In the

United States Court of Appeals

For the Seventh Circuit

Nos. 09-3079, 09-3177

IN RE:

SOUTH BEACH SECURITIES, INC.,

Debtor.

APPEAL OF:

SCATTERED CORPORATION, INC., AND

SOUTH BEACH SECURITIES, INC.,

Appellants.

Appeals from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 08 C 1135—Joan Humphrey Lefkow, Judge.

ARGUED FEBRUARY 19, 2010—DECIDED MAY 19, 2010

Before POSNER, FLAUM, and WOOD, Circuit Judges.

POSNER, Circuit Judge. A corporation called South Beach

Securities filed a petition under Chapter 11 of the Bankruptcy Code and submitted a plan of reorganization. The

bankruptcy judge refused to confirm the plan and dismissed the bankruptcy proceeding. In re South Beach

Securities, Inc., 376 B.R. 881 (Bankr. N.D. Ill. 2007). South
2 Nos. 09-3079, 09-3177

Beach and its only creditor, Scattered Corporation, appealed to the district court, which affirmed. 421 B.R. 456

(N.D. Ill. 2009). Scattered and South Beach now appeal to

us but South Beach has adopted Scattered's brief and

makes no separate arguments.

Led by Leon A. Greenblatt III—a “character” if ever there

was one, see Gary Washburn & Kim Barker, “Randolph

Tower Running Up a Tab: City Says Owner Faces a Hefty

Bill,” Chicago Tribune, Mar. 20, 2001, p. 1; Greg Burns,

“Scattered’s Chief Buoyed by SEC Victory: Greenblatt

Pursues Suit Against Chicago Exchange,” Chicago Tribune,

Nov. 15, 1998, p. 1; Burns, “The ‘Bad Boys’ of Chicago Arbitrage,” Business Week Archives, Aug. 5,

1996, www.businessweek.com/1996/32/b34876.htm (visited

Feb. 19, 2010)—Scattered achieved notoriety some years

ago by selling short more shares of LTV than existed. We

held that this tactic did not violate the securities laws.

Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857 (7th

Cir. 1995). But the Chicago Stock Exchange, of which

Scattered was a member, took a dimmer view of

Scattered’s conduct, accusing it of fraud and precipitating

litigation eventually resolved in the company’s favor

but not before it had been driven out of the securities

business. In re Scattered Corp., 53 S.E.C. 948 (1998); “Scattered Corp. Finally Ends Its Long Battle with CHX with

Settlement Vindicating Firm’s Position,” Securities Week,

Apr. 19, 1999; “Scattered Sells CHX Seat and Exits Securities Industry,” Securities Week, Dec. 8, 1997; “SEC Grants

Scattered Partial Stay in CHX Finding of Firm’s Fraud

and Manipulation,” Securities Week, May 19, 1997. What

it does now is unclear.
Nos. 09-3079, 09-3177 3

South Beach, the debtor in the bankruptcy proceeding,

also is controlled by Greenblatt. It is not participating

actively in this appeal (it has merely, as we said, adopted

Scattered's brief), but the U.S. Trustee—a Department of

Justice official whose role is to be a watchdog in bankruptcy proceedings, 28 U.S.C. § 586(a)(3)—is. He opposed

the confirmation of the plan of reorganization in the

bankruptcy court and the district court and defends

their rulings in this court. He argues that the only

purpose of South Beach’s declaration of bankruptcy, and

of the plan of reorganization, is to avoid taxes, and a plan

of reorganization cannot be confirmed “if the principal

purpose of the plan is the avoidance of taxes.” 11 U.S.C.

§ 1129(d). The U.S. Trustee’s role was especially important

in this case because the bankruptcy was nonadversarial,

and, indeed, as we shall see, phony. Were it not for

his participation, Scattered would have no opponent in

this court.

Scattered argues that the U.S. Trustee is not authorized

to object to a plan of reorganization on the ground that

the plan's primary purpose is to avoid taxes. And

indeed it is not obvious that the U.S. Trustee’s writ runs to

policing against tax evasion—one might think the proper

watchdog would be the Internal Revenue Service, which

could have objected to confirmation of the plan at the

outset, or could step in later by invoking section 269 of the

tax code (discussed below) when and if a party to the

bankruptcy proceeding claimed a tax benefit. 26 C.F.R.

§ 1.269-3(e). And there are objections based on the text of

the Bankruptcy Code to the U.S. Trustee’s playing the

role of tax watchdog in bankruptcy proceedings, though

not compelling objections. 
4 Nos. 09-3079, 09-3177

The Code permits only a “party in interest that is a

governmental unit” to oppose a plan of reorganization on

the ground that the plan’s primary purpose is to beat

taxes. 11 U.S.C. § 1129(d); In re Trans Max Technologies,

Inc., 349 B.R. 80, 91 (Bankr. D. Nev. 2006); 7 Collier

on Bankruptcy ¶ 1129.07, p. 1129-176 (Alan N. Resnick &

Henry J. Sommer eds., 16th ed. 2009). A U.S. Trustee

is deemed not to be “a governmental unit” only “while

serving as a trustee in a” bankruptcy case. 11 U.S.C.

§ 101(27). The U.S. Trustee is not the trustee in bankruptcy

in this case. There is no trustee; South Beach is a debtor

in possession. The Ninth Circuit has ruled, however, that

the U.S. Trustee can never be “a governmental unit,” even

when not serving as a trustee in bankruptcy. Balser v.

Department of Justice, 327 F.3d 903, 908 (9th Cir. 2003). In so

ruling, the court overlooked section 101(27) of the Bankruptcy Code, the section we just quoted that makes

clear that the U.S. Trustee is not a governmental unit

only when he is acting as a trustee in bankruptcy.

Balser was not actually addressing the question whether

the U.S. Trustee is authorized by 11 U.S.C. § 1129(d) to

participate in a bankruptcy. Yet In re Trans Max Technologies, Inc., supra, 349 B.R. at 91, relied on Balser to conclude that the U.S. Trustee was not authorized—while

questioning the oversight that had led the Ninth Circuit

to that erroneous conclusion. Id. at 91 n. 12.

But there is another ground on which to question

the U.S. Trustee’s authority to challenge the plan of

reorganization. Remember that only a “party in interest that

is a governmental unit” (emphasis added) can object to a

plan on tax grounds. Now it is true that the term “party in
Nos. 09-3079, 09-3177 5

interest” is defined nonexclusively as “including the

debtor, the trustee, a creditors’ committee, an equity

security holders’ committee, a creditor, an equity security

holder, or any indenture trustee.” 11 U.S.C. § 1109(b)

(emphasis added). The U.S. Trustee is not excluded. And

anyway “all this section means is that anyone who has

a legally protected interest that could be affected by a

bankruptcy proceeding is entitled to assert that interest

with respect to any issue to which it pertains.” In re James

Wilson Associates, 965 F.2d 160, 169 (7th Cir. 1992). This

implies that the U.S. Trustee can be a “party in interest”

when he seeks to protect the rules and procedures of

bankruptcy, over which he is the congressionally

ordained watchdog—he has a statutory interest in making

sure that bankruptcy law isn’t abused.

But elsewhere in the Code “party in interest” and

“United States trustee” are treated disjunctively. See, e.g.,

11 U.S.C. § 707(b)(1) (“after notice and a hearing, the

court, on its own motion or on a motion by the United

States trustee, trustee . . . or any party in interest . . .”); id.,

§ 1104 (“on request of a party in interest or the United

States trustee”). Yet when we turn to section 307 of the

Code we discover that “the United States trustee may raise

and may appear and be heard on any issue in any case or

proceeding under this title.” This language, exactly

parallel to the authority granted parties in interest by

section 1109(b) (“a party in interest . . . may raise and may

appear and be heard on any issue in a case under this

chapter”), suggests that the U.S. Trustee can object to

a plan of reorganization after all, in his role as guardian of
6 Nos. 09-3079, 09-3177

the public interest in bankruptcy proceedings. See, e.g. In

re United Artists Theatre Co., 315 F.3d 217, 225 (3d Cir. 2003).

The public has an interest in limiting the use of bankruptcy

to the purposes for which it is intended rather than permitting it to be used as a vehicle by which solvent firms can

beat taxes. Courts often have deemed the U.S. Trustee to be

a “party in interest” in related contexts. E.g., In re A-1 Trash

Pickup, Inc., 802 F.2d 774 (4th Cir. 1986) (moving for

conversion or dismissal of Chapter 11 case); In re Miles, 330

B.R. 848, 849-51 (Bankr. M.D. Ga. 2004) (moving for

dismissal or transfer of case because of improper venue).

The statute is a mishmash but the view that the U.S.

Trustee can be a party in interest makes better sense, as

this case illustrates; we’ll see that the case really needed

a watchdog, and we cannot see what would be gained

by everyone having to wait for the Internal Revenue

Service to take action against Greenblatt’s tax shenanigans.

The IRS did receive a copy of the plan and didn’t object to

it, but may have thought that since it could always disallow the deductions later if the plan got confirmed and

since it isn’t in the business of preventing abuse of bankruptcy per se, there was no need for it to intervene in the

bankruptcy.

And even if the U.S. Trustee was not a party in interest,

the bankruptcy or district court, since it can hardly be

thought required to approve an unlawful plan of reorganization, need not turn a deaf ear when the U.S. Trustee,

or anyone else for that matter, argues the plan’s unlawfulness. If in doing so the U.S. Trustee is acting ultra

vires, as we very much doubt, his superiors in the Justice
Nos. 09-3079, 09-3177 7

Department can rein him in; but even if he should be

thought an officious intermeddler, this would not authorize Scattered to flout bankruptcy law. Congress has

authorized the federal courts to “issue any order, process,

or judgment that is necessary or appropriate to carry

out the provisions of this title [the Bankruptcy Code],” and,

even more pointedly, has declared that “no provision of

this title providing for the raising of an issue by a party in

interest shall be construed to preclude the court from, sua

sponte, taking any action or making any determination

necessary or appropriate to enforce or implement court

orders or rules, or to prevent an abuse of process.” 11

U.S.C. § 105(a). Consistent with this language, bankruptcy

judges have considered issues of tax avoidance on their

own initiative. In re Hartman Material Handling Systems, Inc.,

141 B.R. 802, 808-09 and n. 10 (Bankr. S.D.N.Y. 1992); In re

Maxim Industries, Inc., 22 B.R. 611 (Bankr. D. Mass. 1982); cf.

In re Economy Cast Stone Co., 16 B.R. 647, 650 (Bankr. E.D.

Va. 1981). As Hartman explained, “this Court cannot fairly

consider plan confirmation . . . and ignore the obvious tax

avoidance question. Congress has given the bankruptcy

courts the responsibility for determining whether a reorganization plan is proper, including tax considerations.” 141

B.R. at 809.

And given the breadth of the statutory definition of

“party in interest,” how can the U.S. Trustee have standing

to make motions and be heard in bankruptcy cases (as he

is expressly authorized to do, 11 U.S.C. §§ 307, 707(b)(1)) if

he has no “interest” in such cases? We conclude that he is

a party in interest, and come at last to the merits of the

appeal.
8 Nos. 09-3079, 09-3177

South Beach was once a registered securities broker/dealer, but by the time it declared bankruptcy it had

become a shell. It had no employees or business activities,

and its only “assets” were net operating losses. These are

better described as potential assets, because they can

sometimes, but by no means always, as we’re about to

see, be set off against taxable income and thus reduce a

company’s taxes. 26 U.S.C. § 172; United Dominion Industries, Inc. v. United States, 532 U.S. 822, 825 (2001); In re

Comdisco, Inc., 434 F.3d 963, 965 (7th Cir. 2006); In re

Harvard Industries, Inc., 568 F.3d 444, 445-46 n. 2 (3d Cir.

2009); 1 Boris I. Bittker & James S. Eustice, Federal Income

Taxation of Corporations and Shareholders, ¶ 5.03[4], p. 5-17

(7th ed. 2009). We don’t know how South Beach came

to have these losses; its only recent activity was preparing

its bankruptcy filing.

South Beach is wholly owned by NOLA, LLC, which

has no business operations either; its sole asset is the

stock of South Beach. NOLA, a limited liability company,

has three members. One is Greenblatt’s father; the others

are the fathers of Scattered’s other two officers and directors. NOLA is managed by a company named Teletech

whose president and sole employee at the relevant time

was Greenblatt and whose sole function is to manage

NOLA. Through Teletech, and thus through NOLA,

Greenblatt controls South Beach.

In 2001 Greenblatt directed another corporation that

he controls, Loop Corporation, to lend South Beach

$2.2 million for five years at an annual interest rate of

12 percent. He then had South Beach lend NOLA
Nos. 09-3079, 09-3177 9

$3.2 million. The purpose of the loan to NOLA was to

enable it to purchase the stock of a company called

Health Risk Management, Inc (HRM). We do not know

where South Beach obtained $1 million to make up the

difference between the $2.2 million that it received from

Loop and the $3.2 million that it lent to NOLA. It may

have had assets left over from its time as a broker/dealer;

as we said, it has no assets now other than net operating

losses.

Loop then sold to Scattered, for $100,000, the

$2.2 million loan that it had made to South Beach. This

made Scattered a creditor of South Beach, because South

Beach was Loop’s debtor and now Scattered had stepped

into Loop’s shoes. Scattered claims to be owed $3.3 million

by South Beach, though it has not explained why the

$2.2 million loan that it bought from Loop should give it

a $3.3 million claim against South Beach, the debtor on

that loan; conceivably the explanation is the high

interest rate.

Greenblatt is an officer and director of Scattered, along

with the sons of NOLA’s other owners, and it appears

that he negotiated all the transactions relating to this

case both with and on behalf of South Beach. He

also signed South Beach’s Chapter 11 petition. All the companies that we have mentioned except HRM have the

same office address. It is apparent that Greenblatt caused

Scattered to become South Beach’s creditor and caused

South Beach to declare bankruptcy.

South Beach’s bankruptcy filings list, as its sole asset, the

stock in HRM, and assign to that stock a value of zero.
10 Nos. 09-3079, 09-3177

How South Beach ended up with HRM’s stock, which it

had lent NOLA the money to buy, is unexplained, but it

confirms the obvious: all these companies are controlled

by Greenblatt. 

NOLA, having used the money it borrowed from South

Beach to buy stock in HRM that became worthless, and

having no other assets, went broke too, just like South

Beach. Its bankruptcy proceeding began at the same time

as South Beach’s, but is not before us.

South Beach did not list its net operating losses as an

asset. But its disclosure statement, consistent with the

requirement that material tax consequences be described

in it, does state that the purpose of the bankruptcy is to

monetize South Beach’s net operating losses. (Amendments made to the Bankruptcy Code in 2005—which

don’t apply to this case, filed in April 2005—make this

disclosure requirement explicit. 11 U.S.C. § 1125(a)(1);

5 Bankruptcy Service, Lawyer’s Edition § 44:353 (2010). But

the requirement has been held to be implicit in the pre-2005

version of section 1125 applicable to this case. See Hall

v. Vance, 887 F.2d 1041, 1043 (10th Cir. 1989); In re

Metrocraft Publishing Services, Inc., 39 B.R. 567, 571 (Bankr.

N.D. Ga. 1984).)

The plan of reorganization proposed by South Beach and

turned down by the bankruptcy judge and the district

judge would have given Scattered all the stock of South

Beach. A court can’t confirm a plan of reorganization,

however, unless the owners of at least one class of “impaired claims” (a term broadly defined to encompass

claims altered by the plan, 11 U.S.C. § 1124; In re Wabash

Valley Power Ass’n, Inc., 72 F.3d 1305, 1321 (7th Cir. 1995);
Nos. 09-3079, 09-3177 11

In re L & J Anaheim Associates, 995 F.2d 940, 942-43 (9th Cir.

1993); W. Homer Drake, Jr. & Christopher S. Strickland,

Chapter 11 Reorganizations § 12:14, pp. 627-28 (2d ed. 2009)),

other than “an insider” member of the class, vote to

approve it, 11 U.S.C. § 1129(a)(10), and also unless either

the owners of all other classes of impaired claims accept

the plan, or the other conditions in that subsection for a

cramdown (approval of a plan over the objection of one

or some of the creditors) are met. 11 U.S.C. §§ 1129(a)(8),

(b). A class of claims is deemed to have accepted a

plan if creditors (other than the insiders that section

1129(a)(10) excludes from the eligible voters for a plan)

vote for it who own at least two-thirds in amount, and

more than a half in number, of allowed claims of the

class. 11 U.S.C. § 1126(c). Scattered voted for the plan;

South Beach had no other creditors; we defer the question whether in the absence of other creditors Scattered’s consent was effective.

Had the plan been confirmed, Scattered, as sole creditor

of the debtor, would have ended up owning South

Beach’s net operating losses. South Beach could not have

offset those losses against its own income since it has

no income or assets (aside from the potential assets consisting of the losses themselves) and no prospects of

obtaining any; it is not engaged in any business or investment activities and in fact is defunct, though it remains

a corporation in good standing. Consistent with the law

of Mississippi (where it is incorporated) for maintaining

its corporate status in the absence of an agreement by

the shareholders to eliminate the board of directors,

South Beach has a single director. Miss. Code Ann. §§ 79-4-
12 Nos. 09-3079, 09-3177

8.01(a), -8.03(b). He is unpaid and inactive, since he

does nothing. But he does have, Greenblatt testified, “a

beating heart,” and no more is required.

Outside of bankruptcy, South Beach’s net operating

losses could be used to obtain a tax benefit only if the

company received a capital infusion that enabled it to

obtain income against which to offset the losses, or if its

assets (other than the net operating losses) were

acquired by a company that had income or assets. For

the general rule is that taxpayers may not transfer net

operating losses to other taxpayers. In re Luster, 981 F.2d

277, 278-79 (7th Cir. 1992); IRS Private Letter Ruling

9622026 (May 31, 1996). If the plan of reorganization were

approved, Scattered would become the owner of South

Beach and, wanting to extract a tax benefit from South

Beach’s net operating losses, would transfer capital to

South Beach to enable that company to generate

income against which to offset the net operating losses.

The result would be to shield income of Scattered from

federal tax, because South Beach’s income would be

Scattered’s income since Scattered would be South

Beach’s sole owner.

Consistent with the general rule that we just mentioned, both the Internal Revenue Code and the judgemade tax doctrine of “substance over form” (on which

see, e.g., Gregory v. Helvering, 293 U.S. 465 (1935); In re

Comdisco, Inc., supra, 434 F.3d at 965; Yosha v.

Commissioner, 861 F.2d 494, 497 (7th Cir. 1988); In re CM

Holdings, Inc., 301 F.3d 96, 102 (3d Cir. 2002); Stewart v.

Commissioner, 714 F.2d 977, 987-88 (9th Cir. 1983))
Nos. 09-3079, 09-3177 13

impose limitations on using the purchase of a company

as the basis for deducting the company’s net operating

losses from the purchaser’s taxable income. (Comdisco

applied the doctrine to a net operating loss.) If, for example, the owner of the corporation that has the losses

sells his stock, the corporation is not permitted to offset

those losses against its future income by more than the

income the corporation would have earned if its ownership had not changed and it had invested its capital in taxexempt bonds. 26 U.S.C. § 382(a); Garber Industries, Inc. v.

Commissioner, 435 F.3d 555, 557 (5th Cir. 2006); 2 Bittker

& Eustice, supra, ¶¶ 14.42[3], 14.44[1][b], pp. 14-63, 14-92

to 14-93. That rule is designed to minimize the tax incentive for the change in ownership, lest the change confer a

tax benefit on someone (the buyer) other than the previous

owner, who had borne the brunt of the net operating

losses.

But the statute treats family members (spouses, children,

grandchildren, parents) as a single owner, corporations

as being owned by their shareholders, and trusts as

being owned by their beneficiaries, 26 U.S.C. §§ 318(a)(1),

(a)(2)(B), 382(l)(3)(A); 26 C.F.R. §§ 1.382-2T(h)(2), (6), 2

Bittker & Eustice, supra, ¶ 14.43[2][d], pp. 14-71 to 14-72,

and these attribution rules might allow the purchase

by Scattered of South Beach without triggering the application of section 382(a), though the record is too

sketchy for us to be confident of that conclusion.

Corporations in Chapter 11 bankruptcy, moreover, are

allowed to match net operating losses against income

beyond what is permitted by section 382(a) if immediately after the reorganization the debtor’s shareholders
14 Nos. 09-3079, 09-3177

and its “qualified creditors” (which include creditors, like

Scattered, who have held debt for at least 18 months

prior to the filing of the bankruptcy proceeding) own at

least half the stock by virtue of their prior status. 26 U.S.C.

§ 382(l)(5); 2 Bittker & Eustice, supra, ¶ 14.44[6], pp. 14-102

to 14-106. The thinking behind section 382(l)(5) is that

in bankruptcy the creditors rather than the shareholders

are the true owners of the corporation, so there’s no

real ownership change when the creditors receive the

stock of the corporation. 7 Mertens Law of Federal Income

Taxation, § 29:158 (2010). Consistent with this thinking,

the statute imposes certain restrictions on the deduction

of net operating losses. See 26 U.S.C. § 382(l)(5)(B); 7

Mertens, supra, § 29:158; 2 Bittker & Eustice, supra, ¶

14.44[6][a], p. 14-103. But we needn’t get into these; we

can just assume that Scattered’s plan is not vulnerable

under section 382.

Section 269(a)(1) of the Internal Revenue Code, however,

which overlaps the doctrine of substance over form and

imposes restrictions on obtaining tax benefits from net

operating losses beyond the restrictions imposed by

section 382, disallows deductions and other tax benefits,

including net operating losses, 7 Mertens, supra, § 38:97,

when the principal purpose of acquiring corporate

control, or of certain other intercorporate transactions, on

which the claim of benefits is based is to avoid tax. To

preserve the tax benefits of the transaction the taxpayer

must demonstrate that business reasons unrelated to

tax avoidance were the primary purpose of the transaction.

The attribution rules of 26 U.S.C. § 318 don’t apply to

section 269; for section 318 applies only when expressly
Nos. 09-3079, 09-3177 15

made applicable to other provisions in subchapter C of

the tax code, and it hasn’t been made expressly

applicable to section 269, which anyway is not in

subchapter C. But a beneficial owner of a company is

deemed to control it for section 269 purposes; so if he

subsequently becomes its legal owner, there is no acquisition of corporate control and so the change in ownership

does not trigger the restrictions imposed by the section.

See Ach v. Commissioner, 358 F.2d 342, 345-46 (6th Cir.

1966); Rev. Rul. 70-638 (1970); IRS Field Service Advisory

200202057 (Jan. 11, 2002); 7 Mertens, supra, § 38:89 n. 5.

Greenblatt may be the beneficial owner of both

Scattered and South Beach, though this is uncertain, since

Scattered is owned by two other companies and a trust

set up for Greenblatt’s father and children, while South

Beach is owned by NOLA, which is owned by Greenblatt’s father and the fathers of the two other directors.

But because the attribution rules of section 318 don’t

apply to section 269, the ownership of South Beach can’t be

ascribed to Scattered even if Greenblatt is the beneficial

owner of both corporations; and since Scattered therefore

is not the beneficial owner of South Beach, its acquisition

of South Beach can’t escape the bar of section 269(a)(1).

Brick Milling Co. v. Commissioner, T.C. Memo 1963-305; IRS

Rev. Rul. 80-46 (Feb. 25, 1980); 2 Bittker & Eustice, supra,

¶ 14.41[3][d], p. 14-51.

So it looks as if the plan of reorganization, even if

approved, wouldn’t confer the tax benefit that Greenblatt sought. But that doesn’t affect whether the plan

was rightly rejected; for South Beach’s disclosure state-
16 Nos. 09-3079, 09-3177

ment suggests no purpose other than to beat taxes, and

we know that a plan of reorganization may not be confirmed if that is its principal purpose, whether or not the

purpose will actually be accomplished or will be nixed

later by the Internal Revenue Service. The object of bankruptcy is to adjust the rights of the creditors of a bankrupt

company; it is not to allow a solvent company to try

to lighten its tax burden.

The plan of reorganization also had to be rejected on the

closely related ground that it hadn’t been proposed in

good faith. 11 U.S.C. § 1129(a)(3). To be in good faith a

plan of reorganization must have a true purpose and factbased hope of either “preserving [a] going concern” or

“maximizing property available to satisfy creditors.” Bank

of America National Trust & Savings Ass’n v. 203 North

LaSalle Street Partnership, 526 U.S. 434, 453 (1999); see also

In re Madison Hotel Associates, 749 F.2d 410, 425 (7th Cir.

1984). At the onset of the series of transactions among

Greenblatt’s puppet firms, South Beach was solvent. At

the end it was insolvent as a result of having been

directed by Greenblatt to borrow money from another

Greenblatt company, money that South Beach could not

repay to Scattered (the company controlled by Greenblatt to which the loan had been assigned), because

South Beach had lent the borrowed money to NOLA,

which went broke. The series of transactions set the

stage for Scattered, as sole creditor of a bankrupt firm, to

acquire South Beach in a Chapter 11 reorganization. There

were no outside creditors. Their absence, and thus the

absence of any real debt or real creditors, shows that

this case doesn’t belong in bankruptcy court. In re
Nos. 09-3079, 09-3177 17

Coastal Cable TV, Inc., 709 F.2d 762, 764-65 (1st Cir. 1983);

Furness v. Lilienfield, 35 B.R. 1006, 1012 (D. Md. 1983);

In re Stern, 50 B.R. 285, 288 (Bankr. E.D.N.Y. 1985); In re

Setzer, 47 B.R. 340, 346 (Bankr. E.D.N.Y. 1985); In re

Maxim Industries, Inc., supra, 22 B.R. at 613.

Scattered contends that there was another motive for

the bankruptcy besides the tax motive, and that was to

shield South Beach from suits. The argument is bogus.

South Beach’s bankruptcy schedule listed no claims other

than Scattered’s, and the deliberate omission of creditors

from the list submitted by the debtor is unlawful and is

grounds for dismissal of the bankruptcy proceeding. 11

U.S.C. §§ 521(a)(1), 1112(e); In re Seaman, 340 B.R. 698, 702-

03 (Bankr. E.D.N.Y. 2006); see also In re Haga, 131 B.R. 320,

325-26 (Bankr. W.D. Tex. 1991). Scattered argues that

bankruptcy would shield South Beach from being sued

by creditors of its parent, NOLA, such as Wachovia,

Prudential Securities, and the bankruptcy trustee of MJK

Clearing, Inc., rather than by its “own” creditors. But

creditors in bankruptcy include anyone who has a claim

against the debtor, which is defined broadly as any right

to payment; it needn’t be a claim arising from a contractual relation with the debtor. 11 U.S.C. §§ 101(5), (10);

Johnson v. Home State Bank, 501 U.S. 78, 83-84 (1991); Fogel

v. Zell, 221 F.3d 955, 960 (7th Cir. 2000); In re WorldCom,

Inc., 546 F.3d 211, 216 (2d Cir. 2008). And it’s odd to think

that South Beach would ever be the target of a suit, since

it’s a shell. It does have the net operating losses, but

we cannot see how they could be used by a judgment

creditor to obtain a tax benefit, for that would be at the
18 Nos. 09-3079, 09-3177

expense of the Treasury Department rather than of the

wrongdoer.

Greenblatt’s other enterprises are targets of a number

of suits, see, e.g., Wachovia Securities, LLC v. Neuhauser,

No. 04 C 3082, 2004 WL 2526390 (N.D. Ill. Nov. 5, 2004);

In re MJK Clearing, Inc., 408 F.3d 512 (8th Cir. 2005); In

re MJK Clearing, Inc., 241 F.R.D. 491 (N.D. Ill. 2007),

unsurprisingly given Greenblatt’s well-earned reputation

for sailing close to the wind; and if he transferred money

from Scattered to South Beach to take advantage of the

latter’s net operating losses, South Beach might become

a secondary target of the suits. In the 2007 MJK Clearing

case, the trustee in bankruptcy sought an order that

NOLA turn over to him its stock in South Beach. But

Scattered is not about to fund South Beach so that it can

pay judgments. It will receive no capital infusion from

Scattered unless and until it has emerged from bankruptcy.

Bankruptcy is therefore not required for the protection of

South Beach from litigation—not to mention the fact that

to make a firm that one controls insolvent in order to make

it judgment proof, or to otherwise shield assets from

judgment creditors, is not a proper invocation of bankruptcy law. See Shapiro v. Wilgus, 287 U.S. 348, 355 (1932)

(Cardozo, J.); 7 Collier on Bankruptcy, supra, ¶ 1112.07; see

also In re 15375 Memorial Corp., 589 F.3d 605, 625-26 (3d Cir.

2009); In re Dixie Broadcasting, Inc., 871 F.2d 1023, 1026-

28 (11th Cir. 1989).

The bankruptcy judge and the district judge had still

another ground for denying confirmation of the proposed plan of reorganization, illustrating what a travesty
Nos. 09-3079, 09-3177 19

this bankruptcy proceeding is: South Beach’s sole

creditor—Scattered—is an insider of South Beach. Remember that a plan of reorganization can’t be confirmed unless “at least one class of claims that is impaired

under the plan has accepted the plan, determined without

including any acceptance of the plan by any insider.”

11 U.S.C. § 1129(a)(10). The only claim alleged to be

impaired by the plan is Scattered’s claim to the money it

is owed by virtue of having bought Loop’s loan to South

Beach. Scattered voted to accept the plan but was an

insider of the debtor when it did so, because Greenblatt

controls South Beach, Loop, and Scattered. And while

“insider” includes a “person in control of the debtor,” 11

U.S.C. § 101(31)(B)(iii), it is not limited to such persons;

it includes any entity so closely related to the debtor as to

“suggest that any transactions were not conducted at arm’s

length.” In re Winstar Communications, Inc., 554 F.3d 382,

396-97 (3d Cir. 2009); see also In re Krehl, 86 F.3d 737, 742-

43 (7th Cir. 1996); In re U.S. Medical, Inc., 531 F.3d 1272,

1277-78 and n. 5 (10th Cir. 2008); In re AFI Holding, Inc., 355

F.R. 139, 152-53 (B.A.P. 9th Cir. 2006). That condition

obviously is satisfied here.

We recall that acceptance by a class of claims requires

approval by two-thirds (in amount) and more than onehalf (in number) of the claimants, excluding insiders. 11

U.S.C. §§ 1126(c), 1129(a)(10). With Scattered excluded

because of its insider status, there are no eligible voters.

The exclusion of insiders in deciding whether a plan

has been accepted by impaired creditors is intended to

prevent conflicts of interest that can arise when a
20 Nos. 09-3079, 09-3177

creditor has substantial influence over the debtor

beyond what is implicit in being a creditor. See In re U.S.

Medical, Inc., supra, 531 F.3d at 1277-78; In re Friedman, 126

B.R. 63, 69-70 (B.A.P. 9th Cir. 1991). It brakes cramdowns

by ensuring that some disinterested creditors have approved the plan. See, e.g., In re Combustion Engineering,

Inc., 391 F.3d 190, 243-44 (3d Cir. 2004); In re Windsor on

the River Associates, Ltd., 7 F.3d 127, 131 (8th Cir. 1993);

7 Collier on Bankruptcy, supra, ¶ 1129.02[10][a], p. 1129-50

and n. 178. This cannot be a concern in the present case,

however, because the only creditor is an insider. There is

no risk of collusion between an insider creditor and the

debtor at the expense of other creditors, and that takes

the case out of the intended scope of section 1129(a)(10),

though not out of the approval requirement. But even

though the purpose of section 1129(a)(10) is not engaged

here, the fact that only insiders are involved or interested in the bankruptcy (apart from the U.S. Trustee!)

helps show why this bankruptcy doesn’t serve the purposes of bankruptcy law—and why no alternative plan is

conceivable. For while the question presented by the

appeal is whether the plan tendered by South Beach

should have been confirmed, the bankruptcy judge was

right to dismiss the bankruptcy proceeding rather than

give South Beach (realistically, Scattered) a chance

to propose an alternative plan. No confirmable alternative plan is conceivable. See 11 U.S.C. § 1112(b); In re

Hedquist, 450 F.3d 801, 804 (8th Cir. 2006); In re American

Capital Equipment, Inc., 405 B.R. 415, 426-27 (Bankr. W.D.

Pa. 2009); 7 Collier on Bankruptcy, supra, ¶¶ 1112.04[5][a],

[c], 1112.07, pp. 1112-23 to 1112-24, 1112-26, 1112-49

to 1112-62.
Nos. 09-3079, 09-3177 21

It is true that at an earlier stage of the bankruptcy

proceeding the district court reversed the bankruptcy

judge’s ruling that the petition for bankruptcy had been

filed in bad faith and should therefore be dismissed. The

reversal was not necessarily error, because all the facts

were not yet before the bankruptcy court or the district

court. Scattered’s argument that the district court’s

finding that the petition had not been filed in bad faith

is “law of the case” and cannot be reexamined by us is

frivolous, because the doctrine of law of the case limits

reexamination of a ruling in an earlier stage of a litigation by the same court, not by a higher court. Lujan v.

National Wildlife Federation, 497 U.S. 871, 881 n. 1 (1990);

Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753, 761 (7th

Cir. 2007). And anyway the doctrine doesn’t bar reexamination of a ruling even by the same court if there is

a compelling reason for reexamination, Agostini v. Felton,

521 U.S. 203, 236 (1997); Santamarina v. Sears, Roebuck & Co.,

466 F.3d 570, 571-72 (7th Cir. 2006), as there was here

because the facts brought out in the confirmation hearing

showed that the bankruptcy had been filed in bad faith.

Greenblatt’s evasive and at times incredible testimony,

and his orchestration of a scheme aimed at a palpable

misuse of bankruptcy, raise serious ethical and perhaps

legal concerns. The appeal to the district court and now to

our court was frivolous, and we invite the U.S. Trustee to

consider applying for sanctions against Scattered and

South Beach, Greenblatt, the appellants’ law firms, and the

firms’ lawyers who worked on the case, for misconduct in

the bankruptcy and district courts. And we order the

appellants, and the law firms and lawyers that appeared
22 Nos. 09-3079, 09-3177

for them in this court, to show cause why they should not

be sanctioned for their conduct here.

AFFIRMED AND SHOW-CAUSE ORDER ISSUED.

5-19-10