In re Picard, Trustee for Liquidation of Bernard L. Madoff..., 917 F.3d 85 (2019)

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917 F.3d 85United States Court of Appeals, Second Circuit.

IN RE: Irving H. PICARD, TRUSTEEFOR the LIQUIDATION OF BERNARD L.

MADOFF INVESTMENT SECURITIES LLC

Docket Nos. 17-2992(L)|

17-2995|

17-2996|

17-2999|

17-3003|

17-3004|

17-3005|

17-3006|

17-3007|

17-3008|

17-3009|

17-3010|

17-3011|

17-3012|

17-3013|

17-3014|

17-3016|

17-3018|

17-3019|

17-3020|

17-3021

|17-3023

|17-3024

|17-3025

|17-3026

|17-3029

|17-3032

|17-3033

|17-3034

|17-3035

|17-3038

|17-3039

|17-3040

|17-3041

|17-3042

|17-3043

|17-3044

|17-3047

|17-3050

|17-3054

|17-3057

|17-3058

|17-3059

|17-3060

|17-3062

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In re Picard, Trustee for Liquidation of Bernard L. Madoff..., 917 F.3d 85 (2019)

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17-3064|

17-3065|

17-3066|

17-3067|

17-3068|

17-3069|

17-3070|

17-3071|

17-3072|

17-3073|

17-3074|

17-3075|

17-3076|

17-3077|

17-3078|

17-3080|

17-3083|

17-3084|

17-3086|

17-3087|

17-3088|

17-3091|

17-3100|

17-3101|

17-3102

|17-3106

|17-3109

|17-3112

|17-3113

|17-3115

|17-3117

|17-3122

|17-3126

|17-3129

|17-3132

|17-3134

|17-3136

|17-3139

|17-3140

|17-3141

|17-3143

|17-3144

|17-3862

|Argued: November 16, 2018

|Decided: February 25, 2019

SynopsisBackground: Trustee appointed under Securities InvestorProtection Act (SIPA) to administer estate of registeredsecurities broker-dealer through which Ponzi scheme hadbeen perpetrated brought adversary proceedings againstforeign transferees, seeking to recover funds that had beentransferred from broker-dealer to certain foreign “feederfund” customers and then to the transferees. Followingpartial withdrawal of the reference on a consolidated

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basis, transferees filed motions to dismiss. The UnitedStates District Court for the Southern District of NewYork, Jed S. Rakoff, J., found that case involved improperextraterritorial application of bankruptcy statute, and onreturn of matter to lower court, the Bankruptcy Court,

Stuart M. Bernstein, J., 2016 WL 6900689, granteddismissal motion. Trustee appealed.

Holdings: The Court of Appeals, Wesley, Circuit Judge,held that:

focus of bankruptcy statute governing liability oftransferees on avoided transfers, as invoked by SIPAtrustee in tandem with bankruptcy fraudulent transferprovision, was on initial transfers

SIPA trustee's invocation of bankruptcy statute governingliability of transferees on avoided transfers was apermissible domestic application of statute, which did notraise extraterritoriality concerns; and

United States’ interest in applying its law to disputesarising out of fraudulent transfer of funds from debtor'sUnited States bank accounts in furtherance of massivePonzi scheme orchestrated by its principal outweighedinterest of any foreign state.

Vacated and remanded.

Procedural Posture(s): On Appeal; Motion to Dismiss.

*90 These eighty-eight consolidated appeals come fromdozens of related orders of the United States BankruptcyCourt for the Southern District of New York (Bernstein,J.). Plaintiff-Appellant Irving H. Picard, Trustee for theLiquidation of Bernard L. Madoff Investment SecuritiesLLC (“Madoff Securities”), alleges that Madoff Securitiestransferred property to foreign entities that subsequentlytransferred it to other foreign entities, including thehundreds of Appellees. The Trustee contends that MadoffSecurities’ transfers are avoidable (meaning “voidable”)

as fraudulent under § 548(a)(1)(A) of the BankruptcyCode. He thereby seeks to recover the property fromthe Appellees using § 550(a)(2) of the Bankruptcy Code.These actions were dismissed on the grounds that thepresumption against extraterritoriality and internationalcomity principles limit the scope of § 550(a)(2) such

that the trustee of a domestic debtor cannot use it torecover property that the debtor transferred to a foreignentity that subsequently transferred it to another foreignentity. We disagree and hold that neither doctrine barsrecovery in these actions. Accordingly, we VACATE thejudgments of the bankruptcy court and REMAND forfurther proceedings.

Attorneys and Law Firms

ROY T. ENGLERT, JR., Robbins, Russell, Englert,Orseck, Untereiner & Sauber LLP, Washington, D.C.(David J. Sheehan, Seanna R. Brown, Torello H. Calvani,Catherine E. Woltering, Baker & Hostetler LLP, NewYork, NY, for Plaintiff-Appellant Irving H. Picard;Howard L. Simon, Windels Marx Lane & Mittendorf,LLP, New York, NY; Matthew B. Lunn, Young ConawayStargatt & Taylor, LLP, New York, NY, Special Counselfor the Trustee, on the brief), for Plaintiff-Appellant.

JOSEPHINE WANG, General Counsel (Kevin H. Bell,Senior Associate General Counsel for Dispute Resolution,Nathanael S. Kelley, Associate General Counsel, onthe brief), Securities Investor Protection Corporation,Washington, D.C., for Intervenor Securities InvestorProtection Corporation.

FRANKLIN B. VELIE, Sullivan & Worcester LLP, NewYork, NY; THOMAS J. MOLONEY, Cleary GottliebSteen & Hamilton LLP, New York, NY (Diarra M.Guthrie, Samuel P. Hershey, Cleary Gottlieb Steen &Hamilton LLP, New York, NY; Timothy P. Harkness,David Y. Livshiz, Jill K. Serpa, Freshfields BruckhausDeringer US LLP, New York, NY; Marshall R. King,Gibson, Dunn & Crutcher LLP, New York, NY;Jonathan G. Kortmansky, Mitchell C. Stein, Sullivan& Worcester LLP, New York, NY, on the brief), forDefendants-Appellees HSBC Holdings plc, et al., UBSAG, et al., First Peninsula Trustees Limited, et al., and BAWorldwide Fund Management Limited.

Eugene R. Licker, Ballard Spahr LLP, New York,NY, for Defendants-Appellees Lighthouse InvestmentPartners, LLC, Lighthouse Supercash Fund Limited, andLighthouse Diversified Fund Limited.

Dean A. Ziehl (Harry D. Hochman, Alan J. Kornfeld,on the brief), Pachulski Stang Ziehl & Jones LLP, NewYork, NY, for Amicus Curiae National Association ofBankruptcy Trustees, in support of Plaintiff-Appellant.

In re Picard, Trustee for Liquidation of Bernard L. Madoff..., 917 F.3d 85 (2019)

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Roger P. Sugarman, Kegler, Brown Hill + Ritter,Columbus, OH, for Amici Curiae Professors of Conflictof Laws, in support of Plaintiff-Appellant.

Andrea Dobin (Henry M. Karwowski, on the brief),Trenk, DiPasquale, Della Fera & Sodono, P.C.,West Orange, NJ, for Amici Curiae Bankruptcy LawProfessors, in support of Appeal and Reversal.

David Molton, Brown Rudnick LLP, New York, NY, forAmicus Curiae Kenneth Krys, as Liquidator and ForeignRepresentative of Fairfield Sentry Limited, FairfieldSigma Limited, and Fairfield Lambda Limited, in supportof Plaintiff-Appellant and partial reversal.

Daniel M. Sullivan (Matthew Gurgel, Benjamin F.Heidlage, on the brief), Holwell Shuster & GoldbergLLP, New York, NY, for Amici Curiae Brian Child,Christopher Hill, Nilani Perera, Martin Trott, andAndrew Willins, in support of Defendants-Appellees.

George T. Conway III (Emil A. Kleinhaus, Joseph C.Celentino, on the brief), Wachtell, Lipton, Rosen &Katz, New York, NY, for Amicus Curiae SecuritiesIndustry and Financial Markets Association, in supportof Defendants-Appellees.

Richard A. Kirby, FisherBroyles, LLP, Washington, D.C.(Carole Neville, Dentons, New York, NY; Richard Levy,Pryor Cashman LLP, New York, NY, on the brief),for Amici Curiae Lanx BM Investments, LLC, et al., insupport of Defendants-Appellees.

Before: JACOBS, POOLER, AND WESLEY, CircuitJudges.

Opinion

Wesley, Circuit Judge:

*91 These eighty-eight consolidated appeals arise fromthe ongoing fallout of Bernard Madoff’s Ponzi scheme.As alleged, Bernard L. Madoff Investment Securities LLC(“Madoff Securities”) fraudulently transferred billions ofdollars to foreign investors, including the feeder fundsat issue here. These feeder funds, the initial transfereesof that property, subsequently transferred it to otherforeign investors, a group that includes the hundreds ofAppellees. Irving H. Picard, the Appellant and Trusteefor the Liquidation of Madoff Securities, alleges thesetransfers are fraudulent, and thus avoidable (meaning

“voidable”), under § 548(a)(1)(A) of the BankruptcyCode. Invoking § 550(a)(2) of the Bankruptcy Code, theTrustee sued the Appellees to recover the property. Thequestion before us is whether, where a trustee seeks to

avoid an initial property transfer under § 548(a)(1)(A), either the presumption against extraterritoriality orinternational comity principles limit the reach of § 550(a)(2) such that the trustee cannot use it to recover propertyfrom a foreign subsequent transferee that received theproperty from a foreign initial transferee.

Following an order of the United States District Court

for the Southern District of New York (Rakoff, J.), 1

the United States Bankruptcy Court for the Southern

District of New York (Bernstein, J.) 2 dismissed theTrustee’s actions, holding in each that either thepresumption against extraterritoriality or internationalcomity principles prevent the Trustee from using § 550(a)(2) to recover this property. We disagree and holdthat neither doctrine bars recovery in these actions.Accordingly, we vacate the judgments below and remandto the bankruptcy court for further proceedings.

BACKGROUND

Bernard Madoff orchestrated the largest Ponzi scheme inhistory through Madoff *92 Securities, his New Yorkinvestment firm. He enticed investors to buy into allegedinvestment funds by promising returns that seemed, andwere, too good to be true. Rather than invest the money,Madoff commingled it in a checking account he held

with JPMorgan Chase in New York. See, e.g., In reBernard L. Madoff Inv. Sec. LLC., 721 F.3d 54, 59–60(2d Cir. 2013). When investors wanted to withdraw their

funds, Madoff sent them checks from this account. Id.at 73. In effect, Madoff paid his investors using moneyhe received from other investors. In 2008, his fraudulententerprise collapsed.

On December 15, 2008, the Securities InvestmentProtection Corporation, acting pursuant to the SecuritiesInvestor Protection Act of 1978 (“SIPA”), 15 U.S.C. §§78aaa et seq., petitioned the United States District Courtfor the Southern District of New York for a protectiveorder placing Madoff Securities into liquidation. See, e.g.,

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In re Bernard L. Madoff Inv. Sec. LLC, 740 F.3d 81, 84(2d Cir. 2014). As we previously explained:

SIPA establishes procedures for the expeditious andorderly liquidation of failed broker-dealers, andprovides special protections to their customers. Atrustee’s primary duty under SIPA is to liquidate thebroker-dealer and, in so doing, satisfy claims madeby or on behalf of the broker-dealer’s customersfor cash balances. In a SIPA liquidation, a fund of“customer property” is established—consisting of cashand securities held by the broker-dealer for the accountof a customer, or proceeds therefrom, 15 U.S.C. §78lll(4)—for priority distribution exclusively amongcustomers, id. § 78fff–2(c)(1). The Trustee allocates thecustomer property so that customers “share ratablyin such customer property ... to the extent of theirrespective net equities.” Id. § 78fff–2(c)(1)(B).

Id. at 85 (alteration in original) (citation omitted).The Southern District court issued the protective order,appointed Picard as Trustee, and referred the case tothe United States Bankruptcy Court for the Southern

District of New York. Id. at 84–85 (citing Order, SEC v.Bernard L. Madoff and Bernard L. Madoff Inv. Sec. LLC,08-10791 (LLS) (S.D.N.Y. Dec. 15, 2008), ECF No. 4).

Some debtors, such as Madoff Securities, complicate aSIPA trustee’s task by unlawfully transferring customerproperty prior to the formation of a liquidation estate. Toensure that these transfers do not prevent a trustee fromratably distributing customer property, SIPA authorizestrustees to “recover any property transferred by the debtorwhich, except for such transfer, would have been customerproperty if and to the extent that such transfer is voidableor void under the provisions of [the Bankruptcy Code].”15 U.S.C. § 78fff–2(c)(3).

The Bankruptcy Code, in turn, provides various meansfor trustees to avoid a debtor’s transfers and, to theextent that a transfer is avoided, to recover the transferred

property. See 11 U.S.C. §§ 541 et seq. Section 550(a)(1) allows trustees to recover property from the debtor’sinitial transferee. And § 550(a)(2) permits a trustee torecover property from any subsequent transferee.

Many of Madoff Securities’ direct investors were “feederfunds.” A feeder fund is an entity that pools money from

numerous investors and then places it into a “masterfund” on their behalf. A master fund—what MadoffSecurities advertised its funds to be—pools investmentsfrom multiple feeder funds and then invests the money.

Three foreign feeder fund networks that invested withMadoff Securities are relevant to many of these appeals:

*93 • Fairfield Greenwich Group is a network of fundsoperating in New York whose funds are organized inthe British Virgin Islands (“BVI”), where Fairfield isin liquidation. In those proceedings, the bankruptcycourt found, liquidators other than Picard have“brought substantially the same claims [that Picardbrings here] against substantially the same group ofdefendants to recover substantially the same transfers

[that Picard seeks to recover].” SIPC II, 2016 WL6900689, at *13.

• The Kingate Funds is a network of funds organizedin the BVI. Kingate is currently in liquidationproceedings in the BVI and Bermuda. Liquidatorsin those nations have brought substantially the sameclaims Picard brings here “against substantially thesame defendants to recover substantially the same

transfers” with “limited success.” Id. at *14.

• The Harley International (Cayman) Limited Fundsnetwork is located in the Cayman Islands, where it iscurrently in liquidation. Picard pursued some relief inthose proceedings in 2010.

Many of these feeder funds placed all or substantially allof their assets into Madoff Securities’ investment vehicles.Fairfield, for example, invested 95% of its funds withMadoff Securities.

When a feeder fund investor wants to withdraw hermoney, she effectively needs to recover it from the masterfund. The investor initiates a withdrawal by informingthe feeder fund, which itself makes a withdrawal requestfrom the master fund. The master fund then transfersthe money to the feeder fund (the initial transfer), whichsubsequently transfers the money to its investor (thesubsequent transfer).

Because Madoff Securities did not invest the moneyit received from the feeder funds, the invested fundsaccrued no actual gains, despite representations tothe contrary by Madoff Securities personnel. When a

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feeder fund’s investor initiated a withdrawal, MadoffSecurities transferred commingled investor money fromits JPMorgan Chase account in New York to the feederfund, which subsequently transferred the money to itsinvestor.

The hundreds of Appellees are foreign subsequenttransferees that invested in foreign feeder funds. Inthe bankruptcy court below, the Trustee sued theAppellees under § 550(a)(2) of the Bankruptcy Code torecover property the Appellees allegedly received from

Madoff Securities via foreign feeder funds. 3 The Trusteecontended that Madoff Securities’ initial transfers to the

feeder funds were avoidable as fraudulent under §548(a)(1)(A) of the Bankruptcy Code.

The United States District Court for the Southern Districtof New York, Judge Rakoff, withdrew the reference to thebankruptcy court to determine whether § 550(a)(2) allowsthe Trustee to recover *94 this property. In a July 2014decision, the court held on two grounds that the Trusteecould not proceed with these actions. First, it held that thepresumption against extraterritoriality limits the scope of§ 550(a)(2), such that a trustee may not use it to recoverproperty that one foreign entity received from anotherforeign entity. Second, and alternatively, the court heldthat international comity principles limit the scope of §550(a)(2) on these facts. The district court did not dismissany of the Trustee’s complaints but instead remanded tothe bankruptcy court for further proceedings consistentwith its opinion.

On remand, and following further factual development,the United States Bankruptcy Court for the SouthernDistrict of New York, Judge Bernstein, applied the districtcourt’s reasoning and dismissed the Trustee’s claimsagainst the Appellees.

First, the court dismissed the claims against the Appelleesthat invested with Fairfield, Kingate, and Harley oninternational comity grounds. The court found thatthe United States “has no interest in regulating therelationship between [these funds] and their investors orthe liquidation of [these funds] and the payment of their

investors’ claims.” SIPC II, 2016 WL 6900689, at *14.It also found that the foreign nations where those entitiesare in liquidation “[have] a greater interest [than theUnited States] in regulating the activities that gave rise tothe Trustee’s subsequent transfer claims, particularly thevalidity or invalidity of payments by [the funds] to [their]

investors and service providers.” Id. at *16; see also

id. at *14.

Second, the bankruptcy court dismissed the recoveryclaims against the remaining Appellees under thepresumption against extraterritoriality. Interpreting ourprecedent and the district court’s opinion, the bankruptcycourt concluded that the factors relevant to determiningwhether the transactions were extraterritorial were thelocations from which the transfers were made and sentand the location or residence of the initial and subsequenttransferee. The court dismissed the Trustee’s claimsbecause he had not alleged facts sufficient to support a

domestic nexus under these criteria. 4

The Trustee appealed the orders dismissing the recoveryactions. We consolidated those appeals and now resolvethem under the following principles.

DISCUSSION

We begin by unpacking the statutory scheme relevant tothese appeals.

“SIPA serves dual purposes: to protect investors, and toprotect the securities market as a whole.” In re BernardL. Madoff Inv. Sec. LLC, 654 F.3d 229, 235 (2d Cir.2011). To achieve these purposes, SIPA allows courts toappoint trustees, such as Picard, and endow them withcertain authority over liquidation estates. This authorityincludes the power to “allocate customer property of thedebtor,” 15 U.S.C. § 78fff–2(c)(1), which SIPA definesas “cash and securities ... at any time received, acquired,or held by or for the account of a debtor from or forthe securities accounts of a customer, and the proceedsof any such property transferred by the debtor, includingproperty unlawfully converted,” id. § 78lll(4).

*95 “Whenever customer property is not sufficient topay in full the claims [against the debtor], the trusteemay recover any property transferred by the debtor

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which, except for such transfer, would have been customerproperty if and to the extent that such transfer is voidableor void under the [Bankruptcy Code].” Id. § 78fff–2(c)(3).

The Trustee alleges Madoff Securities’ initial transfersto the feeder funds are avoidable as fraudulent under

§ 548(a)(1)(A) of the Bankruptcy Code. That sectionprovides:

The trustee may avoid anytransfer ... of an interest ofthe debtor in property, or anyobligation ... incurred by the debtor,that was made or incurred on orwithin 2 years before the date of thefiling of the petition, if the debtorvoluntarily or involuntarily ... madesuch transfer or incurred suchobligation with actual intent tohinder, delay, or defraud any entityto which the debtor was or became,on or after the date that such transferwas made or such obligation wasincurred, indebted ....

11 U.S.C. § 548(a)(1)(A).

Only once a transfer is avoided may a trustee recoverthe underlying property. Section 550(a), the recoveryprovision, states:

Except as otherwise provided in thissection, to the extent that a transferis avoided under section 544, 545,

547, 548, 549, 553(b), or

724(a) of this title, the trusteemay recover, for the benefit of theestate, the property transferred, or,if the court so orders, the valueof such property, from ... (1) theinitial transferee of such transfer orthe entity for whose benefit suchtransfer was made; or ... (2) any

immediate or mediate transferee ofsuch initial transferee.

Id. § 550(a). 5 Relevant here is § 550(a)(2), as the Trusteeseeks to recover property from subsequent transferees.

I. The Presumption Against ExtraterritorialityThe presumption against extraterritoriality is a canon of

statutory construction. RJR Nabisco, Inc. v. EuropeanCmty., ––– U.S. ––––, 136 S.Ct. 2090, 2100, 195 L.Ed.2d476 (2016). It provides that, “[a]bsent clearly expressedcongressional intent to the contrary, federal laws will be

construed to have only domestic application.” Id. Thiscanon helps “avoid the international discord that canresult when U.S. law is applied to conduct in foreign

countries.” Id. It also reflects the “commonsense notionthat Congress generally legislates with domestic concerns

in mind.” Id. (quoting Smith v. United States, 507U.S. 197, 204 n.5, 113 S.Ct. 1178, 122 L.Ed.2d 548 (1993)).

An action may proceed if either the statute indicatesits extraterritorial reach or the case involves a domesticapplication of the statute. The courts below found thatneither criterion was satisfied and accordingly dismissed

these actions. 6

*96 Because the reach and applicability of a statuteare questions of statutory interpretation, we review alower court’s application of the presumption against

extraterritoriality de novo. See, e.g., Roach v. Morse,440 F.3d 53, 56 (2d Cir. 2006).

A. The Focus of § 550(a) in These ActionsIs on the Debtor’s Fraudulent Transferof Property to the Initial Transferee.

The Supreme Court teaches that we must look to astatute’s “focus” to determine whether a case involves adomestic application of that statute.

If the conduct relevant to thestatute’s focus occurred in the

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United States, then the case involvesa permissible domestic applicationeven if other conduct occurredabroad; but if the conduct relevantto the focus occurred in a foreigncountry, then the case involvesan impermissible extraterritorialapplication regardless of any otherconduct that occurred in U.S.territory.

RJR Nabisco, 136 S.Ct. at 2101. The Supreme Courtrecently explained how to identify a statute’s focus inWesternGeco LLC v. ION Geophysical Corp., ––– U.S.––––, 138 S.Ct. 2129, 201 L.Ed.2d 584 (2018).

WesternGeco involved § 271(f) of the Patent Act, whichprohibits the export of component parts of a patented

product for assembly abroad. Id. at 2135 (citing 35U.S.C. § 271(f)(2)). Plaintiffs alleging infringement under

§ 271(f)(2) can recover damages under 35 U.S.C. §

284. Id. The Federal Circuit held that § 271(f) doesnot allow plaintiffs to recover for lost foreign sales andvacated a jury award premised on such damages. Id.

(citing WesternGeco LLC v. ION Geophysical Corp.,791 F.3d 1340, 1343 (Fed. Cir. 2015)). Reversing, theSupreme Court explained that “[t]he focus of a statute is‘the object of its solicitude,’ which can include the conductit ‘seeks to regulate,’ as well as the parties and interestsit ‘seeks to protect’ or vindicate.” Id. at 2137 (brackets

omitted) (quoting Morrison v. Nat’l Austl. Bank Ltd.,561 U.S. 247, 267, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010)).“When determining the focus of a statute, we do notanalyze the provision at issue in a vacuum.” Id. (citing

Morrison, 561 U.S. at 267–69, 130 S.Ct. 2869). Instead:

If the statutory provision atissue works in tandem with otherprovisions, it must be assessed inconcert with those other provisions.Otherwise, it would be impossibleto accurately determine whether theapplication of the statute in thecase is a “domestic application.”

And determining how the statute hasactually been applied is the wholepoint of the focus test.

Id. (citation omitted) (citing RJR Nabisco, 136 S.Ct. at2101).

Applying this principle, the Court identified the“overriding purpose” of the damages provision, § 284, asa remedy for infringement, because it asks how much aplaintiff is due because of infringement. See id. (quotingGeneral Motors Corp. v. Devex Corp., 461 U.S. 648, 655,103 S.Ct. 2058, 76 L.Ed.2d 211 (1983)General MotorsCorp. v. Devex Corp., 461 U.S. 648, 655, 103 S.Ct. 2058, 76L.Ed.2d 211 (1983)). But because there is more than oneway to infringe, the focus of § 284 depends on “the type ofinfringement that occurred.” See id. In WesternGeco, that

meant turning to § 271(f)(2), which the Court foundfocuses on domestic conduct because it regulates “thedomestic act of ‘suppl[ying] in or from the United States.’ ”

Id. at 2137–38 (brackets in original) (quoting 35 U.S.C.§ 271(f)(2)).

Thus, the Court held that “the focus of § 284, in a case

involving infringement under § 271(f)(2), is on theact of exporting components from the United States,”which is “domestic infringement.” *97 Id. at 2138. Itrejected an argument that the statute focuses on damages,even though it authorizes them, because “what a statuteauthorizes is not necessarily its focus.” Id. Instead, theCourt found that damages are “merely the means by whichthe statute achieves its end of remedying infringements.”Id.

WesternGeco helps resolve two issues relevant tothese cases: (1) whether we should look to the

pertinent avoidance provision (here, § 548(a)(1)(A)) indetermining the focus of § 550(a), and (2) the focus of §550(a) in these actions.

1. We Must Look to § 548(a)(1)(A) toDetermine the Focus of § 550(a) in These Cases

Because the Provisions Work “In Tandem.”

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No one disputes that, in an action where a trustee seeks torecover property under § 550(a), we must at a minimumlook to that section. The dispute is whether we mustadditionally look to the avoidance provision that enablesa trustee’s recovery. Section 550(a) applies only “to theextent that a transfer is avoided under section 544, 545,

547, 548, 549, 553(b), or 724(a) of this title.”11 U.S.C. § 550(a). In other words, a trustee cannot use§ 550(a) to recover property unless the trustee has firstavoided a transfer under one of these provisions.

Like the infringement and damages provisions of thePatent Act, the Bankruptcy Code’s avoidance andrecovery provisions work “in tandem.” See WesternGeco,138 S.Ct. at 2137. In any given case, “it would beimpossible to accurately determine” the focus of § 550(a)without asking why a trustee can use it—i.e., the purposeof the avoidance provision that enables the recoveryaction. See id. (“[D]etermining how the statute hasactually been applied is the whole point of the focus test.”).Just as the focus of § 284 of the Patent Act depends onthe infringement provision that enables a plaintiff to seekdamages, the focus of § 550(a) of the Bankruptcy Codedepends on the avoidance provision that enables a trusteeto recover property.

Thus, to determine § 550(a)’s focus in a given action, acourt must also look to the relevant avoidance provision.

2. When Working In Tandem with §548(a)(1)(A), § 550(a) Regulates a Debtor’s

Fraudulent Transfer of Property, and It ThereforeFocuses on the Debtor’s Initial Transfer.

The focus of a statute is the conduct it seeks to regulate,as well as the parties whose interests it seeks to protect.See id. The district court found that § 550(a) focuses on“the property transferred” and “the fact of its transfer.”

SIPC I, 513 B.R. at 227. On this theory, it concludedthat a recovery action under § 550(a)(2) regulates thesubsequent transfer of property: that from the initialtransferee to the subsequent transferee.

But the harm to the estate as a result of its unlawful

depletion began with the initial transfer. Section 548(a)(1)(A) allows a trustee to “avoid any transfer ... of

an interest of the debtor in property” that the debtor“made ... with actual intent to hinder, delay, or defraudany entity to which the debtor was or became, on or afterthe date that such transfer was made or such obligation

was incurred, indebted.” 11 U.S.C. § 548(a)(1)(A). Ageneral purpose of “the Bankruptcy Code’s avoidance

provisions, including 11 U.S.C. § 548, [is] protect[ing]a debtor’s estate from depletion to the prejudice of the

unsecured creditor.” In re Harris, 464 F.3d 263, 273

(2d Cir. 2006) (Sotomayor, J.) (agreeing with In re

French, 440 F.3d 145, 150 (4th Cir. 2006)). Thus, §548(a)(1)(A)’s purpose *98 is plain: it allows a trustee,for the protection of an estate and its creditors, toavoid a debtor’s fraudulent, hindersome, or delay-causing

property transfer that depletes the estate. See In re

French, 440 F.3d at 150 (“[ Section] 548 focuses not onthe property itself, but on the fraud of transferring it.”).

Section 550(a) works in tandem with § 548(a)(1)(A)by enabling a trustee to recover fraudulently transferredproperty. Recovery is the business end of avoidance.In that sense, § 550(a) “is a utility provision, helping

execute the policy of § 548[ (a)(1)(A) ]” by “tracingthe fraudulent transfer to its ultimate resting place (theinitial or subsequent transferee).” Edward R. Morrison,Extraterritorial Avoidance Actions: Lessons from Madoff,9 Brook. J. Corp. Fin. & Com. L. 268, 273 (2014); see

also In re Ampal-Am. Israel Corp., 562 B.R. 601, 613(Bankr. S.D.N.Y. 2017) (Bernstein, J.) (finding that whenusing § 550(a), “the trustee is essentially tracing propertyinto the hands of the recipient—no different than a trusteeunder non-bankruptcy law”).

We hold that, in recovery actions where a trusteealleges a debtor’s transfers are avoidable as fraudulent

under § 548(a)(1)(A), § 550(a) regulates the fraudulent

transfer of property depleting the estate. 7 While § 550(a)authorizes recovery, “what a statute authorizes is notnecessarily its focus.” WesternGeco, 138 S.Ct. at 2138.

When § 550(a) operates in tandem with § 548(a)(1)(A),recovery of property is “merely the means by which thestatute achieves its end of” regulating and remedying thefraudulent transfer of property. See id.

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Thus, in actions involving both provisions, § 550(a)regulates the debtor’s initial transfer. While thesubsequent transfer may indirectly harm creditors bymaking property more difficult to recover, it is theinitial transfer that fraudulently depletes the estate. Onlythe initial transfer involves fraudulent conduct, or anyconduct, by the debtor.

The language of § 548(a)(1)(A) reflects this focus. Itallows a trustee to avoid certain transfers “the debtor

voluntarily or involuntarily ... made.” 11 U.S.C. §548(a)(1)(A) (emphasis added). This can mean only theinitial transfer, because the debtor has not made thesubsequent transfer. Consequently, when a trustee seeksto recover subsequently transferred property under §550(a), the only transfer that must be avoided is the

debtor’s initial transfer. See Sec. Inv’r Prot. Corp. v.Bernard L. Madoff Inv. Sec. LLC, 480 B.R. 501, 524(Bankr. S.D.N.Y. 2012) (“[A]s a court’s recovery power isgenerally coextensive with its avoidance power, it is logicalthat the relevant transfer for purposes of the presumptionagainst extraterritoriality is only the transfer that is to beavoided, namely the initial transfer.” (quotation marksomitted)); see also *99 Sec. Inv’r Prot. Corp. v. BernardL. Madoff Inv. Sec. LLC, 501 B.R. 26, 30 (S.D.N.Y. 2013).

Two Supreme Court decisions reinforce this conclusion.In WesternGeco, the Court found that “the focus of § 284,

in a case involving infringement under § 271(f)(2), is onthe act of exporting components from the United States.”138 S.Ct. at 2138. Here, the focus of § 550(a), in a case

involving fraudulent transfers avoidable under § 548(a)(1)(A), is on the debtor’s act of transferring property from

the United States. In Morrison, the Court held that§ 10(b) of the Securities Exchange Act of 1934 regulates“deceptive conduct in connection with the purchaseor sale of [certain] securit[ies],” meaning the statute

focuses on “purchase-and-sale transactions.” 561 U.S.at 266–67, 130 S.Ct. 2869 (quotation marks omitted). Byanalogy, § 550(a) regulates a debtor’s unlawful conduct—its fraudulent transfer of property. The statute thusfocuses on that initial transfer, rather than the subsequenttransfer made by the feeder fund.

The lower courts held, and the Appellees now argue,that the relevant Bankruptcy Code provisions regulate

the subsequent transfer of property. Their readings

erroneously overlook how § 548(a)(1)(A) shapes thefocus of § 550(a) here.

The district court, for example, correctly recognizedthat the extraterritoriality analysis must consider “theregulatory focus of the Bankruptcy Code’s avoidance

and recovery provisions.” SIPC I, 513 B.R. at 227(emphasis added). And while we agree with the court’s

finding that § 548(a)(1)(A) “focuses on the nature of the

transaction in which property is transferred,” id., wereject its conclusion that the appropriate “transaction” todetermine the extraterritoriality question is the subsequent

transfer. The only transfer § 548(a)(1)(A) is concernedwith is the initial transfer, as this is the only transfer “the

debtor ... made.” See 11 U.S.C. § 548(a)(1)(A).

The Appellees would have us ignore § 548(a)(1)(A)entirely and look only to § 550(a)(2). For the reasons statedabove, we refuse to “analyze the provision at issue in a

vacuum.” See WesternGeco, 138 S.Ct. at 2137. 8

B. These Actions Involve Domestic Applicationsof the Bankruptcy Code Because § 550(a)Focuses on Regulating Domestic Conduct.

Recognizing that, in these actions, § 550(a) focuseson the debtor’s initial transfer of property, we mustdecide whether Madoff Securities’ transfers took place inthe United States such that regulating them involves adomestic application of that statute. The lower courts,assuming the relevant transaction was the subsequenttransfer, weighed the location of the account from whichand to which the subsequent transfer was made, and thelocation or residence of the subsequent transferor and

transferee. See SIPC II, 2016 WL 6900689, at *25. Wedecline to adopt this balancing test.

We hold that a domestic debtor’s allegedly fraudulent,hindersome, or delay-causing transfer of property fromthe United States is domestic activity for the purposes of

§§ 548(a)(1)(A) and 550(a). 9 *100 The presumptionagainst extraterritoriality therefore does not prohibit thatdebtor’s trustee from recovering such property using §

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550(a), regardless of where any initial or subsequenttransferee is located.

Our rule follows the Supreme Court’s instruction thatwe look to “the conduct relevant to the statute’s focus.”

See, e.g., RJR Nabisco, 136 S.Ct. at 2101. The relevantconduct in these actions is the debtor’s fraudulent transferof property, not the transferee’s receipt of property. Whena domestic debtor commits fraud by transferring propertyfrom a U.S. bank account, the conduct that § 550(a)regulates takes place in the United States.

That resolves these cases. Madoff Securities is a domesticentity, and the Trustee alleges it fraudulently transferredproperty to the feeder funds from a U.S. bank account.These transfers are domestic activity. Because § 550(a)therefore regulates domestic conduct, these cases involvedomestic applications of the statute.

Factoring the transferee’s receipt of property into ouranalysis would not only misread the Bankruptcy Code’savoidance and recovery provisions, but also open aloophole. One can imagine a fraudster who, anticipatinghis downfall, gives his entity’s property to friends andfamily members before a court freezes its assets. TheBankruptcy Code’s avoidance and recovery provisionsordinarily allow a trustee to claw back this property.But what would happen if the fraudster transferred theproperty to a foreign entity that then transferred it toanother foreign entity? Under the Appellees’ theory of §550(a), that transfer would make the property recovery-proof, even if the subsequent foreign transferee then sentthe property to someone located in the United States.The presumption against extraterritoriality is not “a limitupon Congress’s power to legislate,” but a canon ofconstruction meant to guide our understanding of a

statute’s meaning. See Morrison, 561 U.S. at 255,130 S.Ct. 2869. We cannot imagine how it should guideus to read the Bankruptcy Code’s creditor-protectionprovisions in this self-defeating way.

* * *

The lower courts erred by dismissing these actions underthe presumption against extraterritoriality. Because wefind that these cases involve a domestic application of §550(a), we express no opinion on whether § 550(a) clearlyindicates its extraterritorial application.

II. International ComityThe second issue is whether the district court erroneouslydismissed these actions on international comity grounds.We apply international comity principles in two ways:“[first,] as a canon of construction, [comity] might shortenthe reach of a statute; [and] second, [comity] may beviewed as a discretionary act of deference by a nationalcourt to decline to exercise jurisdiction in a case properlyadjudicated in a foreign state, the so-called comity among

courts.” In re Maxwell Commc’n Corp. plc by Homan,93 F.3d 1036, 1047 (2d Cir. 1996). The first applicationis “prescriptive comity” and asks a question of statutoryinterpretation: should a court presume that Congress, outof respect for foreign sovereigns, limited the application of

domestic law on a given set of facts? See Hartford FireIns. Co. v. California, 509 U.S. 764, 817, 113 S.Ct. 2891,125 L.Ed.2d 612 (1993) (Scalia, J., dissenting). The secondapplication is “adjudicative comity.” It asks whether,where *101 a statute might otherwise apply, a courtshould nonetheless abstain from exercising jurisdiction indeference to a foreign nation’s courts that might be a more

appropriate forum for adjudicating the matter. See id.;

see also Royal & Sun All. Ins. Co. of Canada v. CenturyInt’l Arms, Inc., 466 F.3d 88, 93 (2d Cir. 2006).

We have previously declined to decide whetherprescriptive and adjudicative comity are “distinct

doctrines.” See In re Maxwell, 93 F.3d at 1047.Although prescriptive and adjudicative comity sometimes

demand similar analysis, 10 each asks a different questionand is rooted in a different legal theory. We therefore treat

them as distinct doctrines, albeit related ones. 11

This distinction reveals the appropriate standard of reviewfor a lower court’s order dismissing a case on internationalcomity grounds. Prescriptive comity poses a question ofstatutory interpretation. We review those questions de

novo. 12 See, e.g., Roach, 440 F.3d at 56. Adjudicativecomity abstention, on the other hand, concerns a matterof judicial discretion. We thus review adjudicative comity

dismissals for abuse of discretion. See, e.g., Royal &Sun, 466 F.3d at 92. “However, because we are reviewinga court’s decision to abstain from exercising jurisdiction,our review is ‘more rigorous’ than that which is generally

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employed under the abuse-of-discretion standard.” Id.

(quoting *102 Hachamovitch v. DeBuono, 159 F.3d687, 693 (2d Cir. 1998)). Thus, “[i]n review of decisionsto abstain, there is little practical distinction between

review for abuse of discretion and review de novo.” Id.

(quoting Altos Hornos, 412 F.3d at 422–23). 13

The lower courts held that comity principles require“choice-of-law analysis to determine whether theapplication of U.S. law would be reasonable under thecircumstances, comparing the interests of the United

States and the relevant foreign state.” SIPC I, 513

B.R. at 231 (citing In re Maxwell, 93 F.3d at 1047–48). This is a question of prescriptive comity because itasks whether domestic law applies, rather than whetherour courts should abstain from exercising jurisdiction. Thebankruptcy court and both parties agree with this framing.We therefore analyze the lower courts’ decisions through

the lens of prescriptive comity. 14

* * *

At the threshold, “[i]nternational comity comes into playonly when there is a true conflict between American law

and that of a foreign jurisdiction.” In re Maxwell, 93F.3d at 1049. A true conflict exists if “compliance with theregulatory laws of both countries would be impossible.”

Id. at 1050 (citing Hartford Fire, 509 U.S. at 799, 113

S.Ct. 2891). In re Maxwell held that “a conflict betweentwo avoidance rules exists if it is impossible to distributethe debtor’s assets in a manner consistent with both rules.”

Id. 15

The record is unclear about whether issues litigated inthe feeder funds’ liquidation proceedings abroad wouldyield outcomes irreconcilable with the relief the Trustee

demands in these cases. 16 While the Appellees allege thatthere are conflicts, we merely assume without deciding

that these conflicts exist. 17

*103 Prescriptive comity “guides our interpretationof statutes that might otherwise be read to apply to

[extraterritorial] conduct.” Id. at 1047. The doctrinedoes not require clear evidence that a statute does not

reach extraterritorial conduct. Id. Rather, the doctrineis “simply a rule of construction” and “has no application

where Congress has indicated otherwise.” Id.

Comity in bankruptcy proceedings is “especially

important” for two reasons. Id. at 1048. “First,deference to foreign insolvency proceedings will, inmany cases, facilitate ‘equitable, orderly, and systematic’

distribution of the debtor’s assets.” Id. (quoting

Cunard S.S. Co. v. Salen Reefer Servs. AB, 773F.2d 452, 458 (2d Cir. 1985)). “Second, Congressexplicitly recognized the importance of the principlesof international comity in transnational insolvency

situations when it revised the bankruptcy laws.” Id.

(citing 11 U.S.C. § 304 (repealed 2005)). In light of theseconsiderations, “U.S. courts should ordinarily decline toadjudicate creditor claims that are the subject of a foreign

bankruptcy proceeding,” Altos Hornos, 412 F.3d at424, because “[t]he equitable and orderly distributionof a debtor’s property requires assembling all claims

against the limited assets in a single proceeding,” id.

(brackets in original) (quoting Finanz AG Zurich v.Banco Economico S.A., 192 F.3d 240, 246 (2d Cir. 1999)).

To enforce these principles, In re Maxwell announceda choice-of-law test. This test “takes into account theinterests of the United States, the interests of the foreignstate, and those mutual interests the family of nations havein just and efficiently functioning rules of international

law.” In re Maxwell, 93 F.3d at 1048.

The United States has a compelling interest in allowingdomestic estates to recover fraudulently transferredproperty. The prospect of recovery assures creditors andinvestors that they will receive their fair share of propertyin the event an American entity enters into bankruptcyor liquidation. Providing this safeguard is an importantgoal of the Bankruptcy Code’s avoidance and recovery

provisions. See, e.g., Universal Church v. Geltzer, 463F.3d 218, 224 (2d Cir. 2006) (noting that a result that

would undermine § 548(a)(2)’s avoidance provision“would be absurd because it would defeat the entirepurpose of allowing trustees to protect and enhancethe estate by avoiding [unlawful] transfers”). These

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features consequently benefit the American economy bymaking domestic entities more attractive to creditorsand investors. Protecting these individuals, and thereforeprotecting our securities market, are the key purposes ofSIPA. See In re Madoff Securities, 654 F.3d at 235.

When a debtor in American courts is also in liquidationproceedings in a foreign court, the foreign state has atleast some interest in adjudicating property disputes. Inappropriate cases, that interest will trump our own. See

In re Maxwell, 93 F.3d at 1052. But no such parallelproceedings exist here—the feeder funds, not Madoff

Securities, are the debtors in the foreign courts. 18 And theabsence of such *104 proceedings seriously diminishesthe interest of any foreign state in our resolution of the

Trustee’s claims. 19

The only foreign jurisdictions potentially interested inthese disputes are those where a feeder fund that served asan initial transferee is in liquidation. But these interests arenot compelling. Although “U.S. courts should ordinarilydecline to adjudicate creditor claims that are the subject

of a foreign bankruptcy proceeding,” Altos Hornos,412 F.3d at 424, the Trustee is not a creditor and hisclaims are not the subject of a foreign bankruptcy or

liquidation proceeding, see SIPC II, 2016 WL 6900689,at *12 (“[T]here are no parallel foreign avoidance actionsin which the Trustee seeks to recover from the SubsequentTransferees.”).

Nor is the Trustee duplicating the liquidations of thefeeder funds. The proceedings have different means andgoals. The Trustee’s task is tracing property of the estateto net winners among the feeder funds’ investors. Butthe feeder funds’ liquidations proceed under those funds’organizing documents, which are unlikely to discriminatebetween net winners and net losers.

Further, we defer to foreign liquidation proceedingsbecause “[t]he equitable and orderly distribution of adebtor’s property requires assembling all claims against

the limited assets in a single proceeding.” Altos Hornos,

412 F.3d at 424 (quoting Finanz AG, 192 F.3d at 246).This rationale makes sense where a creditor, unable torecover against a debtor in foreign court, attempts to doso in our courts. But in these cases, domestic law is alsoconcerned with “equitable and orderly distribution”—of

the Madoff Securities estate. Consolidating the Trustee’sclaims in federal court is more “equitable and orderly”than forcing him to litigate different claims in differentcountries. SIPA and the Bankruptcy Code envision aunified proceeding, and we would frustrate this goal if welimited the reach of § 550(a) in these actions.

This is not to say the nations adjudicating the feederfunds’ liquidations have no interest in these disputes.Those nations may wish to ensure that the feeder funds’creditors can recover as much property as possible. Ifthe Trustee succeeds in these recovery actions, his successmight frustrate the efforts of those entities’ trustees torecover the same property in foreign court.

But those are not the comity concerns our precedentdiscusses in explaining when and why the BankruptcyCode should give way to foreign law. Nor do we findthem compelling enough to limit the reach of a federalstatute that would otherwise apply here. The BankruptcyCode gives us no reason to think Congress would havedecided that trustees looking to recover property indomestic proceedings are out *105 of luck when trusteesin foreign proceedings may be interested in recovering thesame property. In fact, § 550(a)(2) suggests the opposite:that by allowing trustees to recover property from evenremote subsequent transferees, Congress wanted theseclaims resolved in the United States, rather than throughpiecemeal proceedings around the world.

We therefore hold that the United States’ interest inapplying its law to these disputes outweighs the interestof any foreign state. Prescriptive comity poses no barto recovery when the trustee of a domestic debtor uses§ 550(a) to recover property from a foreign subsequenttransferee on the theory that the debtor’s initial transfer ofthat property from within the United States is avoidable

under § 548(a)(1)(A), even if the initial transferee is inliquidation in a foreign nation.

The lower courts, erroneously focusing on the subsequenttransfer, found that the jurisdictions adjudicating thefeeder funds’ liquidations had a greater interest inresolving these disputes than the United States. Thebankruptcy court, for example, concluded that “[t]heUnited States has no interest in regulating the relationshipbetween the [feeder funds] and their investors or theliquidation of the [feeder funds] and the payment of their

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investors’ claims.” SIPC II, 2016 WL 6900689, at *14.It did so by assuming “[t]he United States’ interest ispurely remedial; the Bankruptcy Code allows the Trusteeto follow the initial fraudulent transfer into the hands of

a subsequent transferee.” Id.

This conclusion rests on incorrect premises: that we shouldlook only to § 550(a), assume the United States has purelyremedial interests, and focus on the subsequent transfer of

property. As we have explained, § 548(a)(1)(A) informs§ 550(a)’s focus in these actions. That focus is on regulatingand remedying a debtor’s fraudulent transfer of property,and this means the relevant transfer is the debtor’s initialtransfer. The domestic nature of those transfers, and ournation’s compelling interest in regulating them, tips the

scales of In re Maxwell’s choice-of-law test in favor ofdomestic adjudication.

The district court found that “investors in these foreignfunds had no reason to expect that U.S. law would apply

to their relationships with the feeder funds.” SIPC I,513 B.R. at 232. But the court’s premise is inaccurate.U.S. law is not regulating the investors’ relationships withthe feeder funds. It is regulating the debtor’s propertytransfers to the feeder funds. Although regulating thesetransfers with recovery actions will affect the subsequenttransferees, that consequence should not unfairly surprisethem. When these investors chose to buy into feeder funds

that placed all or substantially all of their assets withMadoff Securities, they knew where their money wasgoing.

Finally, the district court observed that “the defendantshere have no direct relationship” with Madoff Securities.

Id. But the reason § 550(a)(2)’s tracing provision appliesto subsequent transferees is ensuring that a trustee canrecover from entities with no direct relationship to thedebtor. If the directness of a transfer were relevant to atrustee’s ability to recover property under § 550(a)(2), wecannot see how a trustee could ever recover property fromany subsequent transferee, foreign or domestic.

In sum, we find that prescriptive comity considerations donot limit the reach of the Bankruptcy Code provisions inthese actions.

CONCLUSION

We VACATE the bankruptcy court’s judgmentsdismissing these actions and *106 REMAND for furtherproceedings consistent with this opinion.

All Citations

917 F.3d 85

Footnotes1 Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (SIPC I ), 513 B.R. 222 (S.D.N.Y.), supplemented by 12-

MC-115, 2014 WL 3778155 (S.D.N.Y. July 28, 2014).

2 Sec. Inv’r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC (SIPC II ), AP 08-01789 (SMB), 2016 WL 6900689 (Bankr.S.D.N.Y. Nov. 22, 2016).

3 The Appellees contest whether the money the feeder funds sent them came entirely from Madoff Securities. For thepurpose of these appeals, however, the Appellees assume that the Trustee could trace the money back to MadoffSecurities. We make the same assumption.

4 The court also found that some feeder funds had no connection to their country of organization, were managed andoperated in the United States, and made their subsequent transfers from New York. It denied the motions to dismiss theactions involving their subsequent transfers and granted the Trustee leave to amend so he could show whether thosetransactions were domestic.

5 Section 550(b) limits a trustee’s ability to recover under § 550(a)(2) from certain subsequent transferees who receivedproperty in good faith.

6 Although the Supreme Court has referred to this extraterritoriality analysis as a “two-step framework,” these “steps”

need not be sequential. See id. at 2101 & n.5. Courts generally begin by asking whether the statute indicatesits extraterritorial reach, but they are free “in appropriate cases” to begin by asking whether the case involves an

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extraterritorial application of the statute. Id. at 2101 n.5. This is an appropriate case for beginning with the latterquestion because we hold that the transactions here were domestic, and the extraterritorial reach of a statute is of nomoment when a case is truly a domestic matter.

7 Section 548(a)(1)(A) allows a trustee to avoid a transfer on three grounds: that the debtor had “actual intent to [1]hinder, [2] delay, or [3] defraud any entity to which the debtor was or became ... indebted.” While this opinion concernsthe third ground, we would apply the same logic in a case where a trustee sought to avoid transfers on the theory thatthe debtor sought to “hinder” or “delay” an entity. For example, if a trustee alleged that a debtor made a transfer intendedto delay an entity, the focus of § 550(a) in that action would be on the delay-causing transfer of property that depletesthe estate.Section 550(a) may serve different purposes depending on which of the Bankruptcy Code’s avoidance provisions enables

recovery. We express no opinion on the focus of § 550(a) in actions involving any avoidance provision other than §548(a)(1)(A).

8 The Trustee contends that certain provisions of SIPA provide additional reasons for us to find that § 550(a) focuses ondomestic conduct in these actions. Because we reach that holding without looking to SIPA, we express no opinion onwhether SIPA is relevant to the focus of the Bankruptcy Code’s avoidance and recovery provisions in cases where SIPAtrustees seek to use them.

9 We recognize that our holding cites two nexuses to the United States: (1) the debtor is a domestic entity, and (2) thealleged fraud occurred when the debtor transferred property from U.S. bank accounts. We express no opinion on whethereither factor standing alone would support a finding that a transfer was domestic.

10 In particular, the existence of parallel proceedings can factor into both doctrines. Compare In re Maxwell, 93 F.3dat 1048, 1052 (holding, in the context of applying a prescriptive comity choice-of-law test, that the existence of parallel

foreign proceedings can factor into a foreign state’s interest in applying its law to a dispute), with Royal & Sun, 466 F.3dat 92 (explaining, as a principle of adjudicative comity, that the existence of parallel foreign proceedings is sometimes afactor weighing in favor of abstention). Thus, while this opinion focuses on prescriptive comity, we occasionally look toour adjudicative comity precedent in assessing the weight of any foreign state’s interest in applying its law.

11 Numerous courts and scholars have done the same. See, e.g., Hartford Fire Ins. Co., 509 U.S. at 817, 820, 113 S.Ct.

2891 (Scalia, J., dissenting); Mujica v. AirScan Inc., 771 F.3d 580, 598 (9th Cir. 2014) (“There are essentially twodistinct doctrines [that] are often conflated under the heading international comity.” (quotation marks omitted) (quoting

In re S. African Apartheid Litig., 617 F.Supp.2d 228, 283 (S.D.N.Y. 2009)); Maggie Gardner, Retiring Forum Non

Conveniens, 92 N.Y.U. L. Rev. 390, 392 (2017); see also Royal & Sun, 466 F.3d at 92 (describing these doctrines

as different) (citing Joseph Story, Commentaries on the Conflict of Laws § 38 (1834)); JP Morgan Chase Bank v.Altos Hornos de Mexico, S.A. de C.V., 412 F.3d 418, 424 (2d Cir. 2005) (“International comity, as it relates to this case,involves not the choice of law but rather the discretion of a national court to decline to exercise jurisdiction over a casebefore it when that case is pending in a foreign court with proper jurisdiction.”).

12 The question of whether we review prescriptive comity dismissals de novo or for abuse of discretion arose in In reMaxwell, 93 F.3d at 1051. Although this Court hinted that de novo review should apply, we declined to decide the issue

because the parties did not dispute the appropriate standard of review. See id. (noting that “[b]ecause the doctrine intheory is relevant to construing a statute’s reach, one might expect that [we should apply] de novo review”). The Appelleesdispute the appropriate standard here, but their advocacy for abuse-of-discretion review relies on inapposite adjudicative

comity cases. See Appellee Br. 27 (citing, e.g., In re Vitamin C Antitrust Litig., 837 F.3d 175, 182 (2d Cir. 2016) (“Wehold that the district court abused its discretion by not abstaining, on international comity grounds ....”), vacated on othergrounds by Animal Sci. Prods., Inc. v. Hebei Welcome Pharm. Co. Ltd., ––– U.S. ––––, 138 S.Ct. 1865, 201 L.Ed.2d

225 (2018); Altos Hornos, 412 F.3d at 422 (“Declining to decide a question of law on the basis of international comityis a form of abstention, and we review a district court’s decision to abstain on international comity grounds for abuseof discretion.”)).

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13 The Appellees argue that the higher standard of review announced in Royal & Sun does not bind us, either because

that case relied on a decision applying its rule to Burford abstention or because Royal & Sun “has been superseded”

by later cases. Appellee Br. 28–29; see also Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943).

Both points are wrong. Royal & Sun itself was not a Burford case; it involved adjudicative comity abstention. See

466 F.3d at 92. And the argument that our subsequent cases not using Royal & Sun’s “more rigorous” language

silently “superseded” that case is a nonstarter. See, e.g., Veltri v. Bldg. Serv. 32B-J Pension Fund, 393 F.3d 318,327 (2d Cir. 2004) (“One panel of this Court cannot overrule a prior decision of another panel, unless there has beenan intervening Supreme Court decision that casts doubt on our controlling precedent.” (citation, brackets, and quotationmarks omitted)).

14 In a footnote, the Appellees separately argue that we should decline to exercise jurisdiction on adjudicative comitygrounds. See Appellee Br. 68 n.33. “We do not consider an argument mentioned only in a footnote to be adequately

raised or preserved for appellate review.” United States v. Restrepo, 986 F.2d 1462, 1463 (2d Cir. 1993) (per curiam).

15 In that decision, the panel found a true conflict between English and domestic law because “the parties ... assumed that ...

English law would dictate a different distributional outcome than would United States law.” Id.

16 The district court found that BVI courts had “already determined that Fairfield Sentry could not reclaim transfers madeto its customers under certain common law theories” and found this conclusion in conflict with the relief the Trustee now

demands. SIPC I, 513 B.R. at 232. The Trustee disputes this finding. We decline to decide whether this allegationestablishes a true conflict between domestic and foreign law.

17 These consolidated appeals involve hundreds of Appellees that invested with numerous feeder funds, each involved inits own dispute below. Whether domestic adjudication would conflict with foreign adjudication may turn on different factsin different cases. The parties did not adequately brief us on how we should analyze these distinctions under our comityprecedent. We therefore decline to address the issue.

18 We agree with Judge Batts, who employed similar reasoning in declining to dismiss class actions brought by Kingateinvestors against managers, consultants, administrators, and auditors associated with Kingate on adjudicative comitygrounds:

Although Defendants are correct that under Second Circuit law, foreign bankruptcy proceedings are generally givenextra deference, ... it is the [Kingate] Funds, rather than the Defendants, who are in liquidation in BVI and Bermuda.Thus, it is not clear that the normal justification for deferring to foreign bankruptcy proceedings, to allow “equitable andorderly distribution of a debtor’s property,” would apply under these circumstances.

In re Kingate Mgmt. Ltd. Litig., 09-5386 (DAB), 2016 WL 5339538, at *35 (S.D.N.Y. Sept. 21, 2016) (citations andfootnote omitted), affirmed, 746 Fed.Appx. 40 (2d Cir. 2018).

19 In re Maxwell itself emphasized the importance of parallel foreign proceedings to its holding. See 93 F.3d at 1052(“In the present case, in which there is a parallel insolvency proceeding taking place in another country, failure to apply

§ 547 and § 502(d) does not free creditors from the constraints of avoidance law, nor does it severely undercutthe policy of equal distribution. ... [But] a different result might be warranted were there no parallel proceeding [abroad]—and, hence, no alternative mechanism for voiding preferences ....” (emphasis added)).

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In re Speer, --- Fed.Appx. ---- (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

2019 WL 974674Only the Westlaw citation is currently available.

This case was not selected forpublication in West's Federal Reporter.

RULINGS BY SUMMARY ORDER DO NOT HAVEPRECEDENTIAL EFFECT. CITATION TO A

SUMMARY ORDER FILED ON OR AFTER JANUARY1, 2007, IS PERMITTED AND IS GOVERNED BYFEDERAL RULE OF APPELLATE PROCEDURE32.1 AND THIS COURT'S LOCAL RULE 32.1.1.

WHEN CITING A SUMMARY ORDER IN ADOCUMENT FILED WITH THIS COURT, A PARTY

MUST CITE EITHER THE FEDERAL APPENDIXOR AN ELECTRONIC DATABASE (WITH THE

NOTATION "SUMMARY ORDER"). A PARTY CITINGA SUMMARY ORDER MUST SERVE A COPY OF IT

ON ANY PARTY NOT REPRESENTED BY COUNSEL.United States Court of Appeals, Second Circuit.

IN RE: SPEER, Debtor.Sheri Speer, Appellant,

v.

Seaport Capital Partners, Appellee. 1

17-1440-bk (L)|

17-1444-bk (Con.)|

17-1447-bk (Con.)|

February 27, 2019

Appeals from the United States District Court for theDistrict of Connecticut (Chatigny, J.).

ON CONSIDERATION WHEREOF, IT IS HEREBYORDERED, ADJUDGED, AND DECREED that thejudgments and orders of said District Court be and herebyare AFFIRMED.

Attorneys and Law Firms

Appearing for Appellant: Sheri Speer, Pro Se, Norwich,CT.

Appearing for Appellee: Patrick W. Boatman, EastHartford, CT.

Present: ROSEMARY S. POOLER, RAYMOND J.LOHIER, JR., SUSAN L. CARNEY, Circuit Judges.

SUMMARY ORDER

Appellant Sheri Speer appeals from the followingjudgments and orders of the United States District Courtfor the District of Connecticut (Chatigny, J.): the July13, 2016, judgment affirming the bankruptcy court’sorder denying Speer’s motion to quash Seaport CapitalPartners’ (“Seaport”) subpoena seeking financial recordsfrom People’s United Bank, N.A. and the March 30,2017, order denying Speer’s motion for reconsiderationof the same (No. 17-1440); the July 13, 2016, judgmentaffirming the bankruptcy court’s order denying Speer’smotion to quash Seaport’s subpoena seeking financialrecords from Bank of America, N.A. and the March 30,2017, order denying Speer’s motion for reconsiderationof the same (No. 17-1444); and the August 10, 2016,judgment dismissing Speer’s appeal from the bankruptcycourt’s order denying Speer’s motion to quash Seaport’ssubpoena seeking financial records from Liberty Bankand the March 30, 2017, order denying Speer’s motion forreconsideration of the same (No. 17-1447). We assume theparties’ familiarity with the underlying facts, proceduralhistory, and specification of issues for review.

Speer principally raises three arguments in these appeals:first, that the bankruptcy court should have quashed thesubpoenas because of Seaport’s purported failure to servethem on her before serving them on the banks, as sheasserts is required under Rules 30 and 45 of the FederalRules of Civil Procedure; second, that the subpoenas areoverbroad; and third, that the bankruptcy court shouldhave quashed the subpoenas to protect Speer’s privacyinterests in the information Seaport sought. With respectonly to the appeal in No. 17-1447, Seaport argues thatthe district court properly dismissed Speer’s appeal andlikewise properly denied her motion for reconsideration.

“We exercise plenary review over a district court’saffirmance of a bankruptcy court’s decision, reviewingde novo the bankruptcy court’s conclusions of law, andreviewing its findings of fact for clear error.” AZN Sec.,Inc. v. Giddens ( In re Lehman Bros. Inc.), 808 F.3d 942,946 (2d Cir. 2015) (internal quotation marks omitted).In light of the “wide discretion in its handling of pre-trial discovery” a trial court enjoys, we will reverse a

In re Speer, --- Fed.Appx. ---- (2019)

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bankruptcy court’s decision to deny a motion to quasha subpoena “only upon a clear showing of an abuse of

discretion.” DG Creditor Corp. v. Dabah ( In re DGAcquisition Corp.), 151 F.3d 75, 79 (2d Cir. 1998) (internalquotation marks omitted).

To the extent that Speer has properly preserved herarguments regarding Seaport’s purported failure toprovide her with advance notice of the subpoenas, herarguments are without merit. Federal Rule of CivilProcedure 45 required Seaport to serve on Speer “anotice and a copy of the subpoena[s]” before it servedthe subpoenas on the respective banks. Fed. R. Civ. P.45(a)(4); see also Fed. R. Bankr. P. 9016 (making FederalRule of Civil Procedure 45 applicable to bankruptcyproceedings).

*2 Here, however, Speer has not made a clearshowing that the bankruptcy court exceeded the boundsof its discretion because she has not explained howSeaport’s purported failure—providing simultaneous, ornearly simultaneous, notice to Speer and the banks,rather than advance notice to Speer—caused her anyprejudice. Courts in this Circuit routinely decline to quashsubpoenas automatically based on noncompliance withnotice requirements absent some showing of prejudice.

E.g., Malmberg v. United States, No. 5:06-cv-1042(FJS/GHL), 2010 WL 1186573, at *2 (N.D.N.Y. Mar.24, 2010); Ragusa v. United Parcel Serv., No. 05 Civ.6187 (WHP), 2008 WL 4200288, at *1 (S.D.N.Y. Sept.12, 2008); see also Symeou v. Hornbeam Corp. ( In reHornbeam Corp.), 722 F. App'x 7, 11 (2d Cir. 2018)(summary order) (finding “no abuse of discretion” in adistrict court’s decision not to quash or vacate a subpoenabased on a finding that the movant “did not establishprejudice from the lack of notice”). On that score, asthe district court observed, Seaport’s alleged technicalnoncompliance did not prevent Speer from moving toquash and vigorously litigating the propriety of thesubpoenas at issue in these appeals.

Nor did the bankruptcy court act outside the boundsof its discretion by declining to conclude thatSeaport’s subpoenas were overbroad. Contrary to Speer’scharacterization of the subpoenas, they sought specificcategories of documents within a sufficiently limitedtemporal scope. More significantly, Speer has not made aclear showing that the documents Seaport sought were so

untethered to the allegations in the adversary proceedingcomplaint that the bankruptcy court was compelledto quash the subpoenas. See Fed. R. Civ. P. 26(b)(1)(requiring discovery materials to be relevant to a “claimor defense and proportional to the needs of the case”);Fed. R. Bankr. P. 7026 (making Federal Rule of CivilProcedure 26 applicable in adversary proceedings).

Speer’s argument regarding her privacy interests similarlylacks merit. As to the records related to the variouslimited liability companies, Speer has not provided anylegal authority for the proposition, or an adequate factualbasis to conclude, that she has a privacy interest inthose companies’ records. As to the records related toSpeer’s personal financial records, Speer argues that herprivacy interest in those records is sufficient to provideher with standing to contest the subpoenas and pursuethese appeals. She has not explained how that privacyinterest made the financial records an inappropriatesubject of discovery in an adversary proceeding in whichSeaport alleged, in substance, that Speer concealed andwithheld information about her assets and finances in theunderlying bankruptcy proceeding.

Finally, with respect only to the appeal in No. 17-1447,Speer argues, in substance, that the district court erredby dismissing her appeal because it did not afford hersufficient latitude as a pro se litigant. We review a districtcourt’s dismissal under Rule 41(b) of the Federal Rulesof Civil Procedure for failure to prosecute or complywith a court order “for an abuse of discretion in lightof the record as a whole,” remaining mindful “that such

dismissals are the harshest of sanctions.” Baptiste v.Sommers, 768 F.3d 212, 216-17 (2d Cir. 2014) (internalquotation marks omitted). In this case, however, we neednot decide whether the district court acted outside thebounds of its discretion by dismissing Speer’s appeal,because, as explained above, Speer’s arguments lack merit.In other words, even if we were to find error in thedistrict court’s dismissal, that would not serve as a basisfor reversal because we identify no reversible error in thebankruptcy court’s orders.

We have considered the remainder of Speer’s argumentsand find them to be without merit. Accordingly, thejudgments and orders of the district court hereby areAFFIRMED.

In re Speer, --- Fed.Appx. ---- (2019)

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All Citations

--- Fed.Appx. ----, 2019 WL 974674 (Mem)

Footnotes1 Because these appeals arise from the same adversary proceeding in the United States Bankruptcy Court for the District of

Connecticut and present similar issues, we nostra sponte hereby consolidate these appeals for disposition and designateNo. 17-1440-bk as the lead appeal. The Clerk of the Court is directed to amend the official captions in these appealsto conform with this order.

End of Document © 2019 Thomson Reuters. No claim to original U.S. Government Works.

Matter of Ondova Limited Company, 914 F.3d 990 (2019)

66 Bankr.Ct.Dec. 207

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

914 F.3d 990United States Court of Appeals, Fifth Circuit.

In the MATTER OF: ONDOVALIMITED COMPANY, Debtor

Jeffrey Baron, Appellantv.

Daniel J. Sherman; Munsch, Hardt, Kopf & Harr,P.C.; Liberty Mutual Insurance Company, Appellees

No. 18-10182|

FILED February 4, 2019

SynopsisBackground: Former principal of debtor broughtadversary proceeding against Chapter 11 trustee, lawfirm that represented trustee, and company that issuedsurety bond that insured trustee's faithful performance ofhis official duties, asserting claims for, inter alia, breachof contract, fraud, and gross negligence. Defendantsfiled motions to dismiss. Adopting the report andrecommendation of the United States Bankruptcy Courtfor the Northern District of Texas, Stacey G. Jernigan,J., 2017 WL 477776, over principal's objection, theDistrict Court, Barbara M.G. Lynn, Chief Judge, 2018WL 580151, granted the motions to dismiss and deniedprincipal's motion for leave to file amended complaint.Principal appealed.

Holdings: The Court of Appeals held that:

addressing an issue of first impression for the court,bankruptcy trustees in the Fifth Circuit are entitled toqualified immunity for personal harms caused by actionsthat, while not pursuant to a court order, fall within thescope of their official duties;

here, principal did not plausibly allege any actions bytrustee not covered by absolute or qualified immunity;

trustee's immunity extended to his attorneys; and

principal waived his challenge to the district court's denialof leave to file an amended complaint.

Affirmed.

See also 703 F.3d 296.

Procedural Posture(s): On Appeal; Motion to Dismissfor Failure to State a Claim; Motion to Amend theComplaint.

*992 Appeal from the United States District Court forthe Northern District of Texas, Barbara M.G. Lynn, ChiefJudge

Attorneys and Law Firms

Leonard Harvey Simon, Esq., Pendergraft & Simon,L.L.P., Houston, TX, for Appellant.

Nolan Cornelius Knight, Munsch Hardt Kopf & Harr,P.C., Dallas, TX, for Appellees.

Before REAVLEY, ELROD, and WILLETT, CircuitJudges.

Opinion

PER CURIAM:

Jeffrey Baron appeals the district court's dismissal under

Federal Rule of Civil Procedure 12(b)(6) of hisbankruptcy “adversary proceeding” against Daniel J.Sherman, the trustee responsible for administering thebankruptcy estate of Ondova Limited Company. Baronalso appeals the denial of his motion for leave to amend.

We review both de novo. 1

To survive a motion to dismiss, a complaint must containsufficient facts to state a claim for relief that is plausible

on *993 its face. 2 And while we must accept a plaintiff'sfactual allegations as true, we are not bound to accept as

true “a legal conclusion couched as a factual allegation.” 3

The district court considered and adopted BankruptcyJudge Jernigan's meticulous and well-reasoned 55-pageReport and Recommendation. The district court grantedTrustee Sherman's motion to dismiss because—as thecourt-appointed trustee and an arm of the court—Sherman was entitled to absolute immunity for all actionstaken pursuant to a court order, and entitled to qualifiedimmunity for all other acts within the scope of histrustee duties. Baron's claims against Trustee Sherman's

Matter of Ondova Limited Company, 914 F.3d 990 (2019)

66 Bankr.Ct.Dec. 207

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attorneys (the law firm Munsch Hardt Kopf & Harr,P.C.) also failed because the attorneys were coveredby both derivative trustee immunity and independentattorney immunity. Baron's claim that Trustee Shermanbreached his fiduciary duty also failed because he did notplausibly plead gross negligence. Finally, the district courtdenied Baron's motion to amend his complaint on futilitygrounds.

We agree with the district court's analysis of TrusteeSherman's immunity. Trustees are entitled to absoluteimmunity for all actions taken pursuant to a court

order. 4 And while this circuit does not have controllingprecedent on the issue, numerous sister circuits have heldthat trustees have qualified immunity for personal harmscaused by actions taken within the scope of their official

duties. 5 Only ultra vires actions—actions that fall outsidethe scope of their duties as trustees—are not entitled toimmunity. There is no compelling reason to depart fromour sister circuits' sensible approach. We thus hold thatbankruptcy trustees in the Fifth Circuit are entitled toqualified immunity for personal harms caused by actionsthat, while not pursuant to a court order, fall within thescope of their official duties.

Here, Baron has not plausibly alleged any actions notcovered by absolute or qualified immunity, either inhis original complaint or in his proposed amendedcomplaint. His factual allegations on appeal arelimited to Sherman's decision to seek a receivershipover him, alleged falsehoods or misrepresentationsduring the receivership process, and subsequent useof the receivership to liquidate assets. However—as acknowledged by Bankruptcy Judge Jernigan—allproperty seizures that Baron complains of were doneunder the Receivership Order and were actions taken bythe receiver rather than the trustee. As Judge Jerniganalso notes, between the date Sherman was appointedtrustee and the date Baron filed his adversary proceeding,the bankruptcy court entered approximately 147 ordersin the Ondova Bankruptcy Case. Trustee Sherman wasacting “under the supervision and subject to the orderof the bankruptcy judge”—and thus entitled to absolute

immunity 6 —for virtually all of his tenure as trustee.

*994 Even when Trustee Sherman was not actingpursuant to a court order, he was still entitled to qualified

immunity for actions taken within the scope of his officialduties. Seeking a receivership is sometimes a necessarystep in administering the estate. And we have previously

weighed in on this very receivership. 7 While we foundthat the receivership was without jurisdiction, we also

held that it was pursued without malice. 8 And we have

already awarded a remedy. 9 Baron disagrees with TrusteeSherman's decision to pursue a receivership and allegesthat Sherman made misleading statements during thereceivership process, but these allegations—even whenassumed to be true—cannot transform them into ultravires actions that remove Trustee Sherman's qualifiedimmunity.

Second, we agree with the district court that this immunityextends to Trustee Sherman's attorneys under both a

derivative theory of judicial immunity 10 and under the

separate doctrine of attorney immunity 11 for essentiallythe same reasons articulated by the district court.

Third, we agree with the district court's analysis ofBaron's claims for breach of fiduciary duty. Baron failsto plausibly allege facts sufficient to support a finding ofgross negligence, either in his original complaint or in hisproposed amended complaint.

Finally, while we review de novo the denial of a motion toamend, Baron has failed to raise the new causes of actioncontained within his proposed amended complaint in hisbriefs or argue that the district court erred in finding theseclaims unsuccessful. “It is a well worn principle that thefailure to raise an issue on appeal constitutes waiver of that

argument.” 12 Baron has thus waived the issue, and wewill not disturb the district court's finding of futility.

* * *

We AFFIRM both the district court's dismissal under

Rule 12(b)(6) and the denial of leave to file an amendedcomplaint.

All Citations

914 F.3d 990, 66 Bankr.Ct.Dec. 207

Matter of Ondova Limited Company, 914 F.3d 990 (2019)

66 Bankr.Ct.Dec. 207

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Footnotes1 While a denial of leave to amend is generally reviewed for abuse of discretion, because the district court based its denial

for leave to amend solely on futility, review is de novo. City of Clinton v. Pilgrim's Pride Corp., 632 F.3d 148, 152 (5th Cir.2010) (The “de novo standard of review [is] identical, in practice, to the standard used for reviewing a dismissal under

Rule 12(b)(6).”).

2 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

3 Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986).

4 Boullion v. McClanahan, 639 F.2d 213, 214 (5th Cir. 1981).

5 See, e.g., Grant, Konvalinka & Harrison, PC v. Banks (In re McKenzie), 716 F.3d 404, 413 (6th Cir.), cert denied, 571 U.S.955, 134 S.Ct. 444, 187 L.Ed.2d 285 (2013); Sierra v. Seeber, 966 F.2d 1444 (4th Cir. 1992); Phoenician MediterraneanVilla, LLC v. Swope (In re J & S Props., LLC), 545 B.R. 91, 104 (Bankr. W.D. Pa. 2015) (“When not acting pursuant toan order of court, a bankruptcy trustee is generally afforded qualified immunity.”), aff'd, 554 B.R. 747 (W.D. Pa. 2016),aff'd, 872 F.3d 138 (3d Cir. 2017).

6 Boullion, 639 F.2d at 213

7 Netsphere, Inc. v. Baron, 703 F.3d 296 (5th Cir. 2012).

8 Id. at 313 (“[W]e hold ... that in creating the receivership ‘there was no malice nor wrongful purpose, and only an effortto conserve property in which [the court] believed’ it was interested in maintaining for unpaid attorney fees and to controlBaron's vexatious litigation tactics.” (alteration in original) (quoting W.F. Potts Son & Co. v. Cochrane, 59 F.2d 375, 377–78 (5th Cir. 1932) ) ).

9 Id. at 313–14.

10 See In re DeLorean Motor Co., 991 F.2d 1236, 1241 (6th Cir. 1993).

11 See Troice v. Proskauer Rose, L.L.P., 816 F.3d 341, 349 (5th Cir. 2016) (holding that attorneys are entitled to immunityunder Texas law from suit by non-clients, unless the attorney's conduct “d[oes] not involve the provision of legal services”or is “entirely foreign to the duties of any attorney”).

12 United States v. Griffith, 522 F.3d 607, 610 (5th Cir. 2008) (citing United States v. Thibodeaux, 211 F.3d 910, 912(5th Cir. 2000) ).

End of Document © 2019 Thomson Reuters. No claim to original U.S. Government Works.

Matter of Sneed Shipbuilding, Incorporated, 916 F.3d 405 (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

916 F.3d 405United States Court of Appeals, Fifth Circuit.

In the MATTER OF: SNEEDSHIPBUILDING, INCORPORATED, Debtor

New Industries, Incorporated, Appellantv.

Allison D. Byman, Chapter 11 Trusteeof Sneed Shipbuilding, Incorporated;

Estate of Martin M. Sneed, Sr., Appellees

No. 18-40350|

FILED February 5, 2019

SynopsisBackground: Order was entered by the United StatesBankruptcy Court for the Southern District of Texasapproving settlement between Chapter 11 trustee andparty asserting interest in estate assets, along with saleof these assets to third party. Party contesting terms ofsettlement appealed. The District Court dismissed appealas moot, and party again appealed.

Holdings: The Court of Appeals, Gregg Costa, CircuitJudge, held that:

equitable mootness doctrine did not apply in Chapter 11case in which no plan had even been proposed to limitappellate review of bankruptcy court order approvingsettlement and sale of Chapter 11 debtor's assets, but

appeal from unstayed order of bankruptcy court thatapproved settlement between Chapter 11 trustee and partyasserting interest in estate assets, and that authorized saleof these assets to third party, was statutorily moot.

Affirmed.

Procedural Posture(s): On Appeal; Motion to ApproveSettlement; Motion to Use, Sell, or Lease PropertyOutside the Ordinary Course of Business.

*407 Appeal from the United States District Court forthe Southern District of Texas, Kenneth M. Hoyt, U.S.District Judge

Attorneys and Law Firms

Barnet Bernard Skelton, Jr., Houston, TX, for Appellant.

Simon Richard Mayer, Steven Douglas Shurn, Hughes,Watters & Askanase, L.L.P., Houston, TX, for AppelleeALLISON D. BYMAN.

Richard Lee Fuqua, II, Fuqua & Associates, P.C.,Houston, TX, for Appellee ESTATE OF MARTIN M.SNEED, SR.

Before KING, HIGGINSON, and COSTA, CircuitJudges.

Opinion

GREGG COSTA, Circuit Judge:

In bankruptcy, the right to appeal must sometimes giveway to a heightened interest in finality. Perhaps the mostprominent example is equitable mootness, a judiciallycreated doctrine preventing appeals that threaten tounravel a particularly interrelated confirmation plan. See

In re Manges, 29 F.3d 1034, 1038–39 (5th Cir. 1994).Bars on appeals can also be found in the BankruptcyCode, such as the statute that prevents “reversal ormodification on appeal of an authorization ... of asale or lease of [estate] property” unless that order was

stayed pending appeal. 11 U.S.C. § 363(m); see also

In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir.1994) (“Several provisions of the Bankruptcy Code of1978 provide that courts should keep their hands offconsummated transactions.”).

The bankruptcy trustee in this case invokes both equitableand statutory mootness to try and block an appeal ofa bankruptcy court’s approval of a sale of key estateassets, including a settlement necessary to facilitate thetransaction. Equitable mootness is inappropriate here, but

we conclude that section 363(m) made the bankruptcycourt’s approval the final word on the subject when theobjector did not obtain a stay of that ruling.

I.

Sneed Shipbuilding owned two shipyards in Texas,including one in Channelview. It filed for bankruptcy in

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2016 and, after reorganizing turned tumultuous, the courtappointed a trustee. The trustee then filed a complaintagainst the probate estate of Sneed Shipbuilding’slongtime principal Martin Sneed and several other Sneedfamily members. The complaint alleged that Martinattempted to fraudulently transfer ownership of theChannelview shipyard to himself, among other fraudulentactivities. It sought to avoid (bankruptcy-speak for“undo”) those transactions and have the court declarethat Sneed Shipbuilding was the true titleholder to theChannelview shipyard.

While the bankruptcy progressed slowly, operations at theChannelview shipyard ground to a halt as a barebonesstaff serviced the one remaining customer. Conversion toChapter 7 and liquidation loomed as a real and unpleasantpossibility, so the trustee tried to sell the shipyard. SanJac Marine was interested in purchasing it, but only if thebankruptcy estate and Martin’s probate estate resolvedtheir dispute over the title. To get clean title, the trusteehad two undesirable options: years of litigation againstthe probate estate, during which the shipyard would losemuch of its value, or settlement with the probate estate onunfavorable terms. She chose the latter.

*408 The sale to San Jac Marine was made conditionalon bankruptcy approval of the settlement. The partiesstructured the settlement and sale together along theselines: San Jac Marine paid Sneed Shipbuilding nearly $15million and the trustee used those funds to ensure that thetitle it transferred was clean; encumbrances from a securedcreditor, the debtor-in-possession’s lender, and propertytaxes were all paid off. In addition, Martin’s probate estategave up both its claim to the Channelview property andany other claims in the bankruptcy for about $8 millionand the trustee’s agreement to release any other avoidanceactions. All told the settlement and sale looked somethinglike this:

The bankruptcy court approved the settlement and salein a single order, finding its provisions “non-severableand mutually dependent.” New Industries, an unsecuredcreditor which claimed that Sneed Shipbuilding owedit $550,000 from a construction contract, unsuccessfullyobjected to the disbursement of funds to the probateestate. It did not seek a stay of the court’s approval of thetransaction.

New Industries appealed. The trustee asked the districtcourt to dismiss the appeal, citing both equitable mootness

and 11 U.S.C. § 363(m). The district court dismissedthe appeal as moot without identifying whether it wasapplying equitable or statutory mootness.

II.

The parties focus on whether equitable mootness applies.This doctrine allows courts to abstain from appealsof plan confirmation orders, allowing the interrelatedweb of parties to rely on a final decision. See

In re Pacific Lumber Co., 584 F.3d 229, 240 (5thCir. 2009). As many courts have noted, equitablemootness is not constitutional mootness. In a sense,the bankruptcy doctrine presents the opposite concernof Article III mootness. A case is not equitably mootbecause an appellate reversal would have no effect;it is equitably moot when a reversal might have too

much effect. See Pacific Lumber, 584 F.3d at 240;

In re Continental Airlines, 91 F.3d 553, 569 (3rdCir. 1996) (Alito, J., dissenting). Without an expressbasis in the Bankruptcy Code, equitable mootness

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is *409 controversial. Compare In re One2OneCommunications, LLC, 805 F.3d 428, 441 (3rd Cir. 2015)

(Krause, J., concurring); In re Continental Airlines, 91

F.3d at 569 (Alito, J., dissenting), with In re TribuneMedia Co., 799 F.3d 272, 287–88 (3rd Cir. 2015) (Ambro,

J., concurring); see also UNR, 20 F.3d at 769 (rejectingthe “equitable mootness” label as misleading, but agreeingthat “a plan of reorganization, once implemented, shouldbe disturbed only for compelling reasons”).

We are more hesitant to invoke equitable mootness thanmany circuits, treating it as a “scalpel rather than an axe.”

Pacific Lumber, 584 F.3d at 240; see also 7 COLLIERON BANKRUPTCY ¶ 1129.09 (16th ed. 2018) (referringto this circuit’s “willingness to tolerate the possibilitythat reversal will disrupt the plan” as a “deep divide”between us and other circuits). Equitable mootnesstypically requires a reorganization plan that is at least“substantially consummated.” In re Hilal, 534 F.3d 498,500 (5th Cir. 2008); see also In re San Patricio Cnty. Cmty.Action Agency, 575 F.3d 553, 558 (5th Cir. 2009) (decliningto find dispute over settlement agreement equitably moot,without deciding as a categorical matter whether thedoctrine could apply in a Chapter 7 liquidation). That endstage of the Chapter 11 process must be reached becausethe concern of equitable mootness is that appellatereversal might undermine the plan and the parties’ reliance

on it. In re SI Restructuring, Inc., 542 F.3d 131, 135–36 (5th Cir. 2008). But Sneed Shipbuilding’s bankruptcycase has never reached that stage because no plan has beenproposed.

We recognize that some courts outside our circuit haveemployed equitable mootness when reviewing settlementagreements, not just plan confirmations, in particularly

messy cases. See, e.g., In re Delta Airlines, Inc.,374 B.R. 516, 522–525 (S.D.N.Y. 2007). But that justhighlights the second reason why equitable mootnessshould not apply to the order that New Industries appeals:this settlement and sale were not sufficiently complex.Equitable mootness is aimed at limiting review of complexplans whose implementation has substantial secondary

effects. See, e.g., Tribune, 799 F.3d at 274, 281 (findingmoot an appeal of $7.5 billion reorganization involving243 different classes of creditors). Appellate interventioninto reorganization plans of such complexity may affect

many innocent third parties. See Manges, 29 F.3dat 1042–43. Our ability to produce a single graphic toillustrate the Channelview transaction demonstrates thatthis case does not rise to that level of complexity. Reversalon appeal would only affect a few third parties, all ofwhom participated in the bankruptcy court. This does notappear to be the case to expand equitable mootness intonew frontiers.

III.

That is especially so because the trustee also raised the

possibility of mootness under section 363(m). Thestatute limits the ability of appellate courts to reviewthe sale of estate property when the order approving

the transaction is not stayed. 11 U.S.C. § 363(m);see also In re Ginther Trusts, 238 F.3d 686, 689 (5th

Cir. 2001) (holding that section 363(m) even preventedappeals to determine whether the bankruptcy court lackedjurisdiction). A different motivation than complexity

motivates section 363(m) mootness: the need to

encourage parties to bid for estate property. See In reBleaufontaine, Inc., 634 F.2d 1383, 1389 n.10 (5th Cir.1981) (“If deference were not paid to the policy of speedyand final bankruptcy sales, potential buyers would noteven consider purchasing any bankrupt’s property.”). Thestatute assures purchasers that once the bankruptcy *410court approves the sale and it is consummated (that is,the order is not stayed), then no appellate court can latersecond-guess the deal. The cost, of course, is disposingof the full judicial review for legal accuracy that typicallyfollows a trial court’s ruling. But Congress thought thattrade was worth making to encourage buyers to come tothe table ready to revitalize useful assets, as those buyersmight otherwise stay away when a transaction remainsshrouded in legal uncertainty. The Bankruptcy Code thusentrusts review of a sale solely to the bankruptcy court’sin-the-moment judgment unless a stay is obtained thatprevents the sale from closing prior to appellate review.

Recognizing this role of section 363(m), New Industriessays it does not challenge the sale of the property butonly challenges the disbursement of cash to the probateestate. But it does not cite any authority that wouldallow us to perform this isolated analysis. Paying off the

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probate estate was an essential feature of the sale. Andwhen creditors have tried to cut off part of a sale andchallenge it elsewhere, courts have found their appeals

moot. See In re Trism, Inc., 328 F.3d 1003 (8th Cir.2003) (challenge to release of avoidance action that wasessential to sale of estate assets); In re Ala. Aircraft Indus.,Inc., 464 B.R. 120 (D. Del. 2012) (dispute over creationof litigation trust with funds from sale of estate assets).Without the more than $8 million payment, the probateestate would not have released its claim that it owned theChannelview shipyard. And without that release, San JacMarine likely would have walked away from the deal. Asthe bankruptcy court noted, there is no way to sever the

settlement from the sale; they are mutually dependent.Congress has ordered us not to review such decisions bythe bankruptcy court when they are not stayed. This caseis moot.

* * *

We AFFIRM the district court’s dismissal of the appeal.

All Citations

916 F.3d 405

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Cox v. Richards, --- Fed.Appx. ---- (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

2019 WL 495136Only the Westlaw citation is currently available.

This case was not selected forpublication in West's Federal Reporter.

See Fed. Rule of Appellate Procedure 32.1generally governing citation of judicial decisions

issued on or after Jan. 1, 2007. See alsoU.S.Ct. of App. 5th Cir. Rules 28.7 and 47.5.

United States Court of Appeals, Fifth Circuit.

Suzanne B. COX, Plaintiff-Appellantv.

Wells P. RICHARDS; Canucanoe RentalCabins, L.L.C., Defendants-Appellees

No. 18-60394|

Filed February 7, 2019

SynopsisBackground: Alleged lender brought claim against allegedborrowers to obtain repayment of quarter-million-dollarloan. The United States District Court for the SouthernDistrict of Mississippi, granted alleged borrowers' motionto dismiss on the grounds of judicial estoppel. Allegedlender appealed.

Holdings: The Court of Appeals held that:

alleged lender was judicially estopped from pursuing claimagainst alleged borrowers, and

alleged borrowers' motion to dismiss gave alleged lenderrequired notice of intent to raise defense of judicialestoppel.

Affirmed.

Procedural Posture(s): On Appeal; Motion to Dismiss.

Appeal from the United States District Court for theSouthern District of Mississippi, USDC No. 3:16-CV-668

Attorneys and Law Firms

William Charles Bell, Bell Law Firm, P.L.L.C.,Ridgeland, MS, for Plaintiff-Appellant

Sheldon Givens Alston, Esq., William DementDrinkwater, Esq., Brunini, Grantham, Grower & Hewes,P.L.L.C., Jackson, MS, for Defendants-Appellees

Before DAVIS, JONES, and DENNIS, Circuit Judges.

Opinion

PER CURIAM: *

*1 Plaintiff Suzanne B. Cox brought the instant actionagainst Defendants Wells Richards and CanucanoeRental Cabins, LLC (Canucanoe), seeking to obtainrepayment of a $251,550.14 loan she claims she made toRichards years earlier. Cox now appeals from the districtcourt’s ruling that she is judicially estopped from makingthese claims based on representations she previously madein unrelated bankruptcy proceedings. We AFFIRM.

I

In September 2009, Cox received various assets in adivorce settlement, including a $351,550.14 check. InOctober 2010, she filed for Chapter 7 bankruptcy in theNorthern District of Florida. See In re Cox, 10-32055LMK (Bankr. N.D. Fla. 2011). In her original bankruptcyschedules, Cox listed only $6,550 in assets, including abank account, clothing, a rental deposit, and a car. A fewweeks later, she filed amended schedules listing additionalassets, but did not include the loan to Richards on whichshe now seeks repayment. Cox declared under penaltyof perjury that the information contained in the petitionand schedules was “true and correct to the best of [her]knowledge.”

In February 2011, the Trustee initiated an adversaryproceeding against Cox to deny a discharge for failure todisclose assets in the bankruptcy schedules. See Chancellorv. Cox (In re Cox), 11-03007 MAM (Bankr. N.D. Fla.2011). The Trustee moved for summary judgment, arguingthat Cox was not entitled to a discharge under 11 U.S.C.

§ 727(a)(2)(A), 1 (a)(4)(A), 2 and (a)(5). 3 The bankruptcycourt denied the Trustee’s motion for summary judgment,finding that there were genuine issues of material fact withrespect to whether Cox’s omissions were knowing andfraudulent. After a trial, the bankruptcy court sustainedthe Trustee’s objection to discharge pursuant to § 727(a)(5) for failure to satisfactorily explain the loss of assets

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she obtained through her divorce settlement. The courtdeclined to sustain the Trustee’s objection to dischargebased on § 727(a)(2)(A) or (a)(4)(A), determining that theTrustee failed to establish that Cox failed to disclose assetswith fraudulent intent.

In August 2016, Cox commenced this action againstRichards and Canucanoe in federal district court in

Mississippi. 4 She alleged that in September 2009, sheorally agreed to loan Richards $251,550.14 with aninterest rate of fourteen percent per annum for investmentpurposes, which Richards was supposed to pay backmonthly. Canucanoe, of which Richards is allegedly a

member, filed an answer to Cox’s complaint. 5 Richardsdid not file an answer. Both Canucanoe and Richards thenfiled a motion to dismiss, asserting the defense of judicialestoppel. The district court granted the motion anddismissed the case with prejudice, taking judicial noticeof Cox’s representations in the bankruptcy proceedingsand concluding that Cox was judicially estopped fromasserting a claim against Defendants. Cox moved to alteror amend the judgment pursuant to Federal Rule of CivilProcedure 59(e), which the district court denied. Coxappealed.

II

*2 On appeal, Cox argues that the district court’sapplication of the doctrine of judicial estoppel was anabuse of discretion. She also brings several proceduralchallenges to Defendants’ motion to dismiss. We addresseach in turn.

A

The district court granted the Defendants’ motion todismiss, concluding that Cox was judicially estopped frompursuing her claims against Defendants because she hadpreviously disclaimed the existence of the alleged quarter-million-dollar loan in her bankruptcy proceedings. Wereview a district court’s decision to invoke the equitabledoctrine of judicial estoppel for abuse of discretion. See

United States ex rel. Long v. GSDMIdea City, L.L.C.,798 F.3d 265, 271 (5th Cir. 2015). “The purpose of thedoctrine is to protect the integrity of the judicial processby preventing parties from playing fast and loose with

the courts to suit the exigencies of self interest.” See Inre Superior Crewboats, Inc., 374 F.3d 330, 334 (5th Cir.

2004) (quoting In re Coastal Plains, Inc., 179 F.3d 197,205 (5th Cir. 1999) ). Judicial estoppel is properly invokedwhere “(1) the party against whom judicial estoppel issought has asserted a legal position which is plainlyinconsistent with a prior position; (2) a court accepted theprior position; and (3) the party did not act inadvertently.”

Reed v. City of Arlington, 650 F.3d 571, 574 (5th Cir.2011) (en banc).

Cox argues that the evidence does not support theapplication of judicial estoppel under any of the threeelements. We disagree. As to the first element, thedistrict court correctly concluded that Cox’s positionin the instant litigation is inconsistent with her swornrepresentations in her bankruptcy proceedings. The courtreasoned that Cox testified in her bankruptcy case thatshe had used the $351,550.14 settlement check from herdivorce to pay living expenses and bills and to repaydebts to friends, including a payment of $163,200 toRichards for living expenses he advanced to her beforeshe received the divorce settlement. The district courtfurther noted that Cox failed to list the loan in herinitial and amended bankruptcy schedules or to otherwisemention it. Next, the district court determined that Coxconvinced the bankruptcy court, through her omission,that her assets did not include a loan in the amount of$251,550.14, satisfying the second element. The districtcourt additionally found the third element satisfied,concluding that “Cox had every opportunity to revealthat $251,550.14 asset” and that “[h]er motivation for herconduct is evident: she hoped to hide the asset from theBankruptcy Court and benefit from its receipt later.”

Cox contends that the bankruptcy court’s closure ofher case “return[ed] [her] to the position she was inbefore the bankruptcy filing,” thereby “negat[ing]” thefirst and second elements. Her argument is unavailing.The bankruptcy court, in denying the Trustee’s motionfor summary judgment in the adversary proceeding,accepted both Cox’s omission of any reference to the$251,550.14 loan and her representation that she repaidRichards for the funds he had advanced to her for living

expenses. See Superior Crewboats, 374 F.3d at 335(the second element is met when a court adopts a party’sprior position, “either as a preliminary matter or as partof a final disposition”). “An adversary proceeding and

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the companion bankruptcy case constitute two distinct

proceedings.” In re Porges, 44 F.3d 159, 163 n.2 (2dCir. 1995). Accordingly, the bankruptcy court’s closureof Cox’s bankruptcy case did not revoke her priorinconsistent position, or the court’s acceptance of thatposition, in the separate adversary proceeding.

*3 As to the third element, Cox argues that thereis no evidence her actions were not inadvertent. Shecites to the bankruptcy court’s findings in the adversaryproceeding that the Trustee had not met its burden todemonstrate Cox’s “intent to hinder, delay, or defraud” byconcealing assets and that the evidence instead indicateda “lack of knowledge” on her part. This argument ismisleading. The bankruptcy court’s determinations abouther intent clearly did not pertain to the $251,550.14loan because Cox failed to disclose that loan in theproceedings. Moreover, Cox amended her bankruptcyschedules to reflect additional assets once the bankruptcycourt discovered them, swearing under oath that “[a]nyomissions in the original schedules have been amended.”“[T]he motivation sub-element is almost always met ifa debtor fails to disclose a claim or possible claim tothe bankruptcy court. Motivation in this context is self-evident because of potential financial benefit resulting

from the nondisclosure.” Love v. Tyson Foods, Inc.,677 F.3d 258, 262 (5th Cir. 2012). Thus, the district court

did not abuse its discretion in applying judicial estoppel. 6

B

Cox also brings several procedural challenges toDefendants’ motion to dismiss. First, she argues that,because Canucanoe answered the complaint before filinga motion to dismiss, the motion to dismiss was untimely.Normally, a motion asserting a Rule 12(b) defense “mustbe made before pleading if a responsive pleading is

allowed.” See FED. R. CIV. P. 12(b). However, where,as here, a defendant files a motion to dismiss after filinga responsive pleading, the motion may be treated as one

for judgment on the pleadings under Federal Rule ofCivil Procedure 12(c). See Yassan v. J.P. Morgan Chase& Co., 708 F.3d 963, 975–76 (7th Cir. 2013) (noting that“[d]ismissing a case on the basis of an affirmative defense

is properly done under Rule 12(c), not Rule 12(b)(6),” but affirming the district court’s dismissal “under the

wrong rule”). Because a Rule 12(b)(6) and Rule 12(c)motion warrant the same standard of review, any errorby the district court in granting Defendants’ motion to

dismiss with respect to Canucanoe was harmless. 7 SeeFED. R. CIV. P. 61; see also Patrick v. Rivera-Lopez,708 F.3d 15, 18 (1st Cir. 2013) (noting that the districtcourt’s reliance on the wrong rule of civil procedure was“inconsequential” because the standard of review for bothmotions is the same).

Next, Cox argues that the district court erred byimpermissibly engaging in fact-finding and not takingthe allegations in her complaint as true. We disagree. Adistrict court may take judicial notice of public records

without converting a Rule 12(b)(6) motion into amotion for summary judgment. See Hall v. Hodgkins,

305 F. App'x 224, 227 (5th Cir. 2008) (citing Cinel v.Connick, 15 F.3d 1338, 1343 n. 6 (5th Cir. 1994) ). Thedistrict court’s consideration of publicly available recordsin Cox’s prior bankruptcy proceedings was not error.

*4 Finally, Cox asserts that Defendants’ failure to cite arule of civil procedure in support of their motion to dismiss

fails under the pleading standard set forth in Ashcroftv. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868

(2009), and Bell Atlantic Corp. v. Twombly, 550 U.S.544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). However,where a defendant raises an affirmative defense “in amanner that does not result in unfair surprise” to theplaintiff, any “technical failure to comply precisely with[Federal Rule of Civil Procedure] 8(c) is not fatal.”See Motion Med. Techs., L.L.C. v. Thermotek, Inc., 875F.3d 765, 771 (5th Cir. 2017). Such is the case here, asDefendants’ motion gave Cox the required notice of theirintent to raise the defense of judicial estoppel.

* * *

For these reasons, we AFFIRM.

All Citations

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Footnotes* Pursuant to 5th Cir. R. 47.5, the court has determined that this opinion should not be published and is not precedent

except under the limited circumstances set forth in 5th Cir. R. 47.5.4.

1 A debtor is entitled to a “discharge, unless ... the debtor, with intent to hinder, delay, or defraud a creditor ... has transferred,removed, destroyed, mutilated, or concealed ... property ... within one year before the date of the filing of the petition.”See 11 U.S.C. § 727(a)(2)(A).

2 A bankruptcy court may deny discharge if “the debtor knowingly and fraudulently, in or in connection with the case madea false oath or account.” See 11 U.S.C. § 727.

3 A bankruptcy court may deny discharge if the debtor fails to satisfactorily explain a loss of assets. See 11 U.S.C. § 727.

4 Cox brought this action in federal court, asserting diversity of citizenship and an amount in controversy over $75,000.

See 28 U.S.C. § 1332.

5 Cox contended that Richards was one of two members of Canucanoe and had been paying interest on the loan throughCanucanoe until 2016. Canucanoe denies this allegation.

6 Cox additionally argues that applying judicial estoppel would result in an inequitable result, claiming that Richards andCanucanoe acknowledged the loan by making monthly interest payments to her for more than four years after the close of

her bankruptcy proceedings. We take Cox’s allegations to be true at the motion to dismiss stage, see Ashcroft v. Iqbal,556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), but Cox does not explain how the district court’s application

of judicial estoppel was an abuse of discretion in light of these facts. See Coastal Plains, 179 F.3d at 205 (noting that

judicial estoppel “is intended to protect the judicial system, rather than the litigants”); see also Reed, 650 F.3d at 574(“[J]udicial estoppel is particularly appropriate where ... a party fails to disclose an asset to a bankruptcy court, but thenpursues a claim in a separate tribunal based on that undisclosed asset.” (internal citations and quotation marks omitted) ).

7 As previously noted, Richards did not answer the complaint prior to filing the joint motion to dismiss with Canucanoe. Inany event, Cox does not appear to challenge the timeliness of the motion to dismiss with respect to Richards.

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In re O'Sullivan, 914 F.3d 1162 (2019)

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914 F.3d 1162United States Court of Appeals, Eighth Circuit.

IN RE: Casey Drew O'SULLIVAN DebtorCRP Holdings A-1, LLC Appellant

v.Casey Drew O'Sullivan Appellee

No. 17-3226|

Submitted: September 26, 2018|

Filed: February 1, 2019

SynopsisBackground: Chapter 7 debtor moved to avoid, onexemption-impairment grounds, purported judgmentlien on house that he owned jointly in tenancy bythe entireties with his nonfiling spouse. The UnitedStates Bankruptcy Court for the Western District of

Missouri, 2015 WL 3526996, granted motion, andjudgment creditor appealed. The Bankruptcy Appellate

Panel (BAP), 544 B.R. 407, affirmed, and judgmentcreditor appealed. The Court of Appeals, 841 F.3d 786,vacated and remanded, directing bankruptcy court todetermine whether judgment creditor had a judicial lienon the property, either enforceable or unenforceable. Onremand, the Bankruptcy Court, Cynthia A. Norton, J.,

569 B.R. 163, determined that creditor had a lien whichdebtor could avoid on exemption-impairment grounds,and creditor appealed. The Bankruptcy Appellate Panel,Schermer, J., 2017 WL 4844244, affirmed. Creditorappealed.

The Court of Appeals, Smith, Chief Judge, held thatregistration of foreign judgment created cloud upon title,which constituted a “lien” as federal bankruptcy lawdefined it, such as debtor could avoid as impairingexemption to which he was otherwise entitled in entiretiesproperty.

Affirmed.

Procedural Posture(s): Motion to Avoid Lien onExemption Impairment Grounds.

*1163 Appeal from the United States Bankruptcy,Appellate Panel for the Eighth Circuit

Before SMITH, Chief Judge, MELLOY and STRAS,Circuit Judges.

Attorneys and Law Firms

Robert K. S. Abernathy, WALTON LAW GROUP,Kansas City, MO, Neil Steven Sader, Michael J.Wambolt, SADER LAW FIRM, LLC, Kansas City, MO,for Appellant.

Norman E. Rouse, COLLINS & WEBSTER, Joplin, MO,for Appellee.

Opinion

SMITH, Chief Judge.

CRP Holdings, A-1, LLC (CRP) appeals theBankruptcy Appellate Panel’s (BAP) decision affirmingthe bankruptcy court’s order holding that CRP has anunenforceable judicial lien against the real property of thedebtor, Casey Drew O’Sullivan, and avoiding that lien

pursuant to 11 U.S.C. § 522(f)(1). We affirm.

I. Background

O’Sullivan and his wife acquired a residence as tenants bythe entirety in November 1995. The residence is locatedin Barton County, Missouri (“property”). On January5, 2015, CRP obtained a $765,151.18 default judgmentin the Circuit Court of Platte County, Missouri, againstO’Sullivan. The judgment did not include Sullivan’s wife.CRP then filed a notice of foreign judgment, registeringthe judgment on January 26, 2015, in the Circuit Courtof Barton County, Missouri, in an attempt to obtain ajudicial lien on the property owned by the O’Sullivansas tenants *1164 by the entirety. See Mo. Rev. Stat. §511.440.

On April 3, 2015, O’Sullivan filed a voluntary Chapter7 bankruptcy petition, which his wife did not join.O’Sullivan listed the property in his schedules and claimeda $15,000 homestead exemption under both Mo. Rev.

Stat. § 513.475 and 11 U.S.C. § 522(b)(3)(B). CRP didnot object to O’Sullivan’s claimed exemptions. O’Sullivan

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simultaneously moved to avoid CRP’s purported judicial

lien under 11 U.S.C. § 522(f)(1), asserting that thelien impaired his claimed homestead exemption. CRPobjected to the motion. While acknowledging that it hada judgment lien, CRP argued that its judgment lien didnot attach to the property. Consequently, CRP assertedthat its lien did not affix upon the property nor impairO’Sullivan’s exemption for lien-avoidance purposes.

The bankruptcy court granted O’Sullivan’s motion toavoid CRP’s lien on the property. It concluded that “‘CRP’s judgment lien—although perhaps not enforceable—certainly affixed upon [O’Sullivan’s] home upon CRP’srecording of its judgment in Barton County’ andtherefore impaired O’Sullivan’s claimed exemption.” CRPHoldings, A–1, LLC v. O’Sullivan (In re O’Sullivan), 841F.3d 786, 788 (8th Cir. 2016) (alteration in original).

CRP appealed to the BAP, which affirmed the bankruptcycourt’s order. The BAP likewise concluded that “anunenforceable judgment lien arose” on the property

held by the entireties. CRP Holdings, A–1, LLC v.O’Sullivan (In re O’Sullivan), 544 B.R. 407, 413 (8thCir. B.A.P. 2016), vacated, 841 F.3d 786 (8th Cir.2016). Therefore, the BAP reasoned, it was “possible for

[O’Sullivan] to avoid it under § 522(f).” Id. CRPappealed the BAP’s affirmance of the bankruptcy court’sorder avoiding its purported judicial lien.

On appeal to this court, “CRP challenge[d] the BAP’sconclusion that O’Sullivan could avoid its purportedjudicial lien on the property.” In re O’Sullivan, 841 F.3d at788. “The only contested issues on appeal [were] whethera judicial lien existed and, if so, whether that lien affixedon O’Sullivan’s interest in the property.” Id.

We identified a threshold question that neither party hadaddressed—“whether CRP had a judicial lien properly

subject to avoidance under § 522(f)(1)(A).” Id. at 788–89. Ultimately, we “decline[d] to undertake the question ofwhether there is a cognizable lien under § 522(f)(1) in thefirst instance.” Id. at 790. We opted to vacate the BAP’sdecision and remand “to the bankruptcy court for it todetermine whether CRP has a judicial lien on the property(either enforceable or unenforceable).” Id.

On remand, the bankruptcy court held that CRPpossessed an unenforceable judicial lien against

O’Sullivan’s property and granted O’Sullivan’s motion toavoid the lien. In reaching its conclusion, the bankruptcycourt noted that this court “direct[ed] the parties to

only one of two possible results on remand.” Inre O’Sullivan, 569 B.R. 163, 165 (Bankr. W.D. Mo.2017), aff’d, No. 17-6012, 2017 WL 4844244 (8th Cir.B.A.P. Sept. 22, 2017). The bankruptcy court could find(1) the debt was dischargeable through the bankruptcyproceedings because CRP’s notice of foreign judgmentfailed to give rise to a lien on O’Sullivan’s exempthomestead property, or (2) the lien is avoidable under

§ 522(f)(1) because CRP’s notice of foreign judgmentsecured an either enforceable or unenforceable lien on theexempt property. The bankruptcy court opted for doornumber two. First, it found that “CRP’s judgment was notan enforceable lien against the Debtor’s [tenancy by theentirety] property under Missouri law when the Debtor

filed bankruptcy.” Id.

*1165 Second, it explained its assumption that “CRP

had a cognizable and avoidable lien under § 522(f)(1)”based on “CRP’s actions ... in recording the judgment lienas a foreign judgment in the county where the Debtorowned his exempt home and in challenging the lien

avoidance on contradictory grounds.” Id. at 166.

Third, the court concluded that CRP had no “judgmentlien against the Debtor under Missouri law when the

Debtor filed his Chapter 7 bankruptcy case.” Id.Significantly, the court also noted that the case requiredfurther analysis. This was because “§ 101(36) definesa judicial lien as ‘a lien obtained by judgment, levy,sequestration, or other legal or equitable process or

proceeding.’ ” Id. (quoting 11 U.S.C. § 101(36)). Furthermore, “lien” is defined as a “charge againstor interest in property to secure payment of a debt or

performance of an obligation.” Id. (quoting 11U.S.C. § 101(37) ). The court then looked to Missourilaw to determine whether a “judgment lien” existed under

the Bankruptcy Code. Id. The court determined thatunder Missouri law, a judgment against tenancy-by-the-entirety property is a “ ‘cloud’ against title” giving riseto an “interest in property” such that it may be avoided

under § 522(f)(1). Id. at 166–67 (citing Mahen v.Ruhr, 293 Mo. 500, 240 S.W. 164 (1922) ). The court

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concluded that CRP’s judgment could become a lien ifO’Sullivan vacated the property or his spouse died. Thus,“CRP’s notice of foreign judgment ‘fastened an existent,but presently unenforceable lien’ properly avoided under

§ 522(f)(1).” Id. at 168. Alternatively, the court heldthat CRP’s recording of its “judgment in Barton Countywhere the Debtor’s exempt real estate was located vestedCRP with ‘an interest in property’ as a result of theotherwise unenforceable judgment, such that its resulting‘judicial lien’ as defined by the Bankruptcy Code should

likewise be avoided under § 522(f)(1).” Id.

The BAP affirmed. The BAP, like the bankruptcy court,determined that CRP did not have a lien under Missourilaw because O’Sullivan’s property was owned jointly withhis spouse as tenants by the entirety. The BAP alsoconcluded that the existence of a lien for purposes of

§ 522(f)(1) is determined by looking to state law inthe context of the Bankruptcy Code’s definitions of the

terms “judicial lien” and “lien” under §§ 101(36) and

(37). The BAP construed these terms broadly. Likethe bankruptcy court, the BAP concluded that CRP’srecording of the notice of foreign judgment created acloud on O’Sullivan’s title on his exempt homestead.Under Missouri law, this cloud constituted a “chargeagainst or interest in property” and thus qualified as a“judicial lien.” CRP Holdings, A–1, LLC v. O’Sullivan(In re O’Sullivan), No. 17-6012, 2017 WL 4844244, at *3

(8th Cir. B.A.P. Sept. 22, 2017) (quoting 11 U.S.C. §

101(36)– (37) ). The BAP concluded that a cloud on titlemay warrant a court in removing it. The BAP also notedthe “practical difficulties” that exist for an “ordinarysearcher of the records or even a title company [in] tryingto determine whether the judgment created a lien.” Id. at*4. This could, the BAP explained, impact the property’smarketability of title and value. Furthermore, the courtfound that “CRP’s judgment ‘could become a lien themoment the ... [Debtor’s] spouse dies.’ ” Id. (alteration

and ellipsis in original) (quoting In re O’Sullivan, 569

B.R. at 168). The court found that applying § 522(f)would clear the cloud on the title caused by CRP’srecording of its judgment, which “ ‘fastened an existing,but presently unenforceable lien’ on the Property.” Id.

(quoting O’Sullivan, 569 B.R. at 168).

II. Discussion

On appeal, CRP argues that the bankruptcy court erredin granting O’Sullivan’s *1166 motion to avoid CRP’spurported judicial lien. CRP contends that under Missourilaw, its notice of foreign judgment does not create anenforceable lien, unenforceable lien, or cloud upon title;instead, it represents a contingent future interest that mayvest upon the happening of a future event.

“When reviewing a decision of the BAP, we act as asecond reviewing court of the bankruptcy court decision,independently applying the same standard of review asthe BAP. This appeal turns on the bankruptcy court’sinterpretation of law which we review de novo.” In reO’Sullivan, 841 F.3d at 788 (cleaned up).

“To shield exempt property from ... post bankruptcy

collection efforts, 11 U.S.C. § 522(f)(1) providesa mechanism for bankruptcy courts to avoid, orextinguish, secured debts that would otherwise pass

through the bankruptcy proceeding.” Id. Section 522(f)(1) provides, in relevant part, that “the debtor may avoidthe fixing of a lien on an interest of the debtor in propertyto the extent that such lien impairs an exemption to which

the debtor would have been entitled under [ § 522(b) ],

if such lien is ... a judicial lien.” 11 U.S.C. § 522(f)(1)(A). “To avoid the fixing of CRP’s purported judicial lien,O’Sullivan therefore had to establish that CRP’s notice offoreign judgment had (1) created an avoidable lien under

§ 522(f)(1), that (2) affixed on O’Sullivan’s interest in

property exempted under § 522(b), and (3) impairedO’Sullivan’s claimed exemption in the property.” In reO’Sullivan, 841 F.3d at 788.

As in the prior appeal, the only contested issues “arewhether a judicial lien existed and, if so, whether that lienaffixed on O’Sullivan’s interest in the property.” Id.

The bankruptcy code defines “judicial liens” as liens“obtained by judgment, levy, sequestration, or other

legal or equitable process or proceeding.” 11 U.S.C.§ 101(36). Judicial liens are a subset of “liens,” which aredefined as “charge[s] against or interest[s] in propertyto secure payment of a debt or performance of an

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obligation.” 11 U.S.C. § 101(37). This definitionof “liens” suggests that both unenforceable “charge[s]against” property and enforceable “interest[s] in”property fall within its scope. That interpretation isbolstered by the legislative history of the BankruptcyReform Act which itself states that the definition of lienis “very broad” and “includes inchoate liens.” S. Rep.No. 95–989, at 25 (1978); H.R. Rep. 95–595, at 312(1977).

Id. at 789 (alterations in original).

Given the broad definition of “judicial liens,”

“unenforceable liens may be avoided under § 522(f)(1).” Id. “The distinction between an existent butunenforceable lien and a non existent lien is relevant to

an avoidance analysis under § 522(f)(1).” Id. We lookto state law to determine whether a debtor “possessedan interest to which [a] lien fixed, before it fixed.” Id.

(alteration in original) (quoting Farrey v. Sanderfoot,500 U.S. 291, 299, 111 S.Ct. 1825, 114 L.Ed.2d 337(1991) ). “Fixed” means “to ‘fasten a liability upon.’ ”

Id. (quoting Farrey, 500 U.S. at 296, 111 S.Ct. 1825).“When there is no lien under state law, however, thereis nothing to ‘fasten’ upon the property and give rise to

an unenforceable lien.” Id. As a result, “ § 522(f) is

superfluous and without application.” Id. (quoting Inre Sanders, 39 F.3d 258, 262 (10th Cir. 1994) ).

As we recognized in the prior appeal, our sistercircuits have distinguished between “existent but presentlyunenforceable liens and nonexistent liens.” Id. at 789–90. Persuaded by our sister circuits’ distinctions, we“conclude[d] that where a judgment gives rise to anunenforceable lien, a debtor may move to avoid that

lien under § 522(f). When a judgment *1167 fails togive rise to any judicial lien (including an unenforceable

lien), however, § 522(f)(1) is superfluous and withoutapplication.” Id. at 790.

As we previously framed the issue, the question presentedis whether, under Missouri law, CRP’s notice of foreignjudgment gave rise to a lien on O’Sullivan’s exempthomestead property. If it did give rise to a lien, then

O’Sullivan appropriately moved under § 522(f)(1) to

avoid the lien, even if that lien is existent, but presentlyunenforceable. If CRP’s notice of foreign judgment didnot give rise to a lien, then “the debt would have beendischargeable through the bankruptcy proceedings.” Id.To answer this question, we look to Missouri law.

Entireties property “is owned by a single entity, the

marital community.” Fed. Nat’l Mortg. Ass’n v.Pace, 415 S.W.3d 697, 703 (Mo. Ct. App. 2013).Missouri state court judgments, such as the defaultjudgment CRP obtained against O’Sullivan, are “lien[s]upon the real estate of the person against whom suchjudgment ... is entered” located within the same countyas the judgment. Mo. Rev. Stat. § 511.440 (emphasis

added); see also Mo. Rev. Stat. § 511.350. Thus,when CRP filed its notice of foreign judgment, itcreated a judicial lien on any “real estate” owned byO’Sullivan in Barton County. “Real estate” itself isnarrowly defined as an interest in property “liable tobe sold upon execution.” Mo. Rev. Stat. § 511.010(emphasis added). Here, because the real estate was heldas entireties property, neither spouse arguably had “aseparate interest [in that property] subject to execution,”and a judgment filed against only one spouse could not“constitute a lien on the [entireties] property.” Baker v.Lamar, 140 S.W.2d 31, 35 (Mo. 1940) (emphasis added).

Id. at 789 (alterations and ellipsis in original).

In the prior appeal, we expressed our “serious doubtsas to whether CRP has a lien that affixed ontoO’Sullivan’s interest in the property.” Id. In fact, basedon the aforementioned Missouri case law, we found “astrong argument that CRP did not obtain any lien onthe property.” Id. Crucially, however, we declined to“definitively rule on the avoidance motion in the absenceof such a finding.” Id.

Now, after remand and return to our court, the decisionto decline to determine the avoidance motion in the firstappeal has proven prudent. With respect to tenancy bythe entirety, Missouri law recognizes that “[a] judgmentagainst one [spouse] would not constitute a lien on theproperty since neither [spouse] has a separate interestsubject to execution.” Baker, 140 S.W.2d at 35. Despite theabsence of a lien, Missouri law nonetheless recognizes thatcourts must act in equity to clear a cloud upon a title to realestate that is not apparent on the face of the document.See Mahen, 240 S.W. at 164. In Mahen, a complex

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set of transactions occurred resulting in conveyanceinstruments that the court declared void because theproperty was held as tenants by the entirety. Theseconveyance documents included a sheriff’s deed reciting ajudgment and execution, where the execution was againstonly the husband’s interest that was not subject to levyand was based on a nonexistent judgment against him.Id. at 166 (“[T]he levy and sale under execution was voidbecause the interest of [the husband] was not subject tolevy.”). After acknowledging the conveyance instrumentswere “void,” the court considered “whether all thesevoid instruments are a cloud upon the title which wouldwarrant the interposition of a court of equity.” Id. Thecourt recognized the rule that “where the record does not*1168 show on its face to the ordinary searcher of the

record ... the invalidity of the instrument attacked[,] thecourt will interfere to remove the cloud.” Id. Applying thisrule, the court held:

Here the title was held bythe entireties. To the ordinaryabstracter, or to the lay mind, adistinction might not be discoveredbetween a deed by the entiretiesand a joint tenancy or a tenancyin common. Certain words mightchange the entire effect of theinstrument. Here was a conveyance,regular on its face, made by Mahen,and purporting to convey hisinterest. Here was a deed, regular onits face, which purported to conveythe interest of Josephine Mahen.Here was a sheriff’s deed recitinga judgment and execution in dueform. So far as the record shows, thecasual observer would not penetratethe difference and ascertain thatall these conveyances were voidfrom the inability of the ownersto convey. ... We think the recordsufficiently shows a cloud upon thetitle to warrant the interposition bya court of equity.

Id.

In the present case, as in Mahen, there is no “lien” asMissouri law defines it because CRP’s notice of foreignjudgment was against O’Sullivan, not O’Sullivan and hiswife, who hold the property as tenants by the entirety.Nevertheless, there is a “lien” as federal law defines itbecause a “cloud upon the title” to the property existsunder Missouri law, just as it did in Mahen, by virtue ofCRP’s filing of the notice of foreign judgment. That cloudon title constitutes a “charge against or interest in the

property.” 11 U.S.C. § 101(37). As the BAP observed:

The recording of CRP’s foreign judgment in BartonCounty created a cloud on the Debtor’s title onhis exempt homestead, which constituted a “chargeagainst or interest in property” under Missouri lawand qualified as a “judicial lien” under the Bankruptcy

Code. 11 U.S.C. § 101(36). Where the record doesnot show on its face that recorded documents (such asa judgment) are void, a cloud on title may be createdwarranting the imposition of a court of equity to removeit.

In re O’Sullivan, 2017 WL 4844244, at *3.

Consistent with Mahen, the BAP cited the “practicaldifficulties [that] may exist for an ordinary searcher ofthe records or even a title company trying to determinewhether the judgment [against O’Sullivan] created a lienand the Property is liable for execution.” Id. at *4. Theresult is that the property’s value and marketability of titlewould be affected. We agree with the BAP that CRP’srecording of the foreign judgment created a cloud ontitle under Missouri law sufficient to constitute a “chargeagainst or interest in” O’Sullivan’s property under the

Bankruptcy Code. 11 U.S.C. § 101(37).

Therefore, we conclude that the cloud on title created by“CRP's recording of its judgment ‘fastened an existing,but presently unenforceable lien’ on the Property.” In re

O’Sullivan, 2017 WL 4844244, at *4 (quoting In reO’Sullivan, 569 B.R. at 168). As a result, we hold that

application of § 522(f) will clear the cloud on title toO’Sullivan’s property and, as a result, the bankruptcycourt properly granted O’Sullivan’s motion to avoid thelien.

In re O'Sullivan, 914 F.3d 1162 (2019)

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III. Conclusion

Accordingly, we affirm the judgment of the BAP. All Citations

914 F.3d 1162, 66 Bankr.Ct.Dec. 198

End of Document © 2019 Thomson Reuters. No claim to original U.S. Government Works.

In re Sunnyland Farms, Inc., Slip Copy (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

2019 WL 507536Only the Westlaw citation is currently available.

United States Bankruptcy Court, D. New Mexico.

IN RE: SUNNYLAND FARMS, INC., Debtor.

Case No. 14-10231-t11|

Signed February 8, 2019

Attorneys and Law Firms

Jason Michael Cline, Jason Cline, LLC, Don F Harris,Russell C. Lowe, Albuquerque, NM, for

MEMORANDUM OPINION

Hon. David T. Thuma, United States Bankruptcy Judge

*1 The debtor confirmed a plan of reorganization inthis case several years ago. After confirmation, the Courtresolved a dispute between the reorganized debtor and oneof its creditors about whether the creditor was entitled toreceive stock in the reorganized debtor. The Court ruledthat he was. The debtor and creditor now disagree aboutthe debtor's proposed merger with another corporation.The debtor asks the Court to enforce a provision of itsbylaws allegedly requiring the creditor to arbitrate thedispute. Having reviewed the briefing and the law on theissue, the Court concludes that it lacks jurisdiction tocompel arbitration. The Court also concludes that thereare other problems with the motion, which therefore willbe denied.

I. FACTS

To control expenses, the parties have asked the Courtto rule on the dispute without taking evidence at a finalhearing. The Court therefore makes the following findings

of fact from the record in this case, 1 and solely for thepurpose of ruling on the motion:

Sunnyland Farms, Inc. (“Debtor”) is a New Mexicocorporation that owned a large greenhouse near Grants,New Mexico. Jerry Capussi assisted Debtor in developingits New Mexico business and became a general unsecured

creditor. Before plan confirmation, John Stockwell wasthe Debtor's sole shareholder.

Due to a large fire at the former greenhouse location, theDebtor fell on hard times. Creditors filed an involuntarybankruptcy case against Debtor, which it converted to avoluntary Chapter 11 case.

On January 14, 2015, the Debtor filed its fourth amendedplan of reorganization (the “Plan”). In general terms thePlan proposed pay each general unsecured creditor 1% ofits allowed claim, or (at the creditors' option) to issue oneshare of stock in the reorganized Debtor for every dollar ofallowed claim. Mr. Stockwell received nothing on accountof his stock ownership. However, his wife Lynn Stockwellhad a $ 12,797,282 unsecured claim against the Debtor.She elected to receive stock.

Article 7 of the Plan provides in part:

7.4 After Confirmation of the Plan, the ReorganizedDebtor shall be free to manage its affairs withoutfurther Order of this Court.

7.6 The Debtor shall be free to sell its propertyafter Confirmation, subject to liens thereon and theprovisions of this Plan and any Order of Confirmation.

Article 8 of the Plan (Retention of Jurisdiction) provides:

The Court shall retain jurisdictionafter the Effective date of thisPlan for all purposes provided forby the Code, by this plan, andby applicable law, including, butnot limited to, resolution of claimsobjections as provided for in thePlan, interpretation or constructionof the Plan, hearing and ruling onpending adversary proceedings andthose provided for in paragraph 7.6above, and valuation as may benecessary for implementation of thePlan.

*2 The Court confirmed the Plan on April 8, 2015. Asonly Lynn Stockwell elected to receive shares rather than

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cash, she became the sole shareholder, with 12,797,282shares of stock.

Before Plan confirmation, Mr. Capussi filed a claim for $3,264,287.24. The Debtor objected. The Court held a finalhearing on the claim objection and on August 18, 2015,allowed the claim in the amount of $ 108,000.

Mr. Capussi immediately filed a motion to compel theDebtor to issue him 108,000 shares of stock. The Debtordisputed Mr. Capussi's right to receive stock instead ofcash, arguing that the time to make the election hadpassed. The dispute was submitted to the Court on thebriefs, and on March 28, 2016, the Court ruled that Mr.Capussi had the right to receive stock if he so chose.Thus, about a year after Plan confirmation Mr. Capussibecame the second (and very minority) shareholder of thereorganized Debtor, owning .6% of the stock.

Meanwhile, in December 2015 Lynn Stockwell as the soleshareholder approved a transaction pursuant to whichthe Debtor transferred all its assets to Bright GreenGrow Innovations, LLC, a New Mexico limited liability

company (“Bright Green”). 2 As part of the transactionDebtor's shareholders would “swap” all their shares forBright Green shares. Lynn Stockwell was the majorityowner of Bright Green.

By the time Mr. Capussi became a shareholder in lateMarch 2016, the Debtor had already transferred its assetsto Bright Green. The stock swap, however, had notoccurred.

At a meeting held December 16, 2016, Debtor's board ofdirectors adopted Bylaws, Article IX of which provides:

The corporation may sell or transfer assets duringa dispute between the Shareholders only withauthorization of its Board of Directors given at a specialmeeting called for that purpose and with the subsequentapproval by no less than two-thirds (2/3) vote of theShareholders.

In the event of a dispute as to value of the asset, theproceeds of any sale, exchange, trade etc. shall be heldon a per share basis at the corporations Law Office.The amount of the proceeds required will be establishedby using the latest current appraisal value for any assetas guidance until the dispute between the parties isresolved.

The amount to be held until the dispute is resolved willbe twice the amount of the Shareholders holdings. Asan example, if the Shareholder in dispute has 10,000shares of the corporation's stock and the total proceedsor exchange is $ 1.00 on a per share basis the requiredamount to be held shall be $ 20,000 until the dispute isresolved.

Each Shareholder is responsible for his or her legal costsand the cost of a new appraisal or appraiser costs inresolving any issue between the parties.

The parties will attempt to resolve any dispute arisingout of or relating to these Bylaws through friendlynegotiations amongst the parties. If the matter is notresolved by negotiation, the parties will resolve thedispute using the below Alternative Dispute Resolution(ADR) procedure.

Any controversies or disputes arising out of orrelating to this Agreement will be resolved by bindingarbitration under the rules of the American ArbitrationAssociation. The arbitrator's award will be final, andjudgment may be entered upon it by any court havingproper jurisdiction.

*3 The corporation relies on these Bylaws, how itmanages the sales and transfers of company stock andother normal or special corporate behavior.

Any asset of the corporation will be determined bycurrent fair market value by an accredited appraiser anddelivered to the arbitrator within 30 days of the dispute

notification. 3

A shareholder meeting of Debtor's shareholders wasconvened on August 16, 2017, to consider the stockswap. Mr. Capussi attempted to attend the meeting withhis lawyers. The Stockwells turned the lawyers away,saying they could not attend the meeting. Conflict and

disagreement ensued. 4 It seems clear, however, that Mr.Capussi objected to the stock swap. After Mr. Capussi andhis attorneys left the meeting, Lynn Stockwell voted her99.4% of shares to approve the stock swap.

The parties discussed the matter after the meeting andtheir counsel exchanged correspondence. An April 25,2018, email from Mr. Capussi's counsel to Debtor'scounsel stated: “Mr. Capussi has not filed a suit to set

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aside the transaction and does not intend to do so at thistime.”

The Stockwells and Mr. Capussi attempted, but failed, toresolve their differences through mediation. Although Mr.Capussi has not mounted a legal challenge to the stockswap, on June 28, 2018, Debtor filed the motion to compelMr. Capussi to arbitrate the dispute.

II. DISCUSSION

A. Jurisdiction.A threshold question is whether the Court has jurisdictionto rule on the motion to compel arbitration. Mr. Capussiargues that it does not: the proceeding is too far removedfrom the bankruptcy case, in both time and subject matter.

Federal court bankruptcy jurisdiction is set out in 28U.S.C. § 1334 (Bankruptcy cases and proceedings):

(a) Except as provided in subsection (b) of this section,the district court shall have original and exclusivejurisdiction of all cases under title 11.

(b) Except as provided in subsection (e)(2), andnotwithstanding any Act of Congress that confersexclusive jurisdiction on a court or courts other than thedistrict courts, the district courts shall have original butnot exclusive jurisdiction of all civil proceedings arisingunder title 11, or arising in or related to cases under title11.

District courts may refer a portion of their bankruptcy

jurisdiction to bankruptcy courts, 28 U.S.C. § 157(a). 5

While the limits of bankruptcy court jurisdiction, asopposed to district court jurisdiction, are not always clear,

see, e.g., Stern v. Marshall, 564 U.S. 462 (2011), thatdifficulty is not relevant here. Rather, the question iswhether the motion to compel comes within the federal

court's § 1334 jurisdiction, not the jurisdiction referred

to this Court pursuant to § 157(a).

*4 1. Bankruptcy Jurisdiction under § 1334 in

General. Section 1334 has four distinct grants ofjurisdiction:

a. Cases under Title 11. District courts are given exclusivejurisdiction over “cases under title 11.” This meansbankruptcy cases themselves, such as this chapter 11 case.See 1 Collier on Bankruptcy ¶ 3.01[2] (16th ed.);

b. Arising under. District courts are given original but notexclusive jurisdiction over proceedings “arising under title11,” i.e., proceedings involving causes of action created by

title 11. See Gupta v. Quincy Medical Center, 858 F.3d

657, 662 (1st Cir. 2017), citing Stoe v. Flaherty, 436 F.3d209, 217 (3d Cir. 2006). An example is an action to avoid

a preferential transfer under 11 U.S.C. § 547;

c. Arising in. District courts are given original but notexclusive jurisdiction over proceedings “arising in ... casesunder title 11.” These are proceedings “that are not basedon any right expressly created by title 11, but neverthelesswould have no existence outside of the bankruptcy.”

Gupta, 858 F.3d at 662-63, citing Middlesex PowerEquip. & Marine, Inc. v. Town of Tyngsborough, Mass.

( In re Middlesex Power Equip. & Marine, Inc.), 292F.3d 61, 68 (1st Cir. 2002). Examples include orders toturn over property and determinations of the validity,

extent, or priority of liens. Gupta, 858 F.3d at 663;

d. Related to. Finally, district courts are given originalbut not exclusive jurisdiction over proceedings that are“related to cases under title 11.” A proceeding comeswithin this jurisdictional grant “if the outcome of thatproceeding could conceivably have any effect on the estate

being administered in bankruptcy.” Pacor, Inc. v.

Higgins, 743 F.2d 984 (3d Cir. 1985); Gardner v. UnitedStates (In re Gardner), 913 F.2d 1515, 1518 (10th Cir.1990); In re Houlik, 481 B.R. 661, 674 (10th Cir. BAP2012) (citing Gardner ).

Here, the motion to compel is not a case under title 11,does not arise under title 11, and does not arise in a caseunder title 11. The question, then, is whether it is “relatedto” a case under title 11.

2. Post-confirmation “related to” jurisdiction. The district

court's § 1334 bankruptcy jurisdiction is the samepre- and post- plan confirmation. Houlik, 481 B.R.at 675. “However, it is generally accepted that thecourt's jurisdiction narrows to some extent after plan

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confirmation with respect to ‘related to’ jurisdiction.”

Id.; see also In re Gen. Media, Inc., 335 B.R. 66, 73(Bankr. S.D.N.Y. 2005) (“all courts that have addressedthe question have ruled that once confirmation occurs, thebankruptcy court's jurisdiction shrinks.”). The SeventhCircuit reasoned:

Once the bankruptcy court confirmsa plan of reorganization, the debtormay go about its business withoutfurther supervision or approval.The firm also is without theprotection of the bankruptcy court.It may not come running tothe bankruptcy judge every timesomething unpleasant happens.

Pettibone Corp. v. Easley, 935 F.2d 120, 122 (7th Cir.

1991); see also In re Gen. Media, Inc., 335 B.R. at 73

(quoting Pettibone); In re Boston Reg'l Med. Ctr., Inc.,410 F.3d 100, 106–07 (1st Cir. 2005) (“as the corporationmoves on, the connection [to the underlying bankruptcycase] attenuates.”).

*5 3. The “close nexus” test. While the Tenth Circuit hasnot articulated a test for post-confirmation “related to”jurisdiction, other circuits have. The Third Circuit appliesa “close nexus” test for addressing post-confirmation“related to” jurisdiction. “At the post-confirmation stage,the claim must affect an integral aspect of the bankruptcyprocess – there must be a close nexus to the bankruptcy

plan or proceeding.” In re Resorts Int'l, Inc., 372 F.3d154, 167 (3d Cir. 2004). This “close nexus” test has been

adopted by the Ninth Circuit, In re Pegasus Gold Corp.,394 F.3d 1189, 1194 (9th Cir. 2005), and the Fourth

Circuit, Valley Historic Ltd. Partnership v. Bank of New

York, 486 F.3d 831, 837 (4th Cir. 2007). See also In reDPH Holdings Corp., 448 Fed.Appx. 134, at *2 (2d Cir.2011) (unpublished).

The Fifth Circuit uses a narrower standard: “[post-confirmation] the debtor's estate, and thus bankruptcyjurisdiction, ceases to exist, other than for matterspertaining to the implementation or execution of the

plan.” In re Craig's Stores of Texas, Inc., 266 F.3d

388, 390 (5th Cir. 2001), quoting In re FairfieldCommunities, Inc., 142 F.3d 1093, 1095 (8th Cir. 1998).

This Court earlier used the “close nexus” test fordetermining post-confirmation related-to jurisdiction. SeeIn re Hart Oil & Gas, Inc., 534 B.R. 35, 45 (Bankr. D.N.M.2015). In doing so, the Court relied in part on JudgeLynch's cogent opinion in In re Angel Fire Corp., 2013WL 1856350 (D.N.M.). Judge Lynch concluded that “theTenth Circuit and its B.A.P. have effectively applied theclose-nexus test to the few post-confirmation disputes thathave comes to their attention,” In re Angel Fire Corp., 2013WL 1856350, at *12. The Court also relied on Houlik, 481B.R. at 676 (indicating that it would either adopt the closenexus test or one even narrower). Thus, at least for plans

of reorganization rather than liquidation, 6 the Court willuse the “close nexus” test.

4. Defining the “close nexus” test. While the close nexustest has been defined in different ways, most courts use thefollowing:

a close nexus exists between a post-confirmationmatter and a closed bankruptcy proceeding sufficientto support jurisdiction when the matter ‘affect[s]the interpretation, implementation, consummation,execution, or administration of the confirmed plan.

In re Wilshire Courtyard, 729 F.3d 1279, 1289 (9th Cir.

2013); see also In re Resorts Int'l, Inc., 372 F.3d at

168-69; In re DPH Holdings Corp., 448 Fed.Appx. 134,

137 (2d Cir. 2011); Valley Historic Ltd. Partnership v.Bank of New York, 486 F.3d 831, 836 (4th Cir. 2007);In re HNRC Dissolution Co., 2019 WL 326484, n. 4(6th Cir.). The Third Circuit opined that the close-nexustest “recognized the limited nature of post-confirmation

jurisdiction but retains a certain flexibility.” ResortsInt'l, 372 F.3d at 166-67.

B. The Court Lacks Jurisdiction to Compel Arbitration.1. Under the “close nexus” test, the Court lacks “relatedto” jurisdiction. Applying the “close nexus” test to thisdispute, the Court concludes that it does not have “relatedto” jurisdiction to compel Mr. Capussi to arbitratehis alleged dispute with the Debtor. The dispute does

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not affect the “interpretation, implementation, execution,consummation, or administration of the [Debtor's]confirmed plan.” Under the Plan, Debtor was free tomanage its affairs without further order of this Court,and free to sell its property. It has done both. The BrightGreen share swap was not mentioned in the Plan, whichwas confirmed nearly four years ago. Time has separatedthe reorganized Debtor from this Court, and its “relatedto” jurisdiction, significantly. Debtor is and should befree to operate without Court supervision or control. Ifthere is a dispute with Mr. Capussi over the Bright Greentransaction, it should be taken up in state court.

*6 2. The Plan's “Retention of Jurisdiction” doesnot change the result. Article 8 of the Plan (quotedabove) addresses retained post-confirmation jurisdiction.Debtor's dispute with Mr. Capussi does not fall within theretained jurisdiction article. Furthermore, parties cannotuse such retained jurisdiction provisions to expand the

Court's jurisdiction beyond that granted by § 1334:

Retention of jurisdiction provisionswill be given effect, assuming thereis bankruptcy court jurisdiction.But neither the bankruptcy courtnor the parties can write theirown jurisdictional ticket. Subjectmatter jurisdiction “cannot beconferred by consent” of the

parties. Coffin v. Malvern Fed.Sav. Bank, 90 F.3d 851, 854 (3dCir.1996). Where a court lackssubject matter jurisdiction over adispute, the parties cannot createit by agreement even in a plan of

reorganization. In re ContinentalAirlines, Inc., 236 B.R. 318, 323(Bankr.D.Del.1999), aff'd, 2000 WL1425751 (D. Del. September 12,

2000), aff'd, 279 F.3d 226 (3rdCir.2002).

Resorts Int'l, 372 F.3d at 161.

C. There are Other Problems with the Motion toCompel.Apart from the jurisdiction issue, the Motion lacks meritfor several other reasons. First, there is no actual legalcontroversy to arbitrate, as no lawsuit has been filed.Grumbling and (apparently) idle threats of litigation likelyare insufficient to trigger arbitration rights or obligations.Second, the dispute resolution language in the Bylawsmay have been adopted after Mr. Capussi became ashareholder. If so, he may not be bound by them. See,

e.g., Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63,67 (2010) (“arbitration is a matter of contract.”). Third,the dispute, if there is one, relates to the advisability ofmerging Debtor with Bright Green, rather than to thevalue of Debtor's assets. As such, the dispute resolutionprovisions in the Bylaws may not apply. Finally, if thestock swap received the requisite shareholder approval,Debtor's Bylaws may no longer be relevant.

III. CONCLUSION

This Court does not have post-confirmation jurisdictionto compel Mr. Capussi to arbitrate his alleged dispute withthe reorganized Debtor. Even if it had such jurisdictionit is questionable whether compelling Mr. Capussi toarbitrate would be possible and/or warranted. The Courttherefore will deny the motion, by separate order.

All Citations

Slip Copy, 2019 WL 507536

Footnotes1 Most of the findings are taken from the dockets in the bankruptcy case. See St. Louis Baptist Temple, Inc. v. Fed.

Deposit Ins. Corp., 605 F.2d 1169, 1172 (10th Cir. 1979) (holding that a court may sua sponte take judicial notice of its

docket); LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 196 F.3d 1, 8 (1st Cir. 1999) (same). The

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court also took judicial notice of the New Mexico Secretary of State web site (www.sos.nm.us) listing the formation dateand organizer of Bright Green Grow Innovations, LLC.

2 Bright Green was organized by John Stockwell in December 2015.

3 The title of the Bylaws indicates they were drafted, at least in part, on June 25, 2003, even though the last page saysthey were adopted on December 16, 2016. Article IX does not seem to match the other articles of the Bylaws. In ArticleIX, “Shareholder” is capitalized, unlike the rest of the Bylaws. Article IX sometimes refers to “Shareholders” and othertime to “parties.” The font for the last two paragraphs of Article IX is different from the rest of the Bylaws. The subjectmatter of the article appears tailored to the dispute between the Stockwells and Mr. Capussi. It could be that Article IXwas drafted by the Stockwells after Mr. Capussi became a shareholder and added to the Bylaws, in anticipation of thestock swap dispute.

4 The meeting was transcribed. The transcript reveals, among other things, that the Stockwells joined or left the meeting14 times.

5 § 157(a) introduces the concept of “core proceedings” that bankruptcy courts may hear and determine. By Misc. Order

no. 84-0324, the District Court for the District of New Mexico refers all cases and proceedings listed in 28 U.S.C. §§

157(a) and 1334 to this Court, including all core proceedings.

6 The Court's post-confirmation “related to” jurisdiction may be broader if a confirmed plan is one of liquidation rather than

reorganization. See, e.g., Boston Regional Med. Ctr., Inc. v. Reynolds (In re Boston Regional Med. Ctr.), 410 F.3d100, 107 (1st Cir. 2005); Houlik, 481 B.R. at 675 (citing Boston Regional with approval).

End of Document © 2019 Thomson Reuters. No claim to original U.S. Government Works.

In re Fundamental Long Term Care, Inc., 753 Fed.Appx. 878 (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

753 Fed.Appx. 878This case was not selected for

publication in West's Federal Reporter.See Fed. Rule of Appellate Procedure 32.1

generally governing citation of judicialdecisions issued on or after Jan. 1, 2007.

See also U.S. Ct. of App. 11th Cir. Rule 36-2.United States Court of Appeals, Eleventh Circuit.

IN RE: FUNDAMENTAL LONGTERM CARE, INC., Debtor.

Juanita Jackson, collectively the ProbateEstates, Elvira Nunziata, collectively the ProbateEstates, Joseph Webb, collectively the Probate

Estates, Opal Lee Sasser, collectively the ProbateEstates, Arlene Townsend, collectively the

Probate Estates, James H. Jones, collectivelythe Probate Estates, Plaintiffs-Appellants,

v.Rubin Schron, Defendant-Appellee.

No. 17-11233|

(February 15, 2019)

SynopsisBackground: Probate estates of several deceased nursinghome patients, which had obtained prepetition judgmentsin wrongful death lawsuits in state court against debtorand related entities and individuals, including realestate investor, together with Chapter 7 trustee, broughtadversary proceeding seeking to void the transfer ofassets. Following dismissal of some of the claims withoutprejudice, 507 B.R. 359, estates filed second amendedcomplaint, and defendants moved to dismiss. The UnitedStates Bankruptcy Court for the Middle District ofFlorida, Michael G. Williamson, J., 512 B.R. 690, grantedmotion in part, and in subsequent proceeding, 569 B.R.904, enjoined estates' pursuit of state court claims. Estatesappealed. The District Court, Elizabeth A. Kovachevich,J., 2016 WL 4718145, affirmed, and the Court of Appeals,Julie Carnes, Circuit Judge, 873 F.3d 1325, also affirmed.Investor, who had previously been dismissed from theproceeding, filed motion to tax costs, seeking an orderrequiring the estates to pay certain costs he incurred fromthe litigation. The bankruptcy court entered an orderawarding him $60,162.19 in costs, including depositionand hearing transcripts and related expenses. Estates

appealed to the district court, which affirmed. Estatesappealed.

Holdings: The Court of Appeals held that:

bankruptcy court did not abuse its discretion in awarding$58,650.19 in deposition transcript and video costs and$1,512.00 in hearing transcript costs to investor;

bankruptcy court did not abuse its discretion in awarding$15,500.53 to investor for transcript costs from other,related actions;

bankruptcy court did not abuse its discretion in awarding$1,512.00 in pretrial hearing transcript costs to investor;

estates waived argument on appeal that bankruptcy courtwas not authorized to award $15,092.06 to investor for“extraneous costs”; and

estates waived argument on appeal that equitableconsiderations did not warrant award of costs to investor.

Affirmed.

Procedural Posture(s): On Appeal; Motion for Costs.

Attorneys and Law Firms

*880 Bennie Lazzara, Jr., James L. Wilkes, II, JoannaM. Dettloff, Wilkes & McHugh, PA, Tampa, FL, ColinM. Esgro, Wilkes McHugh Law Office, Pittsburgh, PA,Daniel R. Fogarty, Harley E. Riedel, II, Stichter RiedelBlain & Postler, PA, Tampa, FL, Isaac R. Ruiz-Carus,Rissman Barrett Hurt Donahue & McLain, PA, Tampa,FL, for Plaintiffs-Appellants

Steven Andrew Engel, Benjamin E. Rosenberg, KatherineWyman, Dechert, LLP, New York, NY, RodneyAnderson, Joseph H. Varner, III, Holland & Knight, LLP,Tampa, FL, for Defendant-Appellee

Appeal from the United States District Court for theMiddle District of Florida, D.C. Docket Nos. 8:16-cv-00464-EAK & 8:11-bkc-22258-MGW

Before WILLIAM PRYOR, BRANCH, andANDERSON, Circuit Judges.

In re Fundamental Long Term Care, Inc., 753 Fed.Appx. 878 (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 2

Opinion

PER CURIAM:

This case is an appeal of a bankruptcy court’s award ofcosts to the defendant-appellee, Rubin Schron. We findno error by the bankruptcy court in awarding costs, andaffirm.

I. Background

The parties litigated the underlying bankruptcy case formany years, including a previous appeal to this Court.In re Fundamental Long Term Care, Inc., 873 F.3d 1325(11th Cir. 2017), cert. denied sub nom. Estate of Jacksonv. Schron, ––– U.S. ––––, 139 S.Ct. 210, 202 L.Ed.2d 125(2018). Our opinion in that case recounts the details of thisdispute; the basic facts are as follows:

In 2006, the estates of several deceased nursing homepatients (“the Estates”) filed wrongful death andnegligence actions in state court against a nursinghome company, Trans Healthcare, Inc, (“THI”), andits related management services company, Trans HealthManagement, Inc. (“THMI”). In anticipation of whatthey perceived to be a set of likely adverse judgments,the defendants in that case executed a scheme (the“2006 Transaction”) whereby the assets of THMI weretransferred to a new entity, Fundamental Long TermCare, Inc. (“FLTCI”), leaving THMI as a shell. THI,for its part, went out of business. In this way, thedefendants thought they could avoid the effects of anadverse judgment.

The Estates’ suits were successful, but when the Estatesfigured out that the judgments in their favor were againstinsolvent shell companies, they filed state court actionson fraudulent transfer theories against various entities,including a real estate investor, Rubin Schron, allegingliability under agency theories in an attempt to tiehim to the 2006 Transaction. The Estates also filed aninvoluntary bankruptcy petition against FLTCI, seekingto void the transfer of assets. The bankruptcy court in thataction appointed a trustee.

Concerned that the parallel state and bankruptcylitigation could result in inconsistent outcomes, thebankruptcy court in 2013 enjoined the Estates’ pursuit

of the state court claims and ordered that all of theEstates’ claims against the defendants based on the 2006Transaction be litigated in an adversary proceeding beforethe bankruptcy court. The Estates filed a complaint*881 in the bankruptcy court to begin that adversary

proceeding. The complaint named numerous entities andindividuals as defendants, including Schron.

Schron filed a motion to dismiss for failure to state a claim,insisting that he had nothing to do with the transactionsin question and should not be a party in the proceeding.The bankruptcy court agreed, and dismissed Schron fromthe suit in July of 2014, “concluding that his allegedconnection with the transaction was speculative at best.”In re Fundamental Long Term Care, Inc., 873 F.3d at 1329.After the Estates entered mediation with the remainingdefendants and settled for $24 million, in May of 2016 thebankruptcy court permanently enjoined the Estates from“pursuing claims against Rubin Schron arising out of thenucleus of facts set forth in the adversary complaint inthis proceeding.” Id. at 1334. The Estates then appealedthe dismissal of Schron from the bankruptcy case andthe injunction preventing them from pursuing the sameclaims in state court. Both the district court and this Courtaffirmed. Estate of Jackson v. Schron, No. 8:16-CV-22-T-17, 2016 WL 4718145 (M.D. Fla. Sept. 8, 2016), aff’dsub nom. In re Fundamental Long Term Care, Inc., 873F.3d 1325 (11th Cir. 2017).

Schron filed a Motion to Tax Costs, seeking an orderrequiring the Estates to pay certain costs he incurred fromthe litigation. After a hearing on the motion, in February2016 the bankruptcy court entered an order awardinghim $60,162.19 in costs, including deposition and hearingtranscripts and related expenses. The Estates appealed tothe district court, which affirmed shortly thereafter.

The Estates then appealed the costs award to this Court,which stayed the appeal until the resolution of the appealon the underlying substantive case. After resolving thatappeal and denying a petition for rehearing en banc, thisCourt lifted the stay in this case regarding costs. Thematter is now ripe for review.

II. Legal Standard

In bankruptcy cases this Court “sits as a second courtof review and thus examines independently the factual

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and legal determinations of the bankruptcy court andemploys the same standards of review as the district court”for both factual findings and legal determinations. In reOcean Warrior, Inc., 835 F.3d 1310, 1315 (11th Cir. 2016)(quoting In re Fisher Island Invs., Inc., 778 F.3d 1172, 1189(11th Cir. 2015) ); see also In re Gonzalez, 832 F.3d 1251,1253 (11th Cir. 2016), cert. denied sub nom. Fla. Dep’t ofRevenue v. Gonzalez, ––– U.S. ––––, 137 S.Ct. 2293, 198L.Ed.2d 725 (2017).

Federal Rule of Bankruptcy Procedure 7054(b)(1) statesthat the court “may allow costs to the prevailing partyexcept when a statute of the United States or these rulesotherwise provides.” Title 28 U.S.C. § 1920 lists whatthe court may tax as costs, including “[f]ees for printedor electronically recorded transcripts necessarily obtained

for use in the case.” 1 *882 Id. § 1920(2). “This court willnot disturb a costs award in the absence of a clear abuse

of discretion.” U.S. E.E.O.C. v. W & O, Inc., 213 F.3d

600, 619 (11th Cir. 2000) (quoting Tech. Res. Servs.,Inc. v. Dornier Med. Sys., Inc., 134 F.3d 1458, 1468 (11thCir. 1998) ).

III. Discussion

We review the bankruptcy court’s determination of thecosts award for abuse of discretion, and consider each ofthe Estates’ arguments in turn.

A. Transcripts Not Used in the Dismissal OrderThe $60,162.19 in costs awarded by the bankruptcycourt included $58,650.19 in deposition transcript andvideo costs and $1,512.00 in hearing transcript costs.The Estates argue that these deposition and hearingtranscript costs “were not related to Schron’s 12(b)(6)motion,” and thus not authorized as “necessarily obtainedfor use in the case” under § 1920. The Estates insistthat because the bankruptcy court’s 12(b)(6) analysis wasinherently limited to an examination of the sufficiency ofthe operative complaint, the “use” of the transcripts wouldbe impermissible.

Thus the issue is whether costs can be taxed when atranscript is not ultimately used in a dispositive motion.The Estates attribute a narrowness to § 1920 that does notcomport with the text of the statute. Section 1920 simply

requires that the transcripts be “necessarily obtained foruse in the case.” There is no requirement in the statutorytext that the transcripts must be used later in a proceedingor motion, or that they be cited in the dispositive order.

Our precedent confirms a broader construction of §1920 than the Estates propose. Although “admission intoevidence or use during cross-examination tends to showthat [a transcript] was necessarily obtained,” “[i]t is notnecessary to use a deposition at trial for it to be taxable.”

W & O, Inc., 213 F.3d at 621. We have upheld costsfor depositions of witnesses whose testimony was “notused ... at summary judgment or at trial, and [the party]successfully moved in limine to have the testimony of all

three of these witnesses excluded from trial.” Id. at622. Under such circumstances, the testimony could nothave been used in the dispositive proceeding or motion,but it does not matter if “the use of these depositionswas minimal or that they were not critical to the [party’s]

ultimate success.” Id. at 621. The operative principleis that such costs are taxable when the party opposingthe costs “has not demonstrated that any portion of thedepositions was not ‘related to an issue which was present

in the case at the time the deposition was taken.’ ” Id.

(quoting Indep. Tube Corp. v. Copperweld Corp., 543 F.Supp. 706, 718 (N.D. Ill. 1982) ).

Here, the Estates argue that the depositions and hearingswere unrelated to the motion to dismiss but they have notshown that the depositions and hearings were unrelated

to an issue in the case at the time they occurred. 2 Thebankruptcy court *883 did not abuse its discretion onthis basis by awarding costs for transcripts that were notused in the motion to dismiss.

B. Non-Adversary Proceeding TranscriptsThe Estates also argue that the bankruptcy court’s awardof $15,500.53 for transcripts from other actions (the statecourt actions and the Rule 2004 bankruptcy investigationthat preceded the adversary proceeding) which are distinctfrom the adversary proceeding was an abuse of discretionbecause these transcripts were not necessary for use in thiscase.

We reiterate that § 1920 requires only that a transcript’scost be “necessarily obtained for use in the case.” 28

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U.S.C. § 1920(2). Nothing in § 1920 requires that thedeposition be taken as part of discovery in the same casein which a party requests taxation of costs. It requiresonly that the transcripts be “for use in the case.” § 1920(2)(emphasis added). The statute makes no distinction basedon whether or not the transcripts bear the same casenumber as the action in which the costs are sought.

The Estates have cited no cases from this Circuit thatcategorically exclude transcript costs merely by virtue ofbeing an element of discovery in a separate action. Infact, as the Estates admit, a “Rule 2004 examination is abankruptcy investigative tool that parties in interest useprior to the filing of an adversary proceeding.” It would beodd to declare that the fruits of that “investigative tool”are not necessary for use in the subsequent adversarialproceeding.

With respect to the two state court transcripts challengedby the Estates, this Court previously found that the statecourt claims were “substantially similar, if not identical, tothe claims” in the adversary proceeding. In re FundamentalLong Term Care, Inc., 873 F.3d at 1340. This Courthas already noted the relationship of the state courtdiscovery to the bankruptcy proceeding: “Plaintiffs hadenjoyed the opportunity for extensive discovery in state-court proceedings by the time of the Second AmendedComplaint.” Id., 873 F.3d at 1342. In fact, one of thestate court deposition transcripts in question is of adeposition of Schron himself. It was therefore reasonableto believe that the transcripts from the related state courtcases would be used against Schron in the adversaryproceeding. The fact that the transcripts had their genesesin technically separate legal actions is irrelevant to thedispositive issue: whether they were necessarily obtainedfor use in this case.

As the district court correctly concluded, the Estates’argument “overlooks the realities of litigation,” inparticular the realities of the litigation in this dispute.Here, given the timeline of events and the particulartranscripts obtained, the bankruptcy court did not abuseits discretion in awarding costs related to these transcripts.The depositions that took place before the adversaryproceeding were, as the district court correctly pointedout, the “basis” for the claims in the adversary proceeding.Accordingly, the bankruptcy court did not abuse itsdiscretion by awarding costs for the transcripts from

separate but closely related actions involving the sameunderlying dispute.

C. Pretrial Hearing TranscriptsThe protracted litigation in the underlying case on themerits resulted in an *884 extensive number of hearingsin the bankruptcy court, and Schron requested transcriptsof some of those proceedings. The bankruptcy courtincluded the costs of those transcripts, but the Estatesargue that $1,512.00 in pretrial hearing transcript costs arenot recoverable under § 1920.

First, the Estates assert that Schron failed to showthat the hearing transcripts “limited or clarified issues”which were to be heard at trial and that Schroncould have simply reviewed the pleadings and orderssurrounding the hearings. Section 1920 includes thecosts of “printed or electronically recorded transcriptsnecessarily obtained for use in the case,” and we see noreason why that language does not include transcripts of

pretrial hearings. See, e.g., Chore-Time Equip., Inc. v.Cumberland Corp., 713 F.2d 774, 781–82 (Fed. Cir. 1983).Contrary to the Estates’ argument, pleadings and orderssurrounding hearings may not be enough to completethe litigation picture without transcripts of the hearingsthemselves. This case provides an illustrative example.The bankruptcy court held a hearing during which itdiscussed its findings regarding the taxation of costs; itsorder on the matter simply referenced the hearing. Insuch circumstances, merely reading the briefs and orderdoes not offer insight into the court’s reasoning. We willnot categorically remove a hearing transcript from thescope of § 1920 simply because the hearing had associatedbriefing and orders.

Second, the Estates point to certain transcripts of hearingsthat took place after the bankruptcy court dismissed theclaims against Schron from the case, arguing that it wasnot within the bankruptcy court’s discretion to award thecosts of those transcripts. The question thus is whetherthe timing of some of the hearings makes the cost of theirtranscripts unrecoverable under § 1920.

This Court has previously described Schron’s continuedinvolvement in the litigation following his dismissal asfollows:

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Having earlier been dismissedfrom the adversary proceedingat the pleading stage, Schronwas the sole non-settlingDefendant. Throughout theadversary proceeding, the Estateshad maintained their intentionto pursue further state actionsagainst Schron notwithstanding hisearly dismissal from the case.Schron recognized the possibilityof future action against him ina different venue and accordinglyopposed the various settlementsunless they were accompanied by apermanent injunction preventing theEstates from reviving or bringingany new state-court judgment-enforcement actions against him.Thus, Schron’s insistence on apermanent injunction reflected hislegitimate fear that Plaintiffs wouldtry to upend the resolution reachedby the bankruptcy court after muchlitigation by the parties.

In re Fundamental Long Term Care, Inc., 873 F.3d at1334. Additionally, the Estates appealed the bankruptcycourt’s dismissal of Schron to the district court as wellas to this Court. The ongoing litigation and appeals, andthe subsequent need for Schron to maintain participationin the dispute, justified the costs for transcripts ofthe hearings in question. Under such circumstances, itwas reasonable for Schron to request transcripts. In reFundamental Long Term Care, Inc., 569 B.R. 904 (Bankr.M.D. Fla. 2016) (detailing the continued assertion ofclaims by the Estates against Schron).

Accordingly, we find the bankruptcy court did not abuseits discretion by taxing costs for the pretrial hearingtranscripts.

*885 D. Extraneous Costs

The Estates argue that $15,092.06 3 awarded for“extraneous costs” such as “charges for video streaming,

E-CD litigation packages, conference call/telecomappearances, expedited transcripts, ASC-II rough drafts,technology surcharges, and postage/shipping/handling/processing,” are not authorized by 28 U.S.C. § 1920. TheEstates never singled out these “extraneous” costs to thebankruptcy court, but they insist this new argument isencompassed in their broader argument: the claimed costswere not necessary to the adversary proceeding.

The Estates argue that regardless of the necessity tothe case, these types of costs are not authorized by §1920. However, by not advancing this argument in thebankruptcy court proceeding, the Estates have waived it,and this Court does not have to reach the substantivequestion of whether the bankruptcy court abused itsdiscretion. “We have declined to address issues not raisedbefore the bankruptcy court because an alternate coursewould ‘delay the disposition of bankruptcy cases’ andpermit a party ... to ‘say nothing to the bankruptcy court,await its ruling, bypass that judgment, and for the first

time take that objection to the district court.’ ” In reWorldwide Web Sys., Inc., 328 F.3d 1291, 1300 (11th Cir.2003) (quoting In re Daikin Miami Overseas, Inc., 868 F.2d1201, 1208 (11th Cir. 1989) ). Without being presentedwith argument contesting these costs, the bankruptcycourt could not have erred by including these ancillary

costs in its award. 4

E. Equitable ConsiderationsThe Estates also raise concerns based in equity. They donot claim that the costs awarded are exorbitant; ratherthey point to alleged discovery of malfeasance by theother side’s attorneys. Their argument, however, doesnot explain how the alleged malfeasance is related to thecosts; instead, they simply insist that the bankruptcy court“failed to consider the unfair nature of the proceedingsbelow” when it entered judgment in Schron’s favor andtaxed costs.

The Estates are essentially asking us to hold that the“unfair” nature of the bankruptcy court’s dismissal oftheir case with respect to Schron demands a differentoutcome with respect to costs. The Estates failed to bringthis argument at the bankruptcy court below, and so this

Court need not address it. See Denis v. Liberty Mut. Ins.Co., 791 F.2d 846, 848–49 (11th Cir. 1986). But even if wewere so inclined, this Court found nothing “unfair” about

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the bankruptcy court’s dismissal of the claims againstSchron with prejudice when we affirmed that decisionjust last year. *886 In re Fundamental Long Term Care,Inc., 873 F.3d at 1347–48. Under such circumstances,the equitable considerations in this case do not favor theEstates.

For the foregoing reasons, we affirm the award of costs inits entirety.

AFFIRMED.

All Citations

753 Fed.Appx. 878

Footnotes1 Title 28 U.S.C. § 1920 states in full:

A judge or clerk of any court of the United States may tax as costs the following:(1) Fees of the clerk and marshal;(2) Fees for printed or electronically recorded transcripts necessarily obtained for use in the case;(3) Fees and disbursements for printing and witnesses;(4) Fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtainedfor use in the case;(5) Docket fees under section 1923 of this title;(6) Compensation of court appointed experts, compensation of interpreters, and salaries, fees, expenses, and costsof special interpretation services under section 1828 of this title.A bill of costs shall be filed in the case and, upon allowance, included in the judgment or decree.

2 We note that with respect to depositions which were noticed by the Estates, there is an additional factor in favor of taxingcosts. “Taxation of deposition costs of witnesses on the losing party’s witness list is reasonable because the listing ofthose witnesses indicated both that the plaintiff might need the deposition transcripts to cross-examine the witnesses”,and that “ ‘the information those people had on the subject matter of this suit was not so irrelevant or so unimportant

that their depositions were outside the bound of discovery.’ ” W & O, Inc., 213 F.3d at 621 (quoting IndependenceTube Corp., 543 F.Supp. at 717) (internal citation omitted).

3 In their opening brief, the Estates listed the figure of “extraneous” costs as $15,750.10, but changed it to $15,092.06 intheir reply brief. Neither figure was presented to the bankruptcy court.

4 We note that even if we were to reach the merits of this issue, the types of expenses in question are not categorically

outside the bounds of the statute. See, e.g., Maris Distrib. Co. v. Anheuser-Busch, Inc., 302 F.3d 1207, 1226 (11thCir. 2002) (“Although we do not believe that the costs associated with expedited trial transcripts should be allowed asa matter of course, lest litigation costs be unnecessarily increased, the district court found that expedited transcriptswere necessary in this case given its length and complexity.... [W]e cannot say that the district court clearly abused itsdiscretion by reaching this conclusion.”). The fact-intensive analysis required to parse which ancillary expenses shouldbe included in an award of costs is far better left to the bankruptcy court—and is all the more reason why the Estatesshould have presented their argument regarding these costs to the bankruptcy court in the first instance.

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