Court Opinion

ID: 5125771
Source: CourtListenerOpinion
Date Created: 2021-11-13 01:00:30.915727+00
Date Added: 2024-06-11T08:22:52.635717
License: Public Domain

Case: 19-30795    Document: 00516091362        Page: 1   Date Filed: 11/12/2021

          United States Court of Appeals
               for the Fifth Circuit                             United States Court of Appeals
                                                                          Fifth Circuit

                                                                        FILED
                                                                November 12, 2021
                                No. 19-30795                       Lyle W. Cayce
                                                                        Clerk

   In the Matter of: Richard LaHaye; Cindy LaHaye

                                                                    Debtors,

   New Falls Corporation,

                                                                 Appellant,

                                    versus

   Richard LaHaye; Cindy LaHaye,

                                                                  Appellees.

                 Appeal from the United States District Court
                    for the Western District of Louisiana
                 USDC Nos. 6:18-CV-675 and 6:18-CV-1093

   Before Elrod, Southwick, and Costa, Circuit Judges.
   Gregg Costa, Circuit Judge:
Case: 19-30795     Document: 00516091362          Page: 2   Date Filed: 11/12/2021

                                   No. 19-30795

          A grocery went bankrupt. One of the store’s creditors filed a proof of
   claim for about $325,000, the balance on a loan it had made to the grocery.
   In the business’s Chapter 11 plan, the bankruptcy court awarded the creditor
   the grocery store and the land where it was located. The court assessed the
   value of this property at $225,000. The plan thus reduced the outstanding
   balance on the loan to $100,000. The couple who owned the grocery
   business had guaranteed the loan, so they remained liable but only for the
   remaining balance.
          Soon after the business’s bankruptcy case ended, the couple filed for
   personal bankruptcy. The creditor again filed a proof of claim for the entire
   debt. It argued that the $225,000 credit against the guaranteed loans should
   not apply in the owners’ personal bankruptcy, as the store had not yet been
   transferred. Plus, the vacant property had declined in value.
          The question is whether the terms of the first bankruptcy are binding
   in the second. We conclude that they are. Under section 1141(a) of the
   Bankruptcy Code, the provisions of a confirmed bankruptcy plan bind both
   the debtor and its creditors. As a result, this creditor is bound by the
   provision of the first bankruptcy plan awarding it the grocery store in
   exchange for a fixed-value credit against the guaranteed debt.
                                        I.
          Richard and Cindy LaHaye owned LaHaye Enterprises, LLC, a small
   grocery business in rural Louisiana. In 2011 and 2012, the LLC took out loans
   from Regions Bank totaling $340,805. The LaHayes personally guaranteed
   the loans, making them jointly and severally liable for the loan obligations.
   To further secure the loans, they executed a single mortgage encumbering
   two real properties—a retail space owned solely by the LLC (“the Grocery
   Store”) and a home owned solely by the LaHayes (“the Ventress House”).

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           Soon after the LLC obtained the loans, a national grocery chain came
   to town and drove the LLC’s one store out of business. The LaHayes
   attempted to satisfy the LLC’s outstanding debts by transferring its assets to
   Regions Bank. But the bank ignored their efforts and, in 2015, sold the loans
   and the attached mortgage to New Falls. The LLC filed for Chapter 11
   bankruptcy later that year.
           New Falls asserted a claim against the LLC’s bankruptcy estate for
   the outstanding balance on the loans—at that time, about $326,000. In June
   2016, the bankruptcy court confirmed a Chapter 11 plan, in which the LLC
   agreed to surrender the Grocery Store and all of its contents to New Falls in
   exchange for a roughly $225,000 credit. That credit reduced the balance on
   the loan to $100,000. The plan further provided that the LaHayes would
   make monthly payments against the $100,000 in unsecured debt and would
   be entitled to a partial release of liability for the rest.
           Things did not go according to plan. In October 2016, New Falls
   foreclosed on the mortgage encumbering the Grocery Store and the Ventress
   House and sought to liquidate both properties. To prevent the sale of the
   Ventress House, the LaHayes (as individuals) immediately filed for Chapter
   11 bankruptcy. That stalled the sale of the Grocery Store too, and the vacant
   storefront sat idle, declining in value. 1
           New Falls asserted an even larger claim in the LaHayes’ personal
   bankruptcy, seeking to recover the full balance of the LLC’s debt plus

           1
              The parties disagree as to who should be blamed for the fact that the Grocery
   Store was never transferred. New Falls maintains that the LaHayes’ bankruptcy prevented
   it from completing its foreclosure on the property. But the LaHayes point out that New
   Falls could have removed the Ventress House from its foreclosure petition and sold the
   store on its own. The LaHayes also contend that they repeatedly offered to transfer the
   Grocery Store outright during their personal bankruptcy, and still, New Falls declined to
   accept it.

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   accrued interest. The LaHayes objected, arguing that New Falls was bound
   by the provisions of the first bankruptcy plan—including the $225,000 credit
   and partial release of liability. New Falls agreed that it was bound by the plan
   but only with respect to the debtor, not its guarantors. In New Falls’ view,
   the LaHayes remained severally liable for the entire debt and could not
   indirectly benefit from the credit to the LLC until the LLC’s assets passed to
   New Falls through either sale or transfer of title.
          The bankruptcy court disagreed with New Falls and sustained the
   LaHayes’ objection. It held that, under 11 U.S.C. § 1141, the first bankruptcy
   plan bound the creditor in subsequent proceedings involving the same debt,
   even before the assets were transferred. The court subsequently applied the
   credit and reduced New Falls’ claim against the LaHayes’ bankruptcy estate
   to the $100,000 left unsecured by the first plan.
          New Falls appealed the bankruptcy court orders sustaining the
   LaHayes’ objection and confirming their individual bankruptcy plan. The
   district court upheld both rulings. It found that the extent of the LaHayes’
   personal liability was “specifically addressed” by the first bankruptcy plan,
   so res judicata barred New Falls from relitigating the issue in the second
   bankruptcy.
          An appeal to this court followed. Although New Falls appeals both
   the order sustaining the LaHayes’ objection to its claim and the order
   confirming the plan in the personal bankruptcy, the outcome of the latter
   appeal depends entirely on the success of the former. The question before
   us, then, is whether the LLC’s bankruptcy plan fixed the value of New Falls’
   claim against the LaHayes in their personal bankruptcy.
                                         II.
          New Falls offers two reasons why the LLC’s bankruptcy plan should
   have no bearing on its claim in the LaHayes’ personal bankruptcy. First, New

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   Falls maintains that the plan premised the credit against the debt on New
   Falls’ obtaining ownership of the Grocery Store. The Store has not been
   transferred yet so, in New Falls’ view, the LaHayes are still responsible for
   the entire debt. Next, even if the plan attempted to reduce the LaHayes’
   liability as of the confirmation date, New Falls argues that provision would
   be ineffective because a bankruptcy plan cannot bind a creditor with respect
   to its claims against third-party guarantors. We disagree on both fronts.
                                         A.
          Unless stated otherwise, a bankruptcy plan takes effect upon
   confirmation. 11 U.S.C. § 1141. Recourse to that default rule is not necessary
   here, however, because the LLC’s plan cites confirmation as the event that
   triggers a reduction in the amount the LaHayes owe New Falls.
          The LLC’s bankruptcy plan says that:
          The LaHayes shall be entitled to a partial release of the guaranties of
          the New Falls debt upon confirmation of this plan in an amount equal
          to the value of the property surrendered under the Plan. The LaHayes
          shall thereafter be liable only for the remaining balance of $100,000.00
          as provided for above.
   This language seems clear. “Upon confirmation” of the plan, the LLC
   surrendered the Grocery Store and the LaHayes received a partial release of
   liability. The release was not predicated on New Falls’ first obtaining the
   surrendered property. Rather, confirmation triggered both conditions—
   surrender and release.
          New Falls argues that the plan, when read as a whole, requires
   something more than confirmation to trigger the release. It points to another
   term, which provides that confirmation will “allow the Debtor and New Falls
   to engage in such transactions as are necessary to carry out the provisions of
   the plan . . . and the transfer of any assets or to allow New Falls to foreclose

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   it[s] mortgage on property owned by the Debtor.” New Falls reads this to
   mean that certain “transactions” would need to occur before the release
   could take effect. Specifically, “no credit would be due until the parties
   either reached an agreement to transfer the property to New Falls, or New
   Falls completed its foreclosure proceeding.”
          But the provision that New Falls relies on does not qualify the
   LaHayes’ release of liability. It appears on a different page of the plan and
   does not even mention the release. Instead it lifts the automatic stay that
   barred New Falls from foreclosing on the LLC’s assets during the bankruptcy
   proceedings. Moreover, nothing in the provision suggests that the LaHayes
   bear the burden of ensuring that New Falls receives the surrendered
   property. By cancelling the stay, the plan permits New Falls to pursue the
   property, either by negotiating transfer with the LaHayes or foreclosing on
   the mortgage. This provision shows that the bankruptcy court understood
   that the Grocery Store was not yet in New Falls’ hands, yet it still made the
   release operative “upon confirmation.”
          Reading the plan as a whole, we find no indication that the LaHayes’
   release of liability is conditional. The plan divides the New Falls debt
   between the LLC and the LaHayes, giving them separate responsibilities: (1)
   the LLC satisfies the secured portion by turning over the Grocery Store and
   (2) the LaHayes satisfy the unsecured portion by making monthly payments
   over 20 years. If these obligations only took effect once the Grocery Store
   was transferred, New Falls could upend the arrangement by ignoring the
   LLC’s obligation and going after the LaHayes for the entire debt. We do not
   believe the bankruptcy court intended to let New Falls determine the extent
   of the LaHayes’ personal liability. The only reasonable interpretation of the
   plan is thus the manifest one: “The LaHayes [became] entitled to a partial
   release of the guaranties of the New Falls debt upon confirmation.”

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                                          B.
          Having determined that the plan purports to reduce the LaHayes’
   liability on the New Falls debt to $100,000, the next question is whether that
   term has binding effect beyond the LLC’s bankruptcy. New Falls contends
   that a confirmed bankruptcy plan, albeit binding on the debtor, cannot bind a
   creditor with respect to its claims against third-party guarantors. If correct,
   this argument would mean the release from the LLC’s bankruptcy has no
   practical effect in the LaHayes’ personal bankruptcy. Again, we disagree.
          Under the Bankruptcy Code, the “provisions of a confirmed plan bind
   the debtor . . . and any creditor.” 11 U.S.C. § 1141(a). Based on this
   provision, we have long understood a confirmed bankruptcy plan to have
   binding effect on subsequent proceedings that involve the same debt. See
   Eubanks v. FDIC, 977 F.2d 166, 170 (5th Cir. 1992); Miller v. Meinhard-Com.
   Corp., 462 F.2d 358, 360 (5th Cir. 1972); In re Constructors of Fla., Inc., 349
   F.2d 595, 599 (5th Cir. 1965). This binding effect extends to third parties.
   Indeed, a confirmation order binds every entity that holds a claim or interest
   in the planned reorganization, regardless of whether they assert those
   interests before the bankruptcy court. See Eubanks, 977 F.2d at 170.
          That being said, the “discharge of a debt of the debtor does not affect
   the liability of any other entity” for the debt 11 U.S.C. § 524(e). A debtor’s
   bankruptcy plan generally does not discharge its guarantors’ obligations,
   even if the plan reduces or restructures the debt itself. In re Sandy Ridge Dev.
   Corp., 881 F.2d 1346, 1351 (5th Cir. 1989); United States v. Stribling Flying
   Serv., Inc., 734 F.2d 221, 223–24 (5th Cir. 1984). After all, the reason a lender
   obtains a guaranty is to guard against the risk that the borrower will not repay
   the loan. If a borrower’s insolvency discharged even a guarantor’s liability,
   the guaranty would lose much of its force.
          But discharge is not the issue here. The LLC’s bankruptcy plan does
   not discharge the New Falls debt or the LaHayes’ obligations under it. To

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   the contrary, the plan provides that the LaHayes’ guarantees and mortgage
   “shall remain in force until the New Falls debt is paid in full.” The provision
   granting the LaHayes a partial release of liability for the secured portion of
   the debt is not a discharge. Rather, it requires New Falls to recover the
   secured debt from an asset—the Grocery Store—that is part of the LLC’s
   estate. The guarantee remains, with the LaHayes still owing the leftover
   balance. 2
          This is not the first time we have recognized the distinction between
   erasing a guaranty (impermissible) and reducing a guarantor’s liability by
   ordering a debtor to surrender assets in satisfaction of the debt (permissible).
   See Stribling, 734 F.2d at 223; Sandy Ridge, 881 F.2d at 1354; NCNB Tex.
   Nat’l Bank v. Johnson, 11 F.3d 1260, 1266 (5th Cir. 1994). In Stribling, for
   example, the debtor’s bankruptcy plan did not discharge a guaranty; instead,
   it ordered asset transfers and payments that reduced the debt and, in tandem,
   the guarantors’ liability. 734 F.2d at 224 (explaining that the guarantors’
   liability was “subject to credit for amounts paid on this debt by or on behalf
   of the corporate obligor”). Applying the same logic, in Sandy Ridge, we
   approved a proposed Chapter 11 plan similar to the LLC’s. That debtor also
   offered to surrender some of its real estate in exchange “for a ‘credit on the
   indebtedness.’” Sandy Ridge, 881 F.2d at 1349. The bankruptcy court
   rejected the plan due, in part, to its concern that the credit would release the
   debtor’s guarantors from liability. Id. at 1350–51. We reversed, explaining
   that the proposed plan would not “operate to release the nondebtor

          2  Accordingly, we need not address New Falls’ argument that the mortgage
   encumbering the Ventress House is subject to independent, in rem liability—unaltered by
   the LaHayes’ in personam release. We do not doubt that the mortgage is still effective.
   Nothing in the LLC’s bankruptcy plan prevents New Falls from seeking to repossess the
   Ventress House should the LaHayes default on the outstanding balance.

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   guarantors.” Id. at 1351. The surrendered assets would satisfy the secured
   portion of the claim and, with the guaranty still in existence, the creditor
   “would then be able to pursue the guarantors” for the remaining unsecured
   sum (the total debt minus the credit). Id. at 1354; see also Johnson, 11 F.3d at
   1266; R.I.D.C. Indus. Dev. Fund v. Snyder, 539 F.2d 487, 490 n.3, 494 (5th
   Cir. 1976) (both distinguishing discharge of guaranty from payments that
   reduce the underlying debt). The LLC’s plan operates the same way.
          A simple way to frame the difference between discharging a debt and
   crediting an asset against its balance is to imagine that the bankruptcy court
   had ordered the LLC to turn over cash instead of real estate. No one would
   view an order requiring the LLC’s estate to pay New Falls $250,000 in cash
   as eliminating a guaranty. It would be a payment that reduced the debt—and
   thus the guarantee—to a $100,000 balance. The fact that the provision at
   issue contemplates an exchange of real property rather than cash does not
   make it any less binding. See Sandy Ridge, 881 F.2d at 1351.
          A bankruptcy plan, then, can limit a creditor’s claim against third-
   party guarantors—not by discharging the guaranty but by determining the
   source and value of payments satisfying the guaranteed debt. Indeed, the
   bankruptcy court has broad discretion to determine how a debt will be settled,
   including through the sale or transfer of “all or any part of the property of the
   [bankrupt entity’s] estate.” See 11 U.S.C. § 1123(a)(5)(A)–(D).
          Nonetheless, New Falls has refused the form of recovery provided by
   the LLC’s bankruptcy plan, in hopes that a claim against the LaHayes might
   yield a better outcome. This is where the preclusive aspect of section 1141
   kicks in. In providing that “the provisions of a confirmed plan bind the
   debtor . . . and any creditor,” 11 U.S.C. § 1141(a), section 1141 is a statutory

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   bar on relitigation akin to common law preclusion doctrines. 3                        See 8
   Collier on Bankruptcy § 1141.02 (16th ed. 2021) (“Section 1141(a)
   of the Code provides that a confirmed chapter 11 plan is binding upon a broad
   list of entities.”). Like traditional res judicata, section 1141(a) provides that
   “a confirmed plan precludes parties from raising claims or issues that they
   could have or should have raised before confirmation.” Id. That is what New
   Falls is trying to do here.
           New Falls’ appeal is a collateral attack on the LLC bankruptcy plan’s
   disposition of the secured debt. See In re Linn Energy, 927 F.3d 862, 867 (5th
   Cir. 2019). New Falls argues that the LaHayes should remain liable for that
   debt until the Grocery Store is transferred. But as we have said, the plan did
   not make transfer a condition of the LaHayes’ release. If New Falls thought
   that transfer should have been the triggering event, it had every opportunity
   to ask for that in the LLC’s bankruptcy. In any event, there is nothing

           3  The relationship between section 1141 and res judicata is not entirely clear. We
   have treated the two as separate but somewhat overlapping doctrines. Eubanks, 977 F.2d
   at 170; see also 8 Collier § 1141.02 (focusing on res judicata only in one of five subsections
   addressing section 1141(a)). In Eubanks, for example, we cited section 1141 in finding that
   a confirmed bankruptcy plan is equivalent to a final order for preclusion purposes but
   proceeded to also consider the other res judicata factors. 977 F.2d at 169. Despite section
   1141’s finality command, consideration of traditional res judicata elements may still be
   required for due process purposes, especially when section 1141 is being applied against a
   party that did not litigate in the underlying bankruptcy. See 8 Collier §§ 1141.02,
   1141.06 (noting constitutional limits on application of Code against creditor that did not
   receive notice). Indeed, the Supreme Court applied res judicata rather than the Code when
   considering whether a confirmed plan’s release of tort claims against a third party bound
   plaintiffs who sued the released party years later. Travelers Indem. Co. v. Bailey, 557 U.S.
   137, 152 (2009).
           To the extent our caselaw requires consideration of the preclusion elements even
   when, as here, the party seeking to relitigate appeared in the original bankruptcy, see
   Eubanks, 977 F.2d at 169, this case meets those criteria. Issue preclusion applies because
   New Falls had a full opportunity to, and did in fact, litigate the same issue it is raising in
   this appeal: the valuation and distribution of the Grocery Store in the LLC’s bankruptcy.
   See Rabo Agrifinance, Inc. v. Terra XXI, Ltd., 583 F.3d 348, 353 (5th Cir. 2009).

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   unusual about crediting a debt based on a postconfirmation transfer. The
   proposal we approved in Sandy Ridge credited a property that would be
   transferred after confirmation. See 881 F.2d at 1348. The same would be true
   of a plan ordering the LLC to pay cash. In either case, upon confirmation of
   the plan, the debtor would be obligated to timely transfer the assets
   corresponding to the credit, and the creditor would be bound to receive them.
   Any postconfirmation default in the debtor’s performance would not void the
   credit but would instead give rise to a new and separate claim against the
   debtor for noncompliance with the plan. See In re Pan Am. Gen. Hosp., LLC,
   385 B.R. 855, 866 (Bankr. W.D. Tex. 2008) (“[P]re-petition debts are
   discharged by confirmation, displaced (and replaced) by the Plan’s treatment
   of those debts, and will not be revived by any post-confirmation default in
   plan payments.”); In re Benjamin Coal Co., 978 F.2d 823, 827 (3d Cir. 1992).
          New Falls cannot undo the LLC bankruptcy’s valuation of the
   Grocery Store either. A reduction in the value of that property seems to be
   what is keeping this litigation going. 4 Since 2016, the property has sat
   abandoned and its value has sharply declined. As New Falls told the district
   court: “We don’t really want it.” But it was not the judiciary’s decision to
   have the Grocery Store secure the LLC’s debt. New Falls purchased the
   LLC’s debt, knowing the Grocery Store was attached as collateral. It is hard
   to see what viable grounds New Falls would have to object to the LLC’s
   surrender of the store as partial settlement of the debt. But regardless of the
   chances of such an objection, the LLC bankruptcy was the place to make it.
   See Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1050 (5th Cir. 1987); In re
   Linn Energy, 927 F.3d at 867.

          4
             Notably, the bankruptcy court’s valuation of the store stemmed from the value
   stated in New Falls’ own proof of claim.

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          We recognize that fixing the value of surrendered assets at the time of
   confirmation subjects creditors to the risk that the assets may decrease in
   value before they are transferred. See Sandy Ridge, 881 F.2d at 1354 (holding
   that a bankruptcy court may value real estate rather than wait to see the price
   of a foreclosure sale). Yet that valuation is “an integral part of the bankruptcy
   process.” Id. And the risk swings both ways. In the years since the LLC plan
   was confirmed, the Store’s value could have increased, due to a new highway
   nearby or foot traffic from new businesses. In that situation, the 2015
   valuation would still bind both parties and New Falls would enjoy the benefit
   of the postconfirmation price fluctuation.
          Under section 1141, New Falls is bound by the provision of the LLC’s
   confirmed bankruptcy plan, which requires it to accept the Grocery Store in
   exchange for a fixed-value credit against the secured debt. New Falls cannot
   use the LaHayes’ personal bankruptcy to relitigate those issues.
                                            ***
          We AFFIRM the judgment of the district court.

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