Court Opinion

ID: 3002474
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:29:39.325615+00
Date Added: 2024-06-11T15:03:00.489417
License: Public Domain

In the

 United States Court of Appeals
                For the Seventh Circuit

No. 07-3753

IN R E:

    W ALTER G EORGE W IESE AND C ARLA K AY W IESE,

                                                  Debtors-Appellees,
                                  v.

A PPEAL OF:

    C OMMUNITY B ANK OF C ENTRAL W ISCONSIN,

                                                             Appellant.

              Appeal from the United States District Court
                for the Western District of Wisconsin.
                No. 07 C 422—John C. Shabaz, Judge.

    A RGUED S EPTEMBER 8, 2008—D ECIDED JANUARY 8, 2009

  Before P OSNER, K ANNE, and T INDER, Circuit Judges.
  T INDER, Circuit Judge. Walter and Carla Wiese are
dairy farmers, and they borrowed money from Com-
munity Bank of Central Wisconsin to expand their dairy
operation by building a new barn and buying additional
cows. Unfortunately, the expansion of the dairy operation
2                                               No. 07-3753

was not profitable. When the Wieses defaulted on the
loan repayment, the Bank commenced foreclosure and
replevin actions in state court on the collateral in which
the Bank held security interests. The Wieses then filed
for Chapter 12 bankruptcy, a voluntary type of bank-
ruptcy specifically designed for family farmers. As part
of the Wieses’ confirmed plan of bankruptcy, the Wieses
and the Bank made certain concessions, one of which
(and the reason for this appeal’s existence) required the
Wieses to release their purported “lender liability” claims
against the Bank, arising from the Bank’s advice in con-
nection with the loan and the construction of the barn.
The Wieses later decided to have the bankruptcy case
dismissed, as they had a statutory right to do—but the
bankruptcy court determined that there was “cause” for
the terms of the confirmed plan to remain binding on
the parties. The Wieses appealed to the district court,
which reversed the decision of the bankruptcy court. Now
the Bank appeals from the district court’s decision, and
the Wieses seek sanctions against the Bank for bringing
this appeal.

                      I. Background
  Chapter 12 bankruptcy was created “to give family
farmers facing bankruptcy a fighting chance to reorgan-
ize their debts and keep their land.” In re Fortney, 36 F.3d
701, 703 (7th Cir. 1994) (quoting In re Kerns, 111 B.R. 777,
788 (S.D. Ind. 1990)). After a debtor chooses to file a
Chapter 12 petition for bankruptcy, creditors file proofs
of claim with the bankruptcy court. See 11 U.S.C. § 501(a).
No. 07-3753                                               3

The debtor must file a reorganization plan that sets out
how the various claims will be paid, and the plan must
meet certain statutory requirements. Id. §§ 1221-22. The
court then holds a confirmation hearing, and a party
in interest can object to the confirmation of a plan. Id.
§ 1224. A plan cannot be confirmed without the consent
of a holder of a secured claim where the holder does not
accept the plan or the debtor does not surrender the
collateral, unless (1) the plan provides that the holder
retain the lien securing the claim; and (2) the value of
property to be distributed to the debtor or trustee
under the plan with respect to that claim is not less than
the allowed amount of the claim. Id. § 1225(a)(5); In re
Krause, 261 B.R. 218, 222 (Bankr. App. Panel 8th Cir. 2001).
Once the plan is confirmed, it is binding on the debtor
and the creditors. 11 U.S.C. § 1227(a). However, a debtor
can request at any time that the court dismiss the case
(unless it has been converted to a Chapter 7 or Chapter 11
bankruptcy), and the court must dismiss it. Id. § 1208(b).
The debtor cannot waive his right to dismiss the case. Id.
A dismissal reinstates avoided transfers or voided liens
made under certain provisions of the bankruptcy code,
vacates certain types of orders made under the code,
and “revests the property of the estate in the entity in
which such property was vested immediately before the
commencement of the case,” unless the bankruptcy
court orders otherwise for “cause.” Id. § 349(b).
  In this case, the Wieses filed for Chapter 12 bankruptcy
on January 13, 2006, after the Bank commenced state
court foreclosure and replevin actions. The state actions
were stayed, and the Bank filed a proof of claim with
4                                               No. 07-3753

the bankruptcy court a few months later. Over the next
several months, the Wieses filed a reorganization plan,
an amended plan, and a second amended plan. The
Bank objected to each plan, and the plans could not be
confirmed because the Bank either would not retain all
its liens securing the claim or the Bank would not
receive the full value for the claim. In November 2006, the
Wieses filed an adversary proceeding objecting to the
Bank’s proof of claim and asserting several pre-petition
“lender liability” claims against the Bank. The parties
reached an agreement on a third amended plan, which
the bankruptcy court confirmed on December 7, 2006.
   The reorganization plan included the following terms:
the Wieses agreed to release the lender liability claims
against the Bank, and the Bank agreed to release a lien
held on funds in escrow, forgive default interest, set a cap
on attorneys’ fees and out-of-pocket expenses, allow a four-
month delay prior to the Wieses’ re-commencing pay-
ment, and re-calculate the Wieses’ loan at the contract
rate of interest rather than at the higher default rate of
interest. Certain liquidation procedures were required
if the Wieses defaulted under the plan.
   Less than a week after the plan’s confirmation, the
Wieses filed a motion to vacate the confirmed order
and liquidate their assets because a loan program they
thought would be available to them was not. In
March 2007, the court denied the motion, as well as
another motion that the Wieses filed to amend the con-
firmed plan, noting that “the parties reached an agree-
ment which was placed on the record with full awareness
No. 07-3753                                                5

that the debtors might not qualify for the loan program in
question.” Consequently, in April 2007, the Wieses moved
to dismiss the case, as was their right under § 1208(b). The
court granted the motion to dismiss. In determining
what effect a post-confirmation dismissal had on the
parties’ rights and obligations, the bankruptcy court noted
that 11 U.S.C. § 349(b) governed and explained that for
“cause” to be ordered, there must be an acceptable
reason for altering the normal impact of § 349(b). The
court concluded:
    “Cause” in this context is usually geared toward
    protecting rights acquired in reliance upon the
    bankruptcy. . . . When a debtor seeks the dismissal
    of a case, the court may properly consider the
    interests of creditors or other third parties which
    were gained in the course of, or in reliance upon,
    the bankruptcy. In this case, the debtors and the
    creditor negotiated a confirmed plan after a series
    of contested hearings. The creditor granted the
    debtors certain concessions, and the debtors
    agreed to the release of certain claims and various
    liquidation provisions in the event of a default. To
    the extent that § 349 might affect the rights ob-
    tained as a result of the confirmed plan, the Court
    finds sufficient “cause” to order otherwise.
In re Wiese, No. 06-10053-12, slip op. at 2-3 (Bankr. W.D.
Wisc. June 6, 2007) (internal citations omitted).
  The Wieses appealed the order. The district court
agreed that § 349(b) governed the rights of the parties in a
post-confirmation dismissal, and it cited the legislative
6                                                No. 07-3753

history to determine that the purpose of subsection (b) “ ‘is
to undo the bankruptcy case, as far as practicable, and
to restore all property rights to the position in which
they were found at the commencement of the case.’ ” Wiese
v. Cmty. Bank of Central Wisc., 2007 WL 5445862, at *1
(W.D. Wisc. 2007) (quoting H.R. Rep. No. 95-595, at
338 (1977)). The district court noted that we held in
In re Sadler, 935 F.2d 918, 921 (7th Cir. 1991), that attempt-
ing to avoid the effect or purpose of a statute is not
an acceptable reason for finding “cause.” Wiese, 2007
WL 5445862, at *2. Allowing a confirmed plan to remain
binding on the parties after dismissal would rob the
debtors of § 1208’s unqualified right to dismiss the case—it
would essentially serve as a waiver, even though an
actual waiver is not permitted by statute. Id. Accordingly,
since the purpose of the statute would be nullified, the
district court concluded that the bankruptcy court’s
“cause” determination must be vacated. Id. The district
court noted that now “debtors-appellants are free to
pursue any legal claims they may have including those
addressed in the confirmed plan.” Id.

                        II. Analysis
  In reviewing the district court’s decision to reverse
the bankruptcy court, we employ the same standard of
review that the district court itself used. Corporate Assets,
Inc. v. Paloian, 368 F.3d 761, 767 (7th Cir. 2004). Therefore,
we review the bankruptcy court’s determinations of law
de novo and findings of fact for clear error. In re ABC-
Naco, Inc., 483 F.3d 470, 472 (7th Cir. 2007). But where the
No. 07-3753                                              7

bankruptcy code commits a decision to the discretion of
the bankruptcy court, we review that decision only for
an abuse of discretion. Fortney, 36 F.3d at 707 (citing
In re Leventhal & Co., 19 F.3d 1174, 1777 (7th Cir. 1994)).
“[A] court abuses its discretion when its decision is pre-
mised on an incorrect legal principle or a clearly
erroneous factual finding, or when the record contains
no evidence on which the court rationally could have
relied.” Corporate Assets, Inc., 368 F.3d at 767.
   The bankruptcy court’s “cause” determination was a
decision committed to its discretion. The bankruptcy
court did not discuss the underlying legal question—
whether § 349(b) would have invalidated the release (or,
to use the terms of § 349(b)(3), “revest[ed] the property
of the estate in the entity in which such property was
vested immediately before the commencement of the
case”) in the absence of a “cause” determination. Instead
it held that “[t]o the extent that § 349 might affect the
rights obtained as a result of the confirmed plan, the
Court finds sufficient ‘cause’ to order otherwise.” In re
Wiese, No. 06-10053-12, slip op. at 3 (emphasis added).
The parties’ filings prior to the bankruptcy court’s order
did not address this question in any substantive way
either, though the Bank did write a letter to the court
noting that the Wieses’ proposed dismissal left the terms
of the plan in doubt and suggesting that all the terms
should remain binding on both parties. On appeal to the
district court, the Wieses argued only that the “cause”
determination was wrong but did not address the under-
lying question; the Bank limited its discussion to the
issues raised by the Wieses. The district court, however,
8                                             No. 07-3753

invalidated the “for cause” determination and stated
that “debtors-appellants are free to pursue any legal
claims they may have including those addressed in the
confirmed plan,” apparently assuming that § 349(b)
abrogated the release. Wiese, 2007 WL 5445862, at *2.
Forced to address the underlying question for the first
time on appeal, the Bank draws a distinction between
§ 349(b)’s effect on terms of the plan that are executory
versus terms of the plan that have already been performed.
The Wieses ask that we not entertain the Bank’s new
arguments. Because we can resolve this appeal based on
the decision actually made by the bankruptcy court, we
will frame the issue as the bankruptcy court did: To
the extent that § 349(b) affects the rights obtained from
the confirmed plan, did the bankruptcy court abuse its
discretion in determining there was “cause” for the plan
to remain binding on the parties?
  We have previously discussed “cause” in the context of
§ 349(b) on one occasion. In Sadler, debtors who were
family farmers filed a petition for voluntary Chapter 13
bankruptcy a few months prior to legislative enactment
of Chapter 12. After Chapter 12 became an option for
family farmers, the debtors hoped to convert the bank-
ruptcy from Chapter 13 to Chapter 7 to Chapter 12 (the
code prohibited conversion directly from Chapter 13 to
Chapter 12). The court denied their motion, and, instead,
the court suggested that they dismiss the Chapter 13 case
and refile it as a Chapter 12. However, the debtors had
avoided a lien on their crops under the Chapter 13 case.
When they took the court’s advice to dismiss and refile
the case, new effective dates attached, so the bank again
No. 07-3753                                                9

claimed an interest in the crops. The bankruptcy court
thought it was equitable for the new filing to relate back
to the old filing date. On appeal, the district court
affirmed on a different theory, using § 349(b) in the dis-
missal of the Chapter 13 case to find “cause” to avoid
reinstating the bank’s lien. We held that this approach
was forbidden. Sadler, 935 F.2d at 920-21. “ ‘Cause’ under
§ 349(b) means an acceptable reason. Desire to make an
end run around a statute” that forbids conversion from
Chapter 13 to Chapter 12 “is not an adequate reason. . . . It
is not part of the judicial office to seek out creative ways
to defeat statutes.” Id. at 921.
  In this case, the Bank contends that the bankruptcy
court properly considered the history of the parties’
negotiations and the concessions granted by the Bank in
determining that there was cause for the parties to con-
tinue to be bound by the plan. On the other hand, the
Wieses contend that the bankruptcy court held that “mere
negotiation” of a confirmed plan is sufficient cause.
Obviously negotiation alone would not be an acceptable
standard for “cause,” since every confirmed plan that
required the consent of the creditor would involve some
degree of negotiation. And indeed, the bankruptcy court
did not hold that “mere negotiation” was sufficient; it
engaged in a brief discussion of the propriety of consider-
ing the interests of creditors which were gained in the
course of, or in reliance upon, the confirmed plan. The
bankruptcy court noted that the Bank had granted the
Wieses certain concessions in return for the Wieses’ release
of claims and agreement to follow certain liquidation
procedures in the case of default. Although the court’s
10                                               No. 07-3753

“cause” determination would have been more useful
had it noted which concessions it found significant, we
can look to the record for “evidence on which the court
rationally could have relied.” Corporate Assets, Inc., 368
F.3d at 767.
  First, we address the bankruptcy court’s conclusion
that it was proper to look to the interests of the creditors
on the dismissal of the case. The court cited one of its
own prior cases, In re Derrick, 190 B.R. 346 (Bankr. W.D.
Wisc. 1995), in which it discussed the legislative history
of § 349(b). In re Wiese, No. 06-100530-12, slip op. at 2. The
legislative history indicated that the purpose of the sub-
section was to “undo the bankruptcy case, as far as practi-
cable” but “where there is a question over the scope of
the subsection, the court will make the appropriate
orders to protect rights acquired in reliance on the bank-
ruptcy case.” H.R. Rep. 95-595, at 338 (1977). The court
noted that one of the purposes of the bankruptcy code,
in addition to providing relief for a debtor, is to “offer
equitable treatment to creditors.” Derrick, 190 B.R. at 351.
Finally, the court quoted this court’s decision in Sadler,
in which we discussed a creditor’s interest after
dismissal: “As things stand, the only claimants to the funds
are the [debtors] and the [creditor]. Between the two, the
[creditor] has the better claim: the [debtors] borrowed
money that they have yet to repay.” Id. at 351-52 (quoting
Sadler, 935 F.2d at 921) (alterations in original). The
opinion in Derrick was well-reasoned, and similar ap-
proaches have been taken by other courts. See, e.g., In re
Keener, 268 B.R. 912, 919 (Bankr. N.D. Tex. 2001) (“Clearly,
the drafters intended that a dismissal would return the
No. 07-3753                                              11

bankrupt to its pre-petition status ‘as far as practicable,’
while also protecting those parties that relied, to their
detriment, on the provisions of the confirmed plan.”); In re
TNT Farms, 226 B.R. 436, 442 (Bankr. D. Idaho 1998) (“On
prior occasions the Court has used this grant of discre-
tion as a means to avoid the harsh or inequitable results
occasioned by the dismissal of a bankruptcy case during
which parties have relied upon their status and acquired
rights.”). It was appropriate for the bankruptcy court
to consider the interests of the Bank.
  We now look to the record for evidence of the conces-
sions the bankruptcy court considered when it made the
“cause” determination. We do not have to look far. The
Wieses needed the Bank’s consent to confirm the plan,
and the Bank was apparently interested in obtaining a
release of the lender liability claims. The Wieses
induced the Bank to consent to the plan by including the
release in their final amended plan. They got what they
bargained for—a confirmed plan. In the plan, the Bank
agreed (among other things) to give up a lien it had on
some funds held in escrow. After confirmation of the
plan, the money in escrow was released to the Wieses,
and the Bank lost the ability to collect it. The Bank’s
agreement to give up the lien was made “in reliance on
the bankruptcy case,” and when the Wieses decided to
dismiss the case, it was not inappropriate for the bank-
ruptcy court to consider the harm that dismissal caused
to the Bank. The bankruptcy court may have also con-
sidered hints of bad faith on the Wieses’ part—the record
contains references to investigations of “missing” cows
or cows sold under the Wieses’ children’s names, unautho-
12                                             No. 07-3753

rized credit card use after the bankruptcy petition was
filed (to the tune of $35,000), and failure to begin the
process of liquidating assets after default in accordance
with the plan (not to mention the Wieses’ desire to
vacate the plan six days after its confirmation for failure
to obtain a loan that they knew all along they might not
be able to obtain).
  Despite the evidence in the record to support the bank-
ruptcy court’s “cause” determination, the district court
held that the determination was, like in Sadler, not for
an “acceptable reason.” The court reasoned that a bank-
ruptcy court could use the cause determination to
perform an “end run” around § 1208(b), which requires
a court to dismiss the case at any time on request of the
debtor. But our concern with performing an “end run”
around the statute here is different than in Sadler,
where the outcome of the district court’s decision was
to accomplish exactly what the statute forbade—the
conversion of a case from Chapter 13 to Chapter 12.
Here, § 1208(b) gives the debtor an unqualified right to
dismiss the case, but the statute that governs the effect
of the dismissal—§ 349(b)—explicitly contemplates that
the court can choose to keep some terms binding on the
parties where there is cause. That the Wieses’ dismissal
had ramifications they did not anticipate does not make
the bankruptcy court’s decision erroneous. See Sadler,
935 F.2d at 921 (“The judge was not promising the
Sadlers that dismissal and reinstatement would be with-
out consequence.”). In sum, the bankruptcy court’s
“cause” determination was not an abuse of discretion.
No. 07-3753                                               13

                      III. Sanctions
  The Wieses filed a motion for sanctions against the
Bank under Federal Rule of Appellate Procedure 38,
which provides that “[i]f a court of appeals determines that
an appeal is frivolous, it may, after a separately filed
motion or notice from the court and reasonable oppor-
tunity to respond, award just damages and single or
double costs to the appellee.” An appeal is “frivolous” if
the “ ‘result is obvious’ ” or “ ‘the appellant’s argument is
wholly without merit.’ ” Wisconsin v. Ho-Chunk Nation,
463 F.3d 655, 662 (7th Cir. 2006) (quoting Ins. Co. of the
W. v. County of McHenry, 328 F.3d 926, 929 (7th Cir. 2003)).
  This case does not warrant sanctions. The result of the
Bank’s appeal was not obvious, since two courts came to
differing conclusions on the issue; nor was the appeal
without merit, since the Bank prevailed. The Wieses
primarily complain that the Bank introduced new argu-
ments and mischaracterized the opinion of the district
court. As mentioned above, the Bank did introduce
new arguments on appeal, but they were made directly
in response to the district court’s opinion, which went a
step beyond what either party had argued by holding
that § 349(b) wiped out the release. Further, the Bank’s
descriptions of the district court’s reasoning were within
the bounds of reasonable interpretation; the arguments
were no more misleading than the Wieses’ oversimplifica-
tion that the bankruptcy court held that the “mere negotia-
tion” of a bankruptcy plan was sufficient cause.
 We take a moment to comment on the tone of the
Wieses’ brief, which was often inappropriate. The Wieses
14                                           No. 07-3753

complained ad nauseam that the Bank’s appeal was frivo-
lous—nine times in the merits brief alone (and many
more times in the motion for sanctions)—and suggesting
that the Bank was “obstinately” refusing to dismiss its
appeal. Appellee Br. 4. The Wieses repeatedly accused
the Bank of intentionally distorting the district court’s
opinion in an attempt to deceive and manipulate this
court and “manufacture” issues for appeal. Id. at 12, 15.
Finally, the Wieses demanded that we put an end to
the Bank’s “tactics of delay and saddling the Wieses with
the unnecessary expense of briefing these arguments.” Id.
at 7. The Wieses’ motion for sanctions contains similar
unfounded accusations. There is a difference between
zealously advocating for one’s clients and unnecessarily
disparaging opposing counsel. The Wieses’ counsel is
advised to revisit the Standards for Professional Conduct
within the Seventh Federal Judicial Circuit, available
at http://www.ca7.uscourts.gov/Rules/rules.htm#standards.

                    IV. Conclusion
  The bankruptcy court’s decision that there was “cause”
for the terms of the confirmed plan to remain binding
on the parties was within its discretion; therefore, we
R EVERSE the decision of the district court, and we D ENY
the Wieses’ motion for sanctions.

                          1-8-09