The Fifth Circuit teaches us to beware of negotiated consent orders. Without regard to the intent of the parties, a consent order will be interpreted strictly according to its terms, just like a contract, even if it produces an arguably “unreasonable result.”
The appeals court’s February 9 opinion also attests to the power of a bankruptcy court over noncore matters when the parties consented.
The Broadly Worded Consent Order
A creditor was a party to a contract with the debtor. Before bankruptcy, the creditor and the debtor were asserting claims against one another in state court. The debtor filed a chapter 11 petition, halting the suit in state court.
In bankruptcy, the debtor sold its assets to the secured lender, including the debtor’s claims against the creditor in state court. To some extent, both the lender and the creditor wanted the suit to proceed in state court. Entered by the bankruptcy court, a consent order negotiated among the parties modified the automatic stay and provided the following:
- In state court, the creditor could liquidate its claims against the debtor for the purpose of exercising its rights of setoff and recoupment;
- If the creditor were to obtain a judgment in excess of the debtor’s claims, the excess could only be enforced by a proof of claim in the bankruptcy case; and
- The creditor could recover “no money damages” from the lender “under any circumstances on account of any claims that have been or could have been asserted in” state court. [Emphasis added.]
With the benefit of hindsight, the creditor came to realize that the italicized language in the agreed order was too broad. Here’s why:
In discovery in state court, the creditor learned that the lender allegedly directed the debtor to breach the contract with the creditor. The creditor then sought leave from the state court to assert new claims against both the debtor and the lender.
Trumpeting the agreed order, the lender moved in bankruptcy court to bar the creditor from asserting any direct claims against the lender. Bankruptcy Judge Harlan D. Hale of Dallas sided with the lender and interpreted the agreed order as barring the creditor from asserting any claims in state court against the lender.
Later, the creditor filed a motion in bankruptcy court under Rules 60(b)(4) and (b)(6), contending that the bankruptcy court lacked jurisdiction to enter an order barring one nondebtor (the creditor) from suing another nondebtor (the lender). Bankruptcy Judge Hale found that he had jurisdiction and denied the motion for reconsideration because the language in the lift-stay order had been negotiated among the parties.
The district court affirmed, prompting the creditor to appeal unsuccessfully to the circuit court.
The Bankruptcy Court’s Jurisdiction
In his February 9 opinion, Circuit Judge Patrick E. Higginbotham first addressed the jurisdiction and power of the bankruptcy court to enjoin one nondebtor from suing another nondebtor. Odds would have seemed to favor reversal, because the Fifth Circuit is one of three circuits commonly understood as prohibiting nonconsensual, third-party releases in chapter 11 plans. See Bank of N.Y. Trust Co. v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009).
Making no analogy to chapter 11, Judge Higginbotham did not depart from established law closer to home. He quickly concluded that a claim by the creditor against the lender could “conceivably” affect the bankruptcy estate, thus conferring “related to” jurisdiction.
Even given jurisdiction, the constitutional power of the bankruptcy court was another question, because the claims by one nondebtor against another were noncore.
Without hesitation, Judge Higginbotham concluded that the lender and the creditor had “knowingly and voluntarily consented to the bankruptcy court’s jurisdiction over the claims in the California Action.” He said,
The parties agreed to the language of the [consent order] and presented it to the bankruptcy court, which then entered the proposed order. The parties having thus consented, the bankruptcy court had jurisdiction to hear and enter appropriate orders related to the proceedings surrounding the entry of the Lift Stay Order.
With jurisdiction and constitutional power to enter the consent order, Judge Higginbotham said that the bankruptcy court “retained jurisdiction to interpret and enforce its orders.”
Interpreting a Consent Order
Referring to the motion for rehearing that the bankruptcy court denied, the creditor argued that the court ignored the parties’ intent and “surrounding circumstances” to “produce an unreasonable result.”
Given that the consent order was negotiated and drafted by the parties, Judge Higginbotham approached interpretation as matter of contract law. He said,
Where a contract’s terms are unambiguous, it must be enforced irrespective of the parties’ subjective intent; the same applies to an unambiguous court order such as the [consent order].
Judge Higginbotham said that the consent order “unambiguously conditioned” stay modification by ordering that the creditor could obtain “no money damages . . . of any kind” from the lender. Reliance on “subjective intent” was “unavailing,” and references to the circumstances were “also irrelevant when interpreting an unambiguous consent order.”
The lesson to be learned: Be careful when negotiating consent orders. They will be interpreted strictly in accordance with the plain language.
The Fifth Circuit teaches us to beware of negotiated consent orders. Without regard to the intent of the parties, a consent order will be interpreted strictly according to its terms, just like a contract, even if it produces an arguably “unreasonable result.”
The appeals court’s February 9 opinion also attests to the power of a bankruptcy court over noncore matters when the parties consented.