This writer was under the impression that orders by bankruptcy courts are to be interpreted according to their plain terms, particularly so when the bankruptcy court has interpreted its own order.
Evidently in the Ninth Circuit, an appellate court can rewrite a bankruptcy court’s order in exigent circumstances. Notably, the circuit court’s opinion is nonprecedential.
The Sale Agreement and Approval Order
The stalking horse bidder signed a contract to buy a hotel and made a $250,000 deposit. The sale agreement said that the deposit was nonrefundable absent a flood or “other casualty.”
The stalking horse won the auction. At the sale-approval hearing, the bankruptcy judge said that the buyer would forfeit the refund “if you can’t close.” The bankruptcy judge went on to say that the inability to obtain financing, to obtain a transfer of the franchise or to deliver the purchase price on the closing day would not be grounds to return the deposit.
The sale-approval order said that the “deposit is nonrefundable.”
After the sale was approved, there was a water leak, which was concededly a “casualty” within the meaning of the sale contract. The buyer demanded the return of its deposit, but the trustee refused.
After the sale-approval hearing, the case was reassigned to a different bankruptcy judge. The new bankruptcy judge interpreted the sale order as overriding the buyer protections in the contract. The district court affirmed, but the circuit reversed in a nonprecedential, per curiam opinion on December 28.
The circuit court found “no evidence” in the record that the bankruptcy judge intended to modify the contract. More precisely, the appeals court said that the bankruptcy judge did not “purport to alter or supersede [the sale contract]” at the auction or in the sale order.
With regard to the bankruptcy judge’s statement at the sale hearing about forfeiting the deposit, the appeals court said it was “not inconsistent” with the contract and did not “mandate forfeiture of the deposit in the case of a casualty.”
Saying that general language in the sale-approval order did not alter the specific terms in the contract, the circuit court reversed the lower courts, mandated the return of the deposit and held that “the Sale Order’s general statement about nonrefundability of the deposit does not override the specific terms of the [sale contract.]”
Observations
Notably, the bankruptcy judge who interpreted the order was not the same bankruptcy judge who signed the order. That fact may explain why the appeals court gave little deference to the bankruptcy court’s interpretation of its own order.
To buttress its opinion, the Ninth Circuit panel could have cited the fabled but fictitious decision, In re Rachmonis.
The opinion presents practical problems for bankruptcy courts in the Ninth Circuit. Sale orders are often negotiated heavily in the hallway before or after a sale-approval hearing but before submission of the order.
If the submitted order changes the terms of sale without reference to contrary provisions in the contract, what controls? The contract or the order?
If there are no findings of fact by the bankruptcy court when the order alters the terms of sale, there is a risk of reversal, but the bankruptcy judge may be unaware of changes not made in her or his presence.
Concerns of the sort are mitigated because the opinion was nonprecedential.
This writer was under the impression that orders by bankruptcy courts are to be interpreted according to their plain terms, particularly so when the bankruptcy court has interpreted its own order.
Evidently in the Ninth Circuit, an appellate court can rewrite a bankruptcy court’s order in exigent circumstances. Notably, the circuit court’s opinion is nonprecedential.
The Sale Agreement and Approval Order
The stalking horse bidder signed a contract to buy a hotel and made a $250,000 deposit. The sale agreement said that the deposit was nonrefundable absent a flood or “other casualty.”
The stalking horse won the auction. At the sale-approval hearing, the bankruptcy judge said that the buyer would forfeit the refund “if you can’t close.” The bankruptcy judge went on to say that the inability to obtain financing, to obtain a transfer of the franchise or to deliver the purchase price on the closing day would not be grounds to return the deposit.
The sale-approval order said that the “deposit is nonrefundable.”