United States District Court, D. Delaware
IN RE CONSTELLATION ENTERPRISES LLC, et al, Debtors.
CONSTELLATION ENTERPRISES LLC, OFFICE OF THE UNITED STATES TRUSTEE, REPRESENTATIVE CLAIMANT, TREVOR MILLER, DDTL PARTIES, UNITED STATES, Appellees. OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Appellant, Bankr. No. 16-11213-CSS
the former Official Committee of Unsecured Creditors
("Committee") appointed under 11 U.S.C. §
1102(a)(1) in the chapter 11 cases of Constellation
Enterprises LLC and nine related companies
("Debtors"), has appealed the Bankruptcy
Court's denial of a settlement approval motion (B.D.I.
("Settlement Denial Order") (Civ. No. 17-757) and
the Bankruptcy Court's order granting Debtors' motion
to convert their chapter 11 cases to cases under chapter 7
(B.D.I. 1130) ("Conversion Order") (Civ. No.
17-1430). The Committee has also filed a motion for stay of
the Conversion Order pending appeal (Misc. No. 17-276)
("Motion to Stay"). Appellees, the United States
Trustee ("Trustee") and the DDTL
Parties have each moved to dismiss the appeals.
For the reasons set forth below, the Court will dismiss both
appeals and will dismiss the Motion to Stay.
16, 2016, the Debtors filed for relief under chapter 11.
Following court-approved sales of substantially all of their
assets, the Debtors and the Committee, on September 8, 2016,
filed the Joint Motion of the Debtors and Creditors'
Committee for an Order Approving Settlement by and Among the
Debtors, the Creditors' Committee, the Purchaser and the
Ad Hoc Noteholders Group (B.D.I. 560) ("Settlement
Motion"). The Settlement Motion sought approval of a
"structured dismissal" that included a case-ending
mechanism and a settlement agreement to distribute assets to
certain creditors. While the motion was pending before the
Bankruptcy Court, the Supreme Court issued Czyzewski v.
Jevic Holding Corp., 137 S.Ct. 973 (2017), a landmark
decision that held that a bankruptcy court cannot approve
end-of-case distributions that do not follow ordinary
priority rules without the affected creditors' consent.
The Committee maintained that its settlement was still
permissible under a pre-Jevic decision, ICL
Holding Co., Inc., 802 F.3d 547 (3d Cir. 2015). In that
case, the Third Circuit held that a party that purchased a
debtor's assets could pay money to certain creditors to
resolve their objections to the sale, even though such
payment did not follow normal priority rules. See
ICL, 802 F.3d at 555-56. The Third Circuit reasoned that
while the secured lenders paid cash to resolve sale
objections, those funds were not paid at the debtor's
direction, were not proceeds from the secured lenders'
liens, did not at any time belong to the estate, and would
not become part of the estate even as a pass-through. See
proposed settlement at issue here was a structured
transaction whereby the Debtors transferred assets to their
secured creditor in an asset sale, and in turn, the secured
creditor would transfer these assets to a settlement trust
for distribution to unsecured creditors while skipping
creditors of higher priority. The Committee posited that this
was permissible because the settlement assets to be
distributed to unsecured creditors were not estate property.
The Bankruptcy Court rejected that argument, holding that,
even if ICL Holding survived Jevic, the
proposed settlement, as a matter of fact, did not fall within
the ambit of ICL Holding, and thus denied the motion
to settle. (See Civ. No. 17-757, D.I. 10-1, 5/16/17
Hr'g. Tr. at 246:23-248:15). The Settlement Denial Order
was entered on May 16, 2017. (B.D.I. 963). On May 30, 2017,
the Committee timely appealed the Settlement Denial Order.
(See Civ. No. 17-757, D.I. 1). The Debtors did not
appeal the Settlement Denial Order, nor did any individual
creditor or other party in interest.
23, 2017, the Debtors moved to convert their chapter 11 cases
to chapter 7 pursuant to § 1112(a) of the Bankruptcy
Code (B.D.I. 1008) ("Conversion Motion"), citing,
inter alia, the administrative insolvency of the
chapter 11 cases. (Id. at 4-5; B.D.I. 1126). The
Committee urged the Bankruptcy Court to deny the Conversion
Motion based on an "equitable analysis of the facts,
" namely, that the Debtors had agreed to support the
Settlement Motion, that conversion would jeopardize the
Committee's appeal of the Settlement Denial Order, and
that, absent reversal of the Settlement Denial Order, the
unsecured creditors stood no chance of recovery on their
claims. (See B.D.I. 1028 at 1-3, 13-16) (citing
In re Adler, 329 B.R. 406 (S.D.N.Y. 2005)). The
Bankruptcy Court held a hearing on the Conversion Motion on
September 27, 2017. (See Misc. No. 17-276, D.I. 1-1, 9/27/17
Hr'g. Tr.). The Debtors' Conversion Motion was
supported by the Trustee and DDTL Parties. (See
B.D.I. 1024; 9/27/17 Hr'g. Tr. at 29:15-35:8). The
Bankruptcy Court concluded that no evidentiary hearing was
necessary and converted the cases to chapter 7, effective
October 2, 2017 (B.D.I. 1130) (the "Conversion
Order"), based on, inter alia, § 1112(a)
of the Bankruptcy Code, the Debtors' undisputed
eligibility to be debtors under chapter 7, and the
"record that has been established over months of this
case" regarding administrative insolvency of the cases.
(See 9/27/17 Hr'g. Tr. at 35:10-39:16). The
Committee timely appealed the Conversion Order on October 11,
2017. (B.D.I. 1145). On the same day, the Committee moved for
a stay pending appeal in this Court, bypassing the Bankruptcy
Court. (Misc. No. 17-276, D.I. 1). No other party appealed
the Conversion Order. The Debtors' cases are now in
Chapter 7, and the Trustee has appointed a Chapter 7 trustee.
Trustee and the DDTL Parties have moved to dismiss the appeal
of the Settlement Denial Order (Civ. No. 17-757, D.I. 43
& 44) and the appeal of the Conversion Order (Civ. No.
17-1430, D.I. 8 & 9) ("Motions to Dismiss").
The merits of the appeal of the Settlement Denial Order are
fully briefed. (Civ. No. 17-757, D.I. 25, 33, 38, 42). Merits
briefing on the appeal of the Conversion Order was stayed at
the request of the parties pending the Court's decision
on the Motions to Dismiss. (See Civ. No. 17-1430,
D.I. 29). The Motions to Dismiss are fully briefed (Civ. No.
17-757, D.I. 43, 44, 45, 48, 49; Civ. No. 17-1430, D.I. 8, 9,
30, 31, 32). On February 9, 2018, the Court held oral
argument on the Motions to Dismiss. (See Civ. No.
17-757, D.I. 57).
Trustee and DDTL Parties argue that, immediately upon the
conversion of the Chapter 11 cases on October 2, 2017,
"the Committee automatically dissolved and ceased to
exist." (Civ. No. 17-1430, D.I. 8 at 4). "As
mandated by the structure of the Bankruptcy Code, established
by case law, and accepted by commentators, the Committee
automatically dissolved upon the conversion of
Constellation's case to chapter 7." (Id.,
D.I. 9 at 2). "Accordingly, the Committee had neither
the power nor authority to file the Notice of Appeal [of the
Conversion Order] on October 11, 2017." (Id.,
D.I. 8 at 4). "Moreover, as the Committee is now
dissolved, it has neither the power nor authority to continue
to prosecute the Conversion Appeal."
to the Trustee, the sole appellant has dissolved, and
therefore all pending suits, by or against it, must abate.
(Civ. No. 17-757, D.I. 44 at 5-6). "The Supreme Court
has held that, absent statutory authority providing
otherwise, just 'as the death of [a] natural person
abates all pending litigation to which such a person is a
party, dissolution of a corporation at common law abates all
litigation in which the corporation is appearing.'"
(Id. (quoting Oklahoma Natural Gas Co. v.
Oklahoma, 273 U.S. 257, 259 (1927)). Similarly,
litigation against a government-owned corporation abated once
the corporation was dissolved by Congress. (See Id.
at 6 (citing Asociacion de Empleados del Area Canalera
(ASEDAC) v. Panama Canal Comm 'n, 453 F.3d 1309,
1314 (11th Cir. 2006) (finding "no explicit or implicit
expression of Congressional intent to prevent the abatement
of any lawsuit filed against [the wholly government owned
corporations] prior to their dissolution"). The Trustee
cites the Supreme Court's decision in Oklahoma
Natural Gas as instructive:
[C]orporations exist for specific purposes, and only by
legislative act, so that if the life of the corporation is to
continue even only for litigating purposes it is necessary
that there should be some statutory authority for the
prolongation. The matter is not really procedural or
controlled by the rules of the court in which the litigation
pends. It concerns the fundamental law of the corporation
enacted by the state which brought the corporation into
Oklahoma Natural Gas, 273 U.S. at 259-60. According
to the Trustee, there is no reason to treat dissolution of
the Committee differently: "Much like a private
corporation, a creditors' committee is an artificial
entity created by statute, and it can exist only under the
express law of the sovereignty by which it was created. After
dissolution, there must be some statutory authority for the
prolongation of its life for its litigation to continue,
whether on its own or by a substituted party. As no statutory
authority provides for the continued ability of the Committee
to maintain litigation following its dissolution, the appeal
must be dismissed." (Id. at 6).
Committee raises several arguments in opposition to the
Motions to Dismiss. The Committee argues that the Motions to
Dismiss should be denied because they are premised solely
upon the Conversion Order, which should be reversed. (Civ.
No. 17-276, D.I. 23 at 3). According to the Committee, the
Bankruptcy Court erred as a matter of law by declining to
conduct an evidentiary hearing on whether conversion was
appropriate or justified at that time in the chapter 11
cases. (See Id. at 3-4; Civ. No. 17-757, D.I. 45 at
17-19). The Committee further argues that, even if Conversion
Order was properly entered, no provision of the Bankruptcy
Code compels the Committee's dissolution upon conversion.
(See Civ. No. 17-757, D.I. 45 at 8-16). Finally,
even if the Bankruptcy Code mandates the Committee's
dissolution post-conversion, the Committee contends that it
enacted a bylaw amendment purporting to transfer its rights
in the appeal to an ad hoc committee of its former members,
which now may pursue the Committee's rights in the
appeal. (See Id. at 22-23).
JURISDICTION AND STANDARD OF REVIEW
Court has jurisdiction over the appeals pursuant to 28 U.S.C.
§ 158(a). An order converting a case to chapter 7 is a
final appealable order. See In re Fleurantin, 420
Fed.Appx. 194, 196 (3d Cir. 2011), citing In re
Rosson,545 F.3d 764, 770 (9th Cir. 2008) Coining
"all other courts of which we are aware that have
considered the issue" in holding "that a bankruptcy
court order converting a case from one under another chapter
of the Bankruptcy Code to one under Chapter 7 is a final and
appealable order") (footnotes omitted). The Settlement
Denial Order is also a final order. Under the "merger
rule, " prior interlocutory orders merge with the final
judgment in a case, and are reviewable on appeal. See
Elfman Motors, Inc. v. Chrysler Corp.,567 F.2d 1252,
1253 (3d Cir. 1977) ("the appeal from a final judgment
draws in question all prior non-final ...