Court Opinion

ID: 2971165
Source: CourtListenerOpinion
Date Created: 2015-09-22 16:30:08.470852+00
Date Added: 2024-06-11T11:37:36.733194
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RECOMMENDED FOR FULL-TEXT PUBLICATION
           Pursuant to Sixth Circuit Rule 206             2       Pratt, et al. v.                       Nos. 02-5632/5638
   ELECTRONIC CITATION: 2004 FED App. 0113P (6th Cir.)            Ventas, Inc., et al.
               File Name: 04a0113p.06
                                                                   Before: COLE and GILMAN, Circuit Judges;
                                                                      SCHWARZER, Senior District Judge.*
UNITED STATES COURT OF APPEALS
                                                                                 _________________
             FOR THE SIXTH CIRCUIT
               _________________                                                         COUNSEL

SALLY PRATT, et al.,              X                       ARGUED: James M. Morris, MORRIS & MORRIS,
           Plaintiffs-Appellants/ -                       Lexington, Kentucky, for Appellants. David B. Tachau,
                                                          TACHAU, MADDOX, HOVIOUS & DICKENS, Louisville,
                 Cross-Appellees, -                       Kentucky, for Appellees. ON BRIEF: James M. Morris,
                                   -  Nos. 02-5632/5638
                                   -                      Sharon K. Morris, MORRIS & MORRIS, Lexington,
              v.                    >                     Kentucky, for Appellants. David B. Tachau, John D. Dyche,
                                   ,                      TACHAU, MADDOX, HOVIOUS & DICKENS, Louisville,
                                   -
VENTAS, INC., a/k/a Vencor,                               Kentucky, for Appellees.
                                   -
Inc., et al.,                      -                                             _________________
         Defendants-Appellees/ -
               Cross-Appellants, -                                                   OPINION
                                   -                                             _________________
                                   -
JOHN DOES, #1 through #5,          -                         RONALD LEE GILMAN, Circuit Judge. Sally Pratt and
            Defendant-Appellee. -                         others (Plaintiffs) filed various state-law claims against a
                                   -                      large health care provider, Vencor, Inc., which subsequently
                                  N                       spun off a subsidiary with the same name as the parent
       Appeal from the United States District Court       company, and then changed the name of the parent company
    for the Western District of Kentucky at Louisville.   to Ventas, Inc. When “New Vencor,” the subsidiary, filed for
No. 01-00317—John G. Heyburn II, Chief District Judge.    Chapter 11 bankruptcy in the Bankruptcy Court for the
                                                          District of Delaware, Ventas agreed to make substantial
               Argued: March 18, 2004                     financial contributions towards New Vencor’s reorganization.
                                                          In exchange, New Vencor’s Reorganization Plan granted
          Decided and Filed: April 20, 2004               Ventas a full release from Plaintiffs’ claims. The bankruptcy
                                                          court entered a Confirmation Order approving the Plan, which

                                                              *
                                                               W illiam W Schwarzer, Senior United States District Judge for the
                                                          Northern District of California, sitting by designation.

                           1
Nos. 02-5632/5638                          Pratt, et al. v.        3   4      Pratt, et al. v.                      Nos. 02-5632/5638
                                       Ventas, Inc., et al.                   Ventas, Inc., et al.

permanently enjoined Plaintiffs from pursuing their claims                 Each of the named Plaintiffs in this case had filed a state
against Ventas.                                                            court suit against one of the Vencor entities prior to or
                                                                           soon after the commencement of its bankruptcy
   Ignoring the injunction, Plaintiffs sued Ventas in the district         proceedings. In September 1996, Plaintiff Sally Pratt
court below, which subsequently dismissed their case for lack              filed suit against “old” Vencor . . . for age discrimination
of subject matter jurisdiction. Plaintiffs then filed a motion             and wrongful termination. In March 1998, Plaintiff
to vacate the Confirmation Order in the Delaware bankruptcy                Valiza Nystrom filed suit against Vencor Hospitals Texas
court. Because Supreme Court precedent requires us to                      . . . for constructive discharge. In October 1998, Mark
accord preclusive effect to the Delaware bankruptcy court’s                Dayman, Executor of the Estate of Liesel Dayman, filed
conclusion that it had jurisdiction over this matter, Plaintiffs           suit against “new” Vencor . . . for negligence. In
are barred by res judicata from continuing their suit in this              November 1999, Plaintiff Robert McCray, pursuant to a
court. We therefore AFFIRM the judgment of the district                    Power of Attorney for Lee Ona Lee, sued Vencor
court.                                                                     Nursing Centers East . . . for negligence.
                     I. BACKGROUND                                     Pratt, 273 B.R. at 110. Finally, Nystrom’s attorney Mark
                                                                       Byrne filed suit against Vencor for tortious interference with
A. Factual background                                                  his prospective contractual advantage with his client. Id. at
                                                                       n.2.
  Two lower court opinions, one in Delaware and the other in
Kentucky, have summarized the relevant facts of the present               After New Vencor filed for bankruptcy, it filed motions
case. See In re Vencor, Inc., 284 B.R. 79 (Bankr. D. Del.              pursuant to 11 U.S.C. § 362 for an automatic stay in each of
2002), and Pratt v. Ventas, Inc., 273 B.R. 108 (W.D. Ky.               Plaintiffs’ respective state-court actions. Pratt, Damon, and
2002). Because the principal issues on appeal are questions            McCray responded by filing proofs of claim in the bankruptcy
of law, we abstract the following undisputed facts from the            court. On December 14, 2000, a Reorganization Plan for
lower courts’ opinions:                                                New Vencor was proposed, and notice of the Plan was mailed
                                                                       to each of the Plaintiffs who had filed a proof of claim. The
  Prior to May, 1998, Ventas operated, inter alia, several             bankruptcy court confirmed the Plan in a Confirmation Order
  nursing homes under the name Vencor, Inc. (“Old                      issued on March 19, 2001, with the Plan becoming effective
  Vencor”). On May 1, 1998, Old Vencor changed its                     on April 20, 2001. A key component of the Plan was
  name to Ventas and spun off its nursing home operations              summarized as follows:
  to a newly incorporated entity named Vencor, Inc. (“New
  Vencor”). Ventas retained ownership of the real estate                   As part of that Plan, Ventas agreed to contribute $40
  and became New Vencor’s landlord at many of the                          million to the funding of a settlement with the United
  facilities. . . . On September 13, 1999, New Vencor and                  States and agreed to amendments of certain leases which
  several of its affiliates filed for relief under chapter 11 of           it had with [New Vencor], thereby reducing [New
  the Bankruptcy Code.                                                     Vencor’s] rental obligations. In exchange, Ventas was
                                                                           given a release of [Plaintiffs’ personal injury and other]
In re Vencor, Inc., 284 B.R. at 81.
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                                       Ventas, Inc., et al.              Ventas, Inc., et al.

  claims arising from operation of the nursing homes prior          district court for the judicial district in which the bankruptcy
  to May 1, 1998.                                                   court is serving.”) (emphasis in Pratt))
In re Vencor, Inc., 284 B.R. at 81. The terms of the Plan thus        Plaintiffs were encouraged to pursue their claim in the
incorporated an injunction proscribing suits against New            Delaware bankruptcy court, in the United States District
Vencor and Ventas for “any alleged improprieties committed          Court for the District of Delaware, and if necessary, in the
in connection with [New] Vencor’s bankruptcy, prior to the          United States Court of Appeals for the Third Circuit. Id. The
date of confirmation.” Pratt, 273 B.R. at 111.                      complaint was initially dismissed with prejudice, but the
                                                                    district court later modified the order to make it “without
B. Procedural background                                            prejudice,” presumably so that Plaintiffs could raise their
                                                                    claims against Ventas in the proper forum.
   Plaintiffs filed suit in the United States District Court for
the Western District of Kentucky, alleging that Ventas                Each side appealed the district court’s decision, but this
obtained the releases in the Confirmation Order through             court held both appeals in abeyance while Plaintiffs pursued
fraudulent means. They argued that in overseeing New                the merits of their claims in the Delaware bankruptcy court.
Vencor’s bankruptcy proceedings, the bankruptcy court               The bankruptcy court subsequently held that there was no
lacked jurisdiction over Plaintiffs’ third-party action against     basis for Plaintiffs’ assertion that it lacked jurisdiction to
Ventas. As a consequence, Plaintiffs contended that the             grant the releases to Ventas contained in New Vencor’s Plan.
Confirmation Order’s injunction barring suit against Ventas         In re Vencor, Inc., 284 B.R. at 86. Plaintiffs did not appeal
had no preclusive effect on Plaintiffs’ suit filed in the federal   this latter decision.
district court in Kentucky. Ventas responded by filing a
motion to dismiss the complaint pursuant to Rules (9)(b) and           On December 6, 2002, this court lifted the stay on the
12(b)(6) of the Federal Rules of Civil Procedure.                   present appeal of the district court’s decision in Pratt v.
                                                                    Ventas, 273 B.R. 108 (W.D. Ky. 2002). This matter is now
   Relying on the Supreme Court’s decision in Celotex Corp.         ripe for disposition.
v. Edwards, 514 U.S. 300 (1995), the district court held that
Plaintiffs were barred from collaterally attacking the                                     II. ANALYSIS
Confirmation Order issued by the Delaware bankruptcy court.
Pratt, 273 B.R. at 116. The district court subsequently             A. Standard of review
granted Ventas’s motion based upon a lack of subject matter
jurisdiction. It also expressly declined to consider whether           This court reviews whether the district court properly
the bankruptcy court exceeded its statutory authority in            dismissed a claim pursuant to Rule 12(b)(6) of the Federal
granting injunctive relief to Ventas. Id. The court concluded       Rules of Civil Procedure using a de novo standard. Sistrunk
that it could “not properly exercise appellate review over          v. City of Strongsville, 99 F.3d 194, 197 (6th Cir. 1996). A
these earlier bankruptcy proceedings.” Id. ((quoting 28             motion to dismiss may be granted “only if it is clear that no
U.S.C. § 158(a): “An appeal . . . shall be taken only to the        relief could be granted under any set of facts that could be
                                                                    proved consistent with the allegations.” Id. (citation omitted).
Nos. 02-5632/5638                         Pratt, et al. v.    7    8      Pratt, et al. v.                       Nos. 02-5632/5638
                                      Ventas, Inc., et al.                Ventas, Inc., et al.

B. Application of the “collateral attack” doctrine                 of the law,” id. at 313, it held that the Edwardses would not
                                                                   be permitted to collaterally attack the Florida bankruptcy
   The district court held that Plaintiffs’ suit filed in the      court’s § 105 injunction in the federal courts in Texas. The
Western District of Kentucky was an impermissible collateral       Court reasoned:
attack on the bankruptcy court’s Confirmation Order. Pratt,
273 B.R. at 116. A “collateral attack” is a tactic whereby a           It is for the court of first instance to determine the
party seeks to circumvent an earlier ruling of one court by            question of the validity of the law, and until its decision
filing a subsequent action in another court. Id. at 114 (citing        is reversed for error by orderly review, either by itself or
Willy v. Coastal Corp., 503 U.S. 131, 137 (1992)). As                  by a higher court, its orders based on its decision are to
applied to the present case, the district court below believed         be respected. If respondents believed the Section 105
that Plaintiffs’ suit against Ventas in Kentucky was an                Injunction was improper, they should have challenged it
improper attempt to circumvent the Delaware bankruptcy                 in the Bankruptcy Court, like other similarly situated
court’s Confirmation Order that enjoined Plaintiffs from               bonded judgment creditors have done. If dissatisfied
pursuing their claims against Ventas.                                  with the Bankruptcy Court’s ultimate decision,
                                                                       respondents can appeal to the district court for the
   The district court found that the Supreme Court’s decision          judicial district in which the bankruptcy judge is serving,
in Celotex Corp. v. Edwards, 514 U.S. 300 (1995), controlled           see 28 U.S.C. § 158(a), and then to the Court of Appeals
the disposition of Plaintiffs’ action. In Celotex, Bennie and          for the Eleventh Circuit, see §158(d).
Joann Edwards won a judgment against Celotex in the
District Court for the Northern District of Texas for asbestos-    Celotex, 514 U.S. at 313 (quotation marks and citation
related injuries. Celotex posted a supersedeas bond to stay        omitted).
the execution of the judgment pending its appeal to the Fifth
Circuit. Northbrook Property and Casualty Insurance                  In the present case, the district court found that Celotex was
Company served as surety on the bond. The Fifth Circuit            controlling, reasoning as follows:
affirmed the judgment for the Edwardses, but, on that very
day, Celotex filed a Chapter 11 petition for reorganization in         Like the claimants in [Celotex], Plaintiffs . . . assert that
the Bankruptcy Court for the Middle District of Florida. An            the Bankruptcy Court exceeded its jurisdictional bounds
injunction was issued by the bankruptcy court, pursuant to 11          by enjoining post-confirmation suits against a non-debtor
U.S.C. § 105(a), which stayed all actions against Celotex.             third-party for its pre-confirmation action. Celotex
The district court in Texas nevertheless permitted the                 reaffirmed the rule that such a challenge cannot be
Edwardses to enforce the bond against Northbrook. Although             sustained . . . .
the Fifth Circuit affirmed the district court’s decision, it was
subsequently reversed by the Supreme Court.                                                        ...

  Because the Supreme Court concluded that the district                [I]f the Confirmation Order was issued in error—whether
court’s action would “seriously undercut[] the orderly process         the result of either fraud or lack of jurisdiction—it
                                                                       remains the responsibility of the Delaware Bankruptcy
Nos. 02-5632/5638                          Pratt, et al. v.     9    10    Pratt, et al. v.                        Nos. 02-5632/5638
                                       Ventas, Inc., et al.                Ventas, Inc., et al.

  Court, Delaware District Court, and, if necessary, the             that litigants must go through the “proper channels of the
  Third Circuit, to effect any necessary corrections.                statutorily-defined appellate process,” id. at 116, to challenge
                                                                     a bankruptcy court’s judgment was perfectly appropriate. But
Pratt, 273 B.R. at 116 (emphasis added).                             the district court should not have dismissed the Plaintiffs’
                                                                     case under the collateral attack doctrine without first
  In Celotex, the Supreme Court reaffirmed                           determining that the Delaware bankruptcy court in fact had
                                                                     jurisdiction to enter the Confirmation Order. Its failure to do
  the well-established rule that ‘persons subject to an              so, however, is harmless in light of the Plaintiffs subsequent
  injunctive order issued by a court with jurisdiction are           return to the bankruptcy court for the very purpose of
  expected to obey that decree until it is modified or               challenging that court’s authority to grant Ventas a full
  reversed, even if they have proper grounds to object to            release from their claims.
  the order.’
                                                                     C. Application of res judicata
514 U.S. at 306 (quoting GTE Sylvania, Inc. v Consumers
Union, 445 U.S. 375, 386 (1980)) (emphasis added). The                 While the present appeal was held in abeyance, Plaintiffs
bankruptcy court’s injunction in Celotex, therefore, was to be       returned to Delaware to litigate their claim that the
honored only if it was acting “with jurisdiction.”                   bankruptcy court lacked jurisdiction to release Ventas. See In
Accordingly, the Celotex court examined whether the Florida          re Vencor, Inc., 284 B.R. 79 (Bankr. D. Del. 2002). The
bankruptcy court had jurisdiction to enjoin the Edwardses            bankruptcy court reviewed two rounds of briefs and held two
from proceeding against the third-party surety. The Court            hearings on the myriad of claims raised by Plaintiffs. Id. at
ultimately held that the Edwardses’ action fell within the           82. Following these proceedings, the court issued an opinion
bankruptcy court’s jurisdiction to adjudicate matters that are       with a section dedicated specifically to Plaintiffs’
“related to” a case under Title 11. Id. at 310; see 28 U.S.C.        jurisdictional argument. The court “conclud[ed] that the
§ 1334(b), 28 U.S.C. § 157(a). Because the Court found that          Confirmation Order was not beyond [its] jurisdiction.” Id. at
the bankruptcy court did have jurisdiction, the Edwardses            86.
were barred from collaterally attacking the Florida bankruptcy
court’s injunction in the federal courts of Texas.                      Now that the Delaware bankruptcy court has adjudicated
                                                                     the issue of its jurisdiction in In re Vencor, Inc., the Plaintiffs’
  The district court in the present case, by contrast,               right to question that decision in Kentucky is barred by both
“expressly decline[d] to consider whether the Bankruptcy             the collateral attack and res judicata doctrines. “A party that
Court exceeded its statutory authority in granting injunctive        has had an opportunity to litigate the question of subject-
relief to Defendants.” Pratt, 273 B.R. at 116. As excerpted         matter jurisdiction may not . . . reopen that question in a
above, the district court stated that it was the responsibility of   collateral attack upon an adverse judgment.” Ins. Corp. of
the Delaware bankruptcy court, the Delaware district court,          Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694,
and the Third Circuit to correct any jurisdictional errors. Id.      702 n.9 (1982).
The district court’s reliance on Celotex for the proposition
                                                                      Plaintiffs argue, however, that the timeliness of their
                                                                     motion was the real issue before the Delaware bankruptcy
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                                       Ventas, Inc., et al.               Ventas, Inc., et al.

court, not jurisdiction. At oral argument, Plaintiffs’ counsel      collateral action.”); see also Trulis v. Barton, 107 F.3d 685,
contended that the court’s conclusion that it was not acting in     691 (9th Cir. 1995) (holding that plaintiffs could not
excess of its jurisdiction was simply dicta. We read the            challenge the bankruptcy court’s subject matter jurisdiction
bankruptcy court’s discussion of Plaintiffs’ jurisdictional         because they failed to appeal the bankruptcy court’s
issue not as dicta, however, but as an alternative holding.         confirmation order).
After concluding that the Plaintiffs’ motion to set aside the
Confirmation Order was untimely, In re Vencor, Inc., 284               The Supreme Court addressed similar circumstances in
B.R. at 83-84, the court stated:                                    Stoll v. Gottlieb, 305 U.S. 165 (1938). In Stoll, a bankruptcy
                                                                    court confirmed a debtor’s reorganization plan that included
  The [Plaintiffs] assert that the relief requested in their        a release of the debtor’s bond guarantors. Gottlieb, one of the
  Motion can nonetheless be granted. They argue that                bondholders, did not appear at the hearing on the
  Rule 60(b)(4) permits the modification of the                     reorganization plan. The plan was confirmed over the
  Confirmation Order because it was entered by this Court           objection of other bondholders, but no one appealed the
  beyond its jurisdiction and is, therefore, void.                  confirmation order. Instead, Gottlieb launched a two-pronged
                                                                    attack. He first instituted an action against the bond
Id. at 85 (emphasis added). The above-quoted language               guarantors in the Illinois state court system. Second, Gottlieb
indicates that the bankruptcy court considered the Plaintiffs’      filed a motion to vacate the bankruptcy court’s confirmation
jurisdictional claim to be an alternative basis for relief. After   order on the basis that it did not have jurisdiction to cancel the
examining that alternative ground, the court “conclude[d] that      bond guaranty. The bankruptcy court denied Gottlieb’s
there is no basis for an assertion that this Court lacked           contested motion. Back in state court, the bond guarantors
jurisdiction to consider and grant the releases contained in the    defended themselves on the ground that the bankruptcy
Plan.” Id. at 86. We therefore conclude that the bankruptcy         court’s initial confirmation order and its subsequent order
court’s decision in In re Vencor, Inc. is a judgment on the         denying Gottlieb’s jurisdictional claim were res judicata. The
merits of this jurisdictional issue. See Gillespie v. U.S. Steel    Supreme Court of Illinois found in favor of Gottlieb, but the
Corp., 321 F.2d 518, 529-30 (6th Cir. 1963) (holding that           United States Supreme Court reversed, explaining:
where a matter is argued before the court, and the court’s
opinion passes on the issue, the language is not dicta).              We see no reason why a court in the absence of an
                                                                      allegation of fraud in obtaining the judgment, should
   A judgment is “any order from which an appeal lies.” Fed.          examine again the question whether the court making the
R. Civ. P. 54(a). Because Plaintiffs did not appeal the               earlier determination on an actual contest over
bankruptcy court’s decision to the district court in Delaware,        jurisdiction between the parties, did have jurisdiction of
the judgment of the bankruptcy court is now final. See Chicot         the subject matter of the litigation. In this case, the order
County Drainage Dist. v. Baxter State Bank, 308 U.S. 371,             upon the petition to vacate the confirmation settled the
377 (1940) (“The court has the authority to pass upon its own         contest over jurisdiction.
jurisdiction and its decree sustaining jurisdiction against
attack, while open to direct review, is res judicata in a           Id. at 172.
Nos. 02-5632/5638                         Pratt, et al. v.   13   14    Pratt, et al. v.                      Nos. 02-5632/5638
                                      Ventas, Inc., et al.              Ventas, Inc., et al.

  In the present case, there are no allegations of fraud          D. Ventas’s cross-appeal
regarding the decision handed down in In re Vencor, Inc. As
in Stoll, Plaintiffs engaged Ventas in “an actual contest over       In its original order, the district court dismissed Plaintiffs’
jurisdiction,” and therefore “the order upon the petition to      complaint “with prejudice.” Pratt, 273 B.R. at 116. The
vacate the confirmation settled” this issue. See also Republic    court subsequently amended its dismissal as being “without
Supply Co. v. Shoaf, 815 F.2d 1046, 1053-54 (5th Cir. 1987)       prejudice” because the “order was limited solely to the
(holding that where a bankruptcy court determined that it had     question of whether jurisdiction was proper in the Western
subject matter jurisdiction, its confirmation of a                District of Kentucky, and did not reach the merits of the
reorganization plan that released a third-party guarantor had     parties’ underlying substantive claims.” In doing so, the court
res judicata effect in a subsequent suit).                        explained that it had not intended to preclude Plaintiffs from
                                                                  litigating their claims in an appropriate venue, i.e., the
  We note, moreover, that the Stoll court “express[ed] no         Delaware bankruptcy court.
opinion as to whether the Bankruptcy Court did or did not
have jurisdiction of the subject matter.” Id. at 171 n.8. In         On its face, the motion presented by Ventas to the district
fact, the Supreme Court assumed that the bankruptcy court         court was brought pursuant to Rule 12(b)(6), which authorizes
“did not have jurisdiction of the subject matter of the order.”   a dismissal for failure to state a claim. A “dismissal for failure
Id. at 171 (emphasis added). Whether the bankruptcy court         to state a claim under Federal Rule of Civil Procedure
erred in its determination was immaterial to the Court, which     12(b)(6) is a ‘judgment on the merits,’” and is therefore done
held that                                                         with prejudice. Federated Dep’t Stores, Inc. v. Moitie, 452
U.S. 394, 399 n.3 (1981). By contrast, “a dismissal for lack
  we base our conclusion here on the fact that in an actual       of subject matter jurisdiction does not operate as an
  controversy the question of the jurisdiction over the           adjudication on the merits for preclusive purposes.”
  subject matter was raised and determined adversely to the       Holloway v. Brush, 220 F.3d 767, 778 (6th Cir. 2000) (citing
  respondent. That determination is res judicata of that          Rule 41(b) of the Federal Rules of Civil Procedure)
  issue in this action . . . .                                    (quotation marks omitted). This court has explained:
Id. at 177. We likewise pass no judgment on whether the             The rationale behind this is that merely because one court
Delaware bankruptcy court erred in determining that it had          does not have jurisdiction over a dispute does not
jurisdiction to enter the Confirmation Order and the releases       necessarily mean that another court is precluded from
contained therein. For our purposes, the fact that the Delaware     properly exercising jurisdiction over the matter.
bankruptcy court has decided the matter is enough to preclude       Moreover, if a court does not have jurisdiction over a
us from entertaining an identical claim in this court.              matter, it cannot properly reach the merits of the case.
                                                                  Wilkins v. Jakeway, 183 F.3d 528, 533 n.6 (6th Cir. 1999)
                                                                  (citation omitted).
                                                                    Ventas is technically correct that the district court
                                                                  dismissed Plaintiffs’ claim pursuant to Ventas’s Rule 12(b)(6)
Nos. 02-5632/5638                         Pratt, et al. v.   15
                                      Ventas, Inc., et al.

motion and that such dismissals are presumptively “with
prejudice.” But a plain reading of the district court’s opinion
and amended order indicates that the district court’s basis for
dismissing Plaintiffs’ claim was jurisdictional in nature and
was therefore “without prejudice.” Because the district court
amended its order to be “without prejudice,” Plaintiffs were
able, while the present appeal was being held in abeyance, to
pursue their claim in the Delaware bankruptcy court.
Whether the district court erred in amending its order is
therefore moot.
                    III. CONCLUSION
  For all the reasons set forth above, we AFFIRM the
judgment of the district court.