X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
An interesting temporal issue exists within the universe of bankruptcy jurisprudence: Exactly how far does the jurisdiction of the bankruptcy court extend after a Chapter 11 plan of reorganization has been confirmed? For example, suppose a plan of reorganization includes a provision regarding the assumption of a particular contract. Suppose further that, at some point post-confirmation, and perhaps even several years post-confirmation, the nondebtor party to the contract ceases performing and the debtor determines that litigation is its only alternative. A threshold issue in commencing any such litigation would be determining the proper forum. The debtor may view litigation in the bankruptcy court as a wise litigation strategy. After all, the bankruptcy judge may well still be familiar with the underlying facts of the contract and, perhaps, even with the debtor’s entire business. Debtor’s counsel may perceive that the bankruptcy court has a pro-debtor orientation and that the debtor’s best chance for a favorable result resides there. Additionally, the relative speed, reduced cost and ease of process may all militate in favor of a determination that the bankruptcy court may be the most expeditious forum. However, expediency alone does not necessarily confer jurisdiction upon a federal court. A companion issue that may also arise in the context of the exercise of post-confirmation jurisdiction is one of recourse; namely, what recourse is available to a party who objects to a bankruptcy court’s exercise of post-confirmation jurisdiction? Must the party object right away, or may the party safely wait until the case is concluded and then object? These two related issues intersected in a June decision by the 2nd U.S. Circuit Court of Appeals in In re American Preferred Prescription, Inc. [FOOTNOTE 1] ‘AMERICAN PREFERRED PRESCRIPTION’ The debtor in American Preferred Prescription(APP) operated a mail order pharmaceutical service. In 1993, APP commenced a voluntary bankruptcy case under Chapter 11 of the Bankruptcy Code. In March 1996, the Bankruptcy Court for the Eastern District of New York confirmed a proposed plan of reorganization which provided, in relevant part, for the payment in full of all allowed claims. During the pendency of the APP bankruptcy case, a related voluntary Chapter 11 case was commenced by American Prescription Plan Inc. (AP Inc.). AP Inc. and APP shared common principals and a common business. After the APP plan of reorganization had been confirmed, but before full payment had been made to creditors, findings were made in the AP Inc. Chapter 11 case that AP Inc. and APP were, in fact, alter egos of each other and that the common principals of the two companies were engaged in a fraudulent scheme to defraud AP Inc.’s creditors by diverting assets from AP Inc. to APP. Based upon the findings made in the AP Inc. Chapter 11 case, Cost Controls Inc. (Cost Controls), a creditor, filed a motion in the APP case seeking the post-confirmation appointment of a trustee. [FOOTNOTE 2]Judge Eisenberg appointed Kenneth P. Silverman as trustee with certain limited powers to act as a “watchdog” over APP. APP objected to the appointment of a trustee, claiming that such appointment was precluded by the express language of �1104 of the Bankruptcy Code. Section 1104 authorizes the appointment of a trustee, under certain circumstances, at “any time after the commencement of a case, but before confirmation of a plan.” APP contended that the negative implication of �1104 is that the post-Chapter 11 confirmation appointment of a trustee is per se improper. The Bankruptcy Court rejected this argument, holding that such an appointment was authorized pursuant to the court’s general equity powers codified in �105. No party appealed from the order of appointment. Based upon escalating evidence of fraud, the Bankruptcy Court twice enlarged the trustee’s powers. The first expansion of the trustee’s powers permitted the trustee to investigate and settle fraud claims. No appeal was taken from this order. The second expansion enlarged the trustee’s powers to that of a full operating trustee, based upon new proof of continuing “rampant fraud” in the operation of APP’s affairs. Again, no appeal was taken from this order. Nearly one year after the entry of the order enlarging the trustee’s powers to that of an operating trustee, Tracar S.A. (Tracar), a creditor of APP, filed a motion challenging the court’s authority to appoint a post-confirmation trustee in the first place. It should be noted that the trustee had recently succeeded in expunging Tracar’s claim, based upon proof that the loan documents supporting the claim had been fabricated by a principal of APP. Tracar contended that that the post-confirmation appointment of a trustee was a violation of the express language of �1104. The Bankruptcy Court again held that the appointment of the trustee was warranted by the extraordinary facts of the case and permissible under the court’s general equity powers. Tracar appealed to the U.S. District Court. THE DISTRICT COURT OPINION The first issue addressed by the District Court [FOOTNOTE 3]was the fundamental issue of the Bankruptcy Court’s subject-matter jurisdiction. The trustee had argued that Tracar’s objection to his appointment was untimely in that Tracar had not appealed from the order of appointment, or from the subsequent orders enhancing the trustee’s powers. Having failed to timely appeal any of the three orders, the trustee contended that Tracar was precluded from essentially collaterally attacking the effect of these unappealed and final orders. The District Court determined that Tracar’s objection was timely, however, because such objection allegedly implicated the Bankruptcy Court’s subject-matter jurisdiction to have appointed a trustee post-confirmation. [FOOTNOTE 4]Objections relating to subject-matter jurisdiction may be raised at any time. Interestingly, the District Court concluded that, in the event that the post-confirmation appointment was not consistent with the Bankruptcy Code, the Bankruptcy Court, a court of limited jurisdiction, would have exceeded its jurisdiction. Put another way, the court seems to have concluded that a Bankruptcy Court exceeds its jurisdiction each time it commits a reversible error, thereby effectively adding a jurisdictional dimension to virtually every appeal. Turning to the substance of Tracar’s appeal, the District Court concluded that the Bankruptcy Court could not appoint a post-confirmation trustee in the absence of an explicit provision in the plan providing therefore. The District Court reasoned that the language of �1104 prohibits post-confirmation appointments absent contrary language in the plan itself. The trustee filed an appeal to the 2nd U.S. Circuit Court of Appeals. CIRCUIT COURT OPINION The 2nd Circuit disagreed with the District Court’s subject matter jurisdiction analysis and drew a distinction between a court’s jurisdiction to act and its power or authority to act. Clearly, under 28 U.S.C. �1334, a bankruptcy court has jurisdiction over matters uniquely referable to the administration of a debtor’s estate, including the appointment of a post-confirmation trustee. The appropriateness of such an appointment is an exercise of a court’s authority, not its jurisdiction. Having concluded that the appointment was not jurisdictional in nature, the court proceeded to analyze whether the failure of Tracar, or any other party, to appeal from either the order appointing the trustee, or from either of the two orders which enhanced the trustee’s powers, rendered the appointment immune from further review. The court first considered the nature of post-confirmation orders in general. The court analogized such orders to post-judgment orders, which are generally immediately appealable. However, just because an order is immediately appealable, does not necessarily mean that the putative appellant must immediately appeal or be subject to preclusion. The court then performed a balancing test to determine whether this particular order should be accorded preclusive effect, thereby rendering the instant appeal untimely. The primary consideration weighing against preclusion is the risk of precipitating extra, and perhaps unnecessary, appeals. The court was cognizant of the fact that parties may be encouraged to file purely protective appeals, even if the would-be appellants had no real intention to perfect the appeal. These concerns were weighed against the benefits of preclusion. The most significant factor weighing in favor of preclusion was the sheer importance of the order itself. After all, the appointment of a trustee is clearly a significant event in a bankruptcy case. In this case, the trustee was in place for approximately one year before Tracar filed its motion seeking to remove him. In the intervening 12 months, the trustee had settled numerous matters that necessarily effected the rights of many parties. Permitting an attack on the appropriateness of the trustee’s appointment at such a late juncture would put each of those transactions in potential jeopardy. After balancing these competing interests, the court determined that the need for finality in connection with significant post-confirmation orders outweighed the hypothetical risk of promoting unnecessary appeals. As such, Tracar’s objection to the post-confirmation appointment of the trustee was denied. ANALYSIS American Preferred Prescriptionis the latest example of a dichotomy that is inherent in the American bankruptcy system. Among other basic considerations, the American bankruptcy paradigm is based upon the notion that debtors, including business debtors, are entitled to a “fresh start.” In an effort to ensure this new beginning, debtors may often need the assistance and protection of the bankruptcy system, even after plan confirmation. However, the protections of Title 11 were intended to be of finite duration and debtors cannot and should not remain under the “indefinite tutelage” [FOOTNOTE 5]of the bankruptcy court. There are clearly instances where it may be appropriate for a bankruptcy court to remain involved in a debtor’s post-confirmation affairs. In nearly every plan of reorganization, the debtor assumes certain vital contracts that are necessary for the debtor’s viability as a going concern. In the event that these contracts are materially breached by the non-debtor party during the post-confirmation period, the debtor may not be able to survive for any meaningful time without commencing another bankruptcy case. For example, a debtor in the health care field may have a critical contract with its management company that is in dispute. In the event that the management company ceases performing under the contract, the health care provider may have to close its doors. Similarly, a retail debtor may have an agreement with a critical vendor who refuses to ship product during a holiday season due to a contract dispute. Without this product, the retailer may not remain in business until the next holiday season. Finally, a telecommunications debtor may have a dispute with one or more service providers who threaten to discontinue service. If service is interrupted, disgruntled customers will go elsewhere. In each of the above examples, the debtor likely needs immediate relief from a court; however, commencing traditional litigation may not afford the debtor an effective remedy and, therefore, place at risk the financial benefits gained during the course of the bankruptcy case. It is for this reason that debtors often draft plans with decidedly broad clauses providing for the bankruptcy court’s retention of jurisdiction post-confirmation. In this sense, the American Preferred Prescriptiondecision is as important for the issue that it only indirectly addressed, as it is for the issue that it directly resolved. On its face, the 2nd Circuit’s decision in American Preferred Prescriptionis essentially a procedural one. The specific issue resolved is whether a party can challenge a post-confirmation order after the time to appeal that order has expired. Because the Court believed that Tracar’s challenge was untimely, it never reached the “substantial question” of the bankruptcy court’s authority to issue significant post-confirmation orders in the absence of express statutory authority to do. However, the 2nd Circuit did hold that bankruptcy courts do have rather substantial post-confirmation jurisdiction under 28 U.S.C. �1334. In fact, the Court did not draw any distinction between a bankruptcy court’s preconfirmation and post-confirmation jurisdiction. Therefore, the real issue, at least in the 2nd Circuit, concerning the efficacy of post-confirmation orders, is whether there is any legal authority supporting the court’s decision, and not whether the court has the jurisdiction to act post-confirmation. CONCLUSION “The extent to which the bankruptcy court can or should exercise post-confirmation jurisdiction is an issue that has long troubled the bankruptcy court system.” [FOOTNOTE 6]The American Preferred Prescriptiondecision certainly does not purport to resolve all of the uncertainty associated with the proper exercise of post-confirmation jurisdiction. For example, it does not address the circumstances under which it may be appropriate for a bankruptcy court to abstain from exercising its jurisdiction post-confirmation. However, the case does make clear that bankruptcy courts do, in fact, have such jurisdiction. This broad-ranging jurisdiction permits bankruptcy courts to hear a variety of post-confirmation matters and to rule upon them. Finally, the American Preferred Prescriptiondecision is a timely reminder of the importance of vigilance in conducting post-confirmation, as well as pre-confirmation, litigation. In the event that the court enters a significant order, particularly one that effects the rights of third parties, an aggrieved party must file an immediate appeal or risk waiving any objection, even if the objection later appears to be meritorious on its face. John J. Rapisardi is a partner in the Business, Finance and Restructuring Department of Weil, Gotshal & Mangesand is an adjunct professor of law at Pace University School of Law. Timothy Graulich, an associate at the firm, assisted in the preparation of this article. ::::FOOTNOTES:::: FN12001 WL 726328 (June 28, 2001). FN2Apparently, due to the fact that the order of confirmation was not itself obtained through fraud, no party moved for the revocation of such order under �1144 of the Bankruptcy Code. FN3250 B.R. 11 (E.D.N.Y. 2000). FN4The issue of a court’s post-consummation jurisdiction was not raised as “the short hiatus between confirmation of a plan and the initial appointment of the trustee suggests that the plan fell far short of substantial consummation” prior to the trustee’s appointment. 250 B.R. at 22. FN5 North America Car Corp. v. Peerless Weighing & Vending Machine Corp., 143 F.2d 938 (2d Cir. 1944). FN6Collier on Bankruptcy �1142.04, at 1142-6 (Lawrence P. King, 15th ed. 2000).

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.