetdog’s confirmed plan from now litigating its entitlement to Pendency Period interest at the contractual default rate; therefore, I decline to rule on the issue of equitable estoppel because to do so would be unnecessary.

5. Wetdog Concedes that Belle Is Entitled to Pendency Period Interest at the Non-Default Contract Rate

Notwithstanding the res judicata effect of plan confirmation, Wetdog does not contend that Belle is not entitled to any Pendency Period interest. Wetdog argues that it was the parties’ understanding throughout the case that interest would accrue at the non-default contract rate for the period after Belle acquired the Wetdog note. Accordingly, Belle is entitled to the following: Pendency Period interest at the non-default contract rate of the ninety-day LIBOR rate plus 4.25% with the exception that for the first four months when Comerica Bank held the Wetdog note, no interest accrued. (See dckt. 226, at 22.)

To reiterate, this finding is based on Wetdog’s concession and the Court’s holding that res judicata applies. The Court is not determining at this time that the non-default interest rate is more appropriate than the default interest rate or adopting any standard for making such determinations in future cases. See, e.g., Southland Corp. v. Toronto-Dominion (In re Southland Corp), 160 F.3d 1054, 1060 (5th Cir. 1998) (affirming the bankruptcy court’s decision to award secured creditor interest at the default rate both pre- and post-petition because that creditor “triggered the default interest under the contract, the plan did not `cure’ defaults, and default interest at the contract rate was not inequitable”); Cliftondale Oaks, LLC v. Silver Lake Enters., LLC (In re Cliftondale Oaks, LLC), 357 B.R. 883, 885-86 (Bankr. N.D. Ga. 2006) (Drake, J.) .

B. Belle Is Now Barred from Claiming Section 506(b) Fees, Costs, and Charges

Regardless of contrary nonbankruptcy law, a first-in-priority secured creditor is entitled to add post-petition attorney fees to its secured claim to the extent that the fees plus the other components of its secured claim do not exceed the value of the collateral if “(1) the creditor is oversecured; (2) the fees are reasonable; and (3) the fees are provided for in the agreement or state statute under which the claim arose.” In re Amron Techs. Inc., 376 B.R. 49, 54 (Bankr. M.D. Ga. 2007) (Walker, J.) . As outlined below, the res judicata effect of plan confirmation now bars Belle from seeking the allowance of “reasonable fees, costs, and charges” for the same reasons discussed in Part IV.A. 1-3 above.

1. Belle Is Barred from Charging 15% Contractual Attorney’s Fees for Wetdog’s Pre-Petition Default

As a preliminary matter, Belle argued at the hearing, but not in any of its filings, that it is entitled to an unsecured claim to the extent that the Court determines that its reasonable fees are less than 15% of sums due under the Wetdog note based on a provision of the note. (See Ex. D-IA.) The parties agree that Texas law governs the note, but whether Texas law or Georgia law governs is irrelevant. (Dckt. 231, at 5.) Belle’s proof of claim, which has not been amended, stated the amount it was due as of the petition date. That amount did not include the 15% contractual fees now claimed. Wetdog is correct that even if those fees had vested pre-petition, [11] those fees were not included in Belle’s proof of claim and, therefore, are not part of its allowed claim under Bankruptcy Code § 502. [12] Even as late as the February 2015 hearing, Belle conceded that $1,882,320.14 is what it was owed on the petition date. (Hr’g Tr. 21.) Even if res judicata did not bar Belle’s § 506(b) claim and the Court construed the § 506(b) Motion simply as a claim amendment, post-bar-date amendments are subjected to careful scrutiny under Eleventh Circuit precedent. See in re Northlake Hotels, Inc., No. 12-80104-WLH, 2014 WL 1477397, at *2 (Bankr. N.D. Ga. Apr. 3, 2014) (Hagenau, J.).

As an aside, Belle argues that if its fees are barred, Wetdog’s attorneys’ fees are similarly barred because Wetdog has not yet filed its final application for approval of compensation in the case. (Hr’g Tr. 159.) This argument is meritless because Wetdog’s confirmed plan provides: “The § 507(a)(2) fees and expenses of McCallar Law Firm for representing Debtor in this case are to be paid when allowed by the Bankruptcy Court from cash on hand held by Debtor or as may be remaining on retainer.” (Dckt. 102, at 3.) The Second Amended Plan further provides that: “McCallar Law Firm shall continue to be attorneys for the Debtor through the confirmation date and thereafter and shall be entitled to compensation from funds of the Debtor up to confirmation when and as approved by the Court.” (Dckt. 102, at 10.) Therefore, the Second Amended Plan specifically provides for Wetdog’s attorneys’ fees rather than operating to bar them.

2. The “Reasonableness” of Belle’s Fees, Costs, and Charges

In its § 506(b) Motion, [13] Belle seeks reimbursement for fees in the amount of $152,571.57. Even though it was oversecured by nearly $1 million on the petition date, Belle contends that its active participation in the case was reasonable due to its conviction that the Foley House Inn is “diminishing and depreciating on a daily basis.” (Hr’g Tr. 161.) In support of its fees, Belle points out that it voluntarily omitted arguably unreasonable time entries such as time related to acquiring the Wetdog note, certain preliminary intra-firm discussions, travel, time to hearings, investigating the possibility of buying the SBA’s interest in the bankruptcy case, and Texas counsel fees related to a guarantor suit against Grant and Alisen Rogers. Regarding the time entries for local counsel, Belle points to Local Rule 83.4, which mandates local counsel because Mr. Marks was appearing pro hac vice.

Belle argues that its requested fees are in line with those allowed by my colleague John S. Dalis in In re Coastal Realty. In In re Coastal Realty, the bankruptcy court applied the lodestar analysis to determine the reasonableness of an oversecured creditor’s fees. Under the facts of that case, the court found that fees incurred in connection with the collection of guaranty agreements were reasonable and necessary to protect the oversecured creditor’s rights. In re Coastal Realty, 2014 WL 929612, at *14.

In response, Wetdog argues that In re Coastal Really actually supports its view that Belle’s fees exceeded what was reasonable because, in that case, the oversecured creditor’s secured claim of $1,148,3 86.22 (exclusive of its § 506(b) claim) was secured by property determined by the court to be worth $1,375,000.00, leaving only $226,613.78 of protection for its claim. Wetdog also argues that (1) of the $12,500 of engineering fees that Belle sought to be reimbursed for, it only provided documentation for $10,000.00 (Hr’g Tr. 210), and (2) the accounting firm’s invoices are not detailed enough to review for their reasonableness. (Hr’g Tr. 233.)

Because the Court finds above that Belle is barred by the res judicata effect of Wetdog’s confirmed plan from now litigating its entitlement to reasonable fees, costs, and charges under § 506(b), I decline to determine the extent to which its fees were reasonable on the grounds that to do so would be unnecessary.

C. Does Bateman Require a Different Result?

In Universal American Mortgage Co. v. Bateman (In re Bateman), 331 F.3d 821 (11th Cir. 2003), Universal American Mortgage Company (“Universal”) filed a proof of claim in a Chapter 13 case asserting that it was owed $49,178.80 for a pre-petition arrearage on the debtor’s home mortgage. Prior to plan confirmation, no party in interest filed an objection under Bankruptcy Rule 3007 to Universal’s claim. Although the debtor’s plan only proposed to pay $21,600.00 on Universal’s pre-petition arrearage claim, the debtor’s plan was confirmed without objection by Universal. After the Chapter 13 trustee discovered the discrepancy, the debtor filed a post-confirmation objection to Universal’s claim, which the bankruptcy court granted, and Universal filed a motion to dismiss the case, which the bankruptcy court denied.

The Eleventh Circuit affirmed in part and reversed in part. Because Universal’s pre-petition arrearage claim had been allowed under § 502(a) and the debtor had failed to follow Bankruptcy Rule 3007’s procedure for rebutting the prima facie effect of the proof of claim regarding the validity and the amount of the debt, the court “refused[d] to permit an inconsistent plan provision to constitute a constructive objection by reason of the Plan’s notation of dispute alone, especially where [the] bankruptcy court [did] not consider [the] objection until over a year after the Plan’s confirmation.” Id. at 828 (citing In re Starling, 251 B.R. 908, 910 (Bankr. S.D. Fla. 2000) ). Accordingly, the Eleventh Circuit reversed the bankruptcy court’s decision to grant the debtor’s claim objection and rejected the bankruptcy court’s holding that Universal was barred from recouping the balance of its mortgage arrearage. Id. at 828-29.

As for the bankruptcy court’s denial of Universal’s motion to dismiss, the Eleventh Circuit affirmed; however, the court held that the allowed amount of Universal’s arrearage claim survived the res judicata effect of plan confirmation. Id. at 832-33. The Eleventh Circuit relied on its earlier precedent, In re Thomas, 883 F.2d 991 (11th Cir. 1989), in which the court held that “a secured creditor’s lien survived a Chapter 13 Discharge even though it had not been provided for in the plan and the secured creditor had not filed a proof of claim.” Bateman, 331 F.3d at 832 (citing In re Thomas, 883 F.2d at 997 ). Therefore, the court held that under the facts and circumstances of the case, “Universal’s secured claim for arrearage survives the Plan and it retains its rights under the mortgage until Universal’s claim is satisfied in full.” Id. at 834.

An important distinction must be made here. At issue in Bateman was a mortgage arrearage claim, which was owed on the petition date and allowed under § 502(a) because Universal timely filed a proof of claim that was not properly objected to. As provided by the Bankruptcy Rules, a proof of claim filed pursuant to Bankruptcy Rule 3001 “shall constitute prima facie evidence of the validity and amount of the claim.” Fed. R. Bankr. P. 3001(f). In contrast, a creditor’s entitlement to a § 506(b) claim is not established merely by filing a proof of claim. [14] This must be true because, if this case had dismissed before confirmation, Belle would have looked solely to the Wetdog note to determine the amount of debt secured by its lien and would not be limited by § 506(b) for the time period when the case was pending before the bankruptcy court. Accordingly, Bateman does not require a different result.

D. Wetdog’s Motion in Limine (dckt. 204)

At the February 15, 2014 hearing, the Court orally denied Wetdog’s motion in limine because the Court, as the trier of fact, found it unnecessary to exclude certain evidence related to Belle’s professional fees and the application of the Wetdog note’s default interest rate. Because the Court finds above that Belle is barred by the res judicata effect of Wetdog’s confirmed plan from now claiming entitlement to Pendency Period interest at the default rate and charging Pendency Period fees, costs, and charges, I will deny the motion in limine on the additional ground that the issues presented are now moot.

E. Belle’s Motion to Strike

Belle moves to strike the post-hearing brief filed by Tiffany Caron on behalf of Wetdog and seeks a money award for the reasonable costs and disbursements, including reasonable attorney’s fees, that it incurred filing the motion. (Dckt. 236.) After the February 19, 2015 hearing, the Court invited the parties to submit post-hearing briefs on the issue of whether Texas law has a ten-day vesting requirement similar to the requirement under Georgia Code § 13-1-11. The Court in no way ordered or suggested that briefing of any other issues would be inappropriate.

It support of its position that Wetdog’s post-hearing brief (dckt. 231) should be stricken, Belle cites Rule 12(f) of the Federal Rules of Civil Procedure, which it claims is made applicable by Bankruptcy Rule 7012. The matters before the Court are contested matters as opposed to adversary proceedings. See Fed. R. Bankr. P. 7001. The rules for contested matters incorporate certain rules from Part VII of the Bankruptcy Rules to the exclusion of others. See Rule 9014(c). Bankruptcy Rule 7012 is not one of those rules that applies in a contested matter absent the Court explicitly ordering that the rule will apply. The Court did not make Bankruptcy Rule 7012 applicable to the litigation of the matters under consideration. Consequently, Belle’s motion to strike will be denied.

F. Conclusion

Based on the foregoing, Belle is entitled to interest under § 506(b) on its secured claim during the Pendency Period, accruing at the contractual non-default rate of LIBOR plus 4.25%, except that no interest accrued for the first four months of that period. And, Wetdog is entitled to be credited for the $199,750.00 of cash collateral payments it made during the Pendency Period.

The Court will enter a separate order consistent with these findings of fact and conclusions of law.

[1] The default rate under the contract is the lesser of 18% or the Texas maximum lawful rate, which Belle estimates to be around 13%.

[2] Belle later revised downward the applicable interest rate to about 13%, which its expert concluded was the maximum lawful rate under Texas law.

[3] The Court reserves its right to make additional findings of fact and conclusions of law as it deems appropriate or as may be requested by any of the parties.

[4] This $1,882,335.58 figure appears to be an error. In Box 1 of its proof of claim, Belle lists $1,882,320.14 as the “Amount of Claim as of Date Case Filed.” (Claim 3-1, at 1.)

[5] The Rogers’ case has since been voluntarily converted to a case under Chapter 11.

[6] For reasons unknown, Comerica Bank applied cash collateral payments directly to principal reduction during this four-month period. See Ex. D-3.) As explained in Part IV below, it is now too late for Belle to litigate its entitlement to interest during this period due to the res judicata effect of plan confirmation.

[7] The Court uses the term “roughly” because Mr. Lucas’s projections use an ending date of September 5, 2014 rather than the Second Amended Plan’s confirmation date or effective date. Also, as Mr. York pointed out, Mr. Lucas appears to have used an average ninety-day LIBOR rate in his projections whereas the Wetdog Note requires the use of the LIBOR rate for the first day of each quarter. (Hr’g Tr. 103.)

[8] The Second Amended Plan contains the following language: “Debtor reserves the right to object to claims either before or after confirmation. The debtor shall have ninety (90) days following confirmation to file any and all objections to claims.” (Dckt. 102, at 12.) Wetdog’s claim objection was filed within that ninety-day period.

[9] The Court notes here that § 506(b) controls an oversecured creditor’s entitlement to interest accrued and fees incurred only up to plan confirmation and has no application to a secured creditor’s entitlement post-confirmation. See Telfair v. First Union Mort. Corp., 216 F.3d 1333, 1338 (11th Cir. 2000) .

[10] “[O]ne who participates in a chapter 11 plan confirmation proceeding becomes a party to that proceeding even if never formally named as such.” Justice Oaks, 898 F.2d at 1551 (citing Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1051 (5th Cir. 1987) ).

[11] “If Georgia law were to apply, Wetdog disputes that the fees had vested pre-petition, and the Court is skeptical as well. See Bank of the Ozarks v. Coastal Realty Invs., Inc. (In re Coastal Realty Invs., Inc), No. 12-20564, 2014 WL 929612, at *9 (Bankr. S.D. Ga. Mar. 10, 2014) (Dalis, J.) (“The combination of the established case law and the 10-day vesting period required by O.C.G.A. § 13-1-11 (a)(3) allows debtors to minimize their contractual liability for attorneys’ fees by filing for bankruptcy before the mandatory 10-day waiting period has expired.”).

[12] In any event, it is far from established to the Court that the 15% figure would apply because, although the Wetdog Note provides that if there is a default and the note is collected through bankruptcy then the maker agrees to pay the reasonable attorney’s fees of the payee and the expenses of collection, the stipulation that reasonable attorney’s fees equal 15% is conditioned on the phrase “unless any party pleads otherwise.” Wetdog, as a party to the note, has certainly pleaded otherwise by arguing that Belle’s attorney’s fees are unreasonable.

[13] Belle’s counsel refers to this filing as its “Rule 2016 motion.” Because to do so would be unnecessary, the Court declines to rule on whether Bankruptcy Rule 2016 applies to an oversecured creditor’s claim for fees, costs, and charges under § 506(b). However, the Court notes that the rule by its express terms limits its application to “[a]n entity seeking interim or final compensation for services, or reimbursement of necessary expenses from the estate….” Fed. R. Bankr. P. 2016(a) (emphasis added). That does not appear to be what a creditor is requesting when moving for the allowance of its § 506(b) claim.

[14] In re Jack Kline Co., Inc., 440 B.R. 712, 732 (Bankr. S.D. Tex. 2010) (“Filing a proof of claim seeking post-petition interest and fees—as was done here—will not suffice. A proof of claim may include only pre-petition claims. Condrey v. Endeavour Highrise, L.P. (In re Endeavour), 425 B.R. 402, 419 & n.8 (Bankr. S.D. Tex. 2010) (citing Official Bankruptcy Form 10, which expressly states, in bold print, that the claimant should set forth the “Amount of Claim as of Date Case Filed”).

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New Bankruptcy Opinion: IN THE MATTER OF ONDOVA LIMITED COMPANY – Court of Appeals, 5th Circuit, 2015

In the Matter of: ONDOVA LIMITED COMPANY, Debtor.

PETFINDERS, L.L.C., Appellant,



No. 13-10120.

United States Court of Appeals, Fifth Circuit.

August 14, 2015.

Before: JOLLY, HIGGINBOTHAM, and DAVIS, Circuit Judges.


This appeal arises from the bankruptcy case styled Matter of Ondova Limited Company. [1] Petfinders, LLC, appeals a district court order dismissing as moot its appeal from a bankruptcy court order authorizing the Trustee to sell the domain name , an asset of the estate. We adopt the analysis of the district court [2] and, concluding that the appeal to the district court was indeed moot, we affirm the judgment of dismissal.


On October 7, 2011, the Trustee requested authority to sell the domain name pursuant to 11 U.S.C. § 363(b). [3] The bankruptcy court scheduled a hearing for November 9, 2011. On November 7, two days before the section 363 hearing, Petfinders, LLC, filed an objection challenging the proposed sale price and alleged that was not the property of the estate but was instead owned by another entity, Novo Point, LLC, which had assigned its rights and interest in to Petfinders.

Following the November 9 hearing, the bankruptcy court granted the Trustee’s motion, authorized the sale of to Discovery Communications, LLC, for $25,000, and issued an order to that effect. Regarding the arguments advanced on behalf of Petfinders, the bankruptcy court found and concluded as follows:

The Court heard substantial evidence establishing that the Domain Name is clearly property of the Estate. One party asserting that the Domain Name was its property, Petfinders, LLC, offered no evidence whatsoever to support its position. The Court further heard convincing evidence that Discovery holds numerous trademark registrations on the word “petfinder” and that any use or sale by the Trustee of the Domain Name could lead to claims by Discovery of trademark infringement. Accordingly, the Domain Name is property of the Estate, and the sale of the Domain Name for $25,000.00 is an exercise of the Trustee’s sound business judgment and is in the Estate’s best interest under the circumstances.

The Court also heard convincing evidence that the proposed sale was negotiated in good-faith and at arms-length and that Discovery is a third-party purchaser with no affiliations with the Debtor, the Estate or the Trustee and, accordingly, Discovery is entitled to the protections afforded to it as a good-faith purchaser under section 363(m) of the Bankruptcy Code. [4]

The bankruptcy court also ordered that the statutory 14-day stay provided for in Bankruptcy Rule 6004(h) did not apply and that the sale order was effective immediately.

Novo Point filed an emergency motion to stay the sale order in this court. On November 15, 2011, we temporarily stayed the sale “until further order of this court.” [5] Novo Point’s emergency motion was based on its assertion of ownership of and its challenge to the authorized sale price for . [6] On December 2, 2011, after considering Novo Point’s emergency motion to stay, the response, and the reply, we vacated the temporary stay and denied Novo Point’s emergency motion. [7] There has not been a stay of the sale order since the termination of our temporary stay.

This court’s temporary stay having been lifted, the Trustee sold to Discovery Communications, LLC, consistent with the terms authorized in the sale order.

Meanwhile, Petfinders and Novo Point appealed the sale order to the district court. There, the appellants challenged the sale order on grounds that was not the property of the estate and argued, for the first time, that the evidence did not support the bankruptcy court’s conclusion that Discovery was a “good faith purchaser” under 11 U.S.C. § 363(m). The district court dismissed the appeal as moot as to both appellants, concluding that section 363(m) removed its ability to provide an effective remedy in a sale to a good faith purchaser and that the appellants had waived any challenge to Discovery’s good-faith status by failing to raise such challenge before the bankruptcy court. [8]

Petfinders, LLC, appeals.


The plain language of section 363(m) prevents an appellate court from granting effective relief in cases challenging bankruptcy court orders authorizing the sale of property of the estate to a good-faith purchaser, “whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale . . . were stayed pending appeal.” [9] We have interpreted section 363(m) to “patently protect[ ], from later modification on appeal, an authorized sale where the purchaser acted in good faith and the sale was not stayed pending appeal.” [10] We have indicated that a challenge to the purchaser’s good-faith status itself is not mooted by sale if timely raised, [11] but “such a challenge may not be raised for the first time on appeal to the district court.” [12] “It is well established that we do not consider arguments or claims not presented to the bankruptcy court.” [13]

Petfinders did not challenge Discovery’s good-faith status before the bankruptcy court. [14] The bankruptcy court found and concluded that Discovery was a good-faith purchaser under section 363(m). Although Novo Point sought a stay of the sale from this court, it failed to obtain one. The sale to Discovery was subsequently consummated consistent with the terms of the sale order. The district court correctly concluded that this appeal is moot under section 363(m).


As a final matter, the Trustee filed a motion to dismiss this appeal on grounds that Petfinders has failed to demonstrate that it has a claim or interest to the domain name. As we determine that the district court was correct in its order of dismissal, we DENY as MOOT the Trustee’s motion to dismiss and AFFIRM the district court judgment.

[*] Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

[1] Case No. 09-34784-sgj-11 (Bankr. N.D. Tex.).

[2] See R.1828-30 (Order Granting Appellee’s Motion to Dismiss Appeal Based on Mootness).

[3] Section 363(b)(1) provides that “[t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate,” subject to exceptions and conditions not at issue here.

[4] R.28.

[5] Doc. 350 (Case No. 10-11202) (Nov. 15, 2011, Order).

[6] See Motion Filed on Behalf of Party for Stay Pending Appeal, Nov. 4, 2011, at 11-13 (Documents, Case No. 10-11202)

[7] Doc. 368 (Case No. 10-11202) (Dec. 2, 2011, Order).

[8] R.1828-30.

[9] 11 U.S.C. § 363(m).

[10] In re Gilchrist, 891 F.2d 559, 560 (5th Cir. 1990) ; see In re Energytec, Inc., 739 F.3d 215, 218-19 (5th Cir. 2013) (“The section codifies Congress’s strong preference for finality and efficiency in the bankruptcy context, particularly where third parties are involved. By providing good faith purchasers with a final order and removing the risks of endless litigation over ownership, [s]ection 363(m) allows bidders to offer fair value for estate property, which greatly benefits both the debtor and its creditors.”) (internal quotation marks and citations omitted); see also In re Steffen, 552 F. App’x 946, 949 (11th Cir. 2014) (per curiam) (“There is no exception to this rule where the [objecting party] sought a stay pending appeal but was denied.”).

[11] See In re O’Dwyer, No. 14-30917, 2015 WL 2407666, at *4 (5th Cir. May 21, 2015) (“We . . . `have no jurisdiction to review an unstayed sale order once the sale occurs, except on the limited issue of whether the sale was made to a good faith purchaser.'”) (quoting In re Gucci, 105 F.3d 837, 838 (2d Cir. 1997) ).

[12] In re The Watch Ltd., 257 F. App’x 748, 750 (5th Cir. 2007) .

[13] Gilchrist, 891 F.2d at 61 (citation omitted).

[14] See Bankr. Doc. 676, Case No. 09-34784-sgj-11 (Bankr. N.D. Tex.) (Petfinders LLC’s Objection to Trustee’s Motion for Authority to Sell Property of the Estate).

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New Bankruptcy Opinion: IN THE MATTER OF ONDOVA LIMITED COMPANY – Court of Appeals, 5th Circuit, 2015

In the Matter of: ONDOVA LIMITED COMPANY, Debtor,

GARY N. SCHEPPS, Appellant,


DANIEL J. SHERMAN, Chapter 11 Trustee, Appellee.

No. 13-10122.

United States Court of Appeals, Fifth Circuit.

Filed: August 14, 2015.

Before: JOLLY, HIGGINBOTHAM, and DAVIS, Circuit Judges.


Attorney Gary Schepps appeals from a bankruptcy court order entered in the case styled Matter of Ondova Limited Company. [1] The order at issue, entered on December 15, 2011, barred Schepps from appearing or participating further in the Ondova Limited bankruptcy (the “Bar Order”). [2] Concluding that the Bar Order against Schepps was effectively vacated by subsequent orders of the district court and bankruptcy court—and emphasizing that it has so been vacated—we dismiss this appeal as moot. [3]


By way of background, the Ondovo Limited bankruptcy spawned out of a convoluted litigation, the history of which we set out in Netsphere, Inc. v. Baron. [4] Schepps had served as counsel for Jeffrey Baron in Netsphere and he purported to represent Baron and various Baron-controlled entities, along with various other entities, in the Ondovo Limited bankruptcy. Some of the entities Schepps purported to represent in the Ondovo Limited bankruptcy became subject to a receivership order entered by the district court in the Netsphere case on November 24, 2010 (the “Receivership Order”). [5] The Receivership Order identified entities subject to the receivership as Baron and any Baron-controlled entity, and it “enjoin[ed] any person from taking any action based upon any [then] existing directive from any person other than the [r]eceiver with regard to the affairs and business” of any such entity. [6] It also gave the receiver exclusive authority to act on behalf of any such entity in legal proceedings and to control such entity’s actions in such proceedings. [7] After entry of the Receivership Order, Schepps made several filings in the bankruptcy court on behalf of Novo Point, LLC, an entity expressly subject to the receivership, apparently in violation of the Receivership Order. In response to these filings, and on motion of the receiver, the bankruptcy court issued a show-cause order and initiated contempt proceedings against Schepps. Following several rounds of hearings, the bankruptcy court issued the Bar Order, the purpose of which was to prohibit Schepps from taking further action on behalf of entities subject to the receivership in violation of the Receivership Order.

Schepps appealed the Bar Order to the district court. By the time briefing was completed, “the [r]eceivership [was] in the process of winding down,” and the district court reasoned that the underlying purpose of the Bar Order would not be further served by its enforcement at that time. [8] On June 18, 2012, the district court entered an “Order on Appeal” that effectively reversed the Bar Order. [9] The district court’s Order on Appeal was entered on the bankruptcy court docket the same day. [10] In response to the Order on Appeal, the bankruptcy court issued the following order dated August 27, 2012:

This court must honor the guidance and reasoning of the Article III court from which this bankruptcy court’s authority to exercise bankruptcy jurisdiction flows. [The district court] has essentially indicated in the Order on Appeal of Schepps Bar Order that, regardless of whatever restrictions he may have at one time intended with respect to Novo Point, LLC and who may speak for it, he believes Schepps should be permitted to speak for Jeff Baron, Novo Point, LLC, and any other entities Jeff Baron claim he owns in these court proceedings. Given this ruling, this court does not believe it is appropriate to further consider the Show Cause Matters that it has had under advisement.

WHEREFORE, IT IS HEREBY ORDERED, ADJUDGED, AND DECREED, that the Show Cause Matters are considered resolved and discharged and this court will not further consider the appropriateness of civil contempt sanctions against . . . Schepps. [11]

No party challenged the district court’s Order on Appeal or the bankruptcy court’s subsequent order discharging the show-cause matters against Schepps.

Months later, in Netsphere, we vacated the Receivership Order as improper. [12] We found it unnecessary to address an outstanding petition for a writ of mandamus filed by Novo Point, LLC, “which challenged the bankruptcy court’s decision to strike various notices of appeal filed by Novo Point [because] [t]he bankruptcy court struck these notices based on its finding that they violated the terms of the [R]eceivership [O]rder—which we have now set aside.” [13] To be clear, the Bar Order at issue today also stemmed from the GRANTED LEAVE TO APPEAL all orders of the Bankruptcy Court allegedly affecting property now in possession and control of the Receiver on Jeffrey Baron’s behalf.”). bankruptcy court’s efforts to enforce the terms of the Receivership Order, which we vacated in Netsphere.

On January 7, 2013, the district court entered an order instructing the clerk to administratively close the case with regard to Schepps’ appeal of the Bar Order because, “[i]n light of the Fifth Circuit’s recent opinion [in Netsphere] . . . there are no further issues . . . to address concerning the appeal of the [B]ar [O]rder.” [14] Schepps appeals the district court order administratively closing the case to our court. [15]


Our decision in Netsphere vacated the Receivership Order from which the Bar Order derived. Yet even before Netsphere issued both the district court and the bankruptcy court issued orders effectively vacating the Bar Order and discharging all show-cause matters against Schepps. Emphasizing that the Bar Order is no longer of any effect and that Schepps remains an officer of the court in good stead, we DISMISS this appeal as MOOT. The Trustee’s motion to dismiss this appeal as untimely is DENIED as MOOT.

[*] Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

[1] Case No. 09-34784-sgj-11 (Bankr. N.D. Tex.).

[2] R.19-21. The Bar Order provided, specifically, that: (1) “Gary Schepps . . . shall file no further pleadings and/or appeals of any kind in the Ondova Limited Company bankruptcy, Case No. 09-34784-sgj-11;” (2) “[t]he Clerk for the United States Bankruptcy Court for the Northern District of Texas is directed to remove any pleadings and/or appeals filed by Gary Schepps electronically as soon as they are filed;” (3) “[n]o responses are required to be filed by counsel relating to any pleadings or appeals filed by Gary Schepps in this Bankruptcy Case;” and (4) “[i]n the event Gary Schepps files any pleadings in violation of this Order, this court will conduct a show cause hearing and issue appropriate sanctions against Gary Schepps.” Id. at 21.

[3] Schepps’ notice of appeal references a district court order administratively closing the case with regard to his appeal from the Bar Order, but his substantive challenge pertains to the Bar Order itself. Because we dismiss Schepps’ substantive arguments as moot, and because mootness is an independent jurisdictional barrier, see North Carolina v. Rice, 404 U.S. 244, 245-46 (1971), we need not and do not reach the question of whether the district court order administratively closing the case was a “final decision” over which we have jurisdiction under 28 U.S.C. §§ 158(d) and 1291. See generally Mire v. Full Spectrum Lending Inc., 389 F.3d 163 (5th Cir. 2004) (explaining that in some situations an administratively closed case is the functional equivalent of a stay and cannot constitute a final appealable order, but in others it is the functional equivalent of a dismissal over which an appellate court can exercise review).

[4] 703 F.3d 296, 302-05 (5th Cir. 2012).

[5] Doc. 130, Case No. 3:09-cv-00988-L (N.D. Tex.) (Order Appointing Receiver, Nov. 24, 2010).

[6] Id. at 2.

[7] Id. at 7-8.

[8] See R.996-1001.

[9] Id. at 1001 (“[I]t is ORDERED that Gary Schepps has a right to appear in the District Court as counsel of record for Baron and those entities he claims he owns. Schepps is

[10] Doc. 790, Case No. 09-34784-sgj-11 (Bankr. N.D. Tex.).

[11] Doc. 807, Case No. 09-34784-sgj-11 (Bankr. N.D. Tex.).

[12] 703 F.3d 296, 311 (5th Cir. 2012) .

[13] Id. at 315.

[14] R.1002.

[15] Id. at 1003-05.

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New Bankruptcy Opinion: IN RE TS EMPLOYMENT, INC. – Bankr. Court, SD New York, 2015

In re: TS EMPLOYMENT, INC, Chapter 11 Debtor.

Case No. 15-10243 (MG).

United States Bankruptcy Court, S.D. New York.

August 18, 2015.

Albert Togut, Esq., Jeffrey R. Gleit, Esq., Steven S. Flores, Esq., Lauren L. Peacock, Esq., TOGUT, SEGAL & SEGALL LLP, Attorneys for James S. Feltman, Solely in His Capacity as Chapter 11 Trustee New York, NY.

Ronald S. Gellert, Esq., (pro hac vice) GELLERT SCALI BUSENKELL & BROWN, LLC, Proposed Attorneys for the Debtors Corporate Resource Services, Inc., et al. Wilmington, DE.

Barry N. Seidel, Esq., Eric B. Fisher, Esq., Steven B. Smith, Esq., Evan J. Zucker, Esq., DICKSTEIN SHAPIRO LLP, Attorneys for the Ad Hoc Committee of Unsecured Creditors of Corporate Resource Services, Inc., et al. New York, NY.

Neal Jacobson, Esq., Alan Maza, Esq., U.S. SECURITIES AND EXCHANGE COMMISSION, Attorneys for U.S. Securities And Exchange Commission New York, New York.

Monica P. Folch, Esq., PREET BHARARA, UNITED STATES ATTORNEY FOR THE SOUTHERN DISTRICT OF NEW YORK, Attorneys for the Internal Revenue Service New York, NY.


MARTIN GLENN, Bankruptcy Judge.

Pending before the Court is the motion (the “Motion,” ECF Doc. # 127) [1] of the chapter 11 trustee (the “Trustee”) of Debtor TS Employment, Inc. (“TSE”) to transfer venue of the chapter 11 cases of Corporate Resource Services, Inc. (“CRS”) and seven of its affiliated entities (together with CRS, the “Delaware Debtors”) from the bankruptcy court in Delaware to this Court. [2] The Motion is based on section 1412 of title 28 of the United States Code and Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 1014. The Securities Exchange Commission filed a joinder to the Motion. (ECF Doc. # 132.) The Delaware Debtors filed an opposition (the “Opposition,” ECF Doc. # 135.) The Ad Hoc Committee of Unsecured Creditors of Corporate Resource Services, Inc., et al. filed a reservation of rights but took no position on the venue transfer Motion. (ECF Doc. # 138.) The Trustee filed a reply. (ECF Doc. # 141.) The Internal Revenue Service (the “IRS”) also filed a joinder in the Motion (the “IRS Joinder,” ECF Doc. # 142).

Because TSE filed its chapter 11 case in this district before the Delaware Debtors filed their chapter 11 cases in Delaware, Bankruptcy Rule 1014(b) provides that this Court “may determine, in the interest of justice or for the convenience of the parties,” FED. R. BANKR. P. 1014(b), whether to transfer the Delaware Debtors’ cases to this district. No one disputes that the Delaware Bankruptcy Court has statutory venue under section 1408 of title 28 of the United States Code over the cases filed by the Delaware Debtors because CRS (and all but one of the Delaware Debtors) is incorporated in Delaware. Although the parties’ dispute is cloaked in the question of whether venue should be transferred under section 1412 “in the interest of justice or for the convenience of the parties,” 28 U.S.C. § 1412, the real issue here has little to do with whether to transfer venue to this Court. Rather, the crux of the parties’ dispute is whether TSE’s chapter 11 Trustee should be appointed as the chapter 11 Trustee of each of the Delaware Debtors if the cases are transferred here; an issue not presently before this Court. [3]

The Court held a hearing on the Motion on August 18, 2015 and announced its ruling from the bench, granting the Motion, with an Opinion to follow. For the reasons explained below, venue of the cases filed by the Delaware Debtors shall be transferred to this Court forthwith.


TSE filed its chapter 11 case in this Court on February 2, 2015 after it was “discovered” that TSE had failed to pay over $100 million of employee withholding taxes to the IRS and state tax authorities, as if a failure of that magnitude could be anything other than knowing and intentional. The Delaware Debtors filed their cases in the Delaware Bankruptcy Court on July 23, 2015. TSE is 100% owned by Robert Cassera (“Cassera”). CRS is a publicly traded corporation that is 89.7% owned by Cassera. TSE and the Delaware Debtors are “affiliates” under section 101(2) of the Bankruptcy Code. [4] See 11 U.S.C. § 101(2).

TSE, when it was operating—which it no longer is doing—was a “professional employer organization,” or “PEO.” TSE had only one customer—CRS. When CRS was operating, it contracted with third parties to provide staffing, recruiting, and related consulting services. At its peak, CRS provided approximately 30,000 temporary employees to CRS’s contract counterparties. TSE handled the processing and payment of payroll and benefits, including worker’s compensation insurance, for the temporary employees. TSE was also supposed to pay employee withholding taxes to state and federal taxing authorities; TSE was supposed to receive from CRS all amounts TSE paid to or for the benefit of the temporary employees (including the withholding taxes), along with TSE’s fees. TSE and CRS, and their other affiliates, share the same office located at 160 Broadway, New York, New York, and they share (or at least did share) the same employees and the same outside accountants.

The United States Trustee in this district moved for the appointment of a chapter 11 trustee shortly after TSE’s chapter 11 case was filed. After some brief skirmishing, on February 20, 2015, the Court entered a consent order directing the appointment of a chapter 11 trustee. On February 27, 2015, the Court entered an order approving the appointment of James S. Feltman as the chapter 11 Trustee.

What is beyond question is that a major fraud was perpetrated in failing to pay over $100 million of withholding taxes—who was responsible or culpable in the fraud remains to be established. CRS appeared by counsel at all (or nearly all) hearings in TSE’s chapter 11 case since it was filed.

The Court need not tarry long to conclude that the interest of justice and the convenience of the parties will best be served by transferring the Delaware Debtors’ cases to this Court. Despite the protestations to the contrary by the Delaware Debtors’ counsel, filing the cases in Delaware could only have been done for one purpose—to prevent one court from overseeing these related cases. Having one court administer these cases is the most cost effective and efficient use of judicial resources.


The Trustee moves pursuant to Bankruptcy Rule 1014(b) to transfer the venue of CRS’s bankruptcy case from the Delaware Bankruptcy Court to this Court. Bankruptcy Rule 1014(b) provides in part:

If petitions commencing cases under the Code . . . are filed in different districts by, regarding, or against . . . (4) a debtor and an affiliate, the court in the district in which the first-filed petition is pending may determine, in the interest of justice or for the convenience of the parties, the district or districts in which any cases should proceed. The court may so determine on motion and after a hearing, with notice to the following entities in the affected cases: the United States trustee, entities entitled to notice under Rule 2002(a), and other entities as the court directs. The court may order the parties to the later-filed cases not to proceed further until it makes the determination.

FED. R. BANKR. P. 1014(b). Under the Bankruptcy Code, an “affiliate” is defined in part as a “corporation 20 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by the debtor, or by an entity that directly or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of the debtor. . . .” 11 U.S.C. § 101(2)(B). The term “entity” includes a “person,” such as Cassera. Id. § 101(15). Cassera owns 100% of TS Employment and 89.7% of CRS. TS Employment and CRS are therefore “affiliates” under the Code. CRS, by way of its Opposition and the Delaware Bankruptcy Court’s order granting joint administration, concedes that the remaining Delaware Debtors are affiliates of CRS. (See Opp. at 6; Case No. 15-11546 (MFW), ECF Doc. # 40.) As a result of CRS filing a bankruptcy petition in a different district, this Court—or the Court in which the first petition was filed—is the proper court to determine “the district or districts in which” the two entities cases shall proceed. FED. R. BANKR. P. 1014(b).

Consideration of the transfer of venue turns on the discretionary power granted bankruptcy courts by section 1412 of title 28 of the United States Code. In re Dunmore Homes, Inc., 380 B.R. 663, 670 (Bankr. S.D.N.Y. 2008) (citations omitted). A case or proceeding commenced in a proper district may be transferred to another district if the court finds that the transfer would be in the interest of justice or for the convenience of the parties. See 28 U.S.C. § 1412. Section 1412 is worded in the disjunctive, allowing a case to be transferred under either the interest of justice rationale or the convenience of the parties rationale. See generally In re Patriot Coal Corp., 482 B.R. 718, 739 (Bankr. S.D.N.Y. 2012) ; Dunmore, 380 B.R. at 670 ; Enron Corp. v. Arora (In re Enron Corp.), 317 B.R. 629, 637 (Bankr. S.D.N.Y. 2004) . The decision to transfer venue is within the discretion of the court, as evidenced by the use of the permissive “may” in section 1412 and should be based on the facts underlying each particular case. Dunmore, 380 B.R. at 670 ; Enron, 317 B.R. at 638 & n.8 ; see also Gulf States Exploration Co. v. Manville Forest Prods. Corp. (In re Manville Forest Prods. Corp.), 896 F.2d 1384, 1391 (2d Cir. 1990) (concluding that review should be on an individualized basis). The moving party has the burden to demonstrate by a preponderance of the evidence that the interest of justice or the balance of convenience weighs in favor of transfer. Manville, 896 F.2d at 1390 ; Puerto Rico v. Commonwealth Oil Refining Co. (In re Commonwealth Oil Refining Co.), 596 F.2d 1239, 1241 (5th Cir. 1979) (“CORCO”); Patriot Coal, 482 B.R. at 740 ; Dunmore, 380 B.R. at 670 ; Lionel Leisure, Inc. v. Trans Cleveland Warehouses, Inc. (In re Lionel Corp.), 24 B.R. 141, 142 (Bankr. S.D.N.Y. 1982) . This is “a heavy burden of proof,” Dunmore, 380 B.R. at 670, because a debtor’s choice of forum is “presumed to be the appropriate district for hearing and determination of a proceeding in bankruptcy,” Manville, 896 F.2d at 1390-91 . Thus, courts must cautiously exercise the power to transfer a case as a debtor’s selection of a proper venue is entitled to great weight. See Dunmore, 380 B.R. at 675 .

Courts often look to the criteria established in the circuit court decisions in Manville and CORCO when evaluating the interest of justice and convenience of the parties. Both Manville and CORCO affirmed bankruptcy court decisions denying change of venue motions, but both cases support granting the Motion in this case. In Manville, the court dealt with a motion to transfer venue of an adversary proceeding from New York to Louisiana; the main case was pending in New York. Manville, 896 F.2d at 1386-87 . The Second Circuit affirmed the denial of the venue transfer motion, concluding that the bankruptcy court appropriately struck the balance between the economic and efficient administration of the case and the convenience of the parties. Id. at 1391. Here, all of those factors point to administration of all of the cases in New York. The only connection to Delaware is the happenstance of CRS’s incorporation in that state. In CORCO, the Fifth Circuit emphasized the place where the management of the debtor took place, see CORCO, 596 F.2d at 1242-44, 1247-48, a factor that unquestionably points to venue in New York for the Delaware Debtors’ cases as well.

The interest of justice prong provides a broad and flexible standard. Patriot Coal, 482 B.R. at 739 ; Dunmore, 380 B.R. at 671 ; In re Enron Corp., 274 B.R. 327, 343 (Bankr. S.D.N.Y. 2002) . “The court considers whether (i) transfer would promote the economic and efficient administration of the bankruptcy estate; (ii) the interests of judicial economy would be served by the transfer; (iii) the parties would be able to receive a fair trial in each of the possible venues; (iv) either forum has an interest in having the controversy decided within its borders; (v) the enforceability of any judgment would be affected by the transfer; and (vi) the plaintiff’s original choice of forum should be disturbed.” Enron, 317 B.R. at 638-39 . Courts also consider the impact of the learning curve if the case is transferred. Dunmore, 380 B.R. at 672 (citation omitted). “The learning curve analysis involves consideration of the time and effort spent by the current judge and the corresponding effect on the bankruptcy case in transferring venue.” In re Enron Corp., 284 B.R. 376, 404 (Bankr. S.D.N.Y. 2002) . “In addition, courts consider the ability of interested parties to participate in the proceedings and the additional costs that might be incurred to do so.” Dunmore, 380 B.R. at 672 (citation omitted).

“The convenience of parties prong has six factors: (i) proximity of creditors of every kind to the court; (ii) proximity of the debtor; (iii) proximity of witnesses necessary to the administration of the estate; (iv) location of the assets; (v) economic administration of the estate; and (vi) necessity for ancillary administration if liquidation should result.” Id. Among these, the economic and efficient administration of the estate is the factor given the greatest weight. Id.; Enron, 274 B.R. at 343 .

Applying either the interest of justice or the convenience of the parties test here, the Court concludes that TSE’s Trustee has established by a preponderance of the evidence that venue of the Delaware Debtors’ cases should be transferred to New York. Nothing other than the Delaware Debtors’ selection of Delaware—a choice obviously made to complicate administration of these affiliates’ cases—supports leaving venue of the Delaware Debtors’ cases in Delaware.

All of these cases are inextricably intertwined. See, e.g., Enron, 284 B.R. at 398 (finding affiliates “intertwined” such that circumstances dictated venue transfer); In re Andover Data Servs., Inc., 35 B.R. 297, 301 (Bankr. S.D.N.Y. 1983) (transferring venue to first-filed jurisdiction of affiliate where, among other things, action in the first-filed case affected the second-filed entity). As the IRS argues in its joinder in the Motion, “TSE is liable for nonpayment of employee withholding taxes, and CRS, as the employer of individuals whose withholding taxes were not paid, may also be responsible for that tax liability. (IRS Joinder at 2 (citing United States v. Huff, No. 12 Cr. 750 (NRB), 2014 WL 7192410, at *3-4 (S.D.N.Y. Dec. 17, 2014) (companies “who outsource tax and payroll services do not relinquish all responsibility for the payment of taxes” and may be held liable for nonpayment of taxes); United States v. Total Employment Co., 305 B.R. 333 (M.D. Fla. 2004) ; United States v. Garami, 184 B.R. 834 (M.D. Fla. 1995) ).)

At bottom, the questions will have to be answered in all of these cases—what happened to the $100 million and who is responsible for the shortfall? These questions should be answered, if possible, in one bankruptcy court. [5] Bankruptcy distributions to the creditors of TSE and the Delaware Debtors, to the extent property is recovered, may well depend on the answer to these questions.

With respect to the convenience of the parties, the Motion correctly recites:

virtually all of the relevant parties have substantial connections to New York, with virtually none to Delaware. To name a few,

•CRS’ largest creditor, TSE, operated in New York and is administered here,

•CRS’ only secured lender is in New York,

•94.46% of CRS’ unsecured debt of its top 30 creditors is held by New Yorkers,

•CRS’ principal office, where it keeps its books and records, is in New York,

•CRS’ certified public accountants are in New York, and

•two of CRS’ law firms are in New York.

(Motion at 3.)

The selection of the venue most consistent with the interest of justice and the convenience of the parties simply is not a close question—all of the cases belong in New York. The Delaware Debtors’ decision to file in Delaware was a cynical effort to avoid the judicial scrutiny that accompanies having all of these cases administered in the same court. The Delaware Debtors’ decision to fight the venue transfer motion has unnecessarily resulted in incurring additional expenses when the real issue—not raised by the Motion—has to do with the appointment of a chapter 11 trustee.

Once all of the cases are here, the following questions will have to be addressed very soon:

(1) Should all of the cases be jointly administered?

(2) Should a chapter 11 trustee be appointed in the additional cases?

(3) May the same chapter 11 trustee oversee all of the cases in light of the claims between the debtors?

(4) May the debtors’ estates in all of these cases be substantively consolidated?

(5) Should any or all of the cases be converted to cases under chapter 7?

(6) How will these cases be funded if they remain in chapter 11?

The Court will enter a separate order scheduling a case management conference in all of the cases.


For the reasons explained above, the Trustee’s Motion to transfer venue of the cases filed by the Delaware Debtors in the Delaware Bankruptcy Court is GRANTED.


[1] References to “ECF Doc. #____” are to docket entries in Case No. 15-10243 (MG) before this Court, unless otherwise indicated.

[2] The Delaware Debtors and the case numbers for each in the files and records of the United States Bankruptcy Court for the District of Delaware (the “Delaware Bankruptcy Court”) are as follows: CRS, Case No. 15-11546 (MFW); Accountabilities, Inc., Case No. 15-11547 (MFW); Corporate Resource Development, Inc., Case No. 15-11550 (MFW); Diamond Staffing Services, Inc., Case No. 15-11552 (MFW); Insurance Overload Services, Inc., Case No. 15-11548 (MFW); Integrated Consulting Services, Inc., Case No. 15-11549 (MFW); The CRS Group, Inc., Case No. 15-11551 (MFW); and TS Staffing Services, Inc., Case No. 15-11553 (MFW). CRS owns 100% of the equity interests of the other seven Delaware Debtors. See Declaration of Henry Ewen in Support of Corporate Resource Services, Inc. et al.’s Omnibus Memorandum of Law in Opposition to the Chapter 11 Trustee’s Application to Transfer Venue of the Chapter 11 Cases of Corporate Resource Services, Inc. and its Affiliated Entities from the United States Bankruptcy Court for the District of Delaware to This District and All Joinders Thereto 3 (the “Ewen Decl.,” ECF Doc. # 135, Ex. A). The Delaware Debtors’ chapter 11 cases are jointly administered under the CRS case number (Case No. 15-11546). (See Case No. 15-11456 (MFW), ECF Doc. # 40.)

[3] See Ewen Decl. ¶ 19 (“Even though keeping the Delaware Debtors[‘] cases in Delaware is the most costeffective solution and provides the best change [sic] of maximizing recovery for its creditors, as a compromise the Delaware Debtors agreed to change the venue of their chapter 11 cases to New York on the sole condition that the TSE Trustee not serve as trustee for all of TSE and the Delaware Debtors.”).

[4] Although CRS disputes the “affiliate” relationship in its Opposition, the Court is unpersuaded. (See Opp. at 13.)

[5] This statement obviously does not exclude the possibility that other civil, regulatory, or criminal cases or proceedings are also possible.

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New Bankruptcy Opinion: IN RE TRIBUNE MEDIA COMPANY – Court of Appeals, 3rd Circuit, 2015

IN RE: TRIBUNE MEDIA COMPANY f/k/a Tribune Company, f/k/a Times Mirror Corporation, et al., Debtor



Nos. 14-3332, 14-3333.

United States Court of Appeals, Third Circuit.

Argued April 15, 2015.
Opinion filed: August 19, 2015.

Roy T. Englert, Jr., Esquire (Argued), Matthew M. Madden, Esquire, Hannah W. Riedel, Esquire, Mark T. Stancil, Esquire, Robbins, Russell, Englert, Orseck, Untereiner & Sauber, 1801 K Street, N.W., Suite 411-L, Washington, DC 20006, Counsel for Appellants, Aurelius Capital Management, L.P., Law Debenture Trust Company of New York.

David J. Adler, Esquire, McCarter & English, 245 Park Avenue, 27th Floor, New York, NY 10167. Katharine L. Mayer, Esquire, McCarter & English, 405 North King Street, Renaissance Centre, 8th Floor, Wilmington, DE 19801, Counsel for Appellant, Deutsche Bank Trust Company Americas.

James F. Bendernagel, Jr., Esquire, Sidley Austin, 1501 K Street, N.W., Washington, DC 20005.

James O. Johnston, Esquire (Argued), Jones Day, 555 South Flower Street, 50th Floor, Los Angeles, CA 90071.

Candice L. Kline, Esquire, Jeffrey C. Steen, Esquire, Sidley Austin, One South Dearborn Street, Chicago, IL 60603.

J. Kate Stickles, Esquire, Cole Schotz, 500 Delaware Avenue, Suite 1410, Wilmington, DE 19801, Counsel for Appellees Tribune Media Company.

Before: AMBRO, VANASKIE, and SHWARTZ, Circuit Judges.


AMBRO, Circuit Judge.

Aurelius Capital Management, L.P. (“Aurelius”), along with the Law Debenture Trust Company of New York and Deutsche Bank Trust Company Americas (the “Trustees”), appeal the District Court’s dismissal as equitably moot of their appeals from the Bankruptcy Court’s order confirming Tribune’s Chapter 11 plan of reorganization. We agree with the District Court that Aurelius’s appeal, which seeks to undo the crucial component of the now consummated plan, should be deemed moot. However, we reverse and remand with respect to the Trustees. They seek disgorgement from other creditors of $30 million that the Trustees believe they are contractually entitled to receive. As the relief the Trustees request would neither jeopardize the $7.5 billion plan of reorganization nor harm third parties who have justifiably relied on plan confirmation, their appeal is not equitably moot.

I. Facts and Procedural History

In December 2007, the Tribune Company (which published the Chicago Tribune and the Los Angeles Times and held many other properties) was facing a challenging business climate. Sensing an opportunity, Sam Zell, a wealthy real estate investor, orchestrated a leveraged buy-out (“LBO”), a transaction by which a purchaser (in this case, an entity controlled by Zell and, for convenience, referred to by that name in this opinion) acquires an entity using debt secured by assets of the acquired entity. Before the LBO, Tribune had a market capitalization of approximately $8 billion and about $5 billion in debt.

The LBO was taken in two steps: Zell made a tender offer to obtain more than half of Tribune’s shares at Step One, followed by a purchase of all remaining shares at Step Two. In this LBO, as is typical, Zell obtained financing (called here the “LBO debt”) to purchase Tribune secured by Tribune’s assets, meaning that Zell had nothing at risk. The transaction took Tribune private and saddled the company with an additional $8 billion of debt. Moreover, as a part of the sale, Tribune’s subsidiaries guaranteed the LBO debt. The holders of the debt that Tribune carried before Zell took it over (the “pre-LBO debt”) had recourse only against Tribune, not against the subsidiaries. Thus the LBO debt, guaranteed by solvent subsidiaries, had “structural seniority” over the pre-LBO debt.

Unsurprisingly, Tribune, in a declining industry with a precarious balance sheet, eventually sought bankruptcy protection. It filed under Chapter 11 in December 2008, and at some later point Aurelius, a hedge fund specializing in distressed debt, bought $2 billion of the pre-LBO debt and became an active participant in the bankruptcy process. (We do not know how much Aurelius paid for this debt.)

Ten days after the filing, the U.S. Trustee appointed the Official Committee of Unsecured Creditors (the “Committee”), which obtained permission to pursue various causes of action (e.g., breach of fiduciary duty and fraudulent conveyance) on behalf of the estate against the LBO lenders, directors and officers of old Tribune, Zell, and others (collectively called the “LBO-Related Causes of Action,” see In re Tribune Co., 464 B.R. 126, 136 n.7 (Bankr. D. Del. 2011) [1] ). As the Bankruptcy Court put it, “[f]rom the outset . . . the major constituents understood that the investigation and resolution of the LBO-Related Causes of Action would be a central issue in the formulation of a plan of reorganization.” Id. at 142.

Various groups of stakeholders proposed plans of reorganization; the important ones for the purposes of this appeal are Aurelius’s (the “Noteholder Plan”) and one sponsored by the Debtor, the Committee, and certain senior lenders, called the “DCL Plan” (for Debtor/Committee/Lender) or simply the “Plan.” The primary difference between the Noteholder and the DCL Plans was that the proponents of the former (the “Noteholders”) wanted to litigate the LBO-Related Causes of Action while the DCL Plan proposed to settle them.

Kenneth Klee, one of the principal drafters of the Bankruptcy Code of 1978, was appointed the examiner in this case, and he valued the various causes of action to help the parties settle them. Professor Klee concluded that whether Step One left Tribune insolvent (and was thus constructively fraudulent) was a “very close call” if Step Two debt was included for the purposes of this calculation. Id. at 159. He further concluded that a court was “somewhat likely” to find intentional fraud and “highly likely” to find constructive fraud at Step Two. Id. He also valued the recoveries to Aurelius’s and the Trustees’ classes of debt under the various litigation scenarios and concluded that the DCL Plan settlement offered more money ($432 million) than all six possible litigation outcomes except full avoidance of the LBO transactions, which would have afforded the pre-LBO lenders $1.3 billion. Id. at 161. Given these findings for both steps of the LBO, full recovery was a possibility.

The DCL Plan restructured Tribune’s debt, settled many of the LBO-Related Causes of Action for $369 million, and assigned other claims to a litigation trust that would continue to pursue them and pay out any proceeds according to a waterfall structure whereby the pre-LBO lenders stand to receive the first $90 million and 65% of the Trust’s recoveries over $110 million (this aspect of the Plan we refer to as the “Settlement”). Aurelius objected because it believes the LBO-Related Causes of Action are worth far more than the examiner or Bankruptcy Court thought and that it can get a great deal more money in litigation than it got under the Settlement. The Bankruptcy Court’s opinion on confirmation, thoroughly done by Judge Kevin Carey, discussed the parties’ disagreement at length and ultimately concluded that it was “uncertain” that litigation would result in full avoidance of the LBO. Id. at 174. And full avoidance was the only result the Bankruptcy Court’s opinion suggests could plausibly result in greater recovery than the Settlement. See id. at 161 (citing examiner’s opinion that only full avoidance could exceed settlement value); 174 (rejecting contrary expert opinions). Thus the Court held that the Settlement was reasonable, and, on July 23, 2012, the DCL Plan was confirmed over Aurelius’s objection.

Aurelius promptly moved for a stay pending appeal under Bankruptcy Rule 8007. The Bankruptcy Court held a hearing on the motion at which it considered whether to issue a stay and, if so, whether to condition it on a bond. Aurelius opposed posting a bond in any amount. The Court stayed its confirmation order, but it also considered how much an unsuccessful appeal by Aurelius would cost Tribune. As a result of this valuation, the Court conditioned its stay on Aurelius’s posting a $1.5 billion bond to indemnify Tribune against the estimated costs associated with staying the order for the likely time to appeal. In re Tribune Co., 477 B.R. 465, 482 (Bankr. D. Del. 2012) .

With the threat of equitable mootness looming, Aurelius and the Trustees filed emergency motions to vacate the bond requirement and to expedite their appeals. The District Court, however, denied the motions and ordered that the briefing schedule for these appeals would be the same as for other appealing parties (who are not before us). Aurelius appealed the denial of the motions related to the bond requirement, but we dismissed the appeal for want of appellate jurisdiction (the denials were not final orders). Aurelius objected that the amount of the bond was prohibitively high, but it has never argued to any court that a lower amount would be reasonable; rather, it has consistently tried to eliminate the bond requirement altogether.

The appeals were fully briefed in the District Court on October 11, 2012, when Aurelius and the Trustees again moved to have their appeals heard separately from the other pending appeals; the District Court did not rule on this motion (which Tribune opposed). On December 5, 2012, Aurelius again moved for expedition (the Court again denied the motion), and the Plan was consummated on December 31. On January 18, 2013, Tribune moved to dismiss the appeals as equitably moot. About 18 months later, the District Court granted that motion.

As all agreed, the plan was substantially consummated, and Tribune persuaded the District Court that it could not effectively afford relief without causing undue harm either to reorganized Tribune or to its investors. Aurelius appeals, arguing that the case is not equitably moot and that the Settlement was unreasonably low. The fund seeks modification of the confirmation order to reinstate the LBO-Related Causes of Action that the Settlement resolved so that the claims can be fully litigated or re-settled.

The Trustees also appeal. They represent certain pre-LBO debt treated as “Class 1E creditors” in the Plan. They argue that they had subordination agreements with the holders of two series of pre-LBO notes Tribune issued, called the PHONES Notes and the EGI Notes, worth a total of about $30 million. According to the subordination agreements, if Tribune went bankrupt, any recovery by the PHONES and EGI Notes would be payable to the Class 1E holders. However, the Plan provides that any recovery from those Notes will be distributed pro rata between Class 1E and Class 1F . The latter has about 700 creditors in it, the majority of whom “are individuals and small-business trade creditors.” In re Tribune Co., Nos. 12-cv-1072 et al., 2014 WL 2797042, at *6 (D. Del. June 18, 2014). Further complicating the intercreditor dispute is that under the Plan Class 1F members were allowed to choose one of two payment options: either they could receive a lump sum at the time of their election or they could participate in the Plan’s litigation trust (the latter holding out a potentially greater, but more uncertain, recovery). The Trustees contend that the Plan gives Class 1F $30 million dollars that should go to Class 1E, and they propose several ways in which Class 1E could recover that money without fatally unravelling the Plan.

We have jurisdiction under 28 U.S.C. §§ 158(d) and 1291. We review the Court’s equitable mootness determination for abuse of discretion. [2]

II. Discussion

A. The Doctrine of Equitable Mootness

“Equitable mootness” is a narrow doctrine by which an appellate court deems it prudent for practical reasons to forbear deciding an appeal when to grant the relief requested will undermine the finality and reliability of consummated plans of reorganization. [3] The party seeking to invoke the doctrine bears the burden of overcoming the strong presumption that appeals from confirmation orders of reorganization plans—even those not only approved by confirmation but implemented thereafter (called “substantial consummation” or simply “consummation”)—need to be decided. In re SemCrude, L.P., 728 F.3d 314, 321 (3d Cir. 2013) . Unless we can readily resolve the merits of an appeal against the appealing party, our starting point is the relief an appellant specifically asks for. And even “when a court applies the doctrine of equitable mootness, it does so with a scalpel rather than an axe. To that end, a court may fashion whatever relief is practicable instead of declining review simply because full relief is not available.” In re Blast Energy Servs., Inc., 593 F.3d 418, 425 (5th Cir. 2010) (internal quotation marks omitted) (citations omitted).

We first recognized the doctrine of equitable mootness in In re Continental Airlines, 91 F.3d 553 (3d Cir. 1996) (en banc) . The case closely divided our Court, with seven judges voting to recognize the doctrine over the dissent of six. We explicitly held that it was the law of our Circuit but did not lay down any particularly clear guidance on how to decide whether an appeal was moot. Instead, the majority opinion noted certain factors theretofore considered in making a mootness call:

Factors that have been considered by courts in determining whether it would be equitable or prudential to reach the merits of a bankruptcy appeal include (1) whether the reorganization plan has been substantially consummated, (2) whether a stay has been obtained, (3) whether the relief requested would affect the rights of parties not before the court, (4) whether the relief requested would affect the success of the plan, and (5) the public policy of affording finality to bankruptcy judgments.

Id. at 560 (citation omitted). This statement reveals that the doctrine was then, as far as our Court was concerned, in its infancy. Note, for example, that we listed “[f]actors that have been considered by courts” without specifying whether those factors are entitled to equal weight or whether any is necessary or sufficient. Id. Over the years, our precedential opinions have refined the doctrine to its current, more determinate state. As we recently put it,

equitable mootness . . . proceed[s] in two analytical steps: (1) whether a confirmed plan has been substantially consummated; and (2) if so, whether granting the relief requested in the appeal will (a) fatally scramble the plan and/or (b) significantly harm third parties who have justifiably relied on plan confirmation.

SemCrude, 728 F.3d at 321 .

This two-step inquiry reduces uncertainty from the factors of Continental, and this appeal reflects the importance of SemCrude’s step (2): in cases where relief would neither fatally scramble the plan nor significantly harm the interests of third parties who have justifiably relied on plan confirmation, there is no reason to dismiss as equitably moot an appeal of a confirmation order for a plan now substantially consummated. For example, reliance on consummation of a plan would not be justified if a third party obtained a benefit that was inconsistent with a contract, statute, or judgment, as any benefit from such an error would result in “ill-gotten gains.” See In re Charter Commc’ns, Inc., 691 F.3d 476, 484 (2d Cir. 2012) (“[I]t would not be inequitable to require the parties to [an illegal] agreement to disgorge their ill-gotten gains, participation in the appeal or not.”).

While courts and counsel readily understand when granting relief on appeal would unravel a plan both confirmed and consummated, who are the “third parties” that equitable mootness is meant to protect? Continental singled out investors as the “particular” beneficiaries of equitable mootness, 91 F.3d at 562, while SemCrude discussed the interests of lenders, customers, and suppliers. 728 F.3d at 325 . Likewise, Philadelphia Newspapers considered the interests of “other creditors” who were not equity investors. 690 F.3d 161, 171 (3d Cir. 2012) . These cases teach that, although parties other than equity investors may rely on plan consummation and thus claim protection in the form of equitable mootness, they may not “merit the same `outside investor’ status as” those who make equity investments in a reorganized entity. In re Zenith Elecs. Corp., 250 B.R. 207, 217 (D. Del. 2000), aff’d sub nom. Nordhoff Investments, Inc. v. Zenith Elecs. Corp., 258 F.3d 180 (3d Cir. 2001) .

One reason some third parties have reliance interests more worthy of protection than others is that we want to encourage behavior (like investment in a reorganized entity) that contributes to a successful reorganization. See Continental, 91 F.3d at 564 (“[T]here was an integral nexus between the investment [by the parties urging mootness] and the success of the Plan.”); see also id. at 563 (“[T]he Eastern claims were crucial to the willingness of the Investors to consummate the Financing Transaction.” (internal quotation marks omitted)).

Also, in appropriate circumstances we further the free flow of commerce—a chief concern of commercial bankruptcy—when we decline to disturb “complex transactions undertaken after the Plan was consummated” that would be most difficult to unravel. Charter, 691 F.3d at 485 (“The Allen Settlement was the product of an intense multi-party negotiation, and removing a critical piece of the Allen Settlement—such as Allen’s compensation and the third-party releases—would impact other terms of the agreement and throw into doubt the viability of the entire Plan.”); see also id. at 486 (“[T]he third-party releases were critical to the bargain that allowed Charter to successfully restructure[,] and . . . undoing them, as the plaintiffs urge, would cut the heart out of the reorganization.”).

At the same time, if funds can be recovered from third parties without a plan coming apart, it weighs heavily against barring an appeal as equitably moot, both in our Court and other circuits. See In re PWS Holding Corp., 228 F.3d 224, 236-37 (3d Cir. 2000) (appeal not moot where appellant “seeks to invalidate releases that affect the rights and liabilities of third parties [and t]he plan has been substantially consummated, but . . . the plan could go forward even if the releases were struck”); In re Paige, 584 F.3d 1327, 1342 (10th Cir. 2009) (“The substantial consummation of a bankruptcy plan may make providing relief difficult, and may raise concerns about fairness to third parties, but `[c]ourts can and do order divestiture or damages in’ situations where business deals or bankruptcy plans have been wrongly consummated.” (quoting In re Res. Tech. Corp., 430 F.3d 884, 886-87 (7th Cir. 2005) (alteration in Paige))). We agree with the Second Circuit that the disgorgement of “ill-gotten gains” is proper assuming that the disgorgement otherwise leaves a plan of reorganization not in tatters. Charter, 691 F.3d at 484 .

In addition to the third parties (particularly investors) identified in our cases, equitable mootness properly applied benefits the estate, In re Zenith Elecs. Corp., 329 F.3d 338, 346 (3d Cir. 2003), and the reorganized entity, id. at 344. All these players have a common interest in the finality of a plan: the estate because it can wind up; the reorganized entity because it can begin to do business without court supervision and can seek funding in the capital markets without the cloud of bankruptcy; investors because a reorganized entity will command a higher and more stable market value outside of bankruptcy; lenders because they can collect interest and principal; customers in certain industries who need parts or services; and other constituents for different context-specific reasons that may boil down to it is easier to do business with an entity outside of bankruptcy. Equitable mootness assures these stakeholders that a plan confirmation order is reliable and that they may make financial decisions based on a reorganized entity’s exit from Chapter 11 without fear that an appellate court will wipe out or interfere with their deal.

The theme is that the third parties with interests protected by equitable mootness generally rely on the emergence of a reorganized entity from court supervision. When a successful appeal would not fatally scramble a confirmed and consummated plan, this specific reliance interest most often is not implicated, as the plan stays in place (with manageable modifications possible) and the reorganized entity remains a going concern. For example, the remedy of taking from one class of stakeholders the amount given to them in excess of what the law allows is not apt to be inequitable, as there is little likelihood it will have damaging ripple effects beyond the classes that the redistribution immediately affects. Consistent with our conclusion in PWS, 228 F.3d at 236-37, and as the Second Circuit reasoned in Charter, 691 F.3d at 484, when taking a payment to which one class is not contractually entitled, and giving it to the party contractually entitled to those funds, would not undermine the basis for other parties’ reliance on the finality of confirmation, it makes little sense to deem an appeal equitably moot.

B. Aurelius’s Appeal is Equitably Moot.

Aurelius concedes that the DCL Plan is substantially consummated, Aurelius Br. at 24 & 26, but it argues that the relief it seeks would neither scramble that Plan nor harm third parties who have relied on consummation. Aurelius asks us to have the confirmation order modified to reinstate the settled LBO-Related Causes of Action. Id. at 58. It argues that it should be allowed to pursue these claims or settle them on more favorable terms and that it can obtain relief from reorganized Tribune, from the LBO lenders themselves, or by redistributing the LBO lenders’ future recovery from the litigation trust. Id. at 27-38.

Aurelius’s argument that the relief it ultimately seeks—further recovery on the LBO-Related Causes of Action—can be afforded (at least in part) misses the point of the equitable mootness inquiry. We must also ask whether the immediate relief Aurelius seeks, revocation of the Settlement in the DCL Plan, would “fatally scramble the plan and/or . . . significantly harm third parties who have justifiably relied on plan confirmation.” SemCrude, 728 F.3d at 321 . We believe it would do both.

To the first concern (fatal scrambling), the Bankruptcy Court noted the obvious: the Settlement was “a central issue in the formulation of a plan of reorganization.” Tribune, 464 B.R. at 142 . Though it is within the power of an appellate court to order the Settlement severed from the Plan and keep the rest of the Plan in place—thereby not attempting to “unscramble the eggs,” Continental Airlines, 91 F.3d at 566, or turning a court into a “Humpty Dumpty repairman,” In re Pub. Serv. Co. of New Hampshire, 963 F.2d 469, 475 (1st Cir. 1992), or any other ovoid metaphor—allowing the relief the appeal seeks would effectively undermine the Settlement (along with the transactions entered in reliance on it) and, as a result, recall the entire Plan for a redo.

Third-party reliance is related here to the problem of scrambling the Plan, as returning to the drawing board would at a minimum drastically diminish the value of new equity’s investment. That investment no doubt was in reliance on the Settlement, as indeed was the reliance of those who voted for the Plan. Aurelius proposed a Noteholder Plan that didn’t include a settlement of the LBO-Related Causes of Action, and it was overwhelmingly rejected by all but 3 of the 243 creditor classes (the remaining classes were Aurelius’, the PHONES Notes’, and a third “class in which a single creditor holding a claim of $47 voted in favor of both the DCL Plan and the Noteholder Plan,” id. at 207). Revoking the Settlement would circumvent the bankruptcy process and give Aurelius by judicial fiat what it could not achieve by consensus within Chapter 11 proceedings or, we can’t help but add, if it had put up a bond.

On appeal, Aurelius proposes no relief that would not involve reopening the LBO-Related Causes of Action. Allowing those suits would “`knock the props out from under the authorization for every transaction that has taken place,'” thus scrambling this substantially consummated plan and upsetting third parties’ reliance on it. In re Chateaugay Corp., 10 F.3d 944, 953 (2d Cir. 1993) (quoting In re Roberts Farms, Inc., 652 F.2d 793, 797 (9th Cir. 1981) ). In this context, the District Court did not abuse its discretion in concluding that Aurelius’s appeal is equitably moot.

When determining whether the case is equitably moot, we of course must assume Aurelius will prevail on the merits because the idea of equitable mootness is that even if Aurelius is correct, it would not be fair to award the relief it seeks. One might argue that holding the appeal moot is therefore by definition in equitable: if Aurelius prevails, that means the Bankruptcy Court committed legal error, and it could not be inequitable to correct the Court’s mistakes. The reasons to reject this hypothesis are twofold.

First, bankruptcy is concerned primarily with achieving a workable outcome for a diverse array of stakeholders, and the reliable finality of a confirmed and consummated plan allows all interested parties to organize their lives around that fact. See Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 Colum. L. Rev. 527, 529 (1983) (identifying speed as one of “three principal characteristics desirable for a reorganization mechanism”).

Second, and relatedly, an important reason we should forbear from hearing a challenge to the order before us is because of Aurelius’s failure to post a bond to obtain a stay pending appeal. Courts may condition stays of plan confirmation orders pending appeal on the posting of a supersedeas bond. The purpose of requiring such a “bond in a bankruptcy court is to indemnify the party prevailing in the original action against loss caused by an unsuccessful attempt to reverse the holding of the bankruptcy court.” In re Theatre Holding Corp., 22 B.R. 884, 885 (Bankr. S.D.N.Y. 1982) . Federal Rule of Civil Procedure 62(d) (made applicable to bankruptcy cases by Bankruptcy Rule 7062) provides for stays pending appeal as of right when a bond is posted in damages actions “or where the judgment is sufficiently comparable to a money judgment so that payment on a supersedeas bond would provide a satisfactory alternative to the appellee.” 10 Collier on Bankruptcy ¶ 7062.06 (16th ed. 2015).

In this case, the Bankruptcy Court carefully calculated the likely damage to the estate of a stay pending an appeal from its confirmation order. In particular, it analyzed the following costs to Tribune and its creditors that a stay would cause: additional professional fees, opportunity costs to creditors who would receive delayed distributions from the DCL Plan or delayed interest and principal payments from reorganized Tribune, and a loss in market value to equity investors caused by the delayed emergence. Tribune, 477 B.R. at 480-83 . We need not go through the opinion in detail, as Aurelius does not squarely argue that the bond requirement was an abuse of discretion, but we note that the valuation was well-considered and as convincing as the alchemy of valuation in bankruptcy can be.

As a result of its calculations, the Court determined that Aurelius should post a $1.5 billion bond to guarantee that the estate could be indemnified in the case of an unsuccessful appeal. Id. at 483. We repeat that Aurelius never challenged the bond amount, instead attempting unsuccessfully to modify the order to remove the bond in its entirety. But given the Bankruptcy Court’s findings on the likely substantial loss to Tribune due to an appeal, a supersedeas bond in some amount was appropriate. Aurelius’s failure to attempt to reduce the bond to a more manageable figure (assuming its representations are correct that it would be unable to finance such a large bond on short notice) leads us to conclude that it effectively chose to risk a finding of equitable mootness and implicitly decided that an appeal with a stay conditioned on any reasonable bond amount was not worth it. This risk-adjusted choice by such a rational actor makes a finding of mootness not unfair, as it appears from the record before us that Aurelius had the opportunity to obtain a stay that would have foreclosed the possibility of a mootness finding. [4]

C. The Trustees’ Appeal is Not Equitably Moot.

To reiterate, the Trustees contend that they are beneficiaries of a subordination agreement that guarantees that they will receive any recovery that goes to the holders of the PHONES and EGI Notes ahead of a class of trade and other creditors (Class 1F). This $30 million intercreditor dispute is not equitably moot. Indeed, there is no prudent reason to forbear from deciding the merits of the Trustees’ appeal.

Again, it is conceded that the Plan has been substantially consummated. Thus we turn to SemCrude’s second question: “whether granting the relief requested in the appeal will (a) fatally scramble the plan and/or (b) significantly harm third parties who have justifiably relied on plan confirmation.” 728 F.3d at 321 . The answer is no.

The merits question presented by the Trustees’ appeal is straightforward: does the Plan unfairly allocate Class 1E’s recovery to 1F? If the answer is yes, disgorgement could be ordered against those Class 1F holders who have received more than their fair share, and the Litigation Trust’s waterfall can be restructured to make sure that 1E gets its recovery to the exclusion of 1F. There’s no chance that this modification would unravel the Plan: the dispute is about whether one of two classes of creditors is entitled to $30 million in the context of a $7.5 billion reorganization.

Nor, if the Trustees rightly read the subordination agreement, has anyone “justifiably relied,” id., on the finality of the confirmation order with respect to the $30 million. It is true that some of the money has been paid out, but it has gone to a readily identifiable set of creditors against whom disgorgement can be ordered, and, assuming the Trustees prevail on the merits, Class 1F members by definition cannot justifiably have relied on the payments. The Class 1F payouts are not “ill-gotten,” Charter, 691 F.3d at 484, in the sense that the members of that class received them as a result of malfeasance, but the Trustees’ argument is that the payments were not valid. Although the trade creditors and retirees who make up Class 1F are likely not sophisticated players and may have understandably relied on any payouts they received, any reliance they have placed on the Plan confirmation and implementation—again, assuming the Trustees’ argument on the merits is correct—is still not legally justifiable because Class 1F’s claim of entitlement to the money is unlawful under the Trustees’ interpretation of the relevant contract.

Moreover, disgorgement from Class 1F is not the only possible remedy here (though conceptually it is the most straightforward). On remand, if the Trustees prevail on the merits, the District Court could enjoin future revenue streams of the litigation trust from going to Class 1F until Class 1E is paid in full. To the extent this would result in disparate initial distributions to the members of Class 1F who participated in the litigation trust and those who elected all cash distributions, the Court could allow payment of this difference to the Class 1F creditors who elected to participate in the trust first before diverting recoveries to Class 1E, thus effectively revoking the option to choose between an initial all-cash distribution and partial cash distribution plus participation in the litigation trust, as the Trustees suggest. Trustees Br. at 19. Tribune’s only response to this proposal by the Trustees is the unsupported statement that it “would be a logistical nightmare and would result in chaos.” Tribune Response at 71 (internal quotation marks omitted). We fail to see the chaos and thus view this as a possible remedial option within the District Court’s discretion.

The District Court held in a conclusory fashion that “[h]undreds of individuals and small-business trade creditors. . . were entitled to rely upon the finality of the Confirmation Order,” 2014 WL 2797042 at *6, but that misses the point of equitable mootness and elevates finality over all other interests. The Plan has arguably deprived one prepetition lender class of $30 million. Requiring Class 1F to pay $30 million to Class 1E if the latter prevails on appeal would not affect Tribune’s value and thus not any of its investors (nor would it harm the estate or new Tribune). It would be unfortunate from the perspective of the members of Class 1F to require disgorgement, but, if they were never entitled to that money in the first place, it is not unfair, and mootness must be fair (equitable in legalese) to be invoked.

Equitable mootness gives limited protection to those who have justifiably relied on the finality of a consummated plan, particularly new equity. No one is arguing that, if the Class 1F creditors lose, the consequences would be any worse than requiring them to forgo a windfall they never should have gotten in the first place. Because we disagree that this class of creditors was entitled to rely on the DCL Plan’s finality (once again assuming that the Trustees should prevail on appeal), we hold that the District Court made an error of law and therefore abused its discretion in holding as it did.

D. Delays Below

Both appellants write with strong language about the District Court’s delays in hearing their appeals, and they characterize Tribune as having “dragg[ed its] heels” throughout the proceeding. Aurelius Br. at 20; see also Trustees Br. at 10 (incorporating by reference Aurelius’s argument that Tribune caused delays in hearing any appeal). Tribune responds that the District Court did nothing more than refuse to give appellants special treatment and that Tribune repeatedly indicated that it would comply with the briefing schedule the District Court imposed. Notably, the appellants do not squarely make an argument that the District Court abused its discretion in setting a briefing schedule; it seems they complain of the timeline to add to the atmosphere of unfairness they are trying to conjure.

In any event, it does not seem that Tribune is to blame for the delay. True, it opposed expedition of the appeal, but there is no suggestion that it missed deadlines or filed abusive motions for extensions of time. And the appellants do not complain of the delay between consummation (December 31, 2012) and decision (June 2014); rather, they complain that the District Court should have decided the case sometime between plan confirmation (July 23, 2012) and consummation (again, December 31, 2012). One hundred sixty-one days is not short, but it’s also not unusual for large cases to take that long to decide. Most importantly, Aurelius and the Trustees do not actually seek relief for the delay; they just complain about it. For all these reasons, the delays below, though arguably unfortunate, do not affect the analysis here.

IV. Conclusion

Aurelius’s appeal is equitably moot: the DCL Plan is consummated; Aurelius spurned the offer of a stay accompanied by a bond; and it would be unfair to Tribune’s investors, among others, to allow Aurelius to undo the most important aspect of the overwhelmingly approved Plan. By contrast, the Trustees’ appeal is not equitably moot: assuming the Trustees prevail on the merits, Class 1F holders must forgo gains to which they were never entitled. Other third parties will not be harmed, nor is the Plan even remotely called into question. We thus affirm in part, reverse in part, and remand.

AMBRO, Circuit Judge, with whom VANASKIE, Circuit Judge, joins, concurring.

Counsel for Aurelius and the Trustees asserted at oral argument that our en banc case In re Continental Airlines, 91 F.3d 553 (3d Cir. 1996), wrongly recognized the doctrine of equitable mootness. At least one esteemed colleague of our Court agrees and has called for its reconsideration. See In re: One2One Commc’ns, LLC, No. 13-3410, 2015 WL 4430302, at *7 (3d Cir. July 21, 2015) (Krause, J., concurring). The One2One concurrence makes three principal challenges to the doctrine: constitutional (Article III of the Constitution requires supervision of decisions by Article I bankruptcy judges); statutory (the Bankruptcy Code does not authorize equitable mootness); and prudential (it is unfair to appellants to deny them relief when a bankruptcy or district court has made an error of law). While we do not need to address every argument made in that concurrence, its well-crafted challenge to equitable mootness makes it worthwhile to lay out briefly why this judge-made doctrine is abided by every Court of Appeals.

I. Equitable Mootness Does Not Violate Article III.

The One2One concurrence expresses “serious constitutional concerns” with the equitable mootness doctrine. Id. at *15. Perhaps the reason this argument does not make it all the way past the goal line to conclude the doctrine is actually unconstitutional is that Supreme Court precedent refutes the position.

The One2One concurrence is concerned that equitable mootness insulates the judgments of Article I bankruptcy judges’ from review by an Article III tribunal and thus violates (1) a personal right to an Article III adjudicator and (2) the integrity of the judicial branch of our Government. To the extent that the right to Article III review is “personal,” we note that the specific personal right the Supreme Court has identified is “to have claims decided before judges who are free from potential domination by other branches of government.” Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 848 (1986) (internal quotation marks omitted). As an equitable doctrine applied by Article III courts, equitable mootness does not implicate this right.

As for the structural concern, the argument rests on an expansive reading of lines of cases where the Supreme Court considered whether Congress may redirect adjudication from state courts and Article III courts to Article I courts. Not one of the cases relied on discusses whether an Article III court may abstain from hearing a case, as the primary evil the cases address (congressional aggrandizement) is irrelevant. See Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1944 (2015) (“Article III . . . bar[s] congressional attempts `to transfer jurisdiction [to non-Article III tribunals] for the purpose of emasculating’ constitutional courts and thereby prevent[ing] `the encroachment or aggrandizement of one branch at the expense of the other.'” (quoting Schor, 478 U.S. at 850 ) (emphasis added) (last two alterations in original)); Stern v. Marshall, 131 S. Ct. 2594, 2620 (2011) (“Is there really a threat to the separation of powers where Congress has conferred the judicial power outside Article III only over certain counterclaims in bankruptcy? The short but emphatic answer is yes. A statute may no more lawfully chip away at the authority of the Judicial Branch than it may eliminate it entirely.”); Thomas v. Union Carbide Agricultural Prods. Co., 473 U.S. 568, 590 (1985) (“Congress . . . select[ed] arbitration as the appropriate method of dispute resolution. Given the nature of the right at issue and the concerns motivating the Legislature, we do not think this system threatens the independent role of the Judiciary in our constitutional scheme.”); N. Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 83 (1982) (“The constitutional system of checks and balances is designed to guard against encroachment or aggrandizement by Congress at the expense of the other branches of government.” (internal quotation marks omitted)); United States v. Raddatz, 447 U.S. 667, 681 (1980) (“Congress was alert to Art. III values concerning the vesting of decisionmaking power in magistrates. . . . We need not decide whether, as suggested by the Government, Congress could constitutionally have delegated the task of rendering a final decision on a suppression motion to a non-Art. III officer. Congress has not sought to make any such delegation.” (footnote omitted) (citation omitted)); Crowell v. Benson, 285 U.S. 22, 49 (1932) (“`[W]e do not consider [C]ongress can . . . withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty.'” (quoting Murray’s Lessee v. Hoboken Land & Improvement Co., 59 U.S. (18 How.) 272, 284 (1855) ).

If it seems formalistic to conclude that a court may abstain from deciding a case even though Congress may not withdraw the same case from the court’s cognizance, that is because the Supreme Court’s separation-of-powers cases—at least where they hold that an Article III violation has occurred—are often formalistic. See Wellness, 135 S. Ct. at 1950 (Roberts, C.J. [the author of Stern], dissenting) (“I would not yield so fully to functionalism.”). Neither the personal rights nor the separation of powers guaranteed by Article III are infringed when Article III courts decline to hear a quite constricted class of cases seeking relief that would upend cases resolved and plans implemented (often years before) and/or would significantly harm third parties who relied on that resolution and implementation. We therefore do not share the constitutional concerns expressed in the One2One concurrence.

II. The Bankruptcy Code Does Not Bar the Equitable Mootness Doctrine.

“[E]very Circuit Court has recognized some form of equitable mootness,” save the Federal Circuit (which does not hear bankruptcy appeals). Nil Ghosh, Plan Accordingly: The Third Circuit Delivers a Knockout Punch with Equitable Mootness, 23 Norton J. Bankr. L. & Prac. 224 & n.8 (2014) (collecting cases). [1] Though of course that does not prove the doctrine’s validity, it is a starting point that counsels us to tread lightly in our examination.

One prominent and frequently cited explanation for the genesis of equitable mootness is that various provisions of the Bankruptcy Code, notably §§ 363(m) and 1127(b), bespeak a congressional intent “that courts should keep their hands off consummated transactions.” In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir. 1994) (Easterbrook, J.) . The former provides that if a sale to a good faith purchaser under 11 U.S.C. § 363 is reversed on appeal, the reversal will not affect the validity of the sale to the purchaser, while § 1127(b) limits parties’ ability to modify plans of reorganization following substantial consummation. However, § 1127(b) on its own terms is not read to limit the authority of appellate courts to forbear reviewing for prudential reasons appeals from orders confirming plans now consummated. UNR, 20 F.3d at 769 . Although § 1129, the plan confirmation provision, is silent on the authority of courts to upend consummated plans at late dates, UNR considered that omission an “interstice[ ]” or gap that courts may fill to effect the intent of Congress to protect the finality of consummated plans, a policy goal that the bench, bar, and academy all recognize as undergirding equitable mootness. See, e.g., id.; Lenard Parkins et al., Equitable Mootness: Will Surgery Kill the Patient?, 29 Am. Bankr. Inst. J. 40 (2010), Troy A. McKenzie, Judicial Independence, Autonomy, and the Bankruptcy Courts, 62 Stan. L. Rev. 747, 789-90 (2010) (describing doctrine and its justifications).

A simpler way to reach the same conclusion starts from the premise that “bankruptcy courts . . . are courts of equity and appl[y] the principles and rules of equity jurisprudence.” Young v. United States, 535 U.S. 43, 50 (2002) (last alteration in original) (internal quotation marks omitted); accord Cybergenics Corp. v. Chinery, 330 F.3d 548, 567 (3d Cir. 2003) (en banc) (“[B]ankruptcy courts are equitable tribunals that apply equitable principles in the administration of bankruptcy proceedings.”). As Judge Posner has put it, equitable mootness “is perhaps best described as merely an application of the age-old principle that in formulating equitable relief a court must consider the effects of the relief on innocent third parties.” In re Envirodyne Indus., Inc., 29 F.3d 301, 304 (7th Cir. 1994) (Posner, J.) ; see also In re Paige, 584 F.3d 1327, 1335 (10th Cir. 2009) (“[T]he doctrine of equitable mootness is rooted, at least in part, in the court’s discretionary power to fashion a remedy in cases seeking equitable relief.”); In re AOV Indus., Inc., 792 F.2d 1140, 1147-48 (D.C. Cir. 1986) (“[T]here exists . . . a melange of doctrines relating to the court’s discretion in matters of remedy and judicial administration. Even when the moving party is not entitled to dismissal on [A]rticle III grounds, common sense or equitable considerations may justify a decision not to decide a case on the merits.” (internal quotation marks omitted) (citations omitted)). Our take is that, in the equitable mootness context, courts may consider whether it is fair in stark circumstances to grant relief that will scramble a consummated plan or will upset third parties’ legitimate reliance on the finality of such a plan.

In awarding injunctions, a classic form of equitable relief, courts always consider the balance of harms to the parties and the public. Equitable mootness, properly applied, similarly reflects a court’s decision that when undoing a confirmed and consummated plan would do more harm to many than good for one (or but a few), this is inappropriate for a court in equity. To illustrate this principle, consider cases where injunctions are statutorily authorized but courts still decline to issue one even in the face of a violation and in the absence of an alternative remedy. For example, in Weinberger v. Romero-Barcelo, the Navy violated the Federal Water Pollution Control Act (FWPCA) by discharging ordnance into navigable waters. 456 U.S. 305, 309 (1982). Rather than enjoin this practice, the District Court ordered the Navy to apply for a permit to continue its discharges, but specifically allowed the Navy to continue its unpermitted activities while its application was pending. The Court did so because, on balancing the equities in the case, it found that the injunction “would cause grievous, and perhaps irreparable harm, not only to Defendant Navy, but to the general welfare of this Nation.” Romero-Barcelo v. Brown, 478 F. Supp. 646, 707 (D.P.R. 1979) . The Supreme Court held that the decision whether to allow a preliminary injunction was left to the sound discretion of the District Court notwithstanding the apparent ongoing violation of the FWPCA. Romero-Barcelo, 456 U.S. at 320.

Similarly, in the preliminary injunction context, the Supreme Court has allowed district courts to deny relief even if the party seeking it meets convincingly the success-on-the-merits requirement. In Amoco Prod. Co. v. Gambell, Alaska, a federal agency allowed oil companies to drill for oil on public lands without giving notice to affected Alaska Natives, an alleged violation of the Alaska National Interest Lands Conservation Act. 480 U.S. 531 (1987). Alaska Natives sought a preliminary injunction barring the drilling. The District Court held that, while the Act applied to the permitting agency, the public interest weighed in favor of oil exploration under the facts presented and, on balance, denied the preliminary injunction. The Supreme Court held that withholding relief was proper despite the finding of a “strong likelihood” of success on the merits. Id. at 541, 544-46.

Although these cases are far from factually on point here, they reinforce the appropriateness of courts’ discretion in issuing or withholding equitable remedies. The doctrine of equitable mootness recognizes those few situations where the practical harm caused by granting relief would greatly outweigh the benefit. Discretion is no less appropriate in the plan confirmation context than in ordering other equitable remedies; hence we believe that the One2One concurrence’s formal challenge that equitable mootness lacks a basis in law misses the point that it is in the equitable toolbox of judges for that scarce case where the relief sought on appeal from an implemented plan, if granted, would leave the plan in tatters and/or bankruptcy battlefield strewn with too many injured bodies.

III. Equitable Mootness Can Be Beneficial as a Practical Matter.

As for the practical challenge, we acknowledge the unfairness that might result where an aggrieved party is deprived of appellate relief even in the face of an erroneous lower court decision. But remember, equitable mootness is only in play for consideration when modifying a court order approving a since-consummated plan would do significant harm. The possibility that a successful appeal will not cause such harm is no reason to abandon the doctrine altogether. Rather, it counsels us to adhere to our precedent that equitable mootness “should be the rare exception and not the rule.” Id. at 321. Moreover, our Court has certainly not been reluctant to reverse ill-advised equitable mootness grants. See, e.g., supra, Maj. Op. at II.C; Semcrude, 728 F.3d 314 at 323 ; Phila. Newspapers, 690 F.3d at 170 ; Zenith Elecs. Corp., 329 F.3d at 346 .

Cases where prudence counsels courts not to hear appeals are rare, but they are real. Complex bankruptcies reorganize thousands of relationships among countless parties. When a plan is substantially consummated, it is sometimes not only as difficult to restore an estate to the status quo ante consummation as it is to gather all the feathers from the proverbial pillow, it is also a crushing expense to the reorganized entity and its shareholders. If we jettisoned the entire equitable mootness doctrine, it is hard to imagine that any complex plan would be consummated until all appeals are terminated. For why would an equity investor wish to put money into a reorganized entity if the plan could be ordered unraveled? And would not the cost of credit increase prohibitively with such a specter? Without equitable mootness, any dissenting creditor with a plausible (or even not-so-plausible) sounding argument against plan confirmation could effectively hold up emergence from bankruptcy for years (or until such time as other constituents decide to pay the dissenter sufficient settlement consideration to drop the appeal), a most costly proposition.

The costs of remaining in bankruptcy underscore one factor that significantly mitigates the injustice to a wronged appellant whose cause may otherwise be deemed moot—the availability of a stay pending appeal. Indeed, If a party obtains a stay, the plan cannot be substantially consummated and thus the appeal cannot be equitably moot.

We acknowledge, however, that stays are costly to estates: in order to operate a business without court supervision and in order to sell shares on the public markets, entities must emerge from bankruptcy with prepetition liabilities restructured or discharged. Thus every day that a company remains in bankruptcy is a day when it will have a hard time attracting the investors, employees, and, in some industries, customers that it needs to exist and prosper.

To protect against this loss, courts may condition stays pending appeal on the posting of a supersedeas bond. As demonstrated by the careful discussion by Judge Carey in this case, valuing the costs for a stay of a plan confirmation order should be feasible in a case involving sophisticated business entities who can hire experts and litigate complex valuation questions. We thus see practical benefit to allowing a stay if the appellant is willing to post a bond set within a reasonable range. Such an order would balance the conceivable harms to various constituencies and would also shift to the appealing party the burden of determining whether its appeal is really worth the candle.

IV. Conclusion

Were we able to revisit our Circuit’s precedent that equitable mootness is available in the right circumstance (consequently rejecting the views of every other Circuit that hears bankruptcy appeals), we would decline to discard this tool of equity. [2] In a very few cases, shutting an appellant out of the courthouse does substantially less harm than locking a debtor inside. Federal courts have ample equitable authority to decide when no remedy is appropriate, and thus, though we should always presume that appeal merits be reached and act with the utmost care when we turn aside an appeal, equitable mootness remains a last-ditch discretionary device for protecting the finality of an unstayed plan that has been consummated.

[1] This is the most relevant Bankruptcy Court opinion we review, though it ultimately denied confirmation of both of the competing plans referred to below—the Noteholder Plan and the DCL Plan. The latter denial was on narrow curable grounds that the DCL Plan proponents quickly addressed, and thus much of the reasoning supporting Judge Carey’s decision to confirm the plan he did is included in the opinion initially denying confirmation.

[2] A panel of our Court was “inclined to agree with” then-Judge Alito’s criticism, see In re Continental Airlines, 91 F.3d 553, 568 n.4 (3d Cir. 1996) (en banc) (Alito, J., dissenting), that “`this standard of review [ ] contradict[s] our precedent that[,] where the district court sits as an appellate court, we exercise plenary review.'” In re SemCrude, L.P., 728 F.3d 314, 320 n.6 (3d Cir. 2013) (quoting In re Phila. Newspapers, LLC, 690 F.3d 161, 167-68 n.10 (3d Cir. 2012) ). However, as was true in SemCrude, the abuse-of-discretion standard of review remains the law of our Circuit. Cont’l Airlines, 91 F.3d at 560 .

[3] “Equitably moot” bankruptcy appeals are not necessarily “moot” in the constitutional sense: they may persist in very live dispute between adverse parties. Thus, in the Seventh Circuit, Judge Easterbrook “banish[ed] `equitable mootness’ from the (local) lexicon.” In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir. 1994) . In SemCrude, 728 F.3d at 317 n.2, we noted that the term “prudential forbearance” more accurately reflects the decision to decline hearing the merits of an appeal because of its feared consequences should a bankruptcy court’s decision approving plan confirmation be reversed.

[4] To the extent it could be argued that our approach endangers any low-value appeal in a large case (because the cost of a stay would overwhelm any potential recovery), we note that the lower a potential recovery is, the less likely an appeal is to be equitably moot because courts will be more willing to make minor changes to a plan of reorganization than big ones. See Phila. Newspapers, 690 F.3d at 170 (claim worth 1.7% of the price of debtor’s assets not equitably moot); Chateaugay, 10 F.3d at 953 (claim worth up to 10% of a reorganized debtor’s working capital was not equitably moot).

[1] See In re Healthco Int’l, Inc., 136 F.3d 45, 48 (1st Cir. 1998) ; In re Charter Commc’ns, Inc., 691 F.3d 476, 481 (2d Cir. 2012) ; In re U.S. Airways Grp., Inc., 369 F.3d 806, 809 (4th Cir. 2004) ; In re Pac. Lumber Co., 584 F.3d 229, 240 (5th Cir. 2009) ; In re United Producers, Inc., 526 F.3d 942, 947 (6th Cir. 2008) ; In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir. 1994) ; In re President Casinos, Inc., 409 F. App’x 31 (8th Cir. 2010) (unpublished); In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir. 2012) ; In re Paige, 584 F.3d 1327, 1337 (10th Cir. 2009) ; In re Holywell Corp., 911 F.2d 1539, 1543 (11th Cir. 1990), rev’d on other grounds sub nom. Holywell Corp. v. Smith, 503 U.S. 47 (1992) ; In re AOV Indus., Inc., 792 F.2d 1140, 1147-48 (D.C. Cir. 1986) .

[2] In addition to its challenge to the basis in law for equitable mootness, the One2One concurrence suggests several possible modifications to the doctrine should it remain. We express no views with respect to whether some or all of those proposed changes would be beneficial. However, we note that it would be unwise to crystallize as a requirement what Judge Krause’s concurrence views as a trend in favor of deciding the merits of an appeal before equitable mootness is addressed. Slip Op. at 25-27 (advocating that we “requir[e] a ruling on the merits” before deciding whether to forbear deciding the appeal) (citing In re Envirodyne Indus., Inc., 29 F.3d at 303-04 ; In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005) ; Behrmann v. Nat’l Heritage Foundation, 663 F.3d 704, 713 n.3 (4th Cir. 2011) ). While we certainly agree that “a court is not inhibited from considering the merits before considering equitable mootness,” Metromedia, 416 F.3d at 144, and add that such an approach often will save substantial time, energy, and money, courts have had unpleasant experiences with “rigid order[s] of battle” like this before, and we do not see the wisdom of an ironclad requirement for all cases. Pearson v. Callahan, 555 U.S. 223, 234 (2009) (internal quotation marks omitted); see also Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 584 (1999) (allowing personal jurisdiction to be decided before subject-matter jurisdiction notwithstanding recent case that had held deciding subject-matter jurisdiction first is a practice “inflexible and without exception,” Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 95 (1998) ).

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New Bankruptcy Opinion: IN RE TMT PROCUREMENT CORPORATION – Bankr. Court, SD Texas, 2015


Case Nos. 13-33763, 13-33743, 13-33744, 13-33745, 13-33746, 13-33747, 13-33748, 13-33750, 13-33751, 13-33752, 13-33754, 13-33755, 13-33756, 13-33757, 13-33758, 13-33759, 13-33760, 13-33761, 13-33762.

United States Bankruptcy Court, S.D. Texas, Houston Division.

August 14, 2015.


MARVIN ISGUR, Bankruptcy Judge.

Hsin-Chi Su has established that there is a substantial or continuing loss to or diminution of the estate under 11 U.S.C. § 1112(b)(4)(A). The appointment of an examiner under § 1112(b)(1) is in the best interests of the creditors and the estates. The Court has already granted preliminary relief in the form of an examiner; further relief is not appropriate.


The Debtors filed for chapter 11 bankruptcy on June 20, 2013. [1] (ECF No. 2458 at 1). Debtors’ cases are jointly administered. At the commencement of the cases, the Debtors owned a number of ships, including some of the largest ships in the world. Hsin-Chi Su, also known as Nobu Su, was the direct or indirect owner of all Debtors. Various creditors moved to dismiss the cases, arguing that the cases were filed in bad faith. The Court ruled that the cases had not been filed in bad faith, but required that the Debtors pledge or cause to be pledged a substantial amount of capital to ensure compliance with court orders and to secure post-petition financing. [2] In response, Nobu Su pledged approximately 25 million shares of Vantage Drilling Company (the “Vantage Shares”) held by his affiliate (F3 Capital). (ECF No. 323). Su is currently engaged in a dispute with Vantage which has been referred to arbitration. (ECF No. 2458 at 4; ECF No. 2440 at 6). Vantage seeks a judgment imposing a constructive trust over the Vantage Shares.

Vantage appealed several of this Court’s orders that concerned the Vantage Shares. Vantage prevailed and the Fifth Circuit held that this Court erred in issuing orders exercising control over Vantage Drilling Company and the Vantage Shares. In re TMT Procurement Corp., 764 F.3d 512 (5th Cir. 2014) . Following remand, this Court issued an order clarifying that the Vantage Shares remained subject to the prior rights, claims, and interests of Vantage as determined by a court of competent jurisdiction. (ECF No. 2323).

On April 8, 2014, A Handy Corporation, B Handy Corporation, and C Handy Corporation confirmed a chapter 11 plan of reorganization. (ECF No. 1355). However, because a condition precedent to the plan’s effective date did not occur, the plan was terminated on April 25, 2014. (ECF No. 1445). The Debtors have not confirmed any other plans of reorganization, although new plans have been filed. (ECF Nos. 2374 and 2375). The new plans do not provide for the reorganization of the Debtors as going concerns. (ECF No. 2458 at 5).

All of the Debtors’ vessels were sold between April and August of 2014. [3] (ECF No. 2458 at 3). Although the Debtors have no material remaining operating assets, the Debtors, in the aggregate, have approximately $16.5 million in cash, all of which is subject to the lien of Macquarie Bank Limited, the DIP lender. Id. The Debtors also possess 3,771,229 of the Vantage Shares and are the pledgees of 15,007,142 additional shares held in the Court’s registry. [4] Id. All of the remaining shares are subject to Macquarie’s lien. The Debtors also hold certain causes of action and rights of recovery, such as arbitration claims involving damaged grain carried by the B Max, potential retention of excess proceeds from the sale of Fortune Elephant, disgorgement and disallowance of professional fees, and certain avoidance actions against prepetition lenders, non-debtor affiliates, and trade vendors. (ECF NO. 2458 at 4; ECF No. 2455).

Because the Debtors have no employees or business operations, they currently have no cash flow from operations. (ECF No. 2458 at 3). The Debtors have not incurred any material expenses, other than limited post-closing sale expenses, United States Trustee fees, and professional fees, since September of 2014. Id. at 2. From November of 2014 to March of 2015, estate and Committee professionals—Bracewell & Giuliani LLP, AlixPartners, LLC, and Kelley Drye & Warren LLP—have incurred $592,646.76 in fees. (ECF No. 2458-1). Of these fees, $548,308.61 are currently outstanding. According to the Debtors, $342,843.00 of the fees would not have occurred but for the litigation caused by Su and F3 Capital. Id.

On May 1, 2015, Su filed a motion to convert all pending cases to chapter 7 pursuant to 11 U.S.C. § 1112(b). (ECF No. 2415). Debtors, the Official Committee of Unsecured Creditors, MRMBS II LLC, Macquarie Bank, Bank Sinopac, and Wilmington Trust (“Respondents”) all objected to the motion to convert. The Court held a hearing on the motion to convert on June 12, 2015. During the hearing, the Court made a preliminary ruling that required the United States Trustee to select an examiner. Su had expressed concern that Debtors were not properly pursuing avoidance actions before the limitations period was set to expire on June 20, 2015. The role of the examiner was limited to determining whether estate causes of action had been preserved for timely prosecution and whether the professional fees charged to the estate were reasonable. (ECF No. 2479). The United States Trustee selected Attorney Elizabeth Guffy as the Examiner.

Ms. Guffy gave her report orally before the Court on June 19, 2015. She concluded that counsel for Debtors and the Committee properly investigated potential avoidance actions. (ECF No. 2520 at 8). On the same date, the Court issued an order authorizing the Committee to file and prosecute certain avoidance actions belonging to the estate. (ECF No. 2506). The Committee and several of Su’s non-Debtor affiliates entered into a tolling agreement extending the limitation period for various causes of action to January 31, 2016. The Court issued a separate order authorizing Ms. Guffy to review the anticipated lawsuits prepared by the Committee. (ECF No. 2507).


I. Cause to Dismiss or Convert Under § 1112(b)(4)(A)

11 U.S.C. § 1112(b)(1) provides that “[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 under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.” Section 1112(b)(4) contains a nonexhaustive list of examples of cause meriting conversion or dismissal. Su alleges that cause has been met through § 1112(b)(4)(A), which states that a “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation” constitutes cause.

“The inquiry under § 1112 is case-specific, focusing on the circumstances of each debtor.” United Savs. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.), 808 F.2d 363, 371-72 (5th Cir.1987) (en banc) . While most chapter 11 debtors can effectuate a plan of reorganization in a matter of months, certain debtors with more complex debt structures or business difficulties may require more time. Id. at 372. Each debtor’s viability and prospects must be evaluated “in light of the best interest of creditors and the estate.” Id.

The party seeking dismissal or conversion bears the burden of proving cause by a preponderance of the evidence. In re Woodbrook Assocs. 19 F.3d 312, 317 (7th Cir. 1994) . In order to demonstrate cause pursuant to § 1112(b)(4)(A), the moving party must demonstrate that there is both (1) a substantial or continuing loss to or diminution of the estate and (2) the absence of a reasonable likelihood of rehabilitation. In re Creekside Sr. Apartments, L.P., 489 B.R. 51, 61 (6th Cir. B.A.P. 2013) . The loss may be substantial or continuing; it need not be both. Id. (citing 7 Collier on Bankruptcy ¶ 1112.04[6][a][i] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2014)) (“By the use of the word “substantial” in section 1112(b)(4)(A), Congress has indicated that a loss need not be continuing in order to satisfy the first prong of this enumerated cause.”). If the loss is sufficiently large given the financial circumstances of the debtor as to materially negatively impact the bankruptcy estate and interest of creditors, the loss is substantial. 7 Collier on Bankruptcy ¶ 1112.04[6][a][i] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2014). Cause can be shown by demonstrating that the debtor suffered or has continued to experience a negative cash flow or declining asset values following the order for relief. In re Paterno, 511 B.R. 62, 66 (Bankr. M.D.N.C. 2014) . “Negative cash flow alone can be sufficient cause to dismiss or convert under § 1112(b).” In re Miell, 419 B.R. 357, 366 (Bankr. N.D. Iowa 2009) (citing Loop Corp. v. United States Trustee, 379 F.3d 511, 515-16 (8th Cir. 2004) .

Su points to Debtors’ Monthly Operating Reports to show that Debtors have suffered a substantial or continuing loss. As of July 31, 2013, the MOR indicated that the net equity for all Debtors was $149,303,179.00. (ECF No. 373 at 5-8). By April 30, 2015, equity had declined to -$333,029,663.00, a decrease of $482,332,842.00. [5] (ECF No. 2454 at 5-8). There is no doubt Debtors have suffered a substantial loss on a pure balance sheet basis.

However, at the June 12, 2015, hearing, the Court questioned whether this loss was actually the result of overly optimistic valuations of the Debtors’ vessels. For example, the A Whale was valued at $98,784,394.00 the month before it was sold. (ECF No. 2166 at 5). It actually sold for $66,500,000.00, a difference of $32,284,394.00. (ECF No. 2375 at 17). This is particularly significant given that the total decline in A Whale’s balance sheet was only $38,845,023.00. Similarly, the C Ladybug sold for $33,615,256.00 less than it was valued. (ECF No. 2056 at 6; ECF No. 2374 at 19). C Ladybug’s balance sheet declined a total of $39,631,647.00. As the Court stated on the record, “if one were to value an asset at $10 million and it turned out you were wrong, it’s worth $2 million, that’s not a loss, that’s an initial error.” (ECF No. 2484 at 20). A significant portion of the $482,332,842.00 balance sheet decrease was likely caused by erroneous initial valuations, making it difficult to rely solely on a balance sheet test to find a substantial loss.

The Debtors’ losses were not limited to declining asset values, however. Su urges the Court to consider the Debtors’ substantial operating losses as demonstrated by the monthly operating reports. Because any losses due to overvaluation of the vessels are considered a non-operating loss, focusing exclusively operating income or losses provides a more accurate portrayal of their true financial condition. Taken together, the Debtors’ operating income for the relevant time period was -$62,062,389.00. The Debtors’ operating losses led to a significant decline in their cash positions. At the beginning of the case, the Debtors’ had aggregate bank balances of $49,654,525.00. (ECF No. 373 at 15). By April 30, 2015, this had declined to $16,438,978.00. (ECF No. 2454 at 15). The negative cash flow meant the Debtors continued to accrue additional debt post-petition, which they were unable to pay using estate assets. (ECF No. 2458 at 3) (stating that the Debtors sold 11,282,771 Vantage Shares primarily to pay down the DIP Facility). Negative cash flow and an inability to pay current expenses as they come due can satisfy the substantial loss or diminution of the estate for purposes of § 1112(b). See Nester v. Gateway Access Solutions, Inc. (In re Gateway Access Solutions, Inc.), 374 B.R. 556, 564 (Bankr. M.D. Pa. 2007) ; In re Galvin, 49 B.R. 665, 669 (Bankr. D.N.D. 1985) .

In Gateway, the court was presented with a decline in cash positions of $372,557.00 over seven months. 374 B.R. at 564 . The court found this, along with evidence of post-petition borrowings of $233,000.00 and the accumulation of administrative expenses, sufficient to establish continuing loss under § 1112(b)(4)(A). Id. Similarly, in In re Om Shivai, Inc., the court found negative cash flow for four out of eight months and a net loss of only $3,856.03 sufficient to establish cause. [6] 447 B.R. 459, 464 (Bankr. D.S.C. 2011). Here, seventeen out of twenty-one Debtors have incurred significant operational losses over the life of the case. Cash on hand has declined by more than $33 million and there is some evidence that the Debtors have struggled to pay expenses as they come due. Su has established a substantial loss or diminution to the estates.

Respondents contend that Su is unable to show a continuing loss to the estate. Since January 1, 2015, the Debtors have incurred only $28,716.00 in operational losses, all of which are due to a single Debtor. (ECF Nos. 2331 and 2356). All of the vessels have been sold and there are no current operations, meaning there is little risk of negative cash flow going forward. As discussed above, however, the Debtors have incurred $592,646.76 in professional fees from November 2014 to March 2015, although not all fees have been approved by the Court. (ECF No. 2458-1). Su has cited several cases holding that yet-to-be-approved fee applications may constitute a continuing loss for the purposes of § 1112(b)(4)(A). See, e.g., Morreale v. 2011-SIP-1 CRE/CADC Venture, LLC (In re Morreale), 533 B.R. 320, 324 (D. Colo. 2015) (holding that the accrual of attorney’s fees alone is sufficient to establish cause); Gateway, 374 B.R. at 564 (finding that post-petition professional expenses were a factor in establishing cause).

But analysis under § 1112(b) must take into account the individual circumstances of the debtors. United Savs. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.), 808 F.2d 363, 371-72 (5th Cir.1987) (en banc) . Debtors have wound down operations and have no tangible assets remaining, save for approximately $16.5 million in cash and the Vantage Shares, both of which are subject to the lien of the DIP Lender. In a case where the debtor has few, if any, tangible assets remaining, the mere accrual of professional fees must be distinguished from actual out-of-pocket losses. In re Gabriel Technologies Corp., 2013 WL 4672785 at *3 (Bankr. N.D. Cal. Aug. 30, 2013). The Gabriel court went on to state that:

Perhaps from an accounting perspective (profit and loss), such accruals would constitute such losses. But the accrual of liabilities are not the same as the incurring of actual out-of-pocket losses, such as the dissipation of assets that diminishes the estate. Leaving the Debtors in possession of the chapter 11 estate is not risking some ever-diminishing pool of assets.

Id. This is a similar situation to the one the Court is presented with here, where the remaining assets are relatively stable in value and are no longer being diminished through operational losses.

The Court must also keep in mind the possibility that litigation will bring in substantial assets to the estate. The Debtors have identified five possible avenues for recovery, several of which Su has asserted could generate substantial recoveries for the estate. [7] See, e.g., (ECF No. 2179) (“Mr. Su believes that . . . if the Arbitration Claims are successful, they could generate a substantial sum for the benefit of the estate.”). As with any litigation, the Debtors must expend professional fees in search of future recoveries. The Court concludes that the mere accrual of professional fees does not constitute a continuing loss to the estate. See Gabriel, 2013 WL 4672785 at *3; In re Miller, 496 B.R. 469, 479 (Bankr. E.D. Tenn. 2013) .

Although Su has not shown a substantial and continuing loss to the estate, there is no requirement that they do so. Cause is defined under the Code as a “substantial or continuing loss to or diminution of the estate.” Having established a substantial loss to the estate, Su has met the first prong of § 1112(b)(4)(A).

The second requirement of § 1112(b)(4)(A) is the absence of a reasonable likelihood of rehabilitation. Rehabilitation does not mean reorganization, which could involve liquidation. “Instead, rehabilitation signifies something more, with it being described as `to put back in good condition; re-establish on a firm, sound basis.'” In re Westgate Properties, Ltd., 432 B.R. 720, 723 (Bankr. N.D. Ohio 2010) (quoting In re V Cos., 274 B.R. 721, 726 (Bankr. N.D. Ohio 2002) ). “The issue of rehabilitation for purposes of Section 1112(b)(4)(A) is not the technical one of whether the debtor can confirm a plan, but, rather, whether the debtor’s business prospects justify continuance of the reorganization effort.” In re LG Motors, Inc., 422 B.R. 110, 116 (Bankr. N.D. Ill. 2009) . Put simply, these Debtors have no business prospects. The Debtors exist to conclude their own liquidation. (ECF No. 2433 at 2). The parties have stipulated that “Debtors are and will remain unable to file Chapter 11 plans of reorganization that provide for the reorganization of the Debtors as going concerns.” (ECF No. 2458 at 5). Accordingly, Su has established that there is no reasonable likelihood of rehabilitation and have established cause to dismiss or convert under § 1112(b)(1).

II. Defenses to Dismissal or Conversion

Su has made a prima facie case of cause to convert Debtors’ cases to chapter 7. However, conversion is not automatic. Dismissal or conversion is not appropriate if “the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.” 11 U.S.C. § 1112(b)(1). A bankruptcy court is afforded wide discretion in acting upon a request for dismissal or conversion. Koerner v. Colonial Bank (In re Koerner), 800 F.2d 1358, 1367 (5th Cir. 1986) . Courts should “consider other factors as they arise, and . . . use [their] equitable powers to reach an appropriate result in individual cases.” C-TC 9th Avenue P’ship v. Norton Co. (In re C-TC 9th Avenue P’ship), 113 F.3d 1304, 1311 n. 5 (2d Cir. 1997) (citing House Report No. 95-595, 95th Cong., 1st Sess. at 405-6, U.S.Code Cong. & Admin.News 1978, pp. 5787, 6363-64).

Su has failed to show how either the estate or its creditors will benefit from conversion. The Debtors, the Committee, the DIP lender, and other creditors are united in their opposition to conversion. It is difficult to understand how conversion would be in the best interest of the creditors if the vast majority of creditors oppose the relief. Furthermore, Su argues that conversion is necessary because the estate continues to accrue substantial amounts of professionals’ fees. But converting the case to chapter 7 necessitates the appointment of a trustee, who would be forced to expend a significant amount of time and money to become familiar with a complex case involving litigation spread across several countries. Unfortunately, Su’s proposed solution to the continued accrual of professional fees would require the estate to spend even more on professional fees.

Su’s concern over the accumulation of professionals’ fees is of particular interest given that the majority of the fees appear to be caused by Su and F3 Capital. The parties have stipulated that of the $548,308.61 in fees incurred by the estate from November 2014 to March 2015, $342,843.00 are considered “related to Mr. Su.” (ECF No. 2458-1). The category “related to Mr. Su,” comprising 58% of total fees, consists of (i) the patent litigation pending in the U.S. District Court for the Southern District of Texas; (ii) the appeals of various sale orders also pending before the District Court; (iii) adversarial motions filed in the main bankruptcy case by Su; and (iv) Debtors’ motion for a protective order over corporate property. Id. The only party seeking conversion in this case has been instrumental in causing the accumulation of professionals’ fees. It would be fundamentally unfair to convert the case because of the accumulation of these fees.

The Court has already determined that the appointment of an examiner is in the best interests of the creditors and the estate. The examiner’s role is limited to reviewing lawsuits to be filed in January of 2016 against Su’s non-debtor affiliates as well as determining whether professionals’ fees are charged to the estates are reasonable. (ECF Nos. 2479 and 2507). Fees to the examiner are limited to $15,000.00 between June 12, 2015 and July 11, 2015 plus no more than $5,000.00 in any month thereafter where aggregate professionals’ fees topped $100,000.00, or no more than $2,500.00 in any other month. (ECF No. 2479). In his motion to convert, Su alleged that “every month administrative expenses continue to accrue without any additional benefit to the estate.” (ECF No. 2415). The examiner provides the estate an independent source to verify the reasonableness of these administrative expenses. Additionally, the examiner’s fees will be limited compared to the alternative of a costly chapter 7 trustee.

If the Court were presented with a situation where the estates continued to accumulate substantial losses to the detriment of the creditors, and if that accumulation could be avoided by conversion to chapter 7, conversion would be an appropriate remedy. However, because the Debtors have terminated operations, they have not suffered substantial losses since December of 2014. “The purpose of § 1112(b)(1) is to preserve estate assets by preventing the debtor in possession from gambling on the enterprise at the creditors’ expense when there is no hope of rehabilitation.” Loop Corp. v. United States Trustee, 379 F.3d 511, 516 (8th Cir. 2004) (internal quotations omitted). Debtors have conceded defeat and are no longer operating a failing business at the creditors’ expense. The only risk of loss looking forward would be the continued accumulation of professionals’ fees, but an examiner is a cost-effective tool to keep fees in check. Accordingly, the appointment of an examiner is in the best interests of the estates and their creditors.


The Court will issue an order consistent with this Memorandum Opinion.

[1] The Debtors are: (1) A Whale Corporation; (2) B Whale Corporation; (3) C Whale Corporation; (4) D Whale Corporation; (5) E Whale Corporation; (6) G Whale Corporation; (7) H Whale Corporation; (8) A Duckling Corporation; (9) F Elephant Inc.; (1) A Ladybug Corporation; (11) C Ladybug Corporation; (12) D Ladybug Corporation; (13) A Handy Corporation; (14) B Handy Corporation; (15) C Handy Corporation; (16) B Max Corporation; (17) New Flagship Investment Co., Ltd.; (18) RoRo Line Corporation; (19) Ugly Duckling Holding Corporation; (20) Great Elephant Corporation; and (21) TMT Procurement Corporation.

[2] F3 Capital later pledged an additional 4 million shares for adequate protection purposes. (ECF No. 545).

[3] Su has appealed the sale orders for the A Whale, B Whale, C Whale, D Whale, G Whale, and H Whale.

[4] 11,282,771 Vantage Shares had previously been sold at an average price of $1.6929 per share. Approximately $17.9 million of the proceeds were applied to principal, interest, and fees under the Macquarie DIP Facility. (ECF No. 2458 at 3).

[5] A decrease in equity was not uniform among all Debtors. A Duckling, A Ladybug, and C Ladybug increased in value over this time period.

[6] The court also noted that the debtor, whose only asset consisted of a small motel, consistently had low occupancy rates and was in need of significant repairs.

[7] First, the insurance litigation filed under seal in ECF No. 2432. Second, the arbitration claims pursuant to the Court’s authorization in ECF No. 2179. Third, the avoidance actions discussed above, several of which have already been filed. Fourth, Su’s appeals of the sale orders for several of the vessels. Fifth, Su’s claims for disgorgement against former counsel for the Unsecured Creditors Committee.

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