Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
June 20 — A bankruptcy court had the power to condition reopening a case on repayment of funds to ensure that the Chapter 11 trustee and her law firm could be indemnified if the unsecured creditor's claims against them failed, a district court in Kentucky held June 16 ( McKinstry v. Richard Holmes Enters., LLC (In re Black Diamond Mining Co.), 2016 BL 192366, E.D. Ky., No. 15-96-ART, 6/16/16 ).
Judge Amul R. Thapar of the U.S. District Court for the Eastern District of Kentucky affirmed the bankruptcy court's decision, concluding that the bankruptcy court correctly dismissed the case when the unsecured creditor failed to deposit the funds.
“Finality is important in litigation; people and companies must be able to move on with their lives,” the court said. “For this reason, a motion to reopen a closed case is not to be taken lightly,” the court said.
Because the bankruptcy court had not yet granted leave to appeal the order reopening the case, the bankruptcy court retained jurisdiction over the order to modify it, the court said.
The bankruptcy court also has the inherent power to impose contempt sanctions to enforce its order, the court said. Unsecured creditor/appellee Richard Holmes Enterprises failed to comply with the bankruptcy court's reconsideration order, and thus the bankruptcy court correctly imposed sanctions, including dismissal, the court said.
Richard Holmes Enterprises failed to present its inability-to-pay defense in a timely fashion during the contempt hearing, and as a result, the bankruptcy court didn't err by failing to consider such a defense, the court said.
Black Diamond Mining Company filed for Chapter 11 bankruptcy. Chapter 11 allows companies (or individuals) to enjoy protections from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court.
Under the terms of the Chapter 11 plan, Black Diamond's assets were assigned to a trust that would be administered on behalf of the unsecured creditors. Trustee Taft McKinstry sued Alvarez & Marsal North America, LLC (A&M), and its officers on behalf of the trust. Richard Holmes Enterprises also agreed to loan money to help fund the trust's expenses. McKinstry agreed to obtain Richard Holmes Enterprises' written consent before settling the case with A&M.
McKinstry settled the case and disbursed $5.77 million to Richard Holmes Enterprises. After the final funds were disbursed, McKinstry filed a final accounting with the bankruptcy court. Richard Holmes Enterprises objected and asked the court not to approve it until it could investigate claims that it might have against McKinstry and her law firm, Dinsmore & Shohl.
The bankruptcy court overruled the objection and closed the case.
Richard Holmes Enterprises moved the bankruptcy court to reopen the case under Bankruptcy Code Section 350(b). The court granted the motion initially, and then McKinstry filed a motion for reconsideration.
The bankruptcy court denied the motion for reconsideration but ordered Richard Holmes Enterprises to repay $500,000 to the trustee to the trust's escrow account as a condition of reopening the case.
When the company failed to comply with that order, the bankruptcy court held Richard Holmes Enterprises in contempt after a hearing in which the court said failure to comply would result in the case being dismissed.
Later, when Richard Holmes Enterprises failed to deposit the funds by the deadline, the bankruptcy court dismissed the case.
On appeal, Richard Holmes Enterprises argued that the bankruptcy court couldn't condition reopening the bankruptcy case on repayment of funds.
“[W]hen reopening a case would place an unfair financial burden on the other side, the bankruptcy court may condition reopening on the moving party's agreement to reimburse the other side's fees and costs,” the court said, citing In re Oglesby, 2014 BL 284772, 519 B.R. 699 (Bankr. N.D. Ohio). In this case, reopening the case would have placed a financial burden on the trustee and her law firm, the court said.
Richard Holmes Enterprises expressed concerns with the A&M settlement but waited until after McKinstry made all the disbursements and the case was closed. As a result, the trust had no funds with which to indemnify the appellants, the court said. Thus, the reopening of the case prejudiced the appellants. The bankruptcy court was well within its discretion in ordering Richard Holmes Enterprises to repay some of its disbursements into an escrow account, the court said.
Richard Holmes Enterprises argued that it couldn't afford to pay the $500,000, and that the bankruptcy court erred by dismissing the case.
The court noted that Richard Holmes Enterprises could have raised this inability-to-pay as a defense in a motion for relief from the order under Federal Rule of Bankruptcy Procedure 9024, but did not do so in a timely fashion.
During the contempt hearing, Richard Holmes Enterprises failed to show that it was “present[ly]” unable to comply with the bankruptcy court's order, the court said. As a result, the bankruptcy court didn't err by failing to consider Richard Holmes Enterprises' inability-to-pay defense.
David B. Goroff, and Geoffrey S. Goodman, Foley & Lardner, LLP, Chicago, represented appellant Taft A. McKinstry, in her capacity as trustee of the BD Unsecured Creditors Trust; David James Treacy, Dinsmore & Shohl LLP, Lexington, Ky.; Michael R. Limrick, Wayne C. Turner, Pro Hac Vice, Hoover Hull Turner LLP, Indianapolis; Patrick A. Ziepolt, Hoover Hull Turner LLP, Indianapolis, represented appellant Dinsmore & Shohl LLP; C. Thomas Ezzell, and Richard A. Getty, The Getty Law Group, PLLC, Lexington, Ky.; Paul Smith, and Timothy F. Lee, Pro Hac Vice, Ware Jackson Lee O'Neill Smith & Barrow, LLP, Houston, represented appellee Richard Holmes Enterprises, LLC.
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