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In re Constellation Enterprises LLC

United States District Court, D. Delaware

March 22, 2018

IN RE CONSTELLATION ENTERPRISES LLC, et al, Debtors.
v.
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

          MEMORANDUM

         Appellant, 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. 963)[1] ("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[2] 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.

         I. BACKGROUND

         On May 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 id.

         The 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.

         On June 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. (B.D.I. 1143).

         The 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).

         II. CONTENTIONS

         The 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." Id.[3]

         According 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 being.

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).

         The 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).

         III. JURISDICTION AND STANDARD OF REVIEW

         The 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 ...


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