Opinion
No. M-47 (SHS), Bankr. No. 93-B-46171 (CB).
April 18, 2005
OPINION ORDER
The purchaser of assets in a bankruptcy proceeding, 127 John Street Realty LLC, (the "Purchaser"), seeks leave to appeal from a November 12, 2004 order of the bankruptcy court. The Purchaser contends first that the order appealed from is a final order and thus may be appealed as of right, and alternatively, that leave to appeal should be granted. This motion is opposed by Sage Realty Corporation, acting in its capacity both as agent for the debtor in the bankruptcy proceeding, John Street Leasehold, LLC, f/k/a 127 John Street Associates (the "Debtor"), and as assignee of interests of certain former tenants of 127 John Street (the "Building"). The Debtor claims to act as fiduciary for all former tenants of the Building with potential claims to a share of a real property tax refund obtained by the Purchaser.
The November 12, 2004 Order directs that approximately $6.2 million dollars in tax refund proceeds obtained by the Purchaser be put in escrow, and that the Purchaser send a second notice to former tenants of the Building advising them of a right to assert a claim to a share of the tax refund. The Order, granting relief sought by Sage, effectively vacates two prior orders issued by the bankruptcy court on October 4, 2002 and January 16, 2003 that had approved of a notice and refund request procedure proposed and implemented by the Purchaser to accept and resolve any potential claims by former tenants to the tax refund proceeds and to vest in the Purchaser the right to any unclaimed portion of the tax refund. On November 22, 2004, the bankruptcy court granted a stay of its order pending appeal.
Because the Order from which the Purchaser seeks to appeal is not a final order, and because the Purchaser has failed to demonstrate that an immediate appeal from the interlocutory order is warranted, leave to appeal is denied.
I. BACKGROUND
The Debtor was a New York partnership that owned, managed and operated the commercial office building known as the 127 John Street Building. It filed a voluntary petition for Chapter 11 bankruptcy relief in 1993. A standard clause in the Building's leases required tenants to pay a pro rata share of real property tax escalations, and also afforded each tenant the right to receive its pro rata share of any net recovery or reduction of those taxes pursuant to any proceeding successfully challenging the tax assessment of the Building. Sometime prior to filing the bankruptcy petition, the Debtor had commenced tax certiorari proceedings pursuant to Article 7 of the New York Real Property Tax Law to challenge the assessment of real property taxes on the Building.
In 1995, before the tax certiorari proceedings had been resolved, the bankruptcy court confirmed the Debtor's amended reorganization plan. The plan provided for the auction sale of the ground lease, the Building, and related assets, (referred to in the plan as "Transferred Assets"), and provided that creditors would be paid from proceeds of the auction sale. Pursuant to an Order dated August 17, 1995, the ground lease and Transferred Assets were sold, and ultimately transferred to the Purchaser. On January 27, 1997, the bankruptcy court ordered the case closed.
The parties disagree as to whether the Purchaser received — as part of the Transferred Assets — any right to the Building's former tenants' pro rata shares of any potential tax refund. The Purchaser contends that the Transferred Assets included all tax certiorari proceedings and tax refunds attributable thereto, subject to such tenants' rights, if any, as may remain after the entry of the order confirming the Debtor's reorganization plan. Sage argues that the bankruptcy court determined in 1995 that the Purchaser had no right to the amount of any potential tax refund that was attributable to the former tenants' pro rata shares. It was clear, however, that the Purchaser had acquired the right to prosecute the tax certiorari proceedings, and accordingly, it did continue the prosecution of those proceedings.
A. Initial Notice to Former Tenants of a Potential Right to Claim a Share of the (Potential) Tax Refund
On September 6, 2002, prior to the conclusion of the tax certiorari proceedings, the Purchaser moved to reopen the bankruptcy proceedings for the purpose of obtaining the bankruptcy court's approval of a procedure by which the Purchaser would notify the Building's former tenants of their right to claim a share of any potential tax refund. The Purchaser served its motion on the trustee, the Debtor and the Debtor's counsel. The motion included a list of former tenants and their addresses compiled by the Purchaser, most of whom had vacated the Building prior to the bankruptcy filing. No objections or responses were made to the motion or the tenant list.
The next month — in October 2002 — the bankruptcy court reopened the case and issued an order granting the Purchaser's motion. The bankruptcy court found, inter alia, that the proposed form of notice was "fair, reasonable and appropriately designed to notify all Tenants of the potential for a Tax Refund and of their need to assert their rights therein," and that the distribution procedures were "fair and reasonable and will serve to conclusively determine all respective rights of Tenants and the Purchaser in the Tax Refund." (Order of The Honorable Cornelius Blackshear, dated October 4, 2002, Exhibit F to Sage's Motion for an Order Re-Opening the Chapter 11 Case).
Pursuant to that order, the Purchaser sent notice to the former tenants and then made a second motion, again served on the trustee, the Debtor, and Debtor's counsel, requesting an order re-closing the bankruptcy proceeding and authorizing the transfer of rights to the (potential) tax refund in accordance with the October 4, 2002 Order. The Debtor objected to the motion, but only to the extent that it sought re-closing of the case, and requested that the case be kept open for the limited purpose of allowing the Debtor to assert a motion disallowing disputed utility tax claims. In opposing the motion to re-close the proceedings, the Debtor expressly stated that it did not oppose the relief sought by the Purchaser.
On January 16, 2003, the bankruptcy court ordered that the case remain open for the limited purpose requested by the Debtor and issued an Order Authorizing Purchaser to Transfer Property and Perform Other Functions In Accordance With Procedures Set Forth In Order Reopening Case, providing that the notice and allocation distribution procedures followed by the Purchaser were "fair and reasonable," that any former tenants — whether or not they had been included on the approved list — that failed to submit a refund request within the deadline would be "deemed to have conclusively forfeited any and all rights in connection with the Tax Refund (if any) with all such rights, title and interest in and to such Tax Refund (if any) irrevocably vesting with Purchaser." (Order of The Honorable Cornelius Blackshear, dated January 16, 2003, at ¶ 3, Exhibit I to Sage's Motion for an Order Re-Opening the Chapter 11 Case). The Order directed that further steps, consistent with the October 4, 2002 Order, were to be taken upon receipt of the Tax Refund. (Id.). On February 20, 2003, the bankruptcy court ordered that the case be closed.
In response to the notice sent pursuant to the October 4, 2002 Order, one former tenant submitted a claim, which was settled. Another former tenant responded to the notice but ultimately did not submit a claim.
B. The Tax Refund
According to Sage, at the time the initial notice procedure was approved by the bankruptcy court, both the bankruptcy court and the Debtor were operating under the assumption that the total of the former tenants' share of the potential tax refund would be approximately $1 million. However, on January 21, 2003 — five days after the bankruptcy court signed the order approving the Purchaser's notice and refund request procedure — the Purchaser entered into an agreement with the City of New York, settling the tax certiorari proceedings for an amount in excess of $15 million, of which approximately $6.2 million was attributable to the pro rata shares of the Building's former tenants. (Notice to Certain Former Tenants, at 2, attached to Order of The Honorable Cornelius Blackshear, dated November 12, 2004, Exhibit A to Purchaser's Motion for Leave to Appeal). The amount of the tax refund exceeded the amount of the largest pre-petition claim on the Debtor's estate — the satisfaction of which required that the Building be sold — and was three times greater than the auction sale price of the ground lease and related assets. The tax refund was actually received by the Purchaser in August 2003.
The Debtor learned of the amount of the tax refund the same month the Purchaser received the tax refund, and immediately began contacting former tenants to see whether they had knowingly waived their rights to the tax refund. Sage ultimately acquired assignments of interest to pursue a claim for their pro rata shares of the tax refund from eight former tenants. It also moved to reopen the bankruptcy proceeding in order to seek re-allocation of the tax refund. Sage contended in the bankruptcy court that the previously approved notice was inadequate to alert the former tenants to what was at issue in light of the size of the tax refund actually received, and thus the orders approving of that notice are void.
C. The November 12, 2004 Order
The bankruptcy court held a hearing in October 2004 on Sage's motion. According to the Purchaser, during the hearing, the bankruptcy court recognized that Fed.R.Civ.P. 60(b) barred the motion as untimely, and therefore invoked its equitable powers pursuant to section 105 of the Bankruptcy Code in order to reopen the case and grant the requested relief.
The bankruptcy court subsequently issued a written order, dated November 12, 2004, reopening the Chapter 11 case "for the purpose of (i) recovering the Former Tenants' Share of the Tax Refund from the Purchaser and placing it in escrow; (ii) determining the expenses incurred by the Purchaser in obtaining the Tax Refund . . ." (iii) "providing notice to all Former Tenants . . . and affording them the opportunity to assert their claims . . ." (iv)" determining the claims of Former Tenants . . . and resolving any disputes that may arise regarding such claims;" (v) "disbursing to the Purchaser . . . Purchaser's Expenses allocable to the Former Tenants' Share of the Tax Refund . . .;" and (vi) "depositing into Court any portion of the Former Tenants' Share of the Tax Refund remaining unclaimed, to be held pending further notification to non-claiming Former Tenants in a manner to be determined by the Court." (Order, dated November 12, 2004). The Order directs the Purchaser to place approximately $6.2 million in escrow together with interest accruing as of August 8, 2003, and to send notice — as directed in the Order — to all former tenants. (Id.).
The Order, which defined the approximately $6.2 million dollars as "the Former Tenants' Share of the Tax Refund," in effect vacated the bankruptcy court's prior orders that had approved of the Purchaser's proposed notice and refund request procedures and had decreed that the right to any portion of the tax refund remaining unclaimed at the expiration of a thirty-day period for submission of refund requests, would vest in the Purchaser.
II. DISCUSSION
The Purchaser contends that the November 12, 2004 Order is a final order from which it may take an appeal as of right. Alternatively, it contends that an immediate appeal of the Order is warranted (1) because the bankruptcy court erred in relying on its equitable powers pursuant to section 105 of the Bankruptcy Code to reopen the case and vacate its prior decisions because Sage's motion, based on mistake, inadvertence and excusable neglect, was not made within the one-year time limitation imposed by Fed.R.Civ.P. 60(b), made applicable to bankruptcy proceedings by Fed.R.Bankr.Proc. 9024; (2) because the bankruptcy court erred in finding that Sage had standing to seek relief on behalf of the former tenants; and (3) because the bankruptcy court erred in directing that funds be placed in escrow.
A. The November 12, 2004 Order Is an Interlocutory Order
Final orders of the bankruptcy court may be appealed to the district court as of right, see 28 U.S.C. § 158(a)(1), while appeals from interlocutory bankruptcy court orders may be taken only with leave of the district court. 28 U.S.C. § 158(a)(3); In re AroChem Corp., 176 F.3d 610, 618 (2d Cir. 1999). Although a flexible approach to the concept of finality should be applied in the bankruptcy context, nonetheless, "for a bankruptcy court order to be final . . . it must completely resolve all of the issues pertaining to a discrete claim, including issues as to the proper relief." In re Fugazy Express, Inc., 982 F.2d 769, 775-76 (2d Cir. 1992); see In re Chateaugay Corp., 922 F.2d 86, 90 (2d Cir. 1990). If an order resolves one element of a dispute but contemplates further proceedings to resolve other matters, it does not qualify as a final order. See Fugazy, 982 F.2d at 776; In re Premier Operations, Ltd., 290 B.R. 33, 43-44 (S.D.N.Y. 2003).
The Purchaser urges that the November 12, 2004 Order is final because it finally determines the rights of the parties to the $6.2 million in tax refund proceeds. However, because the Order undeniably contemplates further proceedings to resolve competing claims to the tax refund, and expressly states that the bankruptcy court will hear "[a]ny dispute that may arise" over claims by former tenants to a share of the tax refund, "upon the application of any of the Purchaser, the Debtor, and/or the claiming Former Tenant," (Order, dated November 12, 2004, at 4), it is not a final order. Importantly, the Purchaser acknowledges that in the event an appeal is not immediately heard — or heard and not granted — it will object in the bankruptcy court to individual claims by former tenants on the grounds that any right to a share of the refund was waived either by participation in the bankruptcy proceeding or by failure to respond to the first notice.
Cases cited by the Purchaser do not require a different result. Contrary to the Purchaser's assertion, the escrow requirement here is not analogous to an interim or preliminary injunction that may be deemed final. See In re Ionosphere Clubs, Inc., 139 B.R. 772, 778 (S.D.N.Y. 1992). Here, the bankruptcy court clearly contemplated that the question of the rights to the escrowed funds will be considered in future proceedings.
B. An Appeal from the Interlocutory Order Is Not Warranted
As noted above, the Purchaser alternatively seeks leave to appeal from the November 12, 2004 Order if the Order is deemed interlocutory, because pursuant to 28 U.S.C. § 158(a)(3), a district court has discretion to grant leave to appeal from a bankruptcy court's interlocutory order.
District courts in this Circuit will permit appeals from interlocutory orders of the bankruptcy court to be taken "on either of two bases: the `collateral order' doctrine or the standards applicable to 28 U.S.C. § 1292(b)." Alexander v. Bank of Woodstock, 248 B.R. 478, 482 (S.D.N.Y. May 16, 2000); see also, Urban Retail Props. v. Loews Cineplex Entm't Corp., 2002 U.S. Dist. LEXIS 6186, 2002 WL 535479, at *4 (S.D.N.Y. Apr. 9, 2002) (citing cases);
An interlocutory order may be appealed pursuant to the collateral order doctrine, first enunciated by the United States Supreme Court in Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 546-47, 69 S. Ct. 1221, 1225-26, 93 L. Ed. 1528 (1949), where the decision would (1) conclusively determine the disputed question, (2) resolve an important issue completely separate from the merits of the actions, and (3) be effectively unreviewable on appeal from a final judgment. In re WorldCom, Inc., 2003 U.S. Dist. LEXIS 11160, 2003 WL 21498904, at *9 (S.D.N.Y. Jun. 30, 2003) (citing Coopers Lybrand v. Livesay, 437 U.S. 463, 468-69, 98 S. Ct. 2454, 57 L. Ed. 2d 351 (1978)). A decision is not reviewable as a collateral order unless it satisfies all three of these requirements. See Alexander, 248 B.R. at 483 (citing United States v. Weiss, 7 F.3d 1088, 1089 (2d Cir. 1993)). Because the Purchaser has not demonstrated that the issues raised here will be unreviewable on appeal from a final judgment, the collateral order doctrine is not applicable.
In regard to the alternative basis for appealing an interlocutory order of the bankruptcy court — 28 U.S.C. § 1292(b) — three requirements must be met: the order must (1) involve a controlling question of law (2) over which there is substantial ground for difference of opinion and (3) an immediate appeal would materially advance the ultimate termination of the litigation. See 28 U.S.C. § 1292(b); Klinghoffer v. S.N.C. Achille Lauro, 921 F.2d 21, 23 (2d Cir. 1990). In addition, leave to appeal is warranted only where "exceptional circumstances" are shown. See e.g., Alexander, 248 B.R. at 483; Abel v. Shugrue (In re Ionosphere Clubs), 179 B.R. 24, 28 (S.D.N.Y. 1995). A question of law is "controlling" if reversal of the order would terminate the action, or if "determination of the issue on appeal would materially affect the outcome of the litigation." North Fork Bank v. Abelson, 207 B.R. 382, 389-90 (E.D.N.Y. 1997) (citing Klinghoffer, 921 F.2d at 24).
The Purchaser contends that leave to appeal should be granted pursuant to 28 U.S.C. § 1292(b) for the following reasons: (1) the question of whether the bankruptcy court erred in invoking its equitable authority under 11 U.S.C. § 105 even though Fed.R.Civ.P. 60(b) barred relief, is a controlling question of law over which substantial ground for difference of opinion exists; and (2) the question of whether the bankruptcy court erred in ordering the Purchaser to place funds in escrow in the absence of any finding that an escrow fund was justified as injunctive relief, attachment or a constructive trust, also presents a controlling question of law.
Finally, the Purchaser urges that leave to appeal is warranted because exceptional circumstances exist, and because Sage lacked standing to pursue relief on behalf of the former tenants. We address each issue in turn.
1. The Bankruptcy Court's Reliance on 11 U.S.C. § 105 to Vacate its Prior Orders Does Not Provide a Basis for Granting Leave to Appeal Pursuant to 28 U.S.C. § 1292(b).
The Purchaser's primary argument in favor of an interlocutory appeal is that the question of whether the bankruptcy court had the authority to vacate its prior orders pursuant to section 105 of the Bankruptcy Code is a controlling question of law over which substantial ground for difference of opinion exists. As the Purchaser notes, a bankruptcy court's equitable power is limited, and "`must and can only be exercised within the confines of the Bankruptcy Code.'" In re Dairy Mart Convenience Stores, Inc., 351 F.3d 86, 92 (2d Cir. 2003) (citing FDIC v. Colonial Realty Co., 966 F.2d 57, 59 (2d Cir. 1992) (quoting Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 99 L. Ed. 2d 169, 108 S. Ct. 963 (1988))). Thus, the Purchaser continues, because Fed.R.Civ.P. 60(b) is made applicable to bankruptcy proceedings by Fed.R.Bankr.Proc. 9024, the bankruptcy court may not invoke its authority under section 105 of the Bankruptcy Code to grant relief that would be barred by Fed.R.Civ.P. 60(b).
The Second Circuit indeed concluded in 1981 that "[t]he amenability of a final order to modification by the bankruptcy court itself . . . is governed by Bankruptcy Rule 924, which incorporates Fed.R.Civ.P. 60." In re Emergency Beacon Corp., 666 F.2d 754, 758 (2d Cir. 1981). However, even assuming solely for the purpose of argument that the bankruptcy court's reliance on section 105 of the Bankruptcy Code rather than Rule 9024 was in error, an interlocutory appeal is not warranted because there are potentially other grounds for affirming the Order. See Emergency Beacon, 666 F.2d at 760 (affirming the bankruptcy court's order because vacatur of the order was proper pursuant to Rule 60(b)(6)); In re Pan Am Corp., 162 B.R. 667, 671-72 (S.D.N.Y. 1993); In re Asusa, Inc., 47 B.R. 928, 932 (S.D.N.Y. 1985) (remanding to bankruptcy court for further findings where vacatur of a prior order was improper under Rule 60(b)(2), but where there were potentially grounds for vacating it under Rule 60(b)(4) or (6)). Contrary to the Purchaser's argument, it is not evident that the bankruptcy did not have the authority to vacate its prior orders under Rule 60(b)(4) or (6), neither of which are subject to a one-year time limitation. See Fed.R.Civ.P. 60(b). Where, as here, there may be an alternative legal basis for vacating the prior orders, the question of whether the bankruptcy court properly invoked its equitable powers is not "controlling." See In re Enron Corp., 316 B.R. 767, 772 (S.D.N.Y. 2004) (citing Cal. Pub. Emples. Ret. Sys. v. Worldcom, Inc., 368 F.3d 86, 95-96 (2d Cir. 2004)). 2. The Escrow Requirement Does Not Provide a Basis for Granting Leave to Appeal Pursuant to 28 U.S.C. § 1292(b).
Rule 9024 of the Federal Rules of Bankruptcy Procedure, which was "promulgated as part of the new Bankruptcy Rules, effective August 1, 1983," was originally issued as Rule 924, which similarly made Fed.R.Civ.P. 60 applicable to bankruptcy cases with exceptions not applicable here. See Matter of Whitney-Forbes, Inc., 770 F.2d 692, 696, n. 2 (7th Cir. 1985) (quoting 11 U.S.C. Appendix — Bankruptcy Rules, Rule 924 (1976)).
The escrow requirement does not warrant an appeal pursuant to the standards of 28 U.S.C. § 1292(b), because granting leave to appeal an interlocutory order is appropriate only in "those cases where an intermediate appeal may avoid protracted litigation."In re 105 E. Second St. Assocs., 1997 U.S. Dist. LEXIS 8019, 1997 WL 311919, at *2 (S.D.N.Y. Jun. 10, 1997) (quoting Koehler v. Bank of Bermuda Ltd., 101 F.3d 863, 865-66 (2d Cir. 1996)). Even if the Purchaser were successful in challenging the escrow requirement, that would not, by itself, materially advance the litigation, and therefore, an appeal is not warranted.
3. There Are No Exceptional Circumstances Warranting an Immediate Appeal.
The Purchaser urges, alternatively, that an appeal is warranted on the basis of exceptional circumstances. See Escondido Mission Vill. L.P. v. Best Prods., Co., 137 B.R. 114, 116 (S.D.N.Y. 1992) (granting leave to appeal on the basis of exceptional circumstances where there was no controlling question of law over which substantial grounds for difference of opinion existed). The Purchaser claims that exceptional circumstances are shown in light of the bankruptcy court's exercise of its equitable powers in contravention of Fed.R.Civ.P. 60(b) and because of the requirement that the Purchaser place the $6.2 million in tax refunds in escrow. However, as was discussed above, even if the bankruptcy court may not exercise its equitable powers in this case, it has not been shown that relief was improper under Fed.R.Civ.P. 60(b). Moreover, a requirement that money be placed in escrow is not the kind of exceptional circumstance that warrants an immediate appeal. See Fischer v. 47th Street Photo, Inc., 1992 WL 396909, at *3 (S.D.N.Y. Dec. 29, 1992) ("an order simply requiring that disputed funds be placed in escrow does not generally present exceptional circumstances [that] justify a departure from the basic policy of postponing review until after the entry of final judgment") (alteration in original) (citations omitted).
4. The Question of Sage's Standing Does Not Warrant Immediate Appeal.
The Purchaser claims that an appeal is warranted because the bankruptcy court erred in finding that Sage had standing to seek relief on behalf of former tenants. Regardless of the merits of the Purchaser's arguments regarding Sage's standing, an immediate appeal to challenge standing is not merited because the Purchaser acknowledges the validity of Sage's status as assignee of the interest of the former tenant, Insurance Company of North America ("INA"). The Purchaser challenges Sage's standing as assignee of INA on the ground that because INA filed a proof of claim in the bankruptcy proceeding, any right it may have had as a former tenant to a share of the then potential tax refund was extinguished when the bankruptcy court confirmed the Debtor's amended reorganization plan. However, this argument ignores the terms of the transfer of assets to the Purchaser that contemplated that former tenants' rights to a share of the potential tax refund would be determined subsequent to the confirmation of the plan. Because this raises a question going to the merits of INA's claim to a share of the tax refund, and not to the validity of the assignment, it does not warrant immediate appeal.
III. CONCLUSION
Because the November 12, 2004 Order is not a final order, and because the Purchaser has not demonstrated that an immediate appeal of the interlocutory order is warranted, leave to appeal is denied.
SO ORDERED.