Bankruptcy Court's Interpretation of Reorganization Plan It Confirmed Receives Deferential Treatment
IN RE: AIRADIGM COMMUNICATIONS, INC. (August 4, 2010)
Airadigm Communications' principal assets when it petitioned for bankruptcy in 1999 were fifteen mobile phone service licenses issued by the FCC. Pursuant to regulation, the FCC revoked the licenses and Airadigm's 2000 reorganization plan treated them as if they were not part of the bankruptcy estate. It did, however, petition for reinstatement of the licenses. The plan provided alternative treatment for the claims of two major creditors (Oneida and Ericsson), depending on whether the licenses were reinstated. Payment of both claims was going to be financed by loans from Telephone and Data Systems, Inc. ("TDS") -- and the claims have since been assigned to TDS. TDS also advanced additional funds directly to Airadigm pursuant to three loans. Each of the loans was to be repaid by collateral surrender. Several years after the reorganization plan was confirmed, the Supreme Court held that the FCC's license revocation rule was invalid. The FCC then denied Airadigm's motion for reinstatement as moot. Airadigm filed a new petition for bankruptcy protection in 2006. The FCC objected, arguing that the 2000 reorganization plan should be modified instead. The parties entered into a stipulation pursuant to which the new petition was recognized. Among other things, the stipulation provided that the 1999 "Allowed Claim(s)" of the FCC, TDS as assignee, and TDS would be allowed in the 2006 bankruptcy. The bankruptcy judge thought the stipulation was unclear and invited the parties to make the intent of the stipulation more clear, but they did not. TDS filed three claims in the 2006 bankruptcy (one each for the direct loans, the Oneida assigned claim, and the Ericsson assigned claim). The FCC objected to them all. The bankruptcy court allowed the claims based on the direct loans and the Ericsson assignment, and disallowed the claim based on the Oneida assignment. Judge Crabb (W.D. Wis.) reversed with respect to the Oneida assignment and allowed all of TDS's claims. The FCC appeals.
In their opinion, Circuit Judges Kanne and Evans and District Judge Dow affirmed in part and reversed in part. The Court first addressed the standard of review. It noted that it would consider matters of law de novo, but that it would grant much deference to the bankruptcy court's interpretation of the 2000 plan. It treated the interpretation of the plan like a court’s interpretation of its own order. On the merits, the Court turned to the claim on the direct loans. First, it concluded that the FCC did not preserve its argument that the claim should be disallowed because the financing arrangement was an asset sale agreement, not a loan. Next, it concluded that the parties' stipulation barred the FCC from proceeding on its argument that the advances should be recharacterized as equity. Although the stipulation was subject to multiple readings, the Court concluded that the best reading, particularly in light of the "last antecedent rule," allowed the FCC to contest only the amount of the loan and the interest calculation. Particularly in light of the FCC's failure to bring forth any extrinsic evidence that supported its interpretation of the stipulation, the Court affirmed the allowance of the direct loans claim. Alternatively, even if the FCC's challenge were allowed, the Court noted that the record did not support a claim for recharacterization. The Court next addressed the Oneida assignment claim. It agreed with the bankruptcy court that the FCC's objection to this claim should be sustained for two reasons. First, it concluded that the bankruptcy court's interpretation of the "thorny" issues presented by the plan and the Supreme Court's decision was not an abuse of discretion. Second, it concluded that TDS was judicially estopped from arguing otherwise. In earlier proceedings, TDS had successfully defeated Oneida's motion to fund its claim. Its later position is diametrically opposed to its successful argument at that time and there is no reasonable justification for their change in position. Finally, with respect to the Ericsson assigned claim, the Court affirmed the allowance of the claim. Unlike the Oneida claim, the 2000 plan did not extinguish Ericsson's rights. In fact, the plan specifically provided that Ericsson retained its liens on terminated licenses. That right survived the 2000 plan and supports a claim in the 2006 bankruptcy.
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Andrea Meyers filed a Chapter 7 petition for bankruptcy relief on September 25, 2007. Months later, she received federal and state tax refunds for the 2007 tax year totaling $3,538. The bankruptcy Trustee moved for the turnover of the pre-petition share of the refunds. Since September 25 was 73.42% into the year as a whole, the Trustee asked for 73.42% of the refunds (or $2597.60). After a reduction related to Illinois' wild-card exemption, the Trustee sought $973.60. Meyers objected. The bankruptcy court sided with the Trustee and the district court affirmed. Meyers appeals.
Nancy Kovacs accumulated some federal income tax liability in the early 1990s. She entered into an agreement with the IRS in 1996 to resolve those liabilities. The agreement required her to pay her tax liabilities on time for the ensuing five years. She was unable to do so. The IRS terminated the agreement and reinstated the tax liability in 2001. Several months later, Kovacs filed for bankruptcy. In late 2001, she received a bankruptcy discharge. The discharge included her tax liabilities. Notwithstanding the discharge, the IRS continued to demand payment. It even applied some overpaid taxes to the obligation. Kovacs' attorney originally misunderstood the impact of the discharge, thought she still owed taxes, and attempted to reach another agreement with the IRS. The IRS continued to demand payment until August of 2003, when it informed Kovacs’ attorneys that the tax liability had indeed been discharged. Remarkably, the IRS sent two more letters -- in September of 2003 -- indicating that the taxes were still owed. Kovacs brought an adversary complaint in bankruptcy seeking damages for the attorneys’ fees she incurred. The bankruptcy court denied the IRS' motion to dismiss on jurisdictional grounds and the case was tried. The bankruptcy court awarded $25,000 in damages. The district court remanded for a determination of the timeliness of the suit under § 7433 of the Internal Revenue Code, which has a two year statute of limitations. It did not address the bankruptcy court's alternative holding that it had authority under §§ 105 and 106 of the bankruptcy code, which has no limitations period. On remand, the bankruptcy court concluded that the cause of action accrued in July 2002 and dismissed her claim for failure to bring it within the two year statute of limitations. Judge Stadtmueller (E.D. Wis.) affirmed. Kovacs appeals..jpg)
Keith and Dawn Smith lived in their Joliet, Illinois home for years. When Dawn inherited title to the home in 2004, it was subject to a state tax lien. Pursuant to Illinois law, it was auctioned off at a tax sale in late 2001. SIPI, LLC was the successful bidder and received a certificate of purchase. Under Illinois tax sale procedure, the sale is followed by a redemption period, during which the owner may redeem the property. If it is not redeemed, the buyer can obtain a tax deed to the property. The tax deed must be recorded within one year after the expiration of the redemption period. The Smiths' redemption period expired on November 1, 2004. SIPI acquired the deed in April of 2005 and recorded the deed in May of 2005. In April 2007, the Smiths petitioned for bankruptcy and filed an adversary complaint against SIPI to avoid the tax sale as a fraudulent transfer under § 548 of the Bankruptcy Code. The bankruptcy court concluded that the tax sale did not occur within the two year "look back period" because the sale was perfected when the redemption period expired in November 2004. Judge Guzman (N.D. Ill.) affirmed. The Smiths appeal.
When Lonnie McKinney fell behind on the property taxes for his 
South Beach Securities, Inc. is controlled by Leon Greenblatt and was once a registered securities dealer. In the early 2000s, Greenblatt orchestrated a number of financial transactions among South Beach and other companies, including Scattered Corporation, which he controlled in whole or in part. At the time, South Beach's only potential assets were net operating losses. As a result of the transactions, Scattered became South Beach's only creditor. South Beach filed a Chapter 11 petition and submitted a plan of reorganization. The U.S. Trustee opposed confirmation of the plan. The bankruptcy court refused confirmation and dismissed the petition. Judge Lefkow (N.D. Ill.) affirmed. Scattered and South Beach appeal..jpg)
Mark Berens practiced law at 
Repository Technologies, Inc. ("RTI") was a software supplier. When it needed additional financing, William Nelson, a minority shareholder, offered to help. He eventually loaned almost $2 million to RTI. Once he sent a notice of default, however, RTI filed for Chapter 11 reorganization. In the bankruptcy proceeding, RTI attempted, unsuccessfully, to recharacterize the entire Nelson debt as equity. Although the bankruptcy court refused to dismiss the case on the ground it was filed in bad faith, it did dismiss it on the ground that RTI was unable to reorganize. The district court affirmed the bankruptcy court and denied Nelson's request to strike, as dictum, the finding that the case had not been filed in bad faith. Nelson appeals -- RTI cross appeals. (Meanwhile, Nelson also filed a complaint in federal court seeking damages for the breach of the loan agreement. The district court froze RTI's assets pending resolution of the case, but not before RTI paid $100,000 to its bankruptcy lawyers. The court also appointed a receiver who transferred all of RTI's assets to Nelson as the successful bidder at a UCC sale. The court approved the sale and dismissed the claims without prejudice.)
Gail and Ronald Goldberg were in the business of making high risk loans. They made such a loan in the amount of $600,000 to Ernest and Beverly Ojeda. The Ojedas provided stock valued at $800,000 as collateral. The original loan agreement was executed in August of 1998, with an original maturity date of October of 1998. The maturity date was extended many times, and the Ojedas continued to pay monthly interest until January of 2006. In late 1999, the company whose stock secured the original loan executed a reverse stock split, significantly reducing the number of shares and value of the collateral. At the time of one of the loan extensions in late 2001, two entities owned by the Ojedas, both of which owned McDonald's restaurants, guaranteed the note. Another maturity date came and went – and the Ojedas continued to make the monthly interest payments. In 2004, the Ojedas sold their interest in the 
Aubrey Howard purchased a $30,000 car. He made a down payment of $4,500 and traded in his old car. Although his old car was worth $14,500, he still owed $22,500. He therefore financed $35,500 (the purchase price minus the down payment plus the $8,000 in negative equity plus $2,000 in taxes and fees). Later (within 910 days), he filed for Chapter 13 bankruptcy. An issue presented to the bankruptcy court was whether the $8,000 in negative equity was subject to the court's cramdown power. The bankruptcy court ruled that negative equity is included in a purchase money security interest and is therefore not subject to the court's cramdown power. Howard appeals.
In 2001, individuals entered into a mortgage on an Indiana property with LaSalle Bank's predecessor. The mortgage was recorded -- but the acknowledgment had a technical defect. In 2007, the individuals petitioned for Chapter 13 bankruptcy. The Trustee initiated an adversary proceeding against La Salle to avoid the mortgage. Indiana law provides that a "properly acknowledged" mortgage is constructive notice of the mortgage to later bona fide purchasers (BFPs). Prior to 2007, Indiana courts held that a mortgage with a technical defect in the acknowledgment did not amount to constructive notice. The Indiana legislature amended the statute in 2007 to overrule the case law and allow constructive notice even with certain technical defects. The legislature amended the statute again in 2008 to provide that the statute applied to all mortgages, regardless of the date of recording. The dispute in the adversary proceeding centered on whether, prior to the 2008 amendment, the 2007 amendment applied to mortgages recorded prior to 2007. The bankruptcy court concluded that the 2007 amendment applied only to mortgages recorded after its effective date. The district court reversed. The Trustee appeals.
CIT Communications Finance Corp. leased telephone equipment to marchFIRST beginning in 2000. After marchFIRST filed for bankruptcy in 2001, CIT sought the return of its equipment. The Trustee denied that marchFIRST held any CIT property. In 2002, CIT filed an administrative claim, asserting that the Trustee breached his fiduciary duty. In May of 2007, CIT filed a lawsuit against the Trustee for breach of fiduciary duty. The bankruptcy court, and the district court, both agreed that the suit was barred by the statute of limitations. CIT appeals.
Crown Unlimited Machine, Inc. ("Crown"), which designed and built custom machinery, was owned by the Stroup family. In 1999, the Stroups sold the company to Kevin Smith for $6 million. The $6 million consisted of $3.1 million that Smith borrowed, a $2.9 million note and only $500 directly from Smith. The Stroups split almost $600,000 in cash withdrawn from the company pre-closing as well as the $3.1 million in cash received at closing. Within about three years, the new Crown declared bankruptcy. The assets brought out $3.7 million. Most of the money was used to pay off the secured debt -- little was left to address over $1.5 million in unsecured debt. The Trustee in bankruptcy brought an action against the Stroups and the company, alleging a fraudulent conveyance. The bankruptcy court awarded over $3 million to the trustee. The district court affirmed. The Stroups appeal -- the Trustee cross-appeals, seeking the $600,000 pre-closing distribution..jpg)
Mercantile National Bank of Indiana sued Jasper- Newton Utility in state court for breach of contract and specific performance. Judgment was entered in Mercantile's favor for approximately $160,000. James Rose was a 50% shareholder in Jasper- Newton. A few weeks later, Rose and the other shareholder sold Jasper-Newton to WSCI. The shareholders indemnified WSCI for the liability to Mercantile. In proceedings to collect on the judgment, Mercantile sought leave to amend its complaint to add a claim under the Indiana Crime Victim Compensation Act. The court entered judgment in Mercantile's favor of almost $600,000. The state appellate court affirmed on the merits. The state Supreme Court reversed, holding that Mercantile could not assert a new CVCA claim in supplemental proceedings to collect the judgment. Rose filed a petition for bankruptcy in the meantime. Mercantile filed an adversary proceeding in the bankruptcy court challenging the dischargeability of its CVCA claim. The bankruptcy court granted Rose's motion to dismiss Mercantile's complaint, concluding that the CVCA claim was barred by the statute of limitations. The district court affirmed the bankruptcy court. Mercantile appeals. During the appeal, the state appellate court ruled that the CVCA claim was commenced within the appropriate limitations period.
Years ago, a corporate predecessor of Apex Oil Co. owned a refinery near Hartford, Illinois. According to the EPA, the operation of the refinery contributed to the contamination of the groundwater in the area. The United States brought an action, pursuant to the Resource Conservation and Recovery Act (RCRA), for an injunction to require Apex to clean up the site. Apex argued that its earlier discharge in bankruptcy relieved it of any cleanup obligation. The district court issued the injunction. Apex appeals.
Joel Turner had monthly mortgage payments of $1500 when he filed a Chapter 13 petition for bankruptcy. In computing his "projected disposable income" under the bankruptcy law, he deducted the mortgage payments. He stated in his plan, however, that he intended to stop making his mortgage payments and turn his home over to the mortgagee. The trustee objected. The $1500 monthly deduction from Turner’s disposable income would make that much unavailable to the unsecured creditors. The bankruptcy court rejected the trustee’s objection. The trustee appealed under a since superseded process for direct appeal to the court of appeals. The process required: a) the trustee to file a notice of appeal in the bankruptcy court within 30 days, b) the bankruptcy court to certify that the ruling satisfied certain statutory criteria, and c) the trustee had to petition the court of appeals for leave to appeal within 10 days of the certification. The trustee filed his notice of appeal and the court certified. The trustee never filed a petition -- but the clerk of the court transmitted the request for certification and the certification order. The Court docketed the appeal.
In 2004, a state court entered a dissolution order in the divorce proceedings of Frank Gallo and Gillian Emery. Gallo had a bankruptcy proceeding pending at the time. The divorce court awarded a Sanibel Island, Florida property to Emery but required her to pay $125,000 to the bankruptcy trustee. Gallo transferred his interest in the Sanibel Island property to Emery but Emery made no payments to the trustee. Gallo filed a lis pendens against the Sanibel Island property. Several months later, Emery obtained an order quieting title and sold the property for $490,000. In a subsequent Gallo bankruptcy proceeding, Emery filed a proof of claim for slander of title, alleging that she lost an opportunity to sell the Sanibel Island property because of the lis pendens notice. The bankruptcy court denied Emery's proof of claim and issued an order directing her to pay the amount of the state court dissolution order. Emery appeals.
When MarchFIRST filed for Chapter 7 bankruptcy, it sent a notice to its creditors. The notice stated that the original of a proof of claim had to be received by 4 p.m. on October 11. It also provided that the proof of claim could be submitted by hand or by mail. Avnet, a MarchFIRST creditor, faxed its proof of claim. The claims agent received the fax at 4:43 p.m. on October 11. The original of the claim was delivered the following morning. The trustee treated the original as the claim and objected to it on the grounds that it was not received until October 12. The bankruptcy court sustained the trustee's objection -- the district court affirmed. Avnet appeals..jpg)
Robert Jafari, a Wisconsin resident, liked to gamble. In September, 2005, 
Theodore Thompson financed his purchase of a 2003 Chevy with General Motors Acceptance Corp. ("GMAC"). After he defaulted, GMAC repossessed the Chevy. A few weeks later, Thompson filed for bankruptcy. GMAC refused his request to return the vehicle to the bankruptcy estate. Thompson claimed that GMAC willfully violated the automatic stay and moved for sanctions. The bankruptcy court denied the motion, holding that a creditor need not return property absent adequate security. Thompson appeals.
When United Airlines reorganized in bankruptcy, several issues remained unresolved. One of those issues involved $60 million of secured loans to United for terminal improvements at Los Angeles International Airport. United is under an obligation to pay to the lenders the full value of the secured asset, up to the $60 million. The bankruptcy court used a discounted-cash-flow analysis to value the asset, mainly because there was little evidence in the record on the market value of improved airport terminal space. The court's analysis resulted in a value of approximately $35 million. The lenders appeal.
Systems Division, Inc. ("SDI") sought and obtained a judgment for patent infringement against Teknek LLC (“Teknek”) and Teknek Electronics “(Electronics”). During the pendency of the patent infringement suit, the shareholders of Teknek and Electronics created Teknek Holdings ("Holdings") and transferred the assets of Teknek and Electronics into Holdings. Following the judgment, SDI added Holdings and the shareholders as defendants under an alter ego theory. Meanwhile, Teknek filed for bankruptcy. SDI filed a notice of its claim in the bankruptcy court. The bankruptcy trustee filed an adversary proceeding against the alter egos, alleging fraudulent transfers and breach of fiduciary duty. The complaint also sought relief against the shareholders personally for Teknek's obligation to SDI. The bankruptcy court enjoined SDI from attempting to collect its judgment outside of bankruptcy. The district court vacated the injunction. The shareholders paid SDI in full on the judgment. The trustee appeals..jpg)
Stephanie Kuehn completed all the coursework necessary for a master's degree at Cardinal Stritch University. She did not, however complete her obligation with respect to tuition. When the university awarded her a degree, she still owed $6,000 in tuition. When she requested a transcript in order to qualify for a salary increase, the university refused. Kuehn filed for bankruptcy. The university continued to refuse to provide her a transcript, both while the bankruptcy case was pending and even after the discharge order. The bankruptcy court ordered the university to provide a transcript and pay damages and attorneys fees. The district court affirmed. The university appeals.
Winthrop Ingersoll founded the Ingersoll Cutting Tool Company (ICTC) in the late 1800s. It remained a family- owned leader in its industry through the year 2000. In 2001, Iscar, Ltd. acquired ICTC. The then-owners and descendents of Winthrop Ingersoll, the Gaylords, alleged that they never intended to sell but were duped into it by outside directors. They contacted attorney Marshall Miller to assist them in blocking the sale. He agreed to do so and enlisted the help of David Margules. The Gaylords reached an agreement to pay Miller and Margules $100,000 for the representation. The litigation proceeded apace. Miller soon asked for an retainer increase to $250,000. The litigation was unsuccessful, the sale was consummated and the Gaylords paid the $250,000. Then things got interesting: a) the attorneys sent invoices totaling $390,000, b) Miller and the Gaylord's submitted their fee dispute to arbitration, c) the arbitrator apparently ruled that the Gaylords did not owe any more to Miller and didn't decide whether they owed anything to Margules, d) the D. C. Superior Court ordered the Gaylords to pay an additional $83,000 to Miller (which they did), and e) Margules brought an action in Delaware to recover the $60,000 he claimed he was owed, which was denied. In the meantime ICTC's parent, Ingersoll International Inc., petitioned for bankruptcy. Although the Gaylords were not debtors in that case, the bankruptcy court confirmed a liquidation plan that released the Gaylords from claims "arising from" or "relating to" their original case to enjoin the sale of the company. The Gaylords sought relief in the bankruptcy court from another claim filed in the D. C. Superior Court by Miller. Although recognizing that the Gaylords were not debtors and that Miller was not a creditor, the bankruptcy court held that the release was valid because it was key to the ultimate negotiation and success of the plan. The district court, after a remand for clarification, affirmed the bankruptcy court. Miller appeals.
Resource Technology Corp. ("RTC") collected methane gas at landfills and converted the gas into energy. In 1995, RTC entered into a ten-year lease at the McCook landfill. RTC was to install and operate a methane collection and conversion system in exchange for royalties. Although the actual royalties were computed on the sale of electrical energy, the lease required RTC to pay a $100,000 royalty advance at the beginning of each year. RTC entered bankruptcy in 1999. The bankruptcy proceeded for several years. When the 2006 royalty advance payment became due, the trustee did not pay it. A few weeks later the owner of the landfill requested that the trustee refrain from entering the premises. In March of 2006, the trustee entered into a settlement agreement with some of RTC's creditors. Illinois Investment sought an order under the agreement compelling the estate to assume the McCook lease. The lessor objected, asserting that the ten-year lease term had expired. The court ruled that the lease had been extended for a five-year term. The lessor then sent a notice of termination of the lease. The bankruptcy court determined that the lessor validly terminated the lease as a result of RTC's failure to make the royalty payment. Illinois Investment appeals.
Before its bankruptcy, Goldblatt's operated six stores in the Chicago area. In January 2003, Great American Group agreed to buy the inventory at two of the stores at a deep discount. Shortly thereafter, Great American agreed to do the same with the inventory at the other four stores. Both sales were contingent on the independent appraisal of the inventories. Both sales were approved by LaSalle Bank, Goldblatt's principal creditor. Before the sales, Great American learned that inventory purchased for $450,000 had been moved from the four stores to the two stores. Great American did not advise the Bank of that fact. The independent appraisal of the first sale confirmed that the inventory was worth at least as much as it had been represented. The appraisal of the inventory from the four other stores, however, indicated that the inventory was worth at least $2 million less than Goldblatt's had estimated. The results of the second appraisal entitled Great American to a refund of approximately $1 million from Goldblatt's. LaSalle Bank, although required by contract to pay, refused to do so. The bankruptcy court, after a trial, concluded that Great American was legally obligated to disclose the movement of the inventory to LaSalle. The court concluded, however, that LaSalle would not have acted any differently had it known and that LaSalle had not shown that it incurred any loss from the movement. On appeal, the district court reversed. The district court agreed that Great American owed a duty of disclosure to LaSalle. However, it held that the fraud excused LaSalle Bank from any obligation to perform. Great American appeals..jpg)
Marvin Ross-Tousey and his wife Deborah (the “debtors”) filed a Chapter 7 bankruptcy petition. Because their household income was above the median income level, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) subjected their petition to a means test. The means test is used to distinguish those debtors who can repay a portion of their debts from those who cannot. A debtor who has enough disposable income to pay at least $166.67 per month to his creditors is expected to file under Chapter 13. A Chapter 7 filing is presumptively abusive in that circumstance. The debtors claimed a vehicle ownership expense allowance of over $800, although they had no debt or lease payments. With that deduction, they had no disposable income and met the means test. The United States Trustee (“UST”) moved to dismiss their petition for abuse. The UST first asserted abuse based on a totality of the circumstances. The UST later amended the motion to include presumptive abuse on the grounds that they should not have taken the vehicle ownership allowance. The bankruptcy court denied the motion. The district court reversed, holding that a debtor cannot claim a vehicle ownership allowance for vehicles he owns outright. The district court remanded for proceedings to determine whether the debtors could rebut the presumption. The debtors appealed. The UST moved to dismiss for absence of finality because the bankruptcy court had not ruled on whether the presumption could be rebutted. The debtors conceded that they could not rebut the presumption.