[1]     

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term 1994

, [5]     

Decided: October 10, 1995

, [6]      IN RE: BEST PRODUCTS CO., INC., ET AL., " />

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In Re Best Products Co., 68 F.3D 26 (2d Cir. 10/10/1995)

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term 1994

No. 152

Docket No. 95-5018

68 F.3d 26, 1995.C02.0000451 <http://www.versuslaw.com>

Decided: October 10, 1995

IN RE: BEST PRODUCTS CO., INC., ET AL.,

Before: FEINBERG, KEARSE and LEVAL, Circuit Judges.

[8]    

Argued: September 5, 1995

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Debtors.

RESOLUTION TRUST CORPORATION, as receiver for FarWest Savings & Loan Association and ABQ Federal Savings Bank,

Appellant, v.

BEST PRODUCTS CO., INC. et al., and CHEMICAL BANK, as Agent and Individually,

Appellees.

Resolution Trust Corporation (RTC) challenged jurisdiction of the United States Bankruptcy Court for the Southern District of New York, Tina L. Brozman, J., to confirm chapter 11 plan of reorganization. The United States District Court for the Southern District of New York, Allen G. Schwartz, J., dismissed RTC's appeal as moot. On RTC's further appeal, the Court of Appeals, Feinberg, J., assumed that the appeal was not moot and held that bankruptcy court had jurisdiction to enforce pre-bankruptcy subordination agreement affecting creditors who had filed claims against debtor.

RICHARD LIEB, New York, NY (Kronish, Lieb, Weiner & Hellman LLP, Joseph A. Guzinski, Tara Hannon, Daniel R. Alcott, of Counsel), for Appellant Resolution Trust Corporation.

HARVEY R. MILLER, New York, NY (Weil, Gotshal & Manges, Kevin W. Barrett, Marc D. Puntus, of Counsel), for Appellee Best Products Co., Inc.

ROBERT A. BOURQUE, New York, NY (Simpson Thacher & Bartlett, Lillian E. Kraemer, Melvyn L. Cantor, of Counsel), for Appellees Bank Group.

ERIC M. ROTH, New York, NY (Wachtell, Lipton, Rosen & Katz, of Counsel), for Appellee Chemical Bank.

FEINBERG, Circuit Judge:

Resolution Trust Corporation (RTC) appeals from an order of the United States District Court for the Southern District of New York, Allen G. Schwartz, J., dismissing RTC's appeal from an order of the United States Bankruptcy Court for the Southern District, Tina L. Brozman, J., confirming a chapter 11 plan of reorganization for appellee Best Products Co., Inc. RTC primarily claims that the bankruptcy court did not have jurisdiction to enforce a pre-bankruptcy agreement subordinating notes held by RTC in favor of notes held by appellees Chemical Bank and various other financial institutions. RTC characterizes its objection to enforcement of the subordination agreement as merely a contract dispute between two creditors and argues that this dispute does not constitute a "core" proceeding within the meaning of 28 U.S.C Section(s) 157. Because the plan of reorganization had been fully consummated, the district court determined that effective relief could not be granted and dismissed RTC's appeal to it as moot. For reasons explained below, we assume that RTC's appeal was not moot but decide that the bankruptcy court did have jurisdiction to enforce the subordination agreement. We therefore uphold the decision of the bankruptcy court.

I. Background

In January 1991, Best Products Co., Inc. and its affiliates (hereafter collectively, Best or Debtor) each filed a petition for relief under chapter 11 of the Bankruptcy Code. The chapter 11 cases were referred to the bankruptcy court and were consolidated and jointly administered. Thereafter, Best operated its business as a debtor in possession.

Best's chapter 11 petition was filed in the aftermath of a disastrous leveraged buyout (LBO) consummated in 1989. In connection with the LBO, Chemical Bank (as successor by merger to Manufacturers Hanover Trust Company) and various other financial institutions (collectively, the Bank Group) provided senior financing of about $622 million. Appellant RTC is the receiver for two failed depository institutions, FarWest Savings & Loan Association (FarWest) and ABQ Federal Savings Bank (ABQ), that also provided financing in connection with the LBO in the amount of approximately $28 million. A subordination agreement, dated September 17, 1990 (the Subordination Agreement), expressly stated that the financing provided by FarWest and ABQ was subordinate to the Bank Group's senior indebtedness. After commencement of the chapter 11 proceeding, the Bank Group and RTC, individually and as agent on behalf of FarWest and ABQ, filed proofs of claim against Best in the approximate amounts of $322 million and $28 million, respectively.

In December 1992, Best commenced various adversary proceedings in the bankruptcy court. The first challenged as unenforceable the loans made by the Bank Group, FarWest and ABQ because they were fraudulent conveyances pursuant to section 544(b) of the Bankruptcy Code (the LBO Action). In separate proceedings Best also sought, among other things, to void the granting of security interests to the Bank Group (the Bank Preference Action) and certain payments made to the RTC as voidable preferences under section 547 of the Bankruptcy Code. RTC moved in the bankruptcy court to dismiss the actions against it for lack of subject matter jurisdiction. RTC also requested the district court to withdraw the reference to the bankruptcy court pursuant to 28 U.S.C. Section(s) 157(d). In April 1994, Judge Haight of the district court refused to withdraw the reference. In re Best Products Co., Inc., No. 93-1115, No. 93-1149, 1994 WL 141970 (S.D.N.Y. April 20, 1994).

A. The Plan

In January 1994, Best offered its fifth proposed plan of reorganization (the Plan). The bankruptcy court found, and the district court agreed, that one of the cornerstones of the Plan was the settlement of the LBO Action and the Bank Preference Action (the Settlement). Under the Plan and the Settlement, in exchange for dismissal with prejudice of Best's adversary proceedings against the Bank Group and allowance of the latter's claim of over $322 million, the Bank Group agreed to release its security interests in certain of Best's property and to "give up" to the general unsecured creditors a distribution of cash and stock valued at roughly $31 million. The Plan enforced the Subordination Agreement. As a consequence, RTC, as the receiver for subordinated creditors FarWest and ABQ, did not receive any recovery under the Plan other than the termination with prejudice of the LBO Action against RTC. The bankruptcy court found that the Bank Group would not have supported the Plan unless it provided for the enforcement of the Subordination Agreement.

Creditor support for the Plan was overwhelming. Only a few creditors, including RTC, contested approval of the Settlement and confirmation of the Plan. RTC challenged the Plan on the ground, among others, that the Plan impermissibly enforced the Subordination Agreement. The objections occasioned an eight-day evidentiary hearing, after which the bankruptcy court overruled all of the objections and confirmed the Plan. In an exhaustive opinion dated May 25, 1994, the bankruptcy court specifically held that it had jurisdiction to enforce the Subordination Agreement. In re Best Products, Co., Inc., 168 B.R. 35, 67 (Bankr. S.D.N.Y. 1994).

B. Proceedings in the District Court

RTC filed a timely notice of appeal to the district court. RTC did not, however, seek a stay of the confirmation order or of the consummation of the Plan either in the bankruptcy court or in the district court. On June 14, 1994, the Plan became effective and Best commenced implementation of the Plan. It is undisputed that the Plan has been substantially consummated.

The essence of RTC's appeal to the district court was that the bankruptcy court did not have jurisdiction to adjudicate what RTC describes as a contractual dispute between two creditors. The basis of RTC's underlying attack on enforcement of the Subordination Agreement was that the Bank Group's notes were not "due" because these notes were fraudulently conveyed to the Bank Group as part of the financing of the LBO. Therefore, subordination of RTC's notes to the Bank Group's notes was not justified.

In a thorough opinion dated January 20, 1995, reported at 177 B.R. 791 (S.D.N.Y. 1995), Judge Schwartz held that RTC's appeal to it was moot and therefore did not reach the issue of the bankruptcy court's jurisdiction. The district judge found that "[t]here [could] be no doubt that the enforcement of the subordination agreements was an essential element of the Plan which was inextricably interwoven with the Settlement and other elements of the Plan." Id. at 801. Therefore, if the Plan's enforcement of the Subordination Agreement were reversed on appeal, the Plan would unravel and Best would have to return to the bankruptcy court as a non-discharged debtor. The district court further determined that, because RTC had not sought to stay execution of the Plan, thousands of transactions had taken place and it would be impossible to restore all parties to their pre-consummation status. Judge Schwartz held that RTC's failure to take any steps to prevent the Plan from taking effect rendered the fashioning of effective relief both impossible and inequitable. The judge therefore dismissed RTC's appeal. Id. at 802-03.

RTC again appealed, this time to this court.

II. Discussion

Before us, RTC principally argues that a challenge to a court's subject matter jurisdiction can never be moot. It asks us to remand this case to the district court for a determination of the proper jurisdiction of the bankruptcy court and presumably, if RTC's position on that court's jurisdiction is correct, for an eventual determination by the district court of the merits of the underlying dispute.

Our review of orders of district courts in their capacity as appellate courts in bankruptcy cases is plenary. In re Manville Forest Products Corp., 896 F.2d 1384, 1388 (2d Cir. 1990). We therefore independently review the factual findings and legal conclusions of the bankruptcy court. Id.; Wegner v. Grunewaldt


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