Southern District of Texas Takes Itself to Task for Failure to Follow Chapter 13 Rules

In an unusual collaborative proceeding initiated by two judges from the Southern District of Texas and concluded by a third, the Court has taken the Standing Chapter 13 Trustee to task for following the guidance of the former judge and has effectively judged the system guilty.   The opinion exposes an apparent rift between the current and former judges of the district and demonstrates an activist approach to problem solving by the judiciary.     Misc. Case No. 15-701, In re:  Chapter 13 Plan Administration in the Brownsville, Corpus Christi and McAllen Divisions.    The Court's Amended Order can be found here.  

What Happened

The Southern District of Texas adopted a standard plan in 2008 which provided that when a mortgage payment was increased or decreased, the debtor's plan payment would be increased or decreased by the same amount.     This was to be done automatically without the necessity for a plan modification.  

At a hearing on December 16, 2015, Judge Marvin Isgur learned that the Standing Chapter 13 Trustee was not automatically adjusting the plan amounts, but was instead waiting for debtors to file a motion to modify.   As a result, Judge Isgur and Judge Eduardo Rodriguez issued an Order to Show Cause in  Miscellaneous Case No 15-701 on December 22, 2015.    Among other things, the Order to Show Cause stated that:

• It appears that the Chapter 13 Trustee may have made distributions to creditors and debtors with an incorrect application of the Plan.
• If the issue were only an historic issue, the Court would not issue the emergency relief contained in this Order.
• The magnitude of the errors, and the appropriate remedy (if any) for the errors is unclear.
• The Court recognizes the difficult position that this Order imposes on the Chapter 13 Trustee.  Accordingly, the Chapter 13 Trustee should not hesitate to retain counsel, directly or through her errors and omissions carrier.

The judges then issued an order which provided for an Initial Status Conference to take place approximately two weeks later.   They requested that David Jones, the Chief Judge for the District, preside over the hearing.    The judges also required that the Standing Chapter 13 Trustee and the U.S. Trustee appear.   Judge Jones handled all subsequent proceedings.

The Chapter 13  Trustee filed a response in which she stated that she had followed the direction of the former Judge who interpreted the standard plan to require that the Debtor file a motion to modify the plan if the mortgage amount changed. 

For years, at least as early as 2004, I have administered Chapter 13 Plans in accordance with Judge Richard Schmidt’s interpretation of the Plan and his direction and approval. Until his retirement on July 30, 2015, Judge Schmidt required debtors file a motion to modify in the event an increase in mortgage payment caused the plan to not timely pay out. If the debtor failed to file a motion to modify, the Trustee would file a motion to dismiss. If there was no objection filed by the debtor, the Trustee would increase the amount of the mortgage payment to reflect the new increased mortgage payment; however, the debtor’s overall payment to the Plan did not increase unless the court signed an order modifying the plan. This was the standard practice for many courts, including Judge Schmidt’s Court until his retirement.

She also submitted an affidavit from the now retired judge stating that he had in fact provided this direction.  

While the Court and the Trustee had adopted a practice "as early as 2004," the judges of the Southern District adopted a standard plan in May 2006 which took a different approach.  Under the standard plan, upon filing of a Mortgage Payment Change Notification, the Trustee was supposed to automatically increase or decrease the amount of the Debtor's payments so that the distribution to unsecured creditors remained constant.    According to Judge Jones, "(t)he effect of this change was to shift responsibility for any change in the debtor's ongoing mortgage payment from the unsecured creditors to the debtor."    However, the practice apparently followed was to put the burden on the debtor to request a modification or for the unsecured creditors to object.       

Following an initial status conference on January 11, 2016, the Court required the Standing Trustee to provide a report identifying all affected cases.     According to the Trustee's report, there were 367 open cases where Debtors had made aggregate underpayments totaling $820,843.47 and 173 open cases where Debtors had made overpayments totaling $412,881.32.   

The Trustee proposed to remedy the situation by refunding overpayments to the extent of available funds and, if this proved insufficient, to seek to recover the overpayments from creditors.   Where debtors had underpaid, the Trustee proposed (i) changing plan payments to the extent feasible, (ii) extending plans beyond sixty months; and (iii) granting hardship discharges where payments could not be made up.    According to the Court, the Trustee resisted the idea that she give notice to all affected parties and inform them that they might have claims against her.  

The Court's Order

On May 5. 2016, the Court issued its Order (which was modified slightly by an amended order the next day).    The Court began with a quote from Abraham Lincoln:

It is as much the duty of government to render prompt justice against itself, in favor of citizens, as it is to administer the same between private individuals. ABRAHAM LINCOLN, Message to Congress in special session, July 4, 1861.

What followed was a sharp critique of the administration of chapter 13 cases in the Brownsville, Corpus Christi and McAllen divisions of the Southern District of Texas, in effect, the Southern part of the Southern District.     The Court stated that "(r)esponsibility for the administration of the chapter 13 process is vested primarily in three independent parties:  the Court, the United States Trustee and the chapter 13 standing trustee."   Amended Order, page 5.   The Court did not mention the role of the debtors, creditors and their attorneys in administering the system.  However, the Court may have implicitly acknowledged the practical difficulty for someone who makes a living within the system to stand up to those tasked with its implementation.  

Judge Jones went on to state:

Based on the affidavits submitted by Ms. Boudloche and her statements to the Court during this proceeding, the Court finds that chapter 13 debtors in the Brownsville, Corpus Christi and McAllen divisions of the Southern District of Texas were intentionally treated in a manner contrary to the Uniform Plan and to other debtors in the Houston, Galveston, Victoria and Laredo divisions of the Southern District of Texas. This disparate treatment was apparently the result of communications between the Court and Ms. Boudloche and the implementation of an unwritten rule or agreement to disregard the Uniform Plan. The Court finds that Ms. Boudloche violated her duties as a chapter 13 trustee. The Court further finds that the United States Trustee violated its duties of oversight and supervision of Ms. Boudloche. Most embarrassing, the Court violated its duty to uphold the integrity and independence of the judiciary.

Amended Order, pp. 7-8.   

The Court adopted the following remedial measures in open cases with a mortgage change notice:

1.   Where the debtor had overpaid, the Court required that the trustee: (i) immediately adjust the plan; (ii) issue a refund to the debtor to the extent of available funds within fourteen days; (iii) recover any overpayments from creditors within sixty days; and (iv) failing that, the Trustee would be required to "satisfy the unpaid deficiency."

2.  Where the debtor had underpaid, the Court required the trustee to immediately file a "mortgage payment change notice" for cases with more than three months remaining.   The debtor would then be required to object within twenty-one days or be bound by the increase.    The Court also required any debtor wishing to assert affirmative relief against the Chapter 13 Trustee to file a pleading within the Miscellaneous Case within 45 days or the claim would be waived.    Once the debtor completed payments under the plan, the trustee would be required to file a Notice of Plan Completion including language stating:

In this case, the chapter 13 trustee failed to administer the debtor(s)’ plan in accordance with its terms. This failure may have resulted in a distribution to unsecured creditors that is less than what would have been received had the chapter 13 trustee properly administered the plan in accordance with its terms. If you object to the granting of a discharge or wish to assert a claim against the chapter 13 trustee, you must file a written pleading in this bankruptcy case specifically setting forth your objection or claim within 21 days of the date of this notice or any such objection or claim is forever waived.

Thus, the Court gave creditors an opportunity to object to the debtor's discharge or assert a claim against the trustee if they were shortchanged.    If creditors remained silent, the debtor's discharge would go through.

Thus, the Court's remedial procedure consisted of moving to compliance on a prospective basis while allowing parties to object or assert claims within a limited window.   If the parties chose not to upset the status quo (as they had done during the previous ten years when the plan was being ignored), the sins of the past would be laid to rest.

However, the Court did not stop there.    The Court ordered the U.S. Trustee to conduct a review of the standing trustee.   The Court stated:

The Court notes that it has listened to over 20 hours of proceedings involving Ms. Boudloche in her capacity as chapter 13 trustee. The Court encourages the United States Trustee to do the same. The Court will reserve further action pending receipt and review of the United States Trustee’s report.

Amended Order, page 10.

The Court concluded its order with an apology.

On behalf of the Bankruptcy Court, the undersigned offers its sincere apology to those debtors and their families that did not receive the justice they deserve. The Court hopes that practitioners in these divisions will share this Order with their clients and convey just how hard it is for the undersigned to publicly recognize the failure of a system that he took an oath to protect. There will be no more secret rules, unspoken practices or disparate treatment of citizens in different divisions. We are one Bankruptcy Court with a single set of written rules. All citizens within the Southern District of Texas will be treated equally and with respect.

Amended Order, page 10.

The Inquisitorial System of Justice

This case involved a judge-driven investigation.    This is a sharp contrast to the adversary system which is the norm in America.    A few words about the distinction between the adversary system and the inquisitorial system are in order.

The American system of justice is characterized by the adversary system in which the litigation is primarily driven by the parties and their advocates.   The adversary system is followed by most of the countries which inherited their legal system from England.   In contrast, most of the rest of the world follows the inquisitorial system of justice in which the Court takes the lead.    I found a good discussion of this topic in an online legal dictionary.

The inquisitorial system can be defined by comparison with the adversarial, or accusatorial, system used in the United States and Great Britain. In the Adversary System, two or more opposing parties gather evidence and present the evidence, and their arguments, to a judge or jury. The judge or jury knows nothing of the litigation until the parties present their cases to the decision maker. The defendant in a criminal trial is not required to testify.

In the inquisitorial system, the presiding judge is not a passive recipient of information. Rather, the presiding judge is primarily responsible for supervising the gathering of the evidence necessary to resolve the case. He or she actively steers the search for evidence and questions the witnesses, including the respondent or defendant. Attorneys play a more passive role, suggesting routes of inquiry for the presiding judge and following the judge's questioning with questioning of their own. Attorney questioning is often brief because the judge tries to ask all relevant questions.

The goal of both the adversarial system and the inquisitorial system is to find the truth. But the adversarial system seeks the truth by pitting the parties against each other in the hope that competition will reveal it, whereas the inquisitorial system seeks the truth by questioning those most familiar with the events in dispute. The adversarial system places a premium on the individual rights of the accused, whereas the inquisitorial system places the rights of the accused secondary to the search for truth.

The inquisitorial system was first developed by the Catholic Church during the medieval period. The ecclesiastical courts in thirteenth-century England adopted the method of adjudication by requiring witnesses and defendants to take an inquisitorial oath administered by the judge, who then questioned the witnesses. In an inquisitorial oath, the witness swore to truthfully answer all questions asked of him or her. The system flourished in England into the sixteenth century, when it became infamous for its use in the Court of the Star Chamber, a court reserved for complex, contested cases. Under the reign of King Henry VIII, the power of the Star Chamber was expanded, and the court used torture to compel the taking of the inquisitorial oath. The Star Chamber was eventually eliminated as repugnant to basic liberty, and England gradually moved toward an adversarial system.

After the French Revolution, a more refined version of the inquisitorial system developed in France and Germany. From there it spread to the rest of continental Europe and to many African, South American, and Asian countries. The inquisitorial system is now more widely used than the adversarial system. Some countries, such as Italy, use a blend of adversarial and inquisitorial elements in their court system.

http://legal-dictionary.thefreedictionary.com/Inquisitorial+System

While Bankruptcy Courts primarily function under the adversary system, section 105(a) authorizes court-led investigations such as the one in this case.    Specifically, section 105(a) provides:

No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

In order to satisfy due process requirements, these proceedings often begin with an order to show cause which informs the responding party of the actions being questioned and allows a response.   In re Gleason, 492 Fed. Appx. 86 (11th Cir. 2012)(unreported).    There is also an inherent tension with the Court's ability to initiate and prosecute a proceeding and remain impartial.   In the case of In re Johnson, 921 F.2d 585 (5th Cir. 1991), the Fifth Circuit reversed an order suspending a trustee where the Circuit Court found that the Bankruptcy Court should have recused itself.   This may explain why, in this particular case, Judges Isgur and Rodriguez initiated the proceeding but then referred it to Chief Judge Jones.    This was all the more important for Judge Rodriguez who had been a volume practitioner in this same court until he was appointed to replace Judge Schmidt.

The inquisitorial proceeding in bankruptcy court is a unique creature.  The ability of the Court to compel a party to appear and show cause in a proceeding where the Court initiates the action, defines its boundaries and renders a judgment is a powerful one.   There are many words that could be written about whether this type of proceeding can comply with due process or whether there are separation of powers problems when the judicial branch compels the executive branch to act.  I will leave those for another author.

Disclaimers:

I am presently representing a client in another Miscellaneous Case in the Southern District of Texas.   Nothing written here is intended to be a comment on that proceeding which involves substantially different facts and legal issues.  

In reporting on this opinion, I have relied on the publicly available record and the descriptions of the proceedings contained within the court orders.    I did not participate in these proceedings and have no personal knowledge other than what I read.  

The period for appealing the Court's order has not yet expired.   As a result, the Order is still subject to modification or reversal on appeal.

Fifth Circuit Report: First Quarter 2016

During the first quarter of 2016, the Fifth Circuit handed down some important decisions relating to bankruptcy and debt.     These include cases about how attorneys get paid from PACA proceeds, standing to object, denial of discharge, dismissal for cause, enforcing a chapter 11 plan, preferences, more fallout from the Stanford Ponzi scheme and some cases of general interest.

Click on the style of the case to go to the opinion.   

Texas Judge Says You Don't Have to Act Rashly to Value a Truck

Western District of Texas Bankruptcy Judge Tony Davis has written a very helpful opinion on valuing a truck in a chapter 13 case.   The ten page opinion is packed with extensive footnotes as well as practical guidelines.   In the end, the valuation issue depended on burden of proof and the relatively weak evidence offered by the debtor prevailed.    In re Solis, No. 15-11181 (Bankr. W.D. Tex. 4/15/16).    The opinion can be found here .

Pre-Packaged Plan Clears Confirmation in Fifteen Days

Shakespeare bemoaned "the law's delay."   Dickens brought us Jarndyce v. Jarndyce, a case spanning generations.   However, a new Chapter 11 case  filed in Corpus Christi demonstrated the opposite of delay, blazing from petition to confirmation in just fifteen days.    Case No. 16-20111, In re Southcross Holdings, LP (Bankr. S.D. Tex. 2016).     The case is all the more remarkable because it involved an energy sector debtor that did not rely on a section 363 sale, but actually raised new capital and restructured its debts.     

About the Debtors

The Southcross entities consist of two halves of a broad, interconnected enterprise providing services across the midstream oil and gas sector.   The Debtor entities, which are shown in blue in the chart below comprise the holding company portion of the corporate structure, while the non-debtor affiliates, shown in salmon below, carry out the operations.    The Debtors own a 2% general partner interest and a 60% limited partnership interest in Southcross Energy Partners, LP, a publicly traded master limited partnership (MLP).    

Southcross owns and operates approximately 4,000 miles of pipelines, two sour gas treating facilities, three processing facilities, two fractionating facilities, and one facility with both processing and fractionating capabilities. The Southcross assets that are owned by the Debtors are located in the Eagle Ford shale in South Texas (the “Eagle Ford”) and include approximately 880 miles of natural gas gathering and NGL transportation pipeline, one sour gas treating facility, and one fractionating facility.

Declaration of Jeffery J. Stegenga, p. 3,  Dkt. No. 8.

A Story of Student Loan Hell

Occasionally I receive emails from people who have read the blog wanting to share their stories or objecting to what I wrote about their case.    They are a poignant reminder that the legal issues we deal with affect real people.   When I write about a case, I am writing about the facts as found by the Court.   The story that comes out of the official court record may be very different from how the individuals involved saw it.   Today I received an email from a woman who offered to share her story about her 30 year ordeal with student loans.   I am reprinting it below as received except that I explained some of the abbreviations she used.  While I can't vouch for the accuracy of the account, I do believe that she is describing how it looks to her.   Here is a story of student loan hell from Florida:

Dear Bankruptcy Attorney:

 
I'm in Florida but all bankruptcies are thru the Federal court system.  I have old student loans (taken out 1981-1983) for a total of $8,000 at 9% interest ($720 per year for 10 years) thru the GSL program (which was not Stafford at the time).  The promissory note (“PN”) said the Department of Education (“DOE”), my bank and I had to be in agreement if the note was to be changed.  The PN said (on the back) that the loans even if not repaid in full should not go past 15 years in repayment.

Cases Demonstrate Multiple Ways to Leave Chapter 7

Paul Simon once said that there must be fifty ways to leave your lover.   Two recent cases show that as with failed romances, there are multiple ways to leave chapter 7.     In Torres v. Krueger (Matter of Krueger), No. 14-11135 (5^th Cir. 1/19/16), the Fifth Circuit dismissed a chapter 7 case for “cause” under 11 U.S.C. §707(a), while in In re Karlinger-Smith, No. 15-10214 (Bankr. W.D. Tex. 1/26/16), Judge Tony Davis found that he could have involuntarily converted an individual debtor to chapter 11 but declined to do so. These cases illustrate the variety of ways in which a case filed under chapter 7 can leave that chapter. The opinions can be found here and here.

Creative Lawyers Thwarted in ASARCO Workaround Attempts

One of the panels at the recent Fifth Circuit Bench-Bar Conference featured Judge Craig Gargotta and Stephen Rosenblatt discussing fee issues raised by Barron & Newburger, P.C. v. Texas Skyline, Ltd. and Baker Botts v. ASARCO.  While I was personally interested in hearing the discussion about my own case, the really interesting part involved what creative lawyers are doing to try to work around the ASARCO decision.    

In the ASARCO case, the reorganized debtor caused Baker Botts to spend about $5 million in attorney time defending its fee application.  Both the Fifth Circuit and the Supreme Court ruled that these services were not compensable because the American Rule provides that parties must bear their own fees absent a statute or contract and 11 U.S.C. Sec. 330 did not allow fees for defending a fee application.    Thus, Baker Botts had to eat the cost of establishing its entitlement to fees in one of the most extraordinarily successful cases of all time.

This has left some creative lawyers wondering how they can protect themselves from the expense of a costly fee battle.    However, two recent decisions from the Bankruptcy Court for the District of Delaware have thrown cold water on these attempts.

Fifth Circuit Report: Oct.-Dec. 2015

The Fifth Circuit decided cases dealing with appellate procedure, exemptions, judicial estoppel, jurisdiction, sanctions, standing and surcharging collateral during the fourth quarter of 2015.  A common theme among the cases is parties being disappointed in a variety of contexts, including having an appeal dismissed on procedural grounds, having a lawsuit dismissed based on incomplete filings in a bankruptcy case, losing exemptions based on unfortunate timing and failure to establish damages after dismissal of an involuntary petition.  

Movie References Abound in Opinion Denying Fees to Alleged Debtor

With the Academy Awards just a week away, one Texas judge has demonstrated his love of film in an opinion chock full of movie references.    The opinion is also a helpful guide to recovery of attorneys' fees under 11 U.S.C. Sec. 303(i).   In re Clean Fuel Technologies II, LLC, No. 15-30827 (Bankr. W.D. Tex. 2/4/16), which can be found here. 

The Court set the tone for the opinion in the opening paragraphs:

This case involves an unsuccessful Involuntary Petition filed under Chapter 7 of the Bankruptcy Code against an alleged debtor. The Court previously dismissed the Involuntary Petition, finding that the petitioning creditors did not meet the eligibility requirements established by statute and recent Fifth Circuit precedent. Now, The Empire Strikes Back through a Counterclaim—the alleged debtor seeks recovery of attorney’s fees and costs against the unsuccessful petitioning creditors under § 303(i) of the Bankruptcy Code.

The Court finds that, upon dismissal of an involuntary petition, a presumption arises in favor of awarding attorneys’ fees and costs to the alleged debtor. In this case, however, the Court determines, based on the totality of the circumstances, the presumption of an award of attorneys’ fees and costs to the alleged debtor has been overcome. As a result, the petitioning creditors in this case have dodged a Bullitt and the Counterclaim filed by this alleged debtor must be denied.

Opinion, p. 1.   The helpful footnotes explain that The Empire Strikes Back was released by Lucasfilm in 1980 and earned an Academy Award for Best Sound, while Bullitt was released by Warner Brothers in 1968 and earned the Academy Award for Best Film Editing.    

Let's Be Careful Out There: The Danger of Omitting Assets

Filing bankruptcy is serious business.    The mere act of filing a petition creates an automatic stay effective against all entities.    Liens can be modified, taxes can be paid out and debts can be discharged.   The price of admission for getting all these benefits is full disclosure.   Unfortunately some debtors either don't understand these obligations or think they can selectively disclose only the assets they want to list.   The consequences for omitting assets can be severe as illustrated by two recent opinions from the Fifth Circuit and a press release from the Acting U.S. Attorney for the Southern District of Illinois.

Current Developments in Texas Homestead Law

            For this post, I attempted to find every Texas case dealing with a homestead exemption during the period between 2010 and 2015.     Many more cases interpreting the Texas constitutional and statutory laws on homesteads are decided in bankruptcy courts than in reported state court opinions.
 

Second Western District Judge Finds Proceeds From Post-Petition Sale Can't Be Clawed Back in Chapter 7

After sorting through conflicting precedents, Judge Craig Gargotta has ruled that a chapter 7 debtor who owned a homestead property on the date of bankruptcy and claimed the property as exempt did not lose the exemption when the property was sold and proceeds were not reinvested within six months.    Lowe v. DeBerry (In re Deberry), Adv. No. 15-5054 (Bankr. W.D. Tex. 10/28/15).

Fifth Circuit Report: August-September 2015

The summer months have been slow at the Fifth Circuit.   August and September's opinions include an update on a prior opinion about abstention related to a chapter 15, judicial estoppel, mootness of an appeal of a sale order, a motion to compromise, removal of a trustee, recognition of a foreign judgment and issues relating to a homestead.
 

After Woerner, Courts Look for "Good Gambles"

You've got to know when to hold 'em
Know when to fold 'em
Know when to walk away
And know when to run
--Kenny Rogers, The Gambler

After the Fifth Circuit’s opinion in Barron & Newburger, P.C. v. Texas Skyline Ltd. (Matter of Woerner), 783 F.3d 286 (5^th Cir. 2015), lawyers for bankruptcy estates breathed a sigh of relief, knowing that they could still be compensated for “good gambles” gone awry.   However, how would the courts measure a “good gamble” in the context of a case that didn’t quite work out?   Two decisions issued on the same day help answer that question.    In Case No. 13-33264, Digerati Technologies, Inc. (Bankr. S.D. Tex. 8/21/15), a highly contentious case resulted in a confirmed plan but only after an initial plan proposed by management was rejected.   In Case No. 10-11365, In re Woerner(Bankr. W.D. Tex. 8/21/15), the Bankruptcy Court that ruled in the case that was eventually reversed by the en banc Fifth Circuit reconsidered its ruling following remand.   In both cases, debtor’s counsel received some but not all of the fees requested.

Texas Judges Explore State Law on Liens and Homestead Exemptions

Much state law regarding liens and property rights emerges from the Bankruptcy Courts because they are frequently the first to confront novel issues.   Two recent opinions from the Western District of Texas bankruptcy judges confirm this trend.   In one case, Judge Tony Davis found that an option to acquire a leased homestead could be claimed as exempt, No. 14-11006, James Wayne See (Bankr. W.D. Tex. 7/14/15), while in the other, Chief Judge Ronald King rejected an attempt to void a judgment creditors' lien under the Texas Property Code, Studensky v. Buttery Company, LLP,  Adv. No. 15-6001 (Bankr. W.D. Tex. 7/2/15).

Fifth Circuit Report: June 2015

This month's Fifth Circuit report doesn't have a lot of bankruptcy sizzle:  an interesting case on abstention and remand,  two unpublished cases about how not to reserve a claim under a plan and a case about suing a trustee.   However, there are some fascinating cases about lenders, liens, fraudulent transfers, the Texas Debt Collection Act and the Fair Debt Collection Practices Act.    The big news here is that the Fifth Circuit vacated its Golf Channel decision and instead certified the question to the Texas Supreme Court.   Here are June's decisions.   (Click on the style of the case to go to the actual opinions).

  

Supreme Court Says Lawyers Don't Get Paid for Defending Their Fees

A Texas law firm did a great job and beat back a punitive attack on their fees.   However, the Supreme Court has ruled that they may not receive compensation for defending their work.   Baker Botts, LLP v. ASARCO, LLC, No. 14-103 (6/15/15).

Introduction

I have previously talked about the case here.   As a result, I will just give the Cliff's Notes version of the facts.  Baker Botts delivered remarkable results in their representation of ASARCO, LLC.   However, when the party they had sued gained control of the Debtor, they faced a withering attack on their fees.   In response to discovery requests, they produced 2,350 boxes of documents and 189 GB of electronic data.    The trial on their fees took six days.   All of this defense did not come cheap.   The firm spent $5 million of time litigating their fees.     

Sale Watch: Esco Marine, Inc.

Case No. 15-20107; Esco Marine, Inc.; Southern District of Texas, Corpus Christi Division

Bidding Procedures Order:   Dkt. #260; 6/26/15

Assets to be Sold:    Assets of Debtors other than Chapter 5 causes of action, claims against insiders, unscheduled or undisclosed assets, cash

Sale Watch: WBH Energy, Ltd.

This is a new feature on A Texas Bankruptcy Lawyers Blog.   Whenever I hear about Section 363 sales in Texas, I will mention them here to try to get the word out.   Please feel free to send me any sales you are involved in or happen to hear about.

Case No. 15-10003; WBH Energy, Ltd.; Western District of Texas, Austin Division

Bidding Procedures Order:    Dkt. #361; 5/11/15

Assets to be Sold:   Oil and gas interests in the Barnett Combo Play of the Fort Worth Basin

Fifth Circuit Report: April-May 2015

At the same time that the Supreme Court was busy ruling upon its bankruptcy cases for the term, the Fifth Circuit was active as well.  There were so many cases in April, that it took me two months to summarize them.    Over the course of April and May, the Court decided no less than sixteen cases with bankruptcy implications.   These include cases relating to civil contempt, post-judgment remedies being granted pre-judgment, the conclusion of the BPRE case and important opinions on property of the estate, attorney’s fees, discharge and dischargeability.  There are also four cases involving disputes between homeowners and lenders, including two where the homeowner’s claim was revived on appeal.   There is enough substance here, including in the unpublished opinions, to keep a lot of lawyers and judges reading for a long time.

Supreme Court Extends Dewsnup But Suggests They Really Don't Care for the Decision

The Supreme Court extended the holding of Dewsnup v. Timm, 502 U.S. 410 (1992) to a fully unsecured junior lien in a chapter 7 case.    However, the Court suggested in a footnote that they are ready to reconsider the underlying precedent.    This suggests that the Petitioners may have lost because they were not bold enough in challenging Dewsnup.   Bank of America v. Caulkett, No. 13-1421 (6/1/15). 

Fifth Circuit Narrows Fraud Dischargeability Claims

Rejecting a Seventh Circuit precedent, the Fifth Circuit has ruled that a non-dischargeability claim under section 523(a)(2)(A) must be based upon a false representation.    While bad conduct that does not involve a misrepresentation may be actionable under other sections of the Code, it will not constitute actual fraud under Sec. 523(a)(2)(A).   Husky International Electronics, Incorporated v. Ritz (Matter of Ritz), No. 14-20526 (5th Cir. 5/22/15).  

Wellness Case Brings Healing for Bankruptcy Court Authority

Resolving an issue left open by two prior decisions, the Supreme Court ruled that the right to entry of a final judgment by an Article III court, like the right to trial by jury, is a personal right which can be waived or consented away (subject to supervision by an Article III Court).    The decision left Chief Justice Roberts, whose broad language in Stern v. Marshall spawned a plethora law review articles, in the minority, while Justice Sotomayor wrote for the six justices in the majority.   Wellness International Network, Ltd. v. Sharif, No. 13-935 (5/26/15).    

The Stern Problem

Article III of the Constitution states that the judicial power is vested in courts created under that Article, which is to say, judges appointed by the President, confirmed by the Senate and enjoying life tenure.    Over the years, Congress created many other judges, such as U.S. Magistrate Judges, Administrative Law Judges and Bankruptcy Judges, to help with the workload of the federal courts.   These judges were not appointed by the President or confirmed by the Senate and did not enjoy life tenure.    While they were under the supervision of Article III Judges, some of these legislatively created judges enjoyed great levels of independence.   

In Stern v. Marshall, 564 U.S. ___, 131 S.Ct. 2594 (2011), the Court said that Congress did not have unlimited power to create adjuncts to assist the Article III judges.   Specifically, the Court said that the Bankruptcy Court did not have the power to enter a final judgment on a state law counterclaim brought by a debtor against a creditor.    Judges, practitioners and academics alike wondered whether the system of independent Article I Bankruptcy Judges could survive this ruling.    This uncertainty was engendered by the narrow scope of the actual issue decided and the sweeping language used by Chief Justice Roberts to support it.   Taken to its fullest extent as suggested by the dissenting justices in that case, it could have meant that Bankruptcy Court's lacked the power to decide anything that could have been decided by courts of law in 1789 and parties lacked the authority to consent to a different result.   

 Life After Stern

The sky did not fall following Stern and the Bankruptcy Courts continued to operate.   However, there was a split of authority as to whether parties could consent to entry of a final judgment by a Bankruptcy Court in a Stern case.    Last year, in Executive Benefits Ins. Agency v. Arkison, 134 S.Ct. 2165 (2014), the Court ducked the consent issue.   Instead, it found that regardless of the Bankruptcy Court's authority to enter a final judgment, it could hear cases within its jurisdiction and submit a report and recommendation to the District Court which could review it on a de novo basis. This was important because the Bankruptcy Court decision was a summary judgment which the District Court was bound to review on a de novo basis in any event.   As a result, even if the Bankruptcy Court lacked authority to enter a final judgment, the District Court's ruling on appeal was the functional equivalent of entry of a final judgment by that court.  

This ruling preserved the ability of Bankruptcy Courts to hear disputes in the first instance.   However, it left open the question of whether Bankruptcy Courts could issue final orders in all matters with consent or by waiver.   The consent issue had enormous practical significance.    If parties could not give valid consent, they could have an advisory trial in the Bankruptcy Court and then request a do-over in the District Court if they didn't like the result.    There was also the possibility (although I am not aware of this actually happening) of a party agreeing to litigate in Bankruptcy Court and ignoring the result on the basis that it had never been approved by the District Court.    

The issue split the circuit courts.   The Fifth, Sixth and Seventh Circuits nixed consent while the Ninth Circuit permitted it.   Today's decision resolved that split and established that parties can consent to entry of a final judgment by a Bankruptcy Judge.   The decision also acknowledges the practical reality that without legislatively created courts, "the work of the federal court system would grind nearly to a halt."   Opinion, p. 2.   In a footnote, the Court noted that the 349 Bankruptcy Judges hear twice as many cases as all of the District and Circuit judges combined.    

What Happened

Sharif was a distributor for Wellness International Network, a manufacturer of health and nutrition products.    Sharif sued Wellness but wound up owing $650,000 in attorneys' fees after he failed to comply with discovery and other litigation obligations.    When Sharif filed bankruptcy, Wellness wanted to know about the $5 million in assets he had listed on a loan application in 2002.   Sharif glibly admitted that he had lied about owning the assets and said that they really belonged to a trust which he administered for his mother and sister.    

Wellness filed an adversary proceeding against Sharif seeking to deny his discharge and establish that the trust was an alter ego.   Sharif answered and conceded that these claims were core proceedings.   Once again, Sharif failed to provide responsive discovery answers.   As a result, the Bankruptcy Court entered default judgment against him and denied his discharge.   The Bankruptcy Court also found that the trust was his alter ego because the Debtor "treats [the Trust's] assets as his own property."    

Sharif appealed to the District Court.   While his case was pending, the Stern decision came out.   He asked to supplement his briefing to assert that the District Court should treat the Bankruptcy Court's ruling as a report and recommendation.   The District Court denied the request for additional briefing as untimely and affirmed the Bankruptcy Court.

The Seventh Circuit affirmed in part and reversed in part.  It upheld denial of the discharge as something that the Bankruptcy Court had the authority to grant.   However, it reversed the ruling on the alter ego claim.   It held that not only did the Bankruptcy Court lack authority to enter a final judgment, but that it might have lacked authority to even hear the case in the first place.   (The latter ruling was based on the fact that 28 U.S.C. Sec. 157 did not authorize Bankruptcy Courts to issue reports and recommendations in core proceedings.   In Executive Benefits, the Supreme Court clarified that Bankruptcy Courts could issue a report and recommendation in any case in which it could not issue a final judgment, thereby eliminating the so-called statutory gap).

The Majority Ruling

Justice Sotomayor began her discussion of consent by stating, "(a)djudication by consent is nothing new."    Opinion, p. 8.    After discussing cases, the Court held that the right to an Article III tribunal is both a personal one which may be waived and a structural one that must be respected.  Justice Sotomayor wrote:

The entitlement to an Article III adjudicator is “a personal right” and thus ordinarily “subject to waiver,” (citation omitted). Article III also serves a structural purpose, “barring 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.’” Id., at 850 (citations omitted). But allowing Article I adjudicators to decide claims submitted to them by consent does not offend the separation of powers so long as Article III courts retain supervisory authority over the process.

Opinion, pp. 11-12.    In reaching this formulation, Justice Sotomayor resolved a question which had been dividing commentators for years:   was the right to an Article III Court personal and thus waivable or was it structural and therefore immutable?   Although the Court answered "both," it did so in a way that set a low bar for satisfying the structural concerns of the Constitution.   So long as the Article III judiciary retained "supervisory authority" over the legislatively created courts, separation of powers was not violated.    Stated another way, Congress can create judicial helpers for the Article III Courts but cannot create an entire independent system out of whole cloth.

Under this standard, it is clear that Bankruptcy Courts are under the supervisory authority of the Article III Courts.   Bankruptcy Judges are appointed by Article III judges and may be removed by them.   They are a unit of the District Court and enjoy their authority by virtue of an order of reference from the District Courts.   The District Courts also have the power to withdraw that reference.   Indeed, if a District Court wished to do so, it could revoke the order of reference completely and decide all bankruptcy matters.    Decisions of Bankruptcy Courts are reviewed by either the District Courts or by Bankruptcy Appellate Panels (with consent).   However, Bankruptcy Appellate Panels only exist if created by the Court of Appeals.   

The Court further noted that the Bankruptcy Courts do not possess "free-floating authority to decide claims traditionally heard by the Article III Courts" but instead may hear "a narrow class of common law claims" which are incidental to their primary bankruptcy powers.   Finally, the Court noted that Bankruptcy Courts were not created by Congress "to aggrandize itself or humble the Judiciary."   Instead, the Court noted the practical benefit to the Article III Judiciary from having Bankruptcy Courts:

Congress could choose to rest the full share of the Judiciary’s labor on the shoulders of Article III judges. But doing so would require a substantial increase in the number of district judgeships. Instead, Congress has supplemented the capacity of district courts through the able  assistance of bankruptcy judges. So long as those judges are subject to control by the Article III courts, their work poses no threat to the separation of powers.

Opinion, pp. 14-15.    

Having ruled that consent was possible, the Court ruled that it need not be express. 

Nothing in the Constitution requires that consent to adjudication by a bankruptcy court be express. Nor does the relevant statute . . . mandate express consent; it states only that a bankruptcy court must obtain“the consent”—consent simpliciter—“of all parties to the proceeding” before hearing and determining a non-core claim.

Opinion, p. 18.    

Thus, the Court remanded the case to the Seventh Circuit to decide the question of whether consent had indeed been given.    

The majority opinion was joined in by Justices Kennedy, Ginsberg, Breyer and Kagan. Justice Alito concurred in the judgment with the demurrer that he would not have reached the issue of whether consent could be implied.   

The Chief Justice and Justices Scalia and Thomas dissented.

The Dissents

At thirty-nine pages, the dissents are nearly twice as long as the majority opinion.    The dissenting justices (each of whom was in the majority in Stern) did not agree that supervisory authority satisfied separation of powers.   The Chief Justice expressed his preference that the Court would have once more avoided deciding the consent issue.   He warned that by deciding the larger issue, the Court was descending a slippery slope.

By reserving the judicial power to judges with life tenure and salary protection, Article III constitutes “an inseparable element of the constitutional system of checks and balances”—a structural safeguard that must “be jealously guarded.”(citation omitted).

Today the Court lets down its guard. Despite our precedent directing that “parties cannot by consent cure” an Article III violation implicating the structural separation of powers, (citation omitted), the majority authorizes litigants to do just that. The Court justifies its decision largely on pragmatic grounds. I would not yield so fully to functionalism. The Framers adopted the formal protections of Article III for good reasons, and “the fact that a given law or procedure is efficient, convenient, and useful in facilitating functions of government, standing alone,will not save it if it is contrary to the Constitution.” (citation omitted).

The impact of today’s decision may seem limited, but the Court’s acceptance of an Article III violation is not likely to go unnoticed. The next time Congress takes judicial power from Article III courts, the encroachment may not be so modest—and we will no longer hold the high ground of principle. The majority’s acquiescence in the erosion of our constitutional power sets a precedent that I fear we will regret. I respectfully dissent.

Roberts, C.J., Dissenting, pp. 1-2.    The Chief went on to quote significant amounts of his opinion from Stern.  He effectively established that despite his protestations to the contrary, he never intended for Stern to be a narrow ruling.   Instead, he sought to interpose the Article III Judiciary as a bulwark against Congressional interference in the bankruptcy arena no matter how difficult or impractical this might be.   His dire sermon concluded with an allusion to the Bible.

Ultimately, however, the structural protections of Article III are only as strong as this Court’s will to enforce them. In Madison’s words, the “great security against a gradual concentration of the several powers in the same department consists in giving to those who administer each department the necessary constitutional means and personal motives to resist encroachments of the others.”The Federalist No. 51, at 321–322 (J. Madison). The Court today declines to resist encroachment by the Legislature.  Instead it holds that a single federal judge, for reasons adequate to him, may assign away our hard-won constitutional birthright so long as two private parties agree. I hope I will be wrong about the consequences of this decision for the independence of the Judicial Branch. But for now, another literary passage comes to mind: It profits the Court nothing to give its soul for the whole world . . . but to avoid Stern claims?

 Roberts, C.J., Dissenting, p. 20.    

Justice Thomas complained that both the majority and the Chief Justice had failed to answer the question of "whether a violation of the Constitution has actually occurred."    Justice Thomas does not appear to answer this question either.   Instead, he appears to conclude that the parties did not brief the proper issues and that those issues "merit closer attention by this Court."   As a result, Justice Thomas would have decided the case on the narrow ground of whether an alter ego claim is in fact a Stern claim.  

What It Means

This case has two main impacts:  the practical and the political.    

On a practical level, Wellness has brought healing to the uncertainty wreaked by Stern.   We now have a pretty solid flow chart for knowing what Bankruptcy Courts should do with matters brought before them.

1. Is there jurisdiction under 28 U.S.C. Sec. 1334?   If yes, proceed to #2.   If no, stop.
2. Has the District Court withdrawn the reference?  If yes, stop.  If no, proceed to #3.
3. Must or should the Court abstain?  If yes, stop.   If no, proceed to hear the matter.
4.  Is the claim one which could have been heard by the courts of law in England in 1789?  If no, proceed to enter a final judgment.  If yes, proceed to #5.
5. Have the parties consented to entry of a final judgment, either expressly or implicitly?  If yes, proceed to enter a final judgment.   If no, enter a report and recommendation

While I may be oversimplifying this, I think it captures the general idea of where we are today.

On a political level, Justices Breyer, Ginsberg, Sotomayor and Kagan have made the journey from  the dissent in Stern to the majority in Wellness.   They were able to make this transition because Justices Alito and Kennedy changed positions.  While this is rank speculation, it is entirely possible that Justices Alito and Kennedy could see the harm in giving the Bankruptcy Courts unlimited power to rule on state law counterclaims and therefore joined the majority in Stern, but did not want to jeopardize the authority of U.S. Magistrates or other consent-based mechanisms.   If the Chief  had gotten his way, the magistrate system, which operates on referral and consent, could well have fallen.

An older definition of conservative is to conserve, to observe respect for existing institutions.    In his desire to assert the dignity of the Article III Judiciary, the Chief Justice could have torn down decades of smoothly functioning institutions, jeopardizing not only Bankruptcy Judges but Magistrate Judges and possibly arbitrators as well.    Thus, Justices Alito and Kennedy could have joined both majorities out of a sense of conservatism.     

Supreme Court Rules Debtor Entitled to Funds Remaining Upon Conversion of Chapter 13 Case

Acknowledging that the statutory language "does not say expressly" what should happen, the Supreme Court nevertheless ruled that undistributed funds held by the Chapter 13 trustee should be returned to the debtor following a conversion.   The Court described its result as "the most sensible reading of what Congress did provide."   Justice Ginsberg wrote the opinion for an unanimous Court.   Harris v. Viegelahn, No. 14-400 (5/18/15).

What Happened

Charles Harris, III began his trip to the Supreme Court when he filed a chapter 13 petition in San Antonio, Texas in February 2010.   He was trying to save his home after defaulting upon his mortgage.    However, by November 2010, the Court had lifted the stay to allow the lender to foreclose.   A year later, he converted his case to chapter 7.   At that time, the Chapter 13 Trustee had over $5,500 on hand.  Rather than returning these funds to the debtor or paying them to the Chapter 7 trustee, she paid them to debtor's counsel and the unsecured creditors.   The Debtor filed a motion for return of the funds.   The Bankruptcy Court granted this motion and the trustee appealed.   The Fifth Circuit reversed, finding that the Bankruptcy Court's order would allow the Debtor to receive a "windfall."    In re Harris, 757 F.3d 468 (5th Cir. 2014).   The Supreme Court granted cert to reconcile a conflict with the Third Circuit.

The Ruling

The Court noted that prior to 1994, there was a split of authority over whether the debtor's post-petition earnings vested in the chapter 7 estate upon conversion.    This problem was solved when section 348(f) was added to the Code.   It provides that absent bad faith, property of the chapter 7 estate following conversion from chapter 13 consists of property which was originally part of the chapter 13 estate which remained "in the possession . . . or control" of the debtor on the date of conversion.  Thus, the funds held by the chapter 13 trustee would not become property of the chapter 7 estate.   

However, this did not answer the question of what the chapter 13 trustee could do with the funds upon conversion.   The court noted that under section 348(e), the chapter 13 trustee's "services" are terminated upon conversion.   The Court concluded that paying money to creditors was one of the "services" provided by the trustee and therefore something that could not be done after conversion.   The Court also concluded that paying money to creditors was not part of the trustee's duty to "wind up" the chapter 13 estate and that a chapter 13 plan did not vest funds in creditors until they were paid out.

The Court rejected the policy arguments that were relied upon by the Fifth Circuit.  It was not a "windfall" for the debtor to receive the undistributed funds for the reason that those funds would have belonged to the debtor if he had initially filed under chapter 7.    The Supreme Court agreed that it was a fortuity that some trustees had lots of money on hand when a case converted and others didn't.   However, the Court suggested that creditors "seek() to include in a Chapter 13 plan a schedule for regular disbursement of funds the trustee collects."   Opinion, p. 11.  The fact that creditors could protect themselves showed that the Court did not need to bend the statute to arrive at a reasonable result.

What Does It Mean?

In this case, the Supreme Court followed the text and structure of the statute rather than relying on easily manipulated policy arguments like the Fifth Circuit did.    The Supreme Court showed that it was willing to look at how the Bankruptcy Code functions to resolve a question that was not completely obvious.   While no statute expressly said that the debtor gets to keep funds in the hands of the chapter 13 trustee, the Court noted that other provisions, such as those revesting post-petition property in the debtor and terminating the services of the trustee, pointed to the correct answer.   This is a functional, pragmatic approach toward interpreting the law and will be useful to practicing lawyers.

The case will likely also encourage Chapter 13 trustees to seek authority to make interim distributions.   The ruling only applies to funds held by the Chapter 13 trustee on the date of conversion.   Had the Trustee received permission for interim distributions, there would have been a much smaller amount on hand and the Trustee would have received commissions on the funds which were distributed.   As the Court pointed out, there is nothing wrong with encouraging Trustees to make distributions early and often.    

Because Trustees will likely modify their procedures to address the ruling, the practical effect of the opinion will likely be minimal.   However, any time that the Supreme Court interprets the Bankruptcy Code, it provides valuable guidance as to how they might rule in other cases.    That will be the lasting impact of this case beyond the relatively small sum that Trustee Viegelahn will be required to pay.

Note:  The Bankruptcy Court order was entered by then-Bankruptcy Judge Leif M. Clark.   Over the years, Judge Clark has been a fertile source of material for this blog.   Congratulations to Judge Clark on being affirmed by the Supreme Court.    Congratulations also to local attorney Steven Cenammo who filed the motion which set this in motion.  

Supreme Court Says Denial of Confirmation Not Automatically Appealable

In a surprisingly casual opinion, the Supreme Court, led by Chief Justice Roberts, has ruled that denial of confirmation of a chapter 13 plan does not give rise to a final order which can be appealed as a matter of right.    Bullard v. Blue Hills Bank, No. 14-116 (5/4/15).     The opinion can be found here.    The Chief's opinion compares the appellate process to the children's game of chutes and ladders, refers to insignificant matters as "small beer issues" and even includes a sentence fragment.   Notwithstanding the relaxed approach to writing, the Court offers clear guidance.   When the court denies a plan with leave to appeal, the debtor may refuse to amend and appeal the ultimate dismissal or may seek to follow the interlocutory appeal route, a process which must be renewed at each stage of the appeal.    However, the debtor may not appeal the denial as a matter of right.   

What Happened

Bullard owned a multifamily property which was worth much less than was owed upon it.   Because the property was apparently not the debtor's residence (or perhaps only part of the property constituted the debtor's residence), the debtor was able to propose a plan which modified the debt.   Chapter 13 allows a debtor to cure and maintain payments on a long term debt or to pay a secured debt over the life of the plan.   Bullard creatively sought to continue making the regular monthly payments on the secured portion of the debt, while paying disposable income with regard to the unsecured portion.    This would give Bullard the ability to complete payments on the secured debt many years after the plan was completed while paying only 5% on unsecured claims.    According to the Chief Justice, it was "no surprise" that the bank objected.   The Bankruptcy Court sustained the objection even though there was contrary authority within the circuit.

 The debtor appealed to the Bankruptcy Appellate Panel which granted leave for an interlocutory appeal.    The BAP agreed with the Bankruptcy Court and affirmed denial of the plan.   The debtor then appealed to the First Circuit which did not permit an interlocutory appeal and dismissed the appeal.    Both the debtor and the bank agreed that the Supreme Court should grant cert to determine whether denial of a plan constituted a final order appealable as a matter of right.   The Solicitor General sided with the debtor and argued that denial of a plan should be appealable as a matter of right.   In an opinion both forceful and whimsical by turns, the Court rejected the arguments of the debtor and the Solicitor General.

The Court's Ruling

The Supreme Court ruled just thirty-three days after oral argument.    The Court noted that determining finality for purposes of appeal was "different in bankruptcy" than from a typical civil case.    

A bankruptcy case involves “an aggregation of individual controversies,” many of which would exist as stand-alone lawsuits but for the bankrupt status of the debtor. (citation omitted). Accordingly, “Congress has long provided that orders in bankruptcy cases may be immediately appealed if they finally dispose of discrete disputes within the larger case.”

 Slip Opinion, p. 4.   So when does a ruling finally dispose of a discrete dispute within the larger case?    The Court agreed with the Bank that confirming a plan would meet this standard but denying confirmation would not.

The relevant proceeding is the process of attempting to arrive at an approved plan that would allow the bankruptcy to move forward. This is so, first and foremost, because only plan confirmation—or case dismissal—alters the status quo and fixes the rights and obligations of the parties. When the bankruptcy court confirms a plan, its terms become binding on debtor and creditor alike. (citation omitted). Confirmation has preclusive effect, foreclosing relitigation of “any issue actually litigated by the parties and any issue necessarily determined by the confirmation order.” (citations omitted). . . .

When confirmation is denied and the case is dismissed as a result, the consequences are similarly significant.Dismissal of course dooms the possibility of a discharge and the other benefits available to a debtor under Chapter 13. Dismissal lifts the automatic stay entered at the start of bankruptcy, exposing the debtor to creditors’ legal actions and collection efforts. §362(c)(2). And it can limit the availability of an automatic stay in a subsequent bankruptcy case. §362(c)(3).

Denial of confirmation with leave to amend, by contrast,changes little. The automatic stay persists. The parties’ rights and obligations remain unsettled. The trustee continues to collect funds from the debtor in anticipation of a different plan’s eventual confirmation. The possibility of discharge lives on. “Final” does not describe this state of affairs. An order denying confirmation does rule out the specific arrangement of relief embodied in a particular plan. But that alone does not make the denial final any more than, say, a car buyer’s declining to pay the sticker price is viewed as a “final” purchasing decision by either the buyer or seller. “It ain’t over till it’s over.”

 Slip Op., pp. 5-6.  

 The language quoted above captures the essence of the opinion.   However, the Court went on to offer several practical reasons for its ruling.

• Appeals take a long time.   "As Bullard's case shows, each climb up the appellate ladder and slide down the chute can take a year."    A more narrow construction on finality avoid delays and inefficiencies.
• While debtors probably would not appeal over "small beer issues," the prospect of an appeal could be used for tactical reasons in negotiating with creditors.   Besides Chapter 11 lawyers might have the money to spend on appealing insignificant issues.
• The Court also stated that lack of a guaranteed appeal would "encourage the debtor to work with creditors and the trustee to develop a confirmable plan as promptly as possible.

 The Court took the time to reject several arguments from the debtor and the Solicitor General.   The SG argued that any order which resolved a contested matter should be considered final for purposes of appeal.    In a firm putdown, the Court stated:

That version of the argument has the virtue of resting on a general principle—but the vice of being implausible. As a leading treatise notes, the list of contested matters is “endless” and covers all sorts of minor disagreements. (citation omitted). The concept of finality cannot stretch to cover, for example, an order resolving a disputed request for an extension of time.

 Slip Op., pp. 8-9.     The Court also suggested that arguing that all orders resolving contested matters should be appealable begged the question.

At other points, the Solicitor General appears to argue that because one possible resolution of this particular contested matter (confirmation) is final, the other (denial) must be as well. But this argument begs the question. It simply assumes that confirmation is appealable because it resolves a contested matter, and that therefore anything else that resolves the contested matter must also be appealable.  But one can just as easily contend that confirmation is appealable because it resolves the entire plan consideration process, and that therefore the entire process is the “proceeding.” A decision that does not resolve the entire plan consideration process—denial—is therefore not appealable.

Slip Op., p. 9.  

The Court was more sympathetic to the debtor's argument that denying the right to appeal would leave the debtor with no effective means of obtaining appellate review. The debtor would be given the Hobson's Choice to either refuse to amend and appeal the dismissal order, which would result in loss of the automatic stay and probably the debtor's property, or to move forward with a plan the debtor did not want.    In a terse statement, the Chief commented "All good points" before noting that:

our litigation system has long accepted that certain burdensome rulings will be “only  imperfectly reparable” by the appellate process. (citation omitted). This prospect is made tolerable in part by our confidence that bankruptcy courts, like trial courts in ordinary litigation, rule correctly most of the time. And even when they slip, many of their errors—wrongly concluding, say, that a debtor should pay unsecured creditors $400 a month rather than $300—will not be of a sort that justifies the costs entailed by a system of universal immediate
appeals.

 Slip Op., pp. 10-11.   Perhaps acknowledging that "life is unfair" was a less than satisfactory answer, the Court went on to note that important issues could be appealed through the interlocutory appeal process.   Indeed, in this case, the BAP allowed an interlocutory appeal although the Court of Appeals did not.  

While discretionary review mechanisms such as these “do not provide relief in every case, they serve as useful safety valves for promptly correcting serious errors” and addressing important legal questions.

 Slip Op., pp. 11-12.
 
What Does It Mean?

This short opinion contains several layers of meaning.    The most basic lesson is that orders denying relief which do not change the status quo cannot be appealed as a matter of right.   It does not matter whether it is an order denying confirmation of a plan, an order refusing to lift the automatic stay or an order declining to dismiss a case.    Any order which leaves the parties free to return to the field of battle another day is not subject to an automatic appeal.   In most cases, the only option will be to request an interlocutory appeal, a process which requires the aggrieved party to be persuasive on the front end of the appeal process.   The option of refusing to propose another plan and allowing the case to be dismissed probably will only apply in the plan confirmation process.   For example, if the court refuses to lift the automatic stay, the creditor cannot create a final order through inaction.  Instead, the debtor or trustee will be allowed to retain the property until some future action changes the status quo.

On a more philosophical note, the opinion shows that the Supreme Court trusts Bankruptcy Judges to make good decisions and does not want the higher courts to be troubled with appeals of many minor matters.    This vote of confidence could bode well for Bankruptcy Courts in the continuing tension between the boundaries of Article I and Article III authority.

There are also two points applicable to appellate argument to be noted here.   When in doubt, cite Collier on Bankruptcy.   This opinion relied on the Collier treatise three different times in a twelve page opinion.   This could lead to a surge in bankruptcy lawyers adding Collier's to their legal research plans.    Finally, just because the Chief Justice used a sentence fragment (which would have meant an automatic F in my high school English class) and used such mixed metaphors as chutes and ladders and small beer, does not mean that practitioners should.   While a well-chosen metaphor or an intentional grammatical error could add force to a brief, a poorly chosen one or too many discordant examples could prejudice the court.   The Chief Justice has life tenure and no one above him reviewing his decisions.   He can engage in written flights of fancy such as those observed here without any negative consequences.   Practitioners cannot.