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It’s Not Final, and That’s Final: The Ninth Circuit’s Gugliuzza Decision

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As we have noted in another post, Non-Final Finality: Does One Interlocutory Issue Resolved in a Bankruptcy Court Order Render All Issues Addressed in the Order Non-Appealable?, not all orders in bankruptcy cases are immediately appealable as a matter of right.  Only those orders deemed sufficiently “final” may be appealed without additional court authorization.  See 28 U.S.C. § 158(a)(3) (interlocutory order may be appealed only with leave of the court).  Appeals from “final” bankruptcy-court orders usually are first heard by a United States district court or a bankruptcy appellate panel (a “BAP”), which have jurisdiction “to hear appeals from final judgments, orders, and decrees” from bankruptcy courts.  Id. § 158(a)(1).

What happens when a district court or a BAP properly exercises appellate jurisdiction over a bankruptcy court’s order, and ultimately remands the matter back to the bankruptcy court for further fact finding?  Is the district court or BAP’s appellate mandate sufficiently final to appeal as a matter of right to the Circuit Court of Appeals?  The Ninth Circuit Court of Appeals recently wrestled with this question in In re Gugliuzza, Case No. 15-55510 (9th Cir. Mar. 24, 2017).

Bullard v. Blue Hills Bank

In Bullard v. Blue Hills Bank, the United States Supreme Court held that a bankruptcy court’s order is final only if it “alters the status quo and fixes the rights and obligations of the parties.”  Bullard v. Blue Hills Bank, 135 S. Ct. 1686, 1689 (2015).  An order denying plan confirmation generally does not satisfy this standard, as long as it leaves the debtor free to propose another plan, because “[t]he parties’ rights and obligations remain unsettled” and the “possibility of discharge lives on.”  Id. at 1693.  In the Supreme Court’s view, “final” simply “does not describe this state of affairs.”  Id.

The Court also observed that every “climb up the appellate ladder and slide down the chute can take more than a year.”  Id.  Given this reality, it would “not make much sense to define the pertinent proceeding so narrowly that the requirement of finality would do little work as a meaningful constraint on the availability of appellate review.”  Id.

Despite providing relative clarity on the non-finality of orders denying plan confirmation, Bullard did not create a new set of bright-line rules.  Rather, it attempted to provide relative guideposts for the rules of finality, which the Court acknowledged “are different in bankruptcy.”  Id. at 1692.  Whether Bullard actually provided meaningful overall clarity remains subject to debate.  Furthermore, Bullard did not directly address the finality of a district court or BAP’s intermediate appellate ruling when the mandate remands a matter back to bankruptcy court.

The Ninth Circuit’s Prior Decisions:  In Conflict with Bullard?

The Ninth Circuit Court of Appeals recently wrestled with the apparent tension between Bullard and the Ninth Circuit’s earlier decision of In re Bonner Mall Partnership, 2 F.3d 899 (9th Cir. 1993).  In Bonner Mall, the Ninth Circuit held that, under certain circumstances, it could exercise jurisdiction over an appeal of a decision by a district court sitting in an appellate capacity “even though a district court has remanded a matter [to the bankruptcy court] for factual findings on a central issue.”  Under Bonner Mall, a district court’s appellate ruling is sufficiently final, despite a remand, if the central issue “is legal in nature and its resolution either 1) could dispose of the case or proceeding and obviate the need for factfinding; or 2) would materially aid the bankruptcy court in reaching its disposition on remand.”  Bonner Mall, 2 F.3d at 904.

Later, in the post-Bullard decision of Landmark Fence, the Ninth Circuit questioned whether the “flexible approach” to finality remained valid after BullardIn re Landmark Fence, 801 F.3d 1099, 1103 n.1 (9th Cir. 2015).  The court went so far as to observe that the “flexible test is arguably in conflict with the Supreme Court’s decision in Connecticut National Bank v. Germain, 503 U.S. 249, 253 (1992),” as well as BullardId.  The Ninth Circuit declined to reconcile the apparent doctrinal conflict, however, because even the flexible approach was “stretched beyond its breaking point” by the appeal in that case, which involved “a district court order that includ[ed] a remand to the bankruptcy court with explicit instructions to engage in ‘further fact-finding.’”  Id. at 1101.

In evaluating appellate jurisdiction over district court order in that case, the court analyzed four factors:  “(1) the need to avoid piecemeal litigation; (2) judicial efficiency; (3) the systemic interest in preserving the bankruptcy court’s role as the finder of fact; and (4) whether delaying review would cause either party irreparable harm.”  Id. at 1102.  The Ninth Circuit ultimately dismissed the appeal, observing that when “an intermediate appellate court remands a case to the bankruptcy court, the appellate process likely will be much shorter if we decline jurisdiction and await ultimate review of all the combined issues.”  Id. at 1103.

In re Gugliuzza:  A New Per Se Rule?

Against this backdrop, in Gugliuzza, the Ninth Circuit considered whether a district court’s order was sufficiently final to confer appellate jurisdiction under 28 U.S.C. § 158(d)(1), when the order affirmed in part and reversed in part a bankruptcy court’s grant of summary judgment, and remanded a discrete issue to the bankruptcy court for further fact finding.  The appeal arose from an adversary proceeding, in which the Federal Trade Commission (“FTC”) obtained a judgment of non-dischargeability against the debtor under 11 U.S.C. § 523(a)(2)(A), on a motion for summary judgment.  The debtor appealed the judgment to the district court, which affirmed in part, reversed in part, and remanded for factual findings on one of the counts asserted by the FTC.

The debtor appealed the district court order to the Ninth Circuit, arguing that despite the remand, the district court’s ruling was immediately appealable under Bonner Mall and its progeny.  The debtor argued that under Bonner Mall, the Ninth Circuit could exercise appellate jurisdiction because the appeal raised “purely legal issues” and a decision could materially aid the bankruptcy court in its decision-making process on a central issue in the case.

The FTC, by contrast, argued that Bullard and Landmark Fence required dismissal of the appeal, so that the bankruptcy court could promptly consider the issue on remand.  The Ninth Circuit agreed, holding that the Bullard and Landmark Fence decisions “clearly limit the applicability of the Bonner Mall line of cases.”  Bullard established that orders may be considered “final” for purposes of Section 158(d) “only when they ‘finally dispose of [a] discrete dispute[] within the larger case.’”  A decision that “remands a case for further fact-finding will rarely have this degree of finality, unless the remand order is limited to ministerial tasks.”

Thus, to the extent Bullard did not already do so, the Gugliuzza decision effectively overrules Bonner Mall and its progeny.  In addition, although the Ninth Circuit professed consistency between its remaining “longstanding precedent” and Bullard, the Gugliuzza decision arguably creates a new bright-line rule that alters, or at least simplifies, the four-factor test for finality previously employed in Landmark Fence and other decisions.  That rule may be summarized as follows:  A decision that remands a case for further fact-finding is not final under 28 U.S.C. § 158(d) unless the remand order is limited to purely ministerial tasks.

Gugliuzza appears to bring additional clarity to a narrow set of cases involving remand orders at the intermediate appellate level.  It remains to be seen whether the Ninth Circuit and other courts will ultimately revise or replace their “flexible standard” tests in other contexts.  Bankruptcy and appellate practitioners should carefully consider finality issues with every bankruptcy court order and at every stage of a bankruptcy appeal, and would be wise to keep an eye on this evolving doctrine.

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What Do You Mean My Claim Is Capped? Ninth Circuit Ruling Further Clarifies Types Of Damages Excluded From A Landlord’s Claim In Bankruptcy

The Ninth Circuit Court of Appeals recently provided landlords dealing with a rejected lease with further guidance on the size and basis of their claims against a tenant’s bankruptcy estate.  Kupfer v. Salma (In re Kupfer), No. 14-16697 (9th Cir. Dec. 29, 2016).  The Ninth Circuit held that the statutory cap – 11 U.S.C. § 502(b)(6) – on a landlord’s claims against a tenant arising from lease rejection in bankruptcy applies only to claims that result directly from the lease termination; the cap does not apply to collateral claims.

The Statutory Cap in Bankruptcy Code Section 502(b)(6)

Bankruptcy Code Section 502(b)(6) caps a landlord’s claim for damages for a lease terminated before or during the tenant’s bankruptcy to (a) the greater of (i) one year’s worth of rent or (ii) 15%, not to exceed three years, of the remaining lease term; plus (b) any unpaid rent due under the lease as of the earlier of (x) the date the bankruptcy case was initiated (commonly called the “petition date”) or (y) the date the landlord repossessed the property or the tenant surrendered it.  The cap is designed to prevent landlords from pursuing large claims arising from terminated long-term leases, when in reality the landlord will likely be able to re-let the space at some point in the future.

Many courts have considered how broadly the statute should be construed and what type of damages are subject to the cap.   (Other cases have dealt with other idiosyncracies of Section 502(b)(6), such as whether the “15%” means 15% of the remaining rent (escalating over time under the lease), or 15% of the remaining lease months at the current rent.  For a recent post on this arcane “15% of what” issue, see here.)   In Kupfer, the Ninth Circuit specifically considered whether Section 502(b)(6) caps a landlord’s entire claim for attorney’s fees and costs, if some of such amounts arose from other lease breaches, and not the lease termination.

Factual Background And Lower Court Rulings

Two related tenants had leased two commercial properties, each lease running for ten years and containing an arbitration clause and a prevailing party attorney’s fees, arbitration fees, and costs provision.  Tenants stopped paying rent and eventually vacated the premises.   Landlords won in arbitration, obtaining a $1.3 million damages award against Tenants for unpaid past rent and the present value of future rent.  Landlords also received an attorney’s fees, arbitration fees, and costs award of almost $200,000.

Tenants subsequently filed Chapter 11 cases.  Landlords filed a proof of claim for the entire arbitration award.  Tenants objected, arguing that Section 502(b)(6) applied to the entire arbitration award, including past rent, future rent, and the fee award.  Landlords argued that the statutory cap should only apply to the past and future rent award, not the fee award.  The bankruptcy court agreed with Landlords and the District Court affirmed.  Tenants appealed to the Ninth Circuit.

The Ninth Circuit Decision

In ruling, the Ninth Circuit considered public policy, legislative history behind the statutory cap, and various cases, including its prior ruling in In re El Toro Materials Co., 504 F.3d 978 (9th Cir. 2007) (damages arising from tort claims for waste, trespass and nuisance were not subject to statutory cap because they would have existed regardless of lease termination).  In El Toro Materials, the Ninth Circuit held that the statutory cap in Section 502(b)(6) only applies to damages directly resulting from lease termination.  (For a contrary ruling that the cap encompasses virtually every form of damages a landlord could suffer, even a breach of the contractual duty to repair and maintain the premises, see the Mr. Gatti’s decision out of Texas, here.)

Extending its reasoning in El Toro Materials, the Ninth Circuit partially reversed the lower court rulings and held the statutory cap only extends to the portion of Landlords’ fee award attributable to litigating Landlords’ future rent claims.  Accordingly, Landlords’ award for attorney’s fees and costs related to claims for unpaid past rent and defending against counterclaims were not subject to the statutory cap.  The Ninth Circuit remanded the case for determining which portion of the fee award related to lease termination – and is therefore included in the cap and hence disallowed – and which portion of the fee award did not arise from the lease termination, and thus would be an additional allowed claim free from the cap of Bankruptcy Code section 502(b)(6).

Conclusion

In the Ninth Circuit, Bankruptcy Code section 502(b)(6) only caps landlord damages directly resulting from lease termination – including attorney’s fees and costs awards to the extent they are attributable to lease terminations.  Thus, a landlord’s claim is not limited if its damages would have existed regardless of a tenant’s lease terminations.

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A Lender’s Federal Post-Judgment Interest Quandary

Post-judgment interest is not something most lenders consider when making a loan. In fact, it is not ordinarily the subject of significant analysis even when litigation becomes necessary.  Where the United States District Court is the preferred venue, however, parties easily can fall into the quandary of being stuck with the federal statutory post-judgment interest rate, which is currently less than 1% per annum.

Pre-judgment, a lender often has solid rights to contract interest and potentially very high default interest rates, which often approach double-digits, added to a recovery when a solvent obligor is on the other side. But a final judgment may be a game-changer on the rate of interest a lender is able to receive.  Recent circuit court decisions are developing the law on post-judgment interest in a way contrary to the economic recovery of contracting parties, and lenders in particular.  It may be possible, however, to draft around this problem.

Current State of the Law

In cases pending before the United States District Court, “post-judgment interest is governed by federal law,” even where jurisdiction is based upon diversity, because post-judgment interest is viewed as a procedural issue. Citicorp Real Estate Inc. v. Smith, 155 F.3d 1097, 1107 (9th Cir. 1998). Federal post-judgment interest is governed by 28 U.S.C. § 1961(a), which provides for “a rate equal to the weekly average 1-year constant maturity Treasury yield” (currently 0.79% and 0.46% a year ago, see here under 1-year Treasury bills).

While federal case law uniformly holds that an “exception to § 1961 exists when the parties contractually agree to waive its application,” there has been significant recent litigation concerning how explicit contracts must be to constitute a waiver. See Fidelity Federal Bank, FSB v. Durga MA Corp., 387 F.3d 1021, 1023 (9th Cir. 2004).  Importantly, a typical contract imposing interest at a specific rate upon a default “until paid” is insufficient under the case law in the Second, Fifth, and Tenth Circuits. FCS Advisors, Inc. v. Fair Finance Co., Inc., 605 F.3d 144 (2d Cir. 2010); Tricon Energy Ltd. v. Vinmar Int’l, Ltd., 718 F.3d 448 (5th Cir. 2013); In re Riebesell, 586 F.3d 782 (10th Cir. 2009). The Fifth Circuit has gone so far as to hold that the term “post-judgment” should be used in order to evidence a clear intent by the parties to waive 28 U.S.C. § 1961 and impose the default contract interest rate post-judgment. Tricon Energy Limited, 718 F.3d at 459.

The Ninth Circuit is the only jurisdiction with an arguable basis in which to assert that a contractual default rate should apply to post-judgment interest. In Citicorp Real Estate, Inc. v. Smith, the court affirmed a judgment awarding post-judgment interest greater than that provided in 28 U.S.C. § 1961 because: 1) the promissory note at issue included an agreed-upon interest rate upon a default; and 2) the parties had previously stipulated to an arbitration award establishing liability that included an interest rate at the rate specified in the note “after judgment until collected.”  155 F.3d at 1108.  It is not clear from the Citicorp holding whether the outcome would have been the same if the parties had not stipulated to an arbitration award with a post-judgment interest rate.  Some trial courts within the Ninth Circuit, however, interpreted Citicorp to allow the application of a contractual default rate of interest to post-judgment interest based solely on a default interest clause. See Mission Produce, Inc. v. Organic Alliance Inc., 2016 WL 1161988 *11 (N.D. Cal. Mar. 24, 2016); Abbate Family Farms Ltd. Part. v. GD Fresh Dist., Inc., 2012 WL 2160959 *6 (E.D. Cal. Jun. 13, 2012); Best Western Intern., Inc. v. Richland Hotel Corp. GP, LLC, 2012 WL 608016 *11-12 (D. Ariz. Jan. 18, 2012); Beaulieu Group LLC v. Inman, 2011 WL 4971701 *5 (D. Ariz. Oct. 19, 2011).

Even Ninth Circuit courts now may require more explicit language before finding a waiver of the federal statutory post-judgment interest rate. While not binding precedent, the Ninth Circuit’s March 16, 2016 holding in the unpublished opinion OREO Corp. v. Winnerman, 642 Fed. Appx. 1951 (9th Cir. 2016), seems to signal that a typical default interest rate in a contract is insufficient to waive § 1961.  In OREO, the court reversed a trial court’s award of post-judgment interest at a promissory note’s default rate.  In doing so, the Ninth Circuit took a very narrow view of Citicorp and reasoned that post-judgment interest at the default rate was allowed in Citicorp  only because the parties had stipulated to an arbitration award with a higher rate of interest.

Implications

Plaintiffs should carefully consider the likely application of the federal statutory post-judgment interest rate when analyzing the benefits of filing in federal court. Unless the contract at issue includes a provision expressly applying the default interest rate post judgment, there is a strong probability the court will impose post-judgment interest at only the federal statutory rate, which is presently less than 1%.

Lenders and other contracting parties currently crafting documents would be wise to include language making clear that the parties intend for the default interest rate to apply not just upon an event of default, but also to post-judgment interest to the extent a lawsuit is necessary.

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Supreme Court Weighs Granting Cert on Bankruptcy Issues Involving Surcharge and Voting Rights of Assignee of Insider Claim

The Supreme Court is considering whether to grant review of two bankruptcy cases.  On October 3, 2016, the Supreme Court invited the Solicitor General to file briefs expressing the views of the United States.  Because the Supreme Court’s justices normally give significant weight to the federal government’s recommendations regarding interpretations of federal statutes (here, the Bankruptcy Code), the Solicitor General’s forthcoming briefs could influence whether the Supreme Court grants cert. on the two notable bankruptcy cases.

Southwest Securities v. Segner

The first case under consideration is Southwest Securities v. Segner (In re Domistyle, Inc.)811 F.3d 691 (5th Cir. 2015).  At the commencement of this case, the trustee believed the debtor possessed equity in certain real property that could benefit unsecured creditors.  Id. at 693-94.  The property was encumbered by Southwest Securities’ lien.  After marketing the property for a year, the trustee was unable to sell the property and ultimately abandoned it to Southwest and moved to surcharge Southwest for the expenses paid in maintaining the property from the start of the case.  Id. at 694-95.  The Bankruptcy Court for the Eastern District of Texas approved the surcharge over Southwest’s objection that the expenses were incurred to benefit unsecured creditors, and not Southwest.

To surcharge a lender for expenses under 11 U.S.C. sec. 506(c), the trustee bears the burden of proving that: “(1) the expenditure was necessary, (2) the amounts expended were reasonable, and (3) the creditor benefitted from the expenses.”  Id. at 695 (quoting In re Delta Towers, Ltd., 924 F.2d 74, 76 (5th Cir.1991)).  Southwest argued the surcharge was improper because, among other things, the bankruptcy court incorrectly found that the expenses were incurred “primarily” for its benefit simply because it ended up being the only creditor who received any payment from the property.  Id. at 695-96.

Southwest relied on language in Delta Towers that “require[ed] that the claimant incur the expenses primarily for the benefit of the secured creditor.” 924 F.2d at 77 (emphasis added).  In rejecting Southwest’s arguments, the Fifth Circuit reasoned that the word “primarily” is absent from the statute and Section 506(c) did not include an express requirement that funds be spent with any particular beneficiary in mind.  811 F.3d at 696.  The Fifth Circuit affirmed the surcharge because there was a direct relationship between the expenses and the collateral, evidenced by the fact that all of the surcharged expenses related only to preserving the value of the property and preparing it for sale.  Id. at 696.  The Fifth Circuit also noted the equitable nature of the statute, and that there was no evidence that Southwest could have sold the property earlier and thereby avoided the ongoing property preservation and maintenance expenses for which it was surcharged.  Id. at 699.

Finally, in weighing whether to grant cert., the Supreme Court will consider whether a circuit split exists.  Southwest argues that the Fifth Circuit’s opinion conflicts with In re Trim-X, Inc., 695 F.2d 296 (7th Cir. 1982) (holding that “expenses incurred prior to the time the trustee determined [the estate] had no equity in the assets were not for the benefit” of the secured creditor) and split panels from at least two other courts of appeals.  See Loudoun Leasing Dev. Co. v. Ford Motor Credit Co. (In re K&L Lakeland, Inc.), 128 F.3d 203 (4th Cir. 1997); Brookfield Prod. Credit Ass’n v. Barron, 738 F.2d 951 (8th Cir. 1984).

The trustee argued that there is no circuit split because the surcharge was to reimburse for benefits to Southwest itself, not potential benefits to unsecured creditors.  Response of Milo H. Segner, Jr., Trustee, in Opposition to Petition for a Writ of Certiorari, at 18-19.

U.S. Bank v. Village at Lakeridge

In The Village at Lakeridge, a non-statutory insider acquired a $2.76 million claim against the debtor from an insider for $5,000.  In re The Village at Lakeridge, LLC, 814 F.3d 993, 997 (9th Cir. 2016).  The debtor attempted to confirm its plan (which included a cramdown of U.S. Bank’s claim) by arguing that the assignee of the insider claim provided the debtor an impaired, consenting class.  U.S. Bank moved to designate the assignee’s claim on the basis that he was both a statutory and non-statutory insider, and that the assignment was made in bad faith.  Id. at 997-98.  The bankruptcy court designated the claim and ruled that the assignee was not entitled to vote because, when the claim was assigned, he acquired the insider status of the assignor as a matter of law.  Id. at 998.  However, the bankruptcy court ruled that the assignee was not himself an insider and the assignment was not made in bad faith. Id.

The Bankruptcy Appellate Panel for the Ninth Circuit reversed the bankruptcy court’s ruling that the assignee acquired insider status by way of assignment and affirmed the bankruptcy court’s determinations that the assignee was not himself an insider and the assignment was not made in bad faith.  The Ninth Circuit then affirmed the BAP.  Id.

In its Petition for a Writ of Certiorari, U.S. Bank urged that review is warranted for three fundamental reasons.  First, U.S. Bank argued that the Ninth Circuit’s ruling allows an insider claim to be transferred to a third party for the purpose of circumventing the Bankruptcy Code’s statutory prohibition against insider voting under 11 U.S.C. § 1129(a)(10).  U.S. Bank’s Petition for a Writ of Certiorari, at 7-8.  U.S. Bank argued that the Ninth Circuit’s holding ignores the general law of assignment, which holds that an assignment transfers all disabilities of the assignor (here, insider status) to the assignee.  Id. at 8.  (By the way, we at The Bankruptcy Cave would absolutely love it if, assuming cert is granted, the opinion can also resolve whether as assignee of a claim take it subject to disallowance impediments under Section 502(d) of the Code, or if an assignee cannot have its claim disallowed due to prior fraudulent transfers or preferences paid to the assignee.  This split is discussed here, courtesy of a post by our friends at Andrews & Kurth.)

Second, U.S. Bank argues a circuit split exists on the standard of review that should be applied to a determination of insider status.  Id. at 19.  U.S. Bank alleged that the Ninth Circuit’s review of the bankruptcy court’s determination of non-statutory insider status for clear error directly conflicts with the standard of review employed by the majority of circuit courts in the Third, Seventh, Tenth and Eleventh Circuits, which hold that questions of insider status are mixed questions of law and fact to be reviewed de novo.  Id. at 19-20 (citing Schubert v. Lucent Tech. Inc. (In re Winstar Comm’ns., Inc.), 554 F.3d 382, 395 (3d Cir. 2009); In re Longview Aluminum, L.L.C., 657 F.3d 507, 509 (7th Cir. 2011); In re Krehl, 86 F.3d 737, 742 (7th Cir. 1996); Anstine v. Carl Zeiss Meditec AG (In re U.S. Med., Inc.), 531 F.3d 1272, 1275 (10th Cir. 2008); and Miami Police Relief & Pension Fund v. Tabas (In re The Florida Fund of Coral Gables, Ltd.), 144 Fed. Appx. 72, 74 (11th Cir. 2005)).

Third, U.S. Bank argued a circuit split also exists on the proper test for determining nonstatutory insider.  Id. at 24.  Specifically, U.S. Bank argued the Supreme Court should resolve whether courts are to conduct an “arm’s length” analysis as applied by the Third, Seventh and Tenth Circuit Courts of Appeal, or apply a “functional equivalent” test which looks to factors comparable to those enumerated for statutory insider classifications as applied by the Ninth Circuit in this action.  Id. at 24-27 (citations omitted).

The debtor disputes that any circuit split of authority exists, and alleges that the Ninth Circuit applied all appropriate standards for determining insider status.  The Village at Lakeridge, LLC Brief in Opposition, at 6-11.

Potential Ramifications

Denying cert. in Southwest could both increase the risk of a surcharge of a secured creditor and dissuade a trustee from promptly abandoning assets.

Denying cert. in Village at Lakeridge could increase efforts by debtors to confirm plans by assigning insider claims to friendly non-insiders who will vote for the plan.

Stay tuned for more developments on both cases.

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