Opinion
Bankruptcy Case No. 03-34762-HDH-11, Civil Action No. 3:04-CV-0754-G.
July 29, 2004
MEMORANDUM ORDER
This is an appeal by Sony Electronics, Inc. ("Sony") from an order of the bankruptcy court granting the motion of J. Gregg Pritchard, Trustee, D.I.C. Creditors' Trust, and The Tape Company, Inc. ("Tape") (collectively, the "Appellees") to extinguish Sony's reclamation claims. As discussed below, the bankruptcy court lacked jurisdiction to enter this order. The order is therefore vacated, and this case is remanded to the bankruptcy court for further proceedings.
I. BACKGROUND
The Debtors were a global distributor of computer supplies and professional tape products. See Brief of Appellant Sony Electronics Inc. ("Appellant's Brief") at 3; Appellees' Response at 4. One of these debtor subsidiaries was Tape, a company that distributed media products to end users such as production and broadcast companies. Appellant's Brief at 4; Appellees' Response at 4. Sony was a large-volume electronics supplier to the Debtors, including Tape. Appellant's Brief at 4; Appellees' Response at 4, 7.In early 2003, the Debtors defaulted on financial covenants on their secured credit facility with their lenders, comprised of Bank of America, N.A. and certain other lenders (the "Bank Group"). Appellant's Brief at 4; Appellees' Response at 4-5. This default precipitated a severe downturn in the Debtors' liquidity that ultimately led to their filing for relief under Chapter 11 of the Bankruptcy Code. See Appellant's Brief at 4; Appellees' Response at 5.
Within days of filing the bankruptcy petitions, and at the request of the Debtors, the bankruptcy court entered an order under 11 U.S.C. §§ 105(a), 503(b), and 546(c): (A) Establishing the Procedure for Treatment of Reclamation Claims and (B) Prohibiting Third-Parties from Interfering with Delivery of the Debtors' Goods (the "Reclamation Procedure Order") on May 13, 2003. See Appellant's Brief at 6; Appellees' Response at 6. The Reclamation Procedure Order established uniform procedures for resolving all putative reclamation claims. See Appellant's Brief at 6; Appellees' Response at 6-7. The Reclamation Procedure Order specifically provided that "[t]he Debtors reserve the right to object to any reclamation claim on any grounds, including the ground that reclamation claims are subject to any secured creditor's liens and that the debt secured by such liens exceeds the value of the goods subject to the reclamation claim." See Appellant's Brief at 6 (quoting the Reclamation Procedure Order); Order on Debtors' Motion Regarding Treatment of Reclamation Claims at 1-2, Bankr. Case No. 03-35724 HDH-11, Mar. 3, 2004 (the "Substantive Reclamation Order") (same).
Because Sony was a "critical vendor" to the Debtors, see Appellees' Response at 7, the Debtors entered into settlement discussions with Sony in an attempt to resolve certain reclamation claims and to secure future shipments of goods during bankruptcy. See Appellant's Brief at 7; Appellees' Response at 7-8. The settlement agreement resulting from those discussions permitted, among other things, a reclamation claim by Sony in the amount of $975,306.45 as an allowed administrative claim against the estate of Tape. See Appellant's Brief at 10-11; Appellees' Response at 8. The Debtors filed an Expedited Motion to Approve Compromise and Settlement with Sony Electronics, Inc. (the "Settlement Motion") and, after a hearing on the Settlement Motion, the bankruptcy court entered, on June 6, 2003, an Agreed Order Approving Compromise and Settlement with Sony Electronics Inc. (the "Agreed Order"). See Appellant's Brief at 7-11; Appellees' Response at 8-9; see also Substantive Reclamation Order at 2.
The Agreed Order specifically provided:
[T]he $975,306.45 balance of the Reclamation Claim against the Estate of Tape shall be allowed as an administrative claim of the Estate of Tape. The treatment of such claim shall be pursuant to this Court's existing and any subsequent Order relating to reclamation procedures.
Substantive Reclamation Order at 2 (citing Agreed Order at 2).
The Bank Group objected to the Agreed Order and ultimately appealed that order on June 18, 2003. See Appellant's Brief at 8, 11; Appellees' Response at 8; see also Appellant's Brief in Appeal from the United States Bankruptcy Court for the Northern District Texas, Dallas Division, Bank of America, N.A., et al. v. Daisytek, Inc., et al., No. 3:03-CV-1834-M (filed Sept. 8, 2003) (the "Bank Group Appeal"). One central argument in the Bank Group Appeal was that the bankruptcy court erred in permitting the reclamation claim against the Tape estate as an administrative claim. See id. at 13-17.
In late 2003, it became clear to the bankruptcy court that the Bank Group's pre-petition collateral would be insufficient to pay its claims. See Appellees' Response at 12; see also Substantive Reclamation Order at 9. After the bankruptcy court approved the liquidation of the Bank Group's pre-petition collateral — including the Debtors' domestic inventory and the proceeds thereof — there were still insufficient funds to pay the Bank Group's secured claims. See Appellees' Response at 13; see also Substantive Reclamation Order at 9-10.
On January 9, 2004, the Debtors filed a Motion Regarding Treatment of Reclamation Claims and Brief in Support (the "Reclamation Motion"), seeking an order from the bankruptcy court extinguishing all reclamation claims or valuing those claims at zero. Appellant's Brief at 11; Appellees' Response at 3; see also Substantive Reclamation Order at 1. Sony opposed this motion. Appellant's Brief at 12-13. On March 3, 2004, the bankruptcy court granted the Reclamation Motion on the basis that any inventory to which Sony's reclamation claimants' rights might have attached had been liquidated and used to satisfy the Bank Group's first priority lien on such inventory. See Substantive Reclamation Order at 9-11. On April 12, 2004, Sony filed a timely notice of appeal from this order. See Notice of Appeal.
II. ISSUES
This appeal poses the following questions: (1) whether the bankruptcy court erred, as a matter of law, in determining that it had jurisdiction to interpret, enforce, and otherwise construe the terms of the Agreed Order with Sony even though an appeal respecting that order was already pending; (2) whether the bankruptcy court erred in finding that the Agreed Order did not provide Sony an administrative expense claim against the bankruptcy estate of Tape; (3) whether the bankruptcy court erred in not concluding that the doctrines of judicial or equitable estoppel precluded the Debtors from challenging Sony's administrative expense claim against the bankruptcy estate of Tape; and (4) whether the bankruptcy court erred, as a matter of law, when it determined that Sony's reclamation claims were extinguished or were otherwise without value. Because this court answers the first question regarding jurisdiction in the affirmative, the bankruptcy court's Substantive Reclamation Order is vacated.
III. ANALYSIS A. Standard of Review
When reviewing a decision of the bankruptcy court, the district court "functions as an appellate court and applies the standard of review generally applied in federal court appeals." Matter of Webb, 954 F.2d 1102, 1103-04 (5th Cir. 1992); Matter of Coston, 991 F.2d 257, 261 n. 3 (5th Cir. 1993) (citing Matter of Hipp, Inc., 895 F.2d 1503, 1517 (5th Cir. 1990)). Conclusions of law are reviewed de novo. Matter of Herby's Foods, Inc., 2 F.3d 128, 131 (5th Cir. 1993). Findings of fact, on the other hand, "whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the Bankruptcy Court to judge the credibility of the witnesses." Webb, 954 F.2d at 1104; FED. R. BANKR. P. 8013. "A finding of fact is clearly erroneous `when although there is evidence to support it, the reviewing court on the entire evidence is left with a firm and definite conviction that a mistake has been committed.'" Matter of Missionary Baptist Foundation of America, Inc., 712 F.2d 206, 209 (5th Cir. 1983) (quoting United States v. United States Gypsum Company, 333 U.S. 364, 395 (1948)). Finally, mixed questions of law and fact are reviewed de novo. Matter of National Gypsum Company, 208 F.3d 498, 504 (5th Cir.), cert. denied, 531 U.S. 871 (2000).
B. The Bankruptcy Court's Jurisdiction
Sony argues that, because the subject matter of the Agreed Order was already the subject of a pending appeal by the Bank Group, the bankruptcy court was without jurisdiction to rule on the Reclamation Motion. See Appellant's Brief at 20-21. The court agrees.
The filing of a notice of appeal divests a bankruptcy court of "its control over those aspects of the case involved in the appeal." Griggs v. Provident Consumer Discount Company, 459 U.S. 56, 58 (1982); see also In re Transtexas Gas Corporation, 303 F.3d 571, 578-79 (5th Cir. 2002) (stating that the Griggs rule "applies with equal force to bankruptcy cases."). Notwithstanding an appeal, however, "the bankruptcy court retains jurisdiction to address elements of the bankruptcy proceeding that are not the subject of that appeal." In re Transtexas, 303 F.3d at 580 n. 2 (5th Cir. 2002); see also Resolution Trust Corporation v. Smith, 53 F.3d 72, 76 (5th Cir. 1995); Alberti v. Klevenhagen, 46 F.3d 1347, 1358 (5th Cir. 1995); In re Board of Directors of Hopewell International Insurance Ltd., 258 B.R. 580, 583 (Bankr. S.D.N.Y. 2001). Further, the bankruptcy court has continuing jurisdiction to interpret and enforce its judgment until the judgment has been properly stayed or superseded, see, e.g., Alberti, 46 F.3d at 1358 ("`[W]e have recognized the continuing jurisdiction of the district court in support of its judgment [during a pending appeal], as long as that judgment has not been superseded.'") (citation omitted); United States v. Revie, 834 F.2d 1198, 1205 (5th Cir. 1987) ("[W]e rule that a bankruptcy court retains jurisdiction to conduct proceedings intended to enforce [an] order until such time as the enforcement of the order has been stayed."), cert. denied, 487 U.S. 1205 (1988), and provided its actions do not impact the appellate process by addressing elements of the bankruptcy proceeding that are the subject of the pending appeal. See In re Transtexas, 303 F.3d at 580 n. 2.
The Fifth Circuit has expressly declined to "adopt the broad rule that a bankruptcy court may not consider any request which either directly or indirectly touches upon the issues involved in a pending appeal and may not do anything which has any impact on the order on appeal." Matter of Sullivan Central Plaza I, Ltd., 935 F.2d 723, 727 (5th Cir. 1991).
Prior to the appeal in the case sub judice, the Bank Group appealed the Agreed Order of the bankruptcy court, arguing that the bankruptcy court erred in approving the relief requested in the Settlement Motion, i.e., that it erred in entering the Agreed Order. See Appellant's Brief in Bank Group Appeal at 13. Specifically, the Bank Group argued that the bankruptcy court erred in permitting the reclamation claim against the Tape estate as an administrative claim. See id. at 13-17. The Bank Group argued, inter alia, that Sony was not entitled to recover on its reclamation claim against Tape because Sony's reclamation rights were subject to the Bank Group's prior lien, and reclamation claims are not entitled to payment until all prior interests are satisfied. See id. at 15-17.
In the Reclamation Motion that is the subject of this appeal, the Debtors asked the bankruptcy court to revisit the issue of the effect of the Bank Group's security interests upon Sony's claim. However, this was a central aspect of the Bank Group appeal. Because the issue of whether the Agreed Order properly allowed the administrative claim against the Tape estate and the effect of the Bank Group's security interests on that reclamation claim was the subject of an already pending appeal, the bankruptcy court lacked jurisdiction to rule upon it again in the context of the Reclamation Motion. See In re Transtexas, 303 F.3d at 578-80.
The Appellees assert expressly, and the bankruptcy court held impliedly, that the bankruptcy court was within its jurisdiction to interpret and enforce the Agreed Order and the Reclamation Procedure Order. See Appellees' Response at 16-20; Substantive Reclamation Order at 4. The Appellees contend that the Reclamation Motion "merely sought to implement the process expressly established in the [Agreed] Order," and that "nothing about the Substantive Reclamation Order modified, vacated, or otherwise impacted this Court's review of the [Agreed] Order on appeal." Appellees' Response at 20. This argument is without merit.
The grounds upon which the bankruptcy court determined that it had jurisdiction to rule on the Reclamation Motion are less than clear. According to the bankruptcy court:
Although Sony's statement of the law is correct regarding a bankruptcy court's jurisdiction to modify one of its order when that order is on appeal, Sony incorrectly states that the Debtors are seeking to modify the Agreed Order. Through the [Reclamation Motion], the Debtors are seeking relief that is consistent with the Agreed Order and with the Reclamation Procedure Order.
Substantive Reclamation Order at 4. The court interprets this language to mean that the bankruptcy court believed it was acting under its retained authority to interpret and enforce its own orders. See Appellees' Response at 16-17.
The Appellees, and indeed the bankruptcy court, sidestep the general rule that a bankruptcy court may not enter an order addressing a post-judgment motion, or otherwise exercise control over, aspects of the case involved in a pending appeal. See In re Transtexas, 303 F.3d at 578, 580. As discussed above, the pivotal issue in the Reclamation Motion — whether the Bank Group's perfected security interests extinguished Sony's reclamation claim against the Tape estate — was already the subject of the pre-existing Bank Group Appeal. The bankruptcy court's entry of the Substantive Reclamation Order purported to resolve a central aspect of that appeal. See Substantive Reclamation Order at 9-11.
Accordingly, the bankruptcy court lacked jurisdiction to consider the Reclamation Motion and to enter its Substantive Reclamation Order with respect to Sony's claims. Upon remand, the Debtors may re-present their reclamation motion to the bankruptcy court, as the Bank Group Appeal has since been dismissed.
Since the filing of this appeal, the Bank Group Appeal has been settled and dismissed. See Notice of Dismissal, Sony Electronics, Inc. v. Daisytek, Inc., et al., No. 3:04-CV-0754-G (filed Jul. 14, 2004). This settlement is, however, outside the record of this appeal and beyond consideration of this court. See Kemlon Products and Development Company v. United States, 646 F.2d 223, 224 (5th Cir.) (denying appellant's request to supplement the record with subsequent events included in the record in related litigation between the parties, the Fifth Circuit stated that "[a] court of appeals will not ordinarily enlarge the record on appeal to include material not before the district court."), cert. denied, 454 U.S. 863 (1981). Regardless of this settlement and dismissal, and pursuant to the above findings, the pendency of the Bank Group Appeal divested the bankruptcy court of jurisdiction to consider the Reclamation Motion and to enter the Agreed Order.
IV. CONCLUSION
For the foregoing reasons, the Substantive Reclamation Order of the bankruptcy court filed March 3, 2004 is VACATED, and this case is REMANDED to the bankruptcy court for further proceedings consistent with this memorandum order.SO ORDERED.