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Bankruptcy Lesson: Control the Process or the Process Will Control You

Posted by Eric Anderson | Feb 19, 2020 | 0 Comments

By Sean Cork, E.D.A. Law

            Supreme Court decisions addressing bankruptcy law are uncommon, but it's rarer still when a Supreme Court case shows the pitfalls of improper strategy.  Ritzen Group, Inc. v. Jackson Masonry, LLC, issued by the Supreme Court on January 14, 2020, is the rare decision that meets both of these criteria.

            Most of the early commentary on Ritzen Group reads like something written by Joe Friday: just the facts (and the ever-important holding).  We can give the Joe Fridays in the legal commentariat a pass, because Ritzen Group is also rare in that it answers the question before it clearly and unequivocally.  In a unanimous decision (even rarer still!) the Supreme Court held that an order of a bankruptcy court denying a creditor's motion for relief from the automatic stay is a final, appealable order and that the creditor, in this case, lost its right to appeal said denial of stay relief because it waited until the statutory 14-day appeal period had passed to file its appeal.

            The lesson of Ritzen Group for creditors is clear: you must appeal an order denying stay relief within 14 days if you wish to preserve your appellate rights [emphasis added].  A deeper dive into the facts of the case, however, reveals not only why the SCOTUS made this particular ruling, but also highlights the importance of crafting and implementing an effective legal strategy in all bankruptcy cases.

            In March of 2013, the Ritzen Group and Jackson Masonry entered into a contract whereby the Ritzen Group agreed to purchase real property from Jackson Masonry for $1.55 million.  This sale did not go through, so naturally, Ritzen Group sued Jackson Masonry in Tennessee state court for breach of contract.  To the surprise of no one, the litigation was highly contentious, with many discovery disputes.  The state court scheduled a hearing on Ritzen Group's fourth motion to compel discovery from Jackson Masonry one week before trial was to begin.  Seventeen minutes before this 9:00 a.m. hearing began, Jackson Masonry filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.  11 U.S.C. § 362(a) immediately imposed an automatic stay on any and all acts to collect or enforce a debt against Jackson Masonry, including the state court litigation. 

            Trying to get the litigation back on track, the Ritzen Group filed a motion in the Bankruptcy Court under 11 U.S.C. § 362(d) to have the automatic stay lifted so that the trial can proceed.  Section 362(d) of the Bankruptcy Code provides that the court “shall grant relief from the stay” for “cause.”  The Ritzen Group argued that the “cause” entitling it to stay relief was that Jackson Masonry filed the bankruptcy case in bad faith for the sole purpose of delaying the litigation.  After conducting an evidentiary hearing, the bankruptcy court denied the motion, finding that Jackson Masonry's financial condition made it a “classic example” of a good faith bankruptcy filing.  In a nod to practicality, the bankruptcy judge also informed the Ritzen Group that granting stay relief would be a waste of judicial resources, for even if they went to trial and won a judgment, they would have to come right back to the bankruptcy court to enforce it.

            Undaunted, the Ritzen Group decided to file an adversary proceeding against Jackson Masonry in the bankruptcy court (an adversary proceeding is like a mini-trial conducted in a bankruptcy case).  This adversary proceeding was basically a rehash of the Ritzen Group's state court action, and was intended to prove that Jackson Masonry had breached the sale contract and thus owed the Ritzen Group millions of dollars.  However, things did not go as planned for the conclusion of this adversary proceeding. the bankruptcy judge ruled that the reason why the sale did not go through was that the Ritzen Group breached the sale agreement by failing to obtain adequate financing by the closing date as required under the contract. 

            After the adversary proceeding is resolved, Jackson Masonry sold the real property at issue for more than $5 million.  The debtor then filed a chapter 11 plan of reorganization that called for a complete discharge of all of its debts in exchange for payments on allowed claims (the Ritzen Group had no allowed claim because they lost the adversary proceeding).  The Ritzen Group did not object to plan confirmation.  Only after the plan was confirmed did the Ritzen Group decide to appeal the bankruptcy court's order denying its motion for relief from the automatic stay.  The rest, as they say, is history.

            This deeper dive into Ritzen Group allows us to understand why the Supreme Court ruled as it did.  Once the chapter 11 plan was confirmed and payments had already been made to creditors there was no way any court was going to allow a creditor to halt the entire process by appealing a stay relief motion filed in the early days of the case.  This is doubly true where the creditor had notice of the plan and its contents and did not object to confirmation.  This highlights a crucially important point to any creditor of a chapter 11 debtor: make sure you read and understand every provision of the chapter 11 plan and object if anything in it unjustly affects you.  As a general rule courts never take pity on a party who is served with a plan, does not object to it, and waits until after it is confirmed to complain about it.

            This case also highlights the importance of bankruptcy planning, even if (or perhaps especially if) you are a creditor.  As I always say, in bankruptcy cases you either control the process or the process controls you.  To take a few examples, the record, in this case, is unclear if the Ritzen Group sought a lien lis pendens against the real property under Tennessee law when it filed the lawsuit.  Had the Ritzen Group done so the entire outcome of the case may have been different, for it would have had an argument that the lien lis pendens made it a secured – as opposed to an unsecured – creditor in Jackson Masonry's bankruptcy case.  Being in the position of a secured creditor is always preferable, and would have given the Ritzen Group increased leverage to cut a deal for payment in the bankruptcy case, for even if the debtor challenged the lien lis pendens, that would require further litigation in the bankruptcy court, the outcome (and cost) of which would be uncertain.

            Moreover, if the Ritzen Group was convinced that Jackson Masonry's bankruptcy case was filed in bad faith, why not file a motion to convert or dismiss the case altogether, or alternatively appoint a chapter 11 trustee to manage the debtor's affairs?  Filing such a motion at the same time as the stay relief motion would have put more pressure on the debtor to resolve the matter, which could have resulted in a settlement resulting in some payment to the Ritzen Group.  While hindsight is always 20/20, any settlement would have been better than the zero recovery the Ritzen Group suffered in this case.

            Ritzen Group highlights the perils creditors face in chapter 11 bankruptcies.  If you ever find yourself in a similar situation, make sure you get sound legal advice immediately.

About the Author

Eric Anderson

Through his experience on both sides of the courtroom, Eric understands that any legal issue can be intimidating to those who do not know the law. Today he uses that experience to defend those in need of a champion. A former prosecutor and Deputy County Counsel, Mr. Anderson began his career w...

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