Spark Factor Design, Inc. v. Hjelmeset (In re Open Medicine Institute, Inc.) (9th Cir. BAP)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, Ret.), analyzing a recent decision of interest:

SUMMARY

In a published opinion, the Seventh Circuit Court of Appeals (the Court) recently ruled that a tax sale purchaser which had not been formally served with notices of chapter 11 proceedings, including plan confirmation, but admitted in court that it was a “party” to the proceedings, was bound by the terms of the confirmed plan. Wheeler Financial, Inc., v. JPMorgan Chase Bank (In re Aguirre), 2022 WL 2166885 (7th Cir. June 16, 2022).

To view the opinion, click here. 

FACTS

Debtors Ramon and Bertha Aguirre owned real property in Illinois. JPMorgan Chase Bank (Chase) held a secured loan on one of the properties in Cook County (the Property). The Aguirres stopped paying the real estate taxes on the Property and Chase also did not pay them, so Wheeler Financial (Wheeler) paid them and received the right to a tax deed once a redemption period had expired. The Aguirres eventually filed a chapter 11 case; their schedules listed some tax debt but not the one to Cook County, now derivatively held by Wheeler. As a consequence, neither Cook County nor Wheeler was on the mailing matrix and neither received notice of the bankruptcy filing.

The Aguirres proposed a plan that would pay all back property taxes, but even though the Cook County/Wheeler obligations were of record, the proposed plan was not served on either. Not surprisingly, Wheeler did not vote on the plan, which was confirmed by the bankruptcy court. When the Aguirres defaulted on making the payments, Wheeler made an appearance in the bankruptcy court, requesting relief from the automatic stay so that it could go to state court to receive the tax deed. The bankruptcy judge granted that relief and the state court issued the tax deed. The Aguirres appealed the stay relief order, which was reversed by the district court because the confirmed plan superseded Wheeler’s lien. On remand, the bankruptcy court declared the tax deed void and approved a modified plan which required the Aguirres to pay about $65,000 to Wheeler. On further appeal, the district court vacated the order voiding the deed but affirmed the order confirming the modified plan. That modified plan provided for full payment of the tax debt to Wheeler.

Both Wheeler and Chase appealed to the Court, which ruled that Wheeler was bound by the plan terms and could not enforce the tax deed to acquire title to the Property.

REASONING

Wheeler asserted on appeal that because it had never been served with notice, it was not bound by the terms of the confirmed plan, arguing that its lien had passed through the bankruptcy undisturbed. This assertion was problematic for the Court because if Wheeler was not bound by the plan, as it claimed, it was really arguing that it was not “a party” to the plan proceedings and its rights were not finally determined by the modified confirmation order which was on appeal. To the Court, that meant the order as to Wheeler was not a final appealable order and it lacked jurisdiction over the appeal.

To answer the jurisdiction question, the Court decided it must determine whether the plan bound Wheeler, because if it did, then Wheeler was a party whose rights had been finally determined, the order was final, and the Court had jurisdiction. The Court analyzed the procedural facts, stridently criticizing both the Aguirres and Chase for not making certain that Wheeler was served with the required notices, particularly because both became aware that back taxes were owed to Cook County and that Wheeler stood in the County’s shoes. This knowledge, after all, led to the need for plan modification. Yet neither litigant had made certain Wheeler was served with process.

Under its factual analysis, however, this lack of notice was not fatal to the Court’s jurisdiction. When the Aguirres missed the deadline imposed by the modified plan to pay off the Wheeler debt, Wheeler filed a motion for relief from stay that treated the plan as binding on it and alleged in the motion that it was a party in interest. Moreover, when queried by the bankruptcy court, Wheeler admitted in open court that it was a party, bound by the plan. That was the lynchpin. The Court concluded that a party can waive service and consent to party status, which Wheeler had done. Since Wheeler was a party bound by the plan terms and had not asserted any viable reasons why the confirmation order was flawed, the Court affirmed that order, according no relief to Wheeler.

AUTHOR’S COMMENTS

I think the Court published this opinion primarily so that it could criticize the litigants for “mak[ing] a mess of this bankruptcy proceeding.” Nevertheless, its holding is significant. By its behavior in a bankruptcy court an entity can become a “party in interest” such that the terms of a chapter 11 plan – or any other order which has a general effect on all noticed parties – are binding on it. Wheeler did that here, by bringing motions for relief from the stay and participating in the district court appeals. For it to then argue that the lack of formal service of process meant it was free from any bankruptcy restriction was disingenuous. The practice pointer is straightforward: if an attorney is representing an entity which actively seeks relief from a bankruptcy court, even without formal service of process, that entity is a party in interest, with all the consequences that entails.

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, Ret.) a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.