Back to Square One … Eighth Circuit Bankruptcy Appellate Panel Reverses Motion to Dismiss Bankruptcy Case Based on Reversal of Three Year Old Ruling

We have written on other occasions on Civic Partners Sioux City, LLC.  When we last wrote in 2015, the debtor had lost the last of many interlocutory appeals following the Bankruptcy Court for the Northern District of Iowa’s denial of confirmation of the debtor’s plan of reorganization – a plan founded on a prior, contested ruling of the bankruptcy court that an amended lease of the debtor’s property to Main Street Theaters, Inc. (“Main Street”) was in effect instead of the original lease between the parties.  Following two years of failed interlocutory appeals on the bankruptcy court’s orders on the lease and denial of plan confirmation, the bankruptcy case was dismissed.  The debtor appealed the dismissal order, a final order of the bankruptcy court, and the United States Bankruptcy Appellate Panel for the Eighth Circuit reversed – not based on the dismissal order itself or the order denying plan confirmation, but based on error in the original bankruptcy court ruling as to which lease was in effect.  In re Civic Partners Sioux City, LLC, 2016 WL 3902658 (B.A.P. 8th Cir.  July 19, 2016).  The ruling is a procedural lesson that, in the grand scheme, appeal of non-final bankruptcy orders may delay an ultimately favorable result.
Civic Partners, the debtor, was tapped by the City of Sioux City, Iowa to develop a retail and movie theater complex known as the Promenade.  Civic Partners issued a promissory note to Sioux City for the property and issued a promissory note for construction financing to Northwest Bank.  Both Sioux City and Northwest Bank received mortgages of the property, and Northwest Bank held an assignment of rents for the property to further secure the debt.
Following construction, Civic Partners leased the movie theater space of the Promenade to Main Street.  Main Street soon fell behind on its lease payments to Civic Partners, causing Civic Partners to fall behind on its payments to Northwest Bank and Sioux City.  All the parties entered into discussions to amend the lease and modify Civic Partners’ obligations to Sioux City and National Bank.
Thereafter, Civic Partners and Main Street entered into an amended lease that expressly provided that Civic Partners could declare the amended lease with Main Street null and void if it was unable to reach agreement with Sioux City and Northwest Bank by a date certain.  Ultimately, Civic Partners formalized its arrangement with Northwest Bank, but was unable to reach agreement with Sioux City.
Having failed to reach agreement with Sioux City, Civic Partners purportedly cancelled the amended lease with Main Street pursuant to the null and void provision and reinstated the original lease; however, both Northwest Bank and Main Street disputed the cancellation.  Without a clear, consensual restructuring path, Civic Partners commenced its bankruptcy case in April 2011.
The Bankruptcy Case and Interlocutory Appeals
Over a year later, Civic Partners sought a determination from the bankruptcy court as to which lease controlled – pointing to the express language of the amended lease regarding its ability to declare the amended lease null and void.  Holding that Iowa rescission law prevented Civic Partners from terminating the amended lease and, in the alternative, that the termination of the lease required Northwest Bank’s consent, the bankruptcy court found that the amended lease controlled.  Civic Partners appealed the bankruptcy court’s decision, which appeal was denied for lack of jurisdiction on the basis that the order was interlocutory.  Except in limited circumstances, courts of appeal have jurisdiction only to hear appeals of final decisions and orders, but not those that are interlocutory – or provisional.  See 28 U.S.C. § 158.
During the pendency of its appeals, Civic Partners filed a plan of reorganization built on the foundation of the amended lease with Main Street.  As we have previously written here on the Bankruptcy Blog, plan confirmation was denied on feasibility grounds.  Soon after the denial of confirmation, Northwest Bank filed a motion to dismiss Civic Partners’ bankruptcy case.  Consideration of Northwest Bank’s motion was delayed, though, because of Civic Partners’ additional appeals – all of which were denied as interlocutory.  Indeed, the law in the Eighth Circuit is clear that an order denying plan confirmation is not an appealable, final order.  See In re Zahn.  Eighteen months later, after final denial of the interlocutory appeals by the Bankruptcy Appellate Panel and the Eighth Circuit Court of Appeals, the bankruptcy court granted Northwest Bank’s motion to dismiss the bankruptcy case.
The Final Appeal
With a final order in hand granting Northwest Bank’s motion to dismiss the bankruptcy case, Civic Partners timely appealed.  The Bankruptcy Appellate Panel found that the review of the bankruptcy court’s ruling on the motion to dismiss necessarily included a review of the various rulings that led to the bankruptcy court’s decision to dismiss the case including the bankruptcy court’s ruling that the amended lease with Main Street, not the original lease, was in effect.
Relying on stalwart principals of contract interpretation, the court focused on the express language of the amended lease in determining whether Civic Partners had the right to declare the amended lease null and void and reinstate the original lease with Main Street.  Because the provision covering Civic Partners’ right to terminate was clear and unambiguous, the Bankruptcy Appellate Panel found that there was no need to examine Northwest Bank’s consent right under the assignment of rents.  Moreover, Main Street’s performance under the amended lease did not negate Civic Partners’ express right to terminate and reinstate the original lease.
Having found the original lease in effect, the Bankruptcy Appellate Panel further found that the bankruptcy court, in dismissing the bankruptcy case, did not consider the potential of a plan of reorganization based on the original lease.  Accordingly, the Bankruptcy Appellate Panel reversed the bankruptcy court’s order dismissing the bankruptcy case.
Things to Consider from Civic Partners
The Bankruptcy Appellate Panel’s decision is instructive in dealing with successive bankruptcy court orders. The numerous interlocutory appeals ultimately, and perhaps unnecessarily, delayed the result desired by the debtor, especially in light of the Bankruptcy Appellate Panel’s, and other appellate court’s, ability to review rulings leading up to a final, appealable order.  On the other hand, while clear that the order denying plan confirmation is interlocutory in the Eighth Circuit, less clear is the path forward on orders such as the one on the Main Street lease.