Opinion
BAP No. KS-00-028, Bankr. No. 94-21906, Chapter 11.
December 22, 2000.
Barbara A. Schermerhorn, Clerk.
Before McFEELEY, Chief Judge, CLARK, and MICHAEL, Bankruptcy Judges.
Appeal from the United States Bankruptcy Court for the District of Kansas
ORDER AND JUDGMENT
This order and judgment has no precedential value and may not be cited, except for the purposes of establishing the doctrines of law of the case, res judicata, or collateral estoppel. 10th Cir. BAP L.R. 8010-2.
This appeal marks the second time that these parties have been before this Court. In the first appeal, MJPB, Inc. v. Fross, BAP No. KS-98-030, 1999 WL 26886 (10th Cir. BAP January 15, 1999) ("Fross I"), this Court determined that a Chapter 11 plan proposed by the Debtors (the "Plan") violated the absolute priority rule set out in 11 U.S.C. § 1129(b)(2)(B)(ii). The Court then reversed an order of the bankruptcy court overruling an objection to the Plan, and it remanded the case for further proceedings. Upon remand, the bankruptcy court dismissed the case. Debtors then appealed the order of dismissal to this Court. For the reasons set forth below, we affirm the decision of the bankruptcy court.
Future references are to Title 11, United States Code, unless otherwise noted.
Background
The facts pertinent to this appeal were set out in Fross I:
The primary asset of Thomas and Melinda S. Fross (Debtors) is their home, valued at $40,000. When the Debtors filed a petition under Chapter 11 on October 18, 1994, they claimed their home and certain personal property as exempt under Kansas law. No party objected to their claimed exemptions. The home is encumbered by a fully secured first mortgage held by Federal Home Loan Mortgage Corporation (FHLMC). MJPB, Inc. (MJPB), the Appellant herein, holds a second mortgage against the home with a balance of approximately $56,317.
The Debtors' Plan of Reorganization (Plan) calls for the bifurcation of MJPB's claim (Class 3) into an allowed secured claim of approximately $18,983 to be paid over twenty years at nine and one-half percent interest. The remaining $37,334 balance of MJPB's claim is treated as a general unsecured claim. The Plan proposes that unsecured creditors (Class 5) be paid ten percent of their claims over ten years at twelve percent interest. The Plan does not contain a class of interests, but provides that the Debtors will retain their property and assets, subject to the security interests of the holders of secured claims. The payments under the Plan are to be funded from the Debtors' future income. Property not required to carry out the Plan may be sold or returned to secured creditors, with any surplus applied toward current operating expenses.
FHLMC voted to accept the Plan. MJPB, having failed to elect treatment under § 1111(b), voted the unsecured deficiency portion of its Class 3 claim to reject the Plan. Class 5 also voted against the Plan. MJPB objected to the confirmation of the Plan, arguing that it violated the absolute priority rule as set forth in § 1129(b)(2)(B)(ii) because the Debtors were retaining their exempt property, including their home.
The bankruptcy court issued a Memorandum Opinion and Judgment overruling MJPB's objection to the confirmation of the Plan. In re Fross, 220 B.R. 405 (Bankr.D.Kan. 1998). Fross acknowledged that the Code distinguishes between property of the debtor and property of the estate, but did not discuss that "of the debtor" or "of the estate" does not modify "property" as the term is used in § 1129(b)(2)(B)(ii). Instead, Fross concluded that the Debtors' exempt property was no longer property of the estate, and that the Plan had not waived the Debtors' right to keep their exempt property outside the estate. Since unsecured creditors lack any right to expect payment of their claims from exempt homestead property under Kansas law, Fross concluded that the Debtors' ownership interest in their exempt property was senior to the interests of unsecured creditors. Id. at 410. In so holding, Fross explained:
If the Frosses' residence were property of the estate, their interest in it would be junior to the claims of unsecured creditors since applicable law would entitle those creditors to payment from the value of the residence. But since the Frosses' interest in their residence is outside the bankruptcy estate, and unsecured creditors cannot reach its value, their interest in the residence cannot be fairly characterized as junior to the claims of unsecured creditors.
Fross I, 1999 WL 26886, at *2-3 (footnote omitted). In Fross I, this Court concluded that the retention of the exempt homestead proposed by the Debtors was a violation of the absolute priority rule and reversed the order confirming the Plan. Debtors sought to appeal Fross I to the United States Court of Appeals for the Tenth Circuit (the "Circuit Court"). However, on July 6, 1999, the Circuit Court dismissed the appeal for lack of jurisdiction on the ground the appeal was interlocutory. MJPB, Inc. v. Fross, No. 99-3078 (10th Cir. June 25, 1999); Appellant's App. at 31.
Upon remand, MJPB sought dismissal or conversion of the bankruptcy case. On April 6, 2000, the bankruptcy court entered its order dismissing the bankruptcy case. The order contained the following statement:
MJPB originally sought dismissal of the case as part of its objection to confirmation of the Plan; the request was then renewed upon remand.
The Court also finds that it is bound by the decision of the Bankruptcy Appellant [sic] Panel and such decision [Fross I] is the law of the case. Because the Debtors cannot propose a plan which complies with the absolute priority rule as interpreted by the Bankruptcy Appellant [sic] Panel, this case must be dismissed. The Court also finds that the plan otherwise complies with all other aspects of 11 U.S.C. § 1129(a) and (b) and that if it is determined on further appeal that this Court is correct in its interpretation of the absolute priority rule, Debtors' plan can be confirmed.
In re Fross, Case No. 94-21906-11 (Bankr.D.Kan. April 6, 2000); Appellant's App. at 34. After the bankruptcy case was dismissed, Debtors timely filed their appeal before this Court.
Statement of Appellate Jurisdiction
When the parties to an appeal grant their consent, this Court has jurisdiction to hear all timely filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit. 28 U.S.C. § 158(a)(1), (b)(1) and (c)(1); Fed.R.Bankr.P. 8002. In the present case, Debtors timely filed their notice of appeal, and neither they nor MJPB opted to have this appeal heard by the United States District Court for the District of Kansas. Accordingly, this Court has jurisdiction to consider this appeal.
Discussion
This appeal presents the same issue presented in Fross I: whether the Debtors' retention of their homestead in the absence of full payment to unsecured creditors violates the absolute priority rule codified in § 1129(b)(2)(B) (the "absolute priority rule"). In Fross I, the Court answered the question in the affirmative, and it reversed an order of the bankruptcy court confirming such a plan. Debtors ask this Court to overrule Fross I. MJPB responds by arguing that Fross I constitutes the "law of the case" with respect to the issue of the absolute priority rule, and it is binding upon this Court.
Said section provides:
(b)(1) Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:
. . . .
(B) With respect to a class of unsecured claims —
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.
11 U.S.C. § 1129(b)(2)(B).
The law of the case doctrine has been considered by the Tenth Circuit Court of Appeals on several occasions. That court's most recent decision on the issue offers the following definition:
"The law of the case `doctrine posits that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.'" United States v. Alvarez, 142 F.3d 1243, 1247 (10th Cir. 1998) (quoting United States v. Monsisvais, 946 F.2d 114, 115 (10th Cir. 1991) (quoting Arizona v. California, 460 U.S. 605, 618, 103 S.Ct. 1382, 75 L.Ed.2d 318 (1983))). "Accordingly, `when a case is appealed and remanded, the decision of the appellate court establishes the law of the case and ordinarily will be followed by both the trial court on remand and the appellate court in any subsequent appeal.'" Id. (quoting Rohrbaugh v. Celotex Corp., 53 F.3d 1181, 1183 (10th Cir. 1995)). "This doctrine is `based on sound public policy that litigation should come to an end and is designed to bring about a quick resolution of disputes by preventing continued re-argument of issues already decided.'" Id. (quoting Gage v. General Motors Corp., 796 F.2d 345, 349 (10th Cir. 1986) (citations omitted)). The rule "also serves the purposes of discouraging panel shopping at the court of appeals level."
Monsisvais, 946 F.2d at 116.
This court has recognized, however, that the law of the case doctrine is not an "inexorable command." Alvarez, 142 F.3d at 1247 (quoting White v. Murtha, 377 F.2d 428, 431 (5th Cir. 1967)). This court will depart from the law of the case doctrine in three exceptionally narrow circumstances:
(1) when the evidence in a subsequent trial is substantially different;
(2) when controlling authority has subsequently made a contrary decision of the law applicable to such issues; or
(3) when the decision was clearly erroneous and would work a manifest injustice.
See Alvarez, 142 F.3d at 1247 (citing Monsisvais, 946 F.2d at 117). Greene v. Safeway Stores, Inc., 210 F.3d 1237, 1241-1242 (10th Cir. 2000). This Court is bound by Greene and has also previously recognized the applicability of the law of the case doctrine to appeals before it. See Farmers Home Admin. v. Buckner (In re Buckner), 218 B.R. 137, 141-143 (10th Cir. BAP 1998). Under the rationale contained in Greene, the decision of Fross I is binding upon this Court unless one of the three exceptions to the rule is present.
Debtors have also admitted that "there is no doubt that [Fross I] is now the law of the case" herein. Appellant's Opening Brief at 15.
The first exception, substantially differing evidence, is not present. The evidence before this Court is identical to what was before the court in Fross I. Debtors argue that the decision in Fross I is manifestly unjust because it has the effect of preventing the Debtors from retaining their exempt homestead. While Debtors correctly state the effect of Fross I, they fail to demonstrate its unfairness, nor do they present any authority in support of their position. While reasonable minds may differ with respect to the result reached by the court in Fross I, the decision can hardly be categorized as clearly erroneous or one that works a manifest injustice. The Court is thus left to consider whether there has been a change in controlling authority that would justify reversal of the decision in Fross I.
It is undisputed that MJPB has a consensual lien upon the residence of the Debtors. The effect of Debtors' plan, if confirmed, would be to pay MJPB less than the full amount of its claim. Such a result is prohibited by statute in Chapter 13 cases. See § 1322(b)(2). In addition, the United States Supreme Court has ruled that such "lien stripping" is not permissible in Chapter 7 cases. See Dewsnup v. Timm, 502 U.S. 410, 417 (1992). These factors cast doubt upon the Debtors' argument that Fross I treats them unjustly.
Debtors argue that the decision of the United States Supreme Court in Bank of America National Trust and Savings Ass'n v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), decided after Fross I, constitutes just such a change in controlling authority. In LaSalle, a partnership filed a petition for relief under Chapter 11. The partnership's major asset was an interest in fifteen floors of an office building located in Chicago, Illinois (the "Building Interest").
The partnership's major creditor was Bank of America ("Bank"), which held a lien upon the Building Interest. The value of the Building Interest was less than the amount of the Bank's claim. The partnership proposed a plan that bifurcated the claim of the Bank, paying the Bank the allowed amount of its secured claim and providing for the discharge of the balance of the Bank's claim in exchange for a sixteen percent dividend on that claim. All other unsecured creditors were to be paid in full. Under the plan, some of the former partners of the debtor were to make a capital infusion of $6.125 million into the reorganized debtor over a five-year period and would thus retain full ownership interest in the reorganized debtor.
The Bank's unsecured deficiency was approximately $38.5 million; the remaining unsecured claims totaled approximately $90,000.00. LaSalle, 526 U.S. at 440.
Bank objected to the proposed plan, arguing that the retention of ownership by the debtor's partners without payment in full of the Bank's unsecured claim violated the absolute priority rule contained in § 1129(b)(2)(B). The partners argued that they were retaining an interest in the reorganized debtor on the basis of the infusion of new capital, not on their prior ownership interest. The bankruptcy court agreed with the partners, and it confirmed the plan over the Bank's objection. The district court and the court of appeals affirmed.
The United States Supreme Court reversed these decisions on the basis of the following issue:
The issue in this Chapter 11 reorganization case is whether a debtor's prebankruptcy equity holders may, over the objection of a senior class of impaired creditors, contribute new capital and receive ownership interests in the reorganized entity, when that opportunity is given exclusively to the old equity holders under a plan adopted without consideration of alternatives. We hold that old equity holders are disqualified from participating in such a "new value" transaction by the terms of 11 U.S.C. § 1129(b)(2)(B)(ii), which in such circumstances bars a junior interest holder's receipt of any property on account of his prior interest.
LaSalle, 526 U.S. at 437. As it considered this issue, the Supreme Court noted in dicta that a "commonsense" consideration of the phrase "on account of" found in § 1129(b)(2)(B)(ii) "recognizes that a causal relationship between holding the prior claim or interest and receiving or retaining property is what activates the absolute priority rule." Id. at 451. However, the Supreme Court explicitly refused to reach the issue of the proper definition of the phrase "on account of" that is contained in § 1129(b)(2)(B)(ii), holding that, no matter how this phrase may be defined, a chapter 11 plan that allows the equity holders to retain an interest in the reorganized debtor "without extending an opportunity to anyone else either to compete for that equity or to propose a competing reorganization plan [may not be confirmed]." Id. at 454.
Debtors argue:
The teaching of LaSalle is that it is the causal connection between the particular pre-petition claim or interest of an entity and the property received or retained under the plan which activates the absolute priority rule. None of the three approaches to the absolute priority rule discussed in LaSalle suggest that the rule is activated where there is no such causal connection or that the holding of a junior general ownership interest in addition to a specific senior interest in exempt property, would bar an entity from securing property on account of its senior interest. Because the interlocutory BAP decision appears to be based upon the concept that holding a junior general ownership interest in addition to holding a senior interest bars an interest holder from receiving or retaining property on account of their senior interest, the interlocutory BAP decision cannot be reconciled with LaSalle.
Appellant's Opening Brief at 15. This argument is flawed. There is a "causal connection" between Debtors' ownership interest in their home and their retention of the home under the proposed plan. Without such an ownership interest, the Debtors would have no right to retain the home. The true linchpin of Debtors' argument is the contention that exemption rights create an interest in the home that is senior to the claims of unsecured creditors. This argument has little if anything to do with LaSalle, and it is the same argument that was made to and rejected by the court in Fross I.
See Fross I, 1999 WL 26886, at *9.
Conclusion
Fross I constitutes the law of the case with respect to the issues raised by the Debtors. If the decision of Fross I is to be altered or reversed, that is a matter left to the Court of Appeals. The decision of the Bankruptcy Court is affirmed.