Opinion
No. 98-45385 J, Adv. No. 02-7171
June 3, 2003
DECISION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
This is a declaratory relief action in which plaintiff Tevis T. Thompson, Jr., trustee in bankruptcy, seeks a determination that a certain adversary proceeding now pending in this court is property of the chapter 7 bankruptcy estate. The adversary proceeding in question isCaptain Blythers, Inc. v. City of Martinez, A.P. no. 99-4024 AJ (the "Martinez Action"), and was filed January 15, 1999 by the then debtor in possession to recover damages against the City of Martinez (the "City").
Agreeing that there are no genuine issues of material fact present, the parties have filed cross-motions for summary judgment pursuant to Fed.R.Civ.P. 56, applicable herein via F.R.Bankr.P. 7056. The court will grant the trustee's motion and deny the cross-motion by the reorganized debtor.
A. Background
The material facts are undisputed, and for the most part, are set forth in a set of Stipulated Facts, filed April 30, 2003. For purposes of clarity, the court will briefly summarize them. Prior to the filing of its chapter 11 petition, the debtor owned a restaurant situated on property it leased from the City. After the chapter 11 filing, the debtor filed the complaint in the Martinez Action, alleging various theories under which the debtor sought to hold the City liable for the damages and losses the debtor suffered as the result of the flooding of the parking lot adjacent to the debtor's restaurant. The flooding forced the debtor to suspend all operations at the restaurant.
On November 4, 1999, while the Martinez Action remained pending, the court confirmed the debtor's Third Amended Plan of Reorganization (the "Plan"). Thereafter, the reorganized debtor defaulted under the Plan, and the U.S. Trustee moved to convert the case from chapter 11 to chapter 7. The court granted the motion, and entered its order of conversion on June 24, 2002. Subsequently, plaintiff herein was appointed trustee in bankruptcy in the converted chapter 7 case, and the trustee then filed the present adversary proceeding wherein he contends that the Martinez Action is property of the chapter 7 estate. The reorganized debtor, defendant herein, disagrees, and contends that the Martinez Action remains its property, not that of the trustee.
The reorganized debtor concedes that it must distribute any litigation recovery to its creditors, but contends that it, and not the trustee, is entitled to control the litigation.
B. Issue Presented
The parties agree that upon the filing of its chapter 11 petition, all of the debtor's claims against the City became property of the estate pursuant to Bankruptcy Code § 541(a), and that the Martinez Action, when filed, was therefore property of the estate.
The parties further agree that upon confirmation, the Martinez Action revested in the debtor pursuant to Bankruptcy Code § 1141(b), which provides: "Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor." Here, there were no provisions in the Plan or the order confirming the plan that "otherwise provided," and the Martinez Action thus left the estate upon confirmation.
Except as otherwise stated, all further section references herein are to the Bankruptcy Code, 11 U.S.C. § 101 et. seq.
Thus, the precise issue before the court is whether the conversion of the case from chapter 11 to chapter 7 operated under the facts of this case to revest the Martinez Action in the estate. The court holds that the answer is "yes."
C. Discussion
The Ninth Circuit's decision in In re Consolidated Pioneer Mortgage Entities (Pioneer Liquidation Corp. v. U.S. Trustee,), 264 F.3d 803 (9th Cir. 2001) is dispositive. In Consolidated Pioneer, as here, the court converted a chapter 11 case to chapter 7 under circumstances where the confirmed plan, as here, did not provide for the estate to continue after confirmation. There, as here, the reorganized debtor argued that conversion would be "technically futile" because nothing would revest in the chapter 7 estate. Id. at 807.
The Ninth Circuit rejected this argument holding that § 1141(b) is subject to the provisions of the plan, and that the plan before it contemplated that the property of the liquidating corporation in is which the estate's property vested upon confirmation revested in the estate upon conversion of the case to chapter 7. The court reasoned:
Despite the fact that the Joint Plan in this case did not specifically provide that remaining assets would revest in the estate in the event of conversion, it (1) contains explicit provisions regarding the distribution of liquidation proceeds to the investors, the plan's primary beneficiaries; and (2) gives the bankruptcy court broad powers to oversee implementation of the plan.
Consolidated Pioneer, 264 F.3d at 807.
Here, the Plan contains explicit provisions dedicating any proceeds of the Martinez Action to the payment of creditors. In particular, paragraph 9.2 provides:
Any claims of in favor of the Debtor and Debtor in Possession, including claims arising under any provision of the Bankruptcy Code, shall be fully reserved and may be enforced by the reorganized debtor for the benefit of creditors in order of priority following confirmation of the plan.
Id.
This provision is consistent with the debtor's court approved disclosure statement, which the debtor provided to creditors as a condition to its being permitted to solicit acceptances of the plan pursuant to § 1125(b). The disclosure statement provided: "Any recovery from the City of Martinez based upon the claims of the debtor against it will be paid to creditors in order of priority."
Section 1125(b) provides in relevant part:
An acceptance or rejection of a plan may not be solicited after the commencement of the case under this title from a holder of a claim or interest with respect to such claim or interest unless, at the time of or before such solicitation, there is transmitted to such holder the plan or a summary of the plan, and a written disclosure statement approved, after notice and a hearing by the court as containing adequate information.
Thus, all of the proceeds of the Martinez Action were dedicated under the Plan to the payment of creditor claims, and the reorganized debtor retained no beneficial interest. It follows that the Plan's "explicit provisions" dedicate the Martinez Action to the payment of creditors, the "primary beneficiaries" (in fact, the only beneficiaries) of the Martinez Action under the Plan.
Moreover, the bankruptcy court here retained "broad powers" after confirmation, if not over the reorganized debtor's day to day activities, at least over the Martinez Action. The Martinez Action is pending in this court. Paragraph 10.1 of the Plan provides "The bankruptcy court shall retain jurisdiction to construe and enforce the Plan, resolve claims, and other controversies, and enter appropriate orders concerning the bankruptcy case."
Thus, this court retained jurisdiction under the Plan to assure that the Martinez Action is prosecuted in good faith for the benefit of the creditors herein, and that all the proceeds of any recovery are paid to creditors.
The Consolidated Pioneer decision is consistent with other cases decided by courts in the Ninth Circuit that the Consolidated Pioneer court cited with approval. Consolidated Pioneer, 264 F.3d at 807 n. 5.See, e.g., In re Smith, 201 B.R. 267, 273 n. 5, (D. Nev. 1996), aff'd 141 F.3d 1179 (9th Cir. 1998); In re RJW Lumber Co., 262 B.R. 91, 93 (Bankr. N.D. Cal. 2001). In RJW Lumber, the court observed that § 1112(b)(7) and (8) permit a court to convert a chapter 11 case to chapter 7 in the event the debtor fails to effectuate substantial consummation of a confirmed plan, or materially defaults thereunder, and that "[t]hese provisions make no sense if there is no point to chapter 7 administration." Id. at 93. As the court stated,
The far better view, consistent with an integrated interpretation of the Code, is that upon conversion the Chapter 7 estate consists of all remaining assets held for the benefit of creditors.
The trustee concedes that outside of the Ninth Circuit, the approaches courts have taken with respect to the issue now before this court have not been uniform. See Trustee's Reply to Opposition, filed May 23, 2003, p. 3, n. 1-2.
Indeed, the reorganized debtor here offers no rationale why, in light of the above quoted Plan provisions and § 1122(b)(8), the Martinez Action must be controlled and administered by the reorganized debtor following conversion, notwithstanding the fact that the reorganized debtor has absolutely no economic stake in the outcome.
Section 1129(b)(8) provides
Except as provided in subsection (c) of this section, on request of a party in interest or the United States trustee or bankruptcy administrator, and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause, including . . . (8) material default by the debtor with respect to a confirmed plan.
The reorganized debtor's attempts to distinguish Consolidated Pioneer are not persuasive. The reorganized debtor argues that the liquidating trust in Consolidated Pioneer was a fiduciary for creditors, whereas here, the reorganized debtor is not. Whether true or not, the fiduciary status of a post-confirmation entity is not the point; rather, the point is whether the assets at issue revest upon conversion to chapter 7, which in. turn, depends on a construction of the Plan. Section 1141(b);Consolidated Pioneer. Here, under that standards articulated inConsolidated Pioneer, the Martinez Action revested in the estate upon conversion.
The reorganized debtor correctly notes that on March 24, 2002, after confirmation of the Plan, this court entered an order stating that the assets of the reorganized debtor were not then property of the estate. By that order, the court confirmed that, under the Plan, the reorganized debtor could sell certain assets without court approval. That order, however, had nothing to do with the issue now before the court, which is not whether confirmation of the Plan vested the assets of the estate in the reorganized debtor, but whether the subsequent conversion of the case to chapter 7 revested the assets of the reorganized debtor in the estate.
Moreover, the estate was not represented in the post-confirmation proceeding in which the order was entered (wherein the reorganized debtor had requested a court order authorizing the sale of certain assets), and in that proceeding, there was no controversy as to, or briefing of, the issues now facing the court. Thus, the order is neither res judicata,Rein v. Providian Financial Corporation, 270 F.3d 895, 899 (9th Cir. 2001) (res judicata requires, inter alia, that the parties in the two proceedings be identical or in privity) nor the "law of the case" as to such issues. See Pit River Home Agric. Coop. Ass'n. v. United States, 30 F.3d 1088, 1097 (9th Cir. 1994) (application of law of case doctrine is discretionary).
D. Conclusion
The court will issue its order granting the trustee's motion for summary judgment, and denying the reorganized debtor's motion for summary judgment. Because no issues remain for decision in this adversary proceeding, the court requests the trustee to submit a proposed judgment on the merits.