Restructuring

For those interested in a quick read with some juicy facts and egregious acts by the relevant practitioners, check out the recent opinion in Church Joint Venture, L.P. v. Blasingame (In re Blasingame), where the Sixth Circuit Court of Appeals held that an order denying approval of a proposed settlement agreement was not a final order susceptible to appeal as of right.  Although the legal issue may not be the juiciest, the issue of jurisdiction and appeals is relevant in all cases and to all practitioners. 
Background
That case dates back to 2008 and an examination of the court docket reveals countless motions, numerous discovery pleadings, several adversary proceedings, and a sheer number of docket entries typically seen only in mega chapter 11 cases.  The facts and circumstances that led to the commencement of the case, however, began in 1983 when the debtors, Bernard and Margaret Blasingame, hired tax attorney Martin Grusin to set up a number of family trusts.  Over the next decade, the debtors accumulated significant debt, owed mostly to Church Joint Venture and Farmers & Merchants Bank, along with approximately $300,000 in unpaid federal taxes.  In June of 2008, after certain creditors began garnishing funds from one of the debtors’ accounts, Grusin advised the debtors to declare bankruptcy and recommended they hire attorney Tommy Fullen to assist with the filing.  Two months later, with Fullen’s assistance, the debtors filed for chapter 7 bankruptcy in the Western District of Tennessee.
When the debtors commenced their chapter 7 case they sought to discharge debts in excess of $7,700,000. While their petition – which was prepared with Fullen’s assistance – claimed possession of only $5,700 in assets, all claimed to be exempt, it was later discovered through inquiry under Bankruptcy Rule 2004 that the debtors had in their possession not less than $18,000,000 in assets that they controlled through a complex web of family trusts, shell companies, and shifting “clearing accounts.”  Among other things, the chapter 7 petition failed to disclose the life estate the debtors held in their $1.7 million homestead (a 28-acre, gated residence compound, complete with an 8,700 square foot and amply furnished home, pool and pool house, guest house, lighted tennis courts, barn and stables), title to which was held by one of the trusts established with Grusin’s assistance.  The chapter 7 petition also failed to disclose approximately $1.2 million in household goods, a number of motor vehicles, approximately 1,700 acres of farmland, and hundreds of thousands of dollars in cash, stocks and investment accounts which the debtors’ regularly commingled.  For example, Margaret Blasingame routinely deposited her paycheck into a bank account held in the name of her son and then their bookkeeper would shift money between that account and another “clearing account,” each of which was undisclosed on the debtors’ petition.
After all of this came to light, the bankruptcy court concluded that the debtors’ conduct was designed to “conceal assets from their creditors both before and after the filing of their bankruptcy petition” and tended to “exhibit common badges of fraud.”  As for the debtors’ attorneys, Grusin later admitted that he gave advice to the debtors regarding the preparation of their schedules and statements that was “not legally supported” and Fullen testified that, in the debtors’ petition, he had selected $4,000 as the value for the debtors’ household goods because that was the “maximum exemption for personal property available at that time.”
Although the chapter 7 trustee acknowledged that the estate had colorable claims for legal malpractice against the debtors’ attorneys, the estate lacked the resources to pursue those claims.  Accordingly, the trustee filed a motion, which was later granted by the bankruptcy court, to permit the debtors’ largest creditor, Church JV, to litigate the malpractice claims on behalf of the estate.  Church JV went on to sue Grusin and Fullen for malpractice and those claims remain pending as an adversary proceeding before the bankruptcy court.
In April 2014, the trustee and the debtors moved jointly, over Church JV’s objection, to settle the estate’s malpractice claim against Grusin and Fullen for $1 million.  It is worth noting that the terms of the proposed settlement included as a condition precedent that Church JV withdraw a pending motion for sanctions against the defendant attorneys.   The bankruptcy court, however, not only denied the settlement motion but, in so doing, it stated that the precondition to the proposed settlement requiring the voluntary dismissal or dismissal by the court of the pending sanction motion “offends public policy and the dignity of this court.”  Strong words.
Nevertheless, in December 2014, the debtors moved to settle the malpractice claims, this time for $1.25 million.  Again, Church JV objected to the proposed settlement, arguing that it did not reflect the value of the lawsuit.  At the hearing, the trustee testified in support of the debtors’ motion and urged the bankruptcy court to approve the settlement.  The bankruptcy court, however, denied the motion, noting that Church JV, as the estate’s largest creditor and the party that had funded and pursued the malpractice litigation on behalf of the estate, was “in the best position to evaluate the potential recovery to the estate from the litigation.” The court also concluded that the “evidence of legal malpractice is overwhelming” and that “there is a high probability that the legal malpractice claim will be successful on the merits.”  Although the parties did not address the issue of standing, the court noted that “the debtors clearly have no standing to pursue settlement of the lawsuit, and the standing of the Trustee is questionable” and went on to state that it is “Church JV who has shouldered the financial burden of pursuing the malpractice claims, and it is Church JV who has the greatest interest in maximizing the estate for unsecured creditors.”
The debtors appealed and the Bankruptcy Appellate Panel of the Sixth Circuit dismissed their appeal for lack of jurisdiction because, the panel concluded, the bankruptcy court’s order was not a “final” order susceptible to appeal as of right under 28 U.S.C. § 158.  The debtors further appealed to the Sixth Circuit Court of Appeals.
Analysis
28 U.S.C. § 158(d)(1) permits consideration of appeals from all “final decisions, judgments, orders, and decrees” issued by a district court or bankruptcy appellate panel sitting in review of a bankruptcy court decision.  Section 158(d)(1) permits parties to appeal bankruptcy court orders as of right only where the orders “finally dispose of discrete disputes within the larger case,” however, where the order does not “alter the status quo or fix the rights and obligations of the parties,” it cannot be said to dispose of a discrete dispute.
In denying the debtors’ appeal and sustaining the bankruptcy court’s order refusing to approve the proposed settlement, the Sixth Circuit found that because the trustee remained free to propose another settlement or, in the alternative, continue to prosecute the malpractice claims, the proposed settlement “did not resolve any of the parties’ rights or obligations as to the estate’s claims against Grusin and Fullen.” Although the debtors argued that the order was final because approval of the settlement would effectively end the legal malpractice action, the Court of Appeals disagreed pointing out that the settlement was not in fact approved and added that “it is of course quite common for the finality of a decision to depend on which way the decision goes.”
Therefore, because, as the Court of Appeals so succinctly stated, “the order changed nothing,” it lacked the finality necessary to exercise jurisdiction to consider the debtors’ appeal under 28 U.S.C. § 158(d)(1).
Conclusion
Although the facts and circumstances of this case are particularly egregious (fyi – the attorneys were both sanctioned), practitioners should be aware of the rules of procedure and rights of appeal to avoid similar rebukes as the attorneys received in Blasingame.
Matthew Goren is an Associate at Weil Gotshal & Manges, LLP in New York.