With eight dissents from the denial of a petition for rehearing en banc, an opinion from the Fifth Circuit teaches an important lesson for creditors’ counsel: If your client has important interests at stake, do not attend a confirmation hearing by telephone.
Instead, attend confirmation hearings in person to dissect last-minute changes in the confirmation order and plan.
The Plan Extinguishes an Easement
The debtor owned real property on which the owner of adjoining land had an easement for a road that was the only access to the adjoining land. The owner of the adjoining land was an instrumentality of the State of Texas presumptively entitled to raise a defense of Eleventh Amendment sovereign immunity.
The debtor held a Section 363(f) sale of the land to be free and clear of liens, claims and “encumbrances.” A third party was the prevailing bidder at auction. The sale was to be completed as part of the confirmation of the debtor’s chapter 11 plan.
The debtor, the landowner and two factions on the Fifth Circuit disagreed about one pivotal fact: Was it clear from the outset that the sale and plan would extinguish the easement held by the adjoining landowner?
Whatever the facts might be in that regard, the debtor’s counsel made extensive changes in the 334-page confirmation order on the night before the confirmation hearing. The final form of the confirmation order was filed electronically just hours before the hearing. At the hearing, the debtor’s counsel did not circulate a blackline showing last-minute alterations.
At the confirmation hearing, debtor’s counsel said there were “extensive” changes in the confirmation order but that none were “material in any real way.” However, the confirmation order did in fact extinguish the easement.
Counsel for the landowner attended the confirmation hearing by telephone and, therefore, could not inspect the proposed confirmation order. Presumably, however, the landowner’s counsel could have inquired about the status of the easement by speaking up at the hearing.
The bankruptcy judge confirmed the plan. The landowner did not appeal.
Six weeks after confirmation, the buyer sold the property to a third party, who informed the landowner that the easement had been extinguished. The landowner responded by filing an adversary proceeding in bankruptcy court.
The bankruptcy court dismissed the landowner’s claims based on fraud and sovereign immunity. The bankruptcy court declined to dismiss the landowner’s claim for denial of due process. The district court affirmed.
Three Circuit Judges vs. Eight
The three-judge panel of the Fifth Circuit affirmed in August. The landowner responded with a petition for panel rehearing and rehearing en banc. On February 27, the Fifth Circuit denied the petition for panel rehearing and rehearing en banc. However, the panel withdrew its August opinion and filed a new opinion reaching the same results.
Like the August version, the new opinion for the panel was authored by Circuit Judge Patrick E. Higginbotham.
The landowner, an instrumentality of the state, contended that the state’s sovereign immunity barred the bankruptcy court from eradicating the easement.
Judge Higginbotham trotted out Supreme Court authority for the proposition that an exercise of the bankruptcy court’s in rem jurisdiction over estate assets does not offend a state’s Eleventh Amendment sovereign immunity. In the case at hand, he said, the bankruptcy court had jurisdiction over the bankrupt estate and gave no affirmative relief against the state. Furthermore, the landowner only had a nonpossessory interest in the debtor’s real property.
Because the bankruptcy court was not exercising in personam jurisdiction over the estate, Judge Higginbotham said there was no Eleventh Amendment violation.
Judge Higginbotham insinuated there might have been flaws in the use of Section 363(f) to extinguish the easement. That argument, he said, was “foreclosed” because the landowner had not taken an appeal from the confirmation order. He therefore upheld dismissal of the Eleventh Amendment claim.
Judge Higginbotham then turned to the landowner’s argument under Section 1144, which allows revocation within six months of confirmation if the order was procured by fraud.
Although eight active judges on the Fifth Circuit fervently disagreed, Judge Higginbotham said there was no fraud. As he read the record, it was always clear that the debtor intended to sell the property and extinguish the easement.
Upholding dismissal of the claim for fraud, Judge Higginbotham said that the panel’s decision “does not undermine” the landowner’s ongoing claim based on denial of due process.
Led by Circuit Judge Edith H. Jones, eight active judges on the circuit dissented from the denial of the petition for rehearing en banc. She said that events in the bankruptcy court raised “troubling due process questions.” The dissenters expressed concern that the panel’s “dismissive attitude toward the due process claim” would tilt the scales against the landowner in the ongoing due process litigation.
There are 16 active judges on the Fifth Circuit. The eight favoring rehearing en banc did not constitute a majority to grant the petition.
With eight dissents from the denial of a petition for rehearing en banc, an opinion from the Fifth Circuit teaches an important lesson for creditors’ counsel: If your client has important interests at stake, do not attend a confirmation hearing by telephone.
Instead, attend confirmation hearings in person to dissect last-minute changes in the confirmation order and plan.
The debtor owned real property on which the owner of adjoining land had an easement for a road that was the only access to the adjoining land. The owner of the adjoining land was an instrumentality of the State of Texas presumptively entitled to raise a defense of Eleventh Amendment sovereign immunity.
The debtor held a Section 363(f) sale of the land to be free and clear of liens, claims and “encumbrances.” A third party was the prevailing bidder at auction. The sale was to be completed as part of the confirmation of the debtor’s chapter 11 plan.