Eighth Circuit B.A.P. Holds Debtors' Attorney Failed to Establish Grounds to Vacate Sale Order in Attempt to Ensure Payment of His Fees, Bloomberg Law Reports®

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Needler v. IRS (In re Burival), No. 10-6085, 2011 BL 153274 (B.A.P. 8th Cir. June 10, 2011) The United States Bankruptcy Appellate Court for the Eighth Circuit (“B.A.P.”) affirmed a bankruptcy court’s decision denying a motion for reconsideration brought by debtors’ attorney, as a holder of an administrative claim, seeking to vacate a sale order that provided that taxes would be paid as a surcharge against the sale proceeds. While the attorney was requesting reconsideration in an attempt to ensure the payment of his fees, the B.A.P. agreed with the bankruptcy court’s finding that the attorney had failed to demonstrate “mistake, inadvertence, surprise, or excusable neglect” or to establish any “newly discovered evidence” to warrant vacating the sale order under Federal Rule of Civil Procedure 60(b). As a result of the B.A.P.’s decision, the sale of the debtors’ property will remain undisturbed, and the attorney’s post-petition fees will most likely remain unpaid in light of the administrative insolvency of the estate.

Bankruptcy Court Authorizes Trustee to Sell Debtors’ Property and Surcharge Proceeds for Payment of Taxes

On November 29, 2007, Gary and Joyce Burival and their sons, Richard and Phillip Burival (collectively, “Debtors”), who were engaged in farming operations, filed for chapter 11 bankruptcy protection. Thereafter, William Needler (“Needler”) became the attorney for all of Debtors’ administratively consolidated cases. Several months later, over Debtors’ objection, the bankruptcy court appointed a chapter 11 trustee (“Trustee”), finding that Debtors’ management of the estate had resulted in continuing operating losses and unpaid administrative expenses. The following year, the Trustee filed a motion to sell Debtors’ real estate, with the motion expressly providing that all taxes would be paid from the sale proceeds and that those taxes would “have priority over all liens, encumbrances, and claims of every type and kind (secured, administrative, or otherwise).” Ultimately, the bankruptcy court issued an order approving the Trustee’s motion and authorizing him to surcharge the sale proceeds for payment of taxes as described in the motion (“Sale Order”). No party appealed the bankruptcy court’s Sale Order.

Needler’s Attempts to Vacate Sale Order

After selling the real estate pursuant to the Sale Order, the Trustee filed a motion to distribute the sale proceeds and included a deduction for taxes and a reserve. Belatedly discovering that the estate was not going to have sufficient funds to pay his administrative claim for attorney’s fees, Needler filed a motion to vacate the sections of the Sale Order providing for the surcharge of taxes (“Motion to Vacate”), arguing that the order had been entered through “mistake” and “inadvertence” and should therefore be vacated pursuant to Rule 60(b). Objecting to Needler’s Motion to Vacate, the Trustee contended that the surcharge was appropriate in light of the fact that a trustee can be held personally liable when the estate has insufficient funds to pay the taxes due and owing on a sale of estate assets. Agreeing with the Trustee, the bankruptcy court denied Needler’s Motion to Vacate and granted the Trustee’s motion to distribute the funds. Needler then filed a motion to reconsider the bankruptcy court’s order denying the Motion to Vacate (“Motion to Reconsider”), claiming that the Trustee had misled the creditors by continually assuring them that there was sufficient money and that they should not be concerned about the fact that the taxes claims would be paid first. Objecting to the Motion to Reconsider, the Trustee denied that he had ever made any such reassurances to the creditors. Ultimately, the bankruptcy court denied Needler’s Motion to Reconsider, and Needler then appealed the ruling to the B.A.P.

Overview of Motions to Vacate under Rule 60(b)

Rendering its decision on appeal, the B.A.P. began its analysis by noting that Rule 60(b) provides, in relevant part, that a court can relieve a party from a final judgment, order, or proceeding on the basis of: (1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence; or (3) any other reason that justifies relief. See Federal Rules of Civil Procedure 60(b)(1), (b)(2), and (b)(6). In applying this provision, the B.A.P. found that reversal of a denial of a Rule 60(b) motion is rare because the statute authorizes relief in only the most exceptional cases. See Koah v. Bond Cold Storage, 408 F.3d 1043, 1045 (8th Cir. 2005). Additionally, the B.A.P. observed that an appeal from the denial of a Rule 60(b) motion does not raise the underlying judgment for review but instead raises only the question of whether the lower court abused its discretion in ruling on the Rule 60(b) motion. As such, the B.A.P. decided in the instant case that it would not consider Needler’s arguments that the bankruptcy court had erred in allowing the liquidation of Debtor’s property or in granting the surcharge, instead limiting its analysis to the bankruptcy court’s denial of the Motion to Reconsider.

B.A.P. Rules Needler Failed to Demonstrate Grounds to Vacate Sale Order

Challenging the denial of the Motion to Reconsider on appeal, Needler argued that the Sale Order should be vacated on the grounds of “mistake, inadvertence, surprise, or excusable neglect” because he had not understood the legal ramifications of allowing surcharge. Rejecting this position, the B.A.P. resolved that, irrespective of whether the Bankruptcy Code authorizes such a discharge, a mistake of law does not constitute excusable neglect. See Noah v. Bond Cold Storage, 408 F.3d at 1045. While Needler further contended that he had failed to object to the Sale Order because he believed Debtors’ property would bring in a price sufficient to satisfy all administrative claims, the B.A.P. determined that the Trustee’s repeated requests for the surcharge clearly raised the issue of the administrative solvency of the estate, such that Needler’s failure to recognize the issue could not qualify as the type of exceptional circumstance that would warrant granting a Rule 60(b) motion.Id. Specifically, the B.A.P. found that Needler’s neglect was not excusable because vacating the Sale Order would result in great prejudice to third parties, including the taxing authorities, who had relied on the order when Debtors’ property was sold. Using a similar rationale, the B.A.P also rejected Needler’s argument that the Sale Order should be vacated on the grounds of “newly discovered evidence,” finding that the reduced sale price did not come within the definition of “newly discovered” evidence because it was not in existence at the time that the Sale Order was entered. Finally, the B.A.P. concluded that there was not “any other reason that justifie[d] relief,” emphasizing that Needler had filed the Motion to Vacate only after the sale of Debtors’ property had already occurred. Accordingly, the B.A.P. decided that Needler had failed to establish grounds to vacate the Sale Order under Rule 60(b).

B.A.P. Affirms Bankruptcy Court’s Denial of Motion to Reconsider

Ultimately affirming the bankruptcy court’s denial of the Motion to Reconsider, the B.A.P. concluded that Needler had failed to establish any grounds to justify vacating the Sale Order under Rule 60(b). The B.A.P.’s decision highlights the significant burden placed on the moving party in order to vacate an existing order, especially where a sale has already occurred, and further illustrates the risk to a debtor’s attorney of non-payment of fees in an administratively insolvent estate.

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