Court Opinion

ID: 3182713
Source: CourtListenerOpinion
Date Created: 2016-03-04 14:04:57.227835+00
Date Added: 2024-06-11T07:38:59.286579
License: Public Domain

In the

      United States Court of Appeals
                    For the Seventh Circuit
                         ____________________
No. 15-1894
SCHAUMBURG BANK & TRUST CO., N.A.,
                                                    Respondent-Appellant,

                                      v.

R. SCOTT ALSTERDA, as the Chapter 7 Trustee for the Bank-
rutpcy Estate of Hartford & Sons, LLC,
                                         Movant-Appellee.
                         ____________________

           Appeal from the United States District Court for the
             Northern District of Illinois, Eastern Division.
              No. 14-cv-10095 — John W. Darrah, Judge.
                         ____________________

     ARGUED NOVEMBER 3, 2015 — DECIDED MARCH 4, 2016
                 ____________________

   Before WOOD, Chief Judge, EASTERBROOK, Circuit Judge,
and BRUCE, District Judge.*
    BRUCE, District Judge. Schaumburg Bank and Trust Com-
pany, N.A. (“the Bank”), appeals from an order of the dis-
trict court affirming a decision by the bankruptcy court that

* Of the Central District of Illinois, sitting by designation.
2                                                    No. 15-1894

the Bank, a creditor of Chapter 7 bankruptcy debtor Hart-
ford & Sons LLC (“the Debtor”), had not been assigned the
right to pursue a claim for fraudulent transfer in state court,
because that claim properly belonged to the bankruptcy es-
tate. Neither party, in their briefs, argued that there was any
issue with appellate jurisdiction in this matter. Upon our re-
view of the record, however, we conclude that no final
judgment or appealable order was entered by the bankrupt-
cy court, and thus we lack appellate jurisdiction to review
the district court’s decision at this time.
                                I.
    The parties do not dispute the underlying facts of this
case. The Debtor operated a site utility construction business
that primarily installed new sewer and water facilities for
industrial and commercial customers. On August 30, 2013,
the Debtor filed a voluntary petition for relief under chapter
11 of Title 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of Illinois. The
chapter 11 bankruptcy was converted to a case under chap-
ter 7, and R. Scott Alsterda (the “Trustee”) was appointed
chapter 7 trustee for Debtor’s estate. The Bank holds a valid,
first-priority security interest in and to all of the Debtor’s as-
sets, including accounts receivable.
    Actions of the Trustee
   After his appointment, the Trustee began investigating
the Debtor’s assets and liabilities, and discovered that two
checks payable to the Debtor had been negotiated and de-
posited into the personal account of Thomas Hartford, Jr.,
the father of Debtor’s principal Thomas Hartford III, on Sep-
tember 13, 2013. The checks, one from Warren F. Thomas
No. 15-1894                                                 3

Plumbing Company issued on August 30, 2013, for
$24,680.70, and one from Powers & Sons Construction Com-
pany Inc., issued on September 9, 2013, for $11,709.19, to-
taled $36,389.89. After discovering the check transfers and
conducting an investigation, the Trustee concluded that both
check transfers could be avoided and their value recovered.
The Thomas Plumbing Company check could be avoided as
a preference or fraudulent transfer under sections 544, 547,
548 and 550 of the Bankruptcy Code as well as sections 5 and
6 of the Illinois Uniform Fraudulent Transfers Act. The Pow-
ers & Sons Construction check transfer could be avoided as
an unauthorized postpetition transfer under sections 549
and 550 of the Bankruptcy Code.
    Before initiating adversary litigation under the Bankrupt-
cy Code, the Trustee and Debtor’s counsel engaged in set-
tlement talks with Hartford Jr. On July 21, 2014, the Trustee
filed a Motion to Approve a Settlement Agreement with
Hartford Jr. in the Bankruptcy Court. Under the terms of the
proposed settlement, Hartford Jr. would pay $36,389.89 to
the Trustee on the behalf of the estate and would release the
Trustee and estate from all claims involving the transfers. In
return, the Trustee would grant Hartford Jr. a release from
all claims regarding the transfers ninety-one days after the
settlement payment cleared.
   Actions of the Bank
    While the Trustee was pursuing the check transfers
against Hartford Jr., the Bank, on October 25, 2013, had filed
a “Motion for Relief from the Automatic Stay to Exercise Its
State Law Remedies with Respect to Pledged Collateral and
for Other Relief” with the Bankruptcy Court.
4                                                  No. 15-1894

   On November 12, 2013, the Bankruptcy Court entered an
order on the motion for relief. The order stated, in relevant
part:
       [1] The relief requested in the Motion is grant-
       ed as set forth herein.
       [2] The automatic stay is modified to allow
       Schaumburg Bank to exercise its state law rem-
       edies with respect to collateral pledged to the
       movant by the Debtor, and in which Schaum-
       burg Bank asserts a valid, first-priority security
       interest[.]
   Sometime after the entry of this order, the Bank discov-
ered the check transfers by Hartford Jr. On April 3, 2014, the
Bank filed a lawsuit against Hartford Jr. in the Circuit Court
of Cook County seeking to recover from Hartford Jr. as
fraudulent transfers the value of the checks. On July 30,
2014, the state court entered judgment in favor of the Bank
and against Hartford Jr. in the amount of the check transfers.
    Proceedings Before the Bankruptcy Court
   On July 31, 2014, one day after the Bank obtained its
judgment in the state court, the Trustee filed his motion,
pursuant to Rule 9019(a) of the Federal Rules of Bankruptcy
Procedure, requesting the bankruptcy court enter an order
approving the settlement of the potential fraudulent transfer
and unauthorized postpetition transfer litigation claims with
Hartford Jr. On September 16, 2014, the bankruptcy court
entered an agreed order granting the Trustee’s motion and
approving the settlement, subject to the Bank’s claims.
No. 15-1894                                                    5

    The Bank filed its objection to the motion to approve set-
tlement on September 24, 2014, arguing that it had capacity
to bring the state court fraudulent transfer lawsuit due to the
bankruptcy court’s modification of the automatic stay and
that it held a superior, first priority security interest in the
settlement proceeds (the transferred checks). Following the
Trustee’s response, the bankruptcy court held a hearing on
the Bank’s objection on October 28, 2014.
    At the hearing, the bankruptcy court, in addressing the
order granting relief from the automatic stay, stated
“[n]othing in the bank’s motion identified the collateral to
which the bank was referring in its motion, nor did the bank
ever give notice that it would be seeking to file a state court
fraudulent conveyance action against the debtor.” The court,
applying this court’s decisions in National Tax Credit Partners,
L.P. v. Havlik, 20 F.3d 705 (7th Cir. 1994) and In re Xonics Pho-
tochemical, Inc., 841 F.2d 198 (7th Cir. 1988), rejected the
Bank’s argument that the order granting relief from the au-
tomatic stay allowed it to pursue the fraudulent transfer ac-
tion in state court. The bankruptcy court stated:
       Therefore, absent the trustee’s abandonment of
       its action or the Court’s order granting deriva-
       tive standing to a third party to bring the ac-
       tions, only the trustee has the right to pursue
       fraudulent conveyance avoidance or recovery
       actions on behalf of the estate.
       ****
       In moving to vacate the automatic stay,
       Schaumburg Bank gave no indication or notice
       to the Court, the trustee or any creditor that it
6                                                 No. 15-1894

      was seeking either of those remedies. Such no-
      tice would have been essential to satisfy the re-
      quirements of due process, particularly in a
      situation such as this one, where an order per-
      mitting a secured creditor to pursue avoidance
      actions on its own behalf would place the se-
      cured creditor in direct conflict with the trustee
      who has the right and perhaps the duty to pur-
      sue the same cause of action on behalf of the
      entire estate. The Seventh Circuit precedent
      cited previously underscores that that would
      be an impermissible result where the trustee
      has not abandoned the cause of action.
    Resolution of the claim assignment argument still left
open the issue of whether the Bank’s security interest on its
own behalf as a secured creditor trumped the Trustee’s in-
terest on behalf of the estate. Applying section 9-315(a)(2) of
the Illinois Uniform Commercial Code, the court found that
once the transferred checks cleared, the proceeds of the
checks were commingled with other cash in Hartford Jr.’s
account, so that the Bank’s security interest would continue
in the cash proceeds from the two deposited and cleared
checks only to the extent that they remained identifiable. It
was the burden of the Bank to prove that it could identify
the claimed proceeds through tracing, and the Bank, up to
that point, had not offered any evidence to support its claim
that the proceeds remained identifiable. The Bankruptcy
Court concluded:
      If Schaumburg Bank believes that it is capable
      of establishing through tracing that the pro-
      ceeds remain identifiable, then the Court will
No. 15-1894                                               7

      allow it the chance to do so through an eviden-
      tiary hearing. However, as Schaumburg Bank
      concedes, if it cannot meet its burden of tracing
      the settlement proceeds, then the Court will
      conclude it has not met its burden of proof and
      will overrule Schaumburg Bank’s objection in
      its entirety.
      That’s my ruling[.]
    The court then inquired of counsel about how the parties
intended to proceed on establishing the traceability of the
check proceeds in Hartford Jr.’s account. The court noted
that the account’s balance may have gone up or down after
the checks were deposited, which, after application of the
lowest intermediate balance rule, “would seem to place a
limit on what the bank could recover because anything that
came in after that would be attributable to cash other than
the proceeds that came from the settlement checks.” The par-
ties agreed that, based on the lowest intermediate balance
rule, the most the Bank could possibly recover would be
$3,300, and the Bank’s counsel stated that the Bank would
not pursue an evidentiary hearing for such a minimal
amount. After some more equivocating from the parties on
how they wished to proceed concerning the proceeds from
the checks, the bankruptcy court stated:
      Let’s do this. Before I clog up my docket with a
      trial date, let’s continue this for a couple of
      weeks so you can check with your client and
      see how they want to proceed.
      I think under my ruling it’s clear the best the
      bank could hope for would be $3,000, but–and
8                                                 No. 15-1894

       the trustee is going to insist on the bank carry-
       ing forward with its burden, which would re-
       quire you to introduce whatever happened to
       it after that.

       So why don’t we–we’ll set it for status. Why
       don’t you guys come back and tell me how you
       want to proceed at that point?
    The parties agreed and asked the court if they would re-
ceive a draft order to follow, and the court stated “[w]e’ll
prepare it.”
   The Bankruptcy Court entered an order on October 30,
2014, stating:
       For the reasons set forth in the record, the
       Court overrules the objections of Schaumburg
       Bank & Trust Company, N.A. to the Trustee’s
       Motion to Approve Settlement with Thomas
       Hartford, Jr.
       This matter is continued for status to Novem-
       ber 18, 2014 at 10:30 a.m. in courtroom 619, 219
       South Dearborn Street, Chicago, Illinois 60604.
    On November 13, 2014, the Bank filed its notice of appeal
to the district court, stating that it was appealing from the
Bankruptcy Court’s order entered October 30, 2014, which
overruled the Bank’s objection to the settlement.
    The District Court Appeal
    The Bank’s appeal was docketed in the district court on
December 16, 2014. On March 26, 2015, the district court en-
tered an order affirming the Bankruptcy Court. The Bank
No. 15-1894                                                   9

filed its notice of appeal to this court on April 24, 2015. On
May 1, 2015, the Bank filed its docketing statement, indicat-
ing this court had jurisdiction to entertain its appeal pursu-
ant to 28 U.S.C. §158(d)(1).
                              II.
    Before addressing the parties’ arguments on the merits,
we must determine if this court has appellate jurisdiction
over this appeal. “‘Jurisdictional questions are pervasive in
bankruptcy cases because of the tension between the ‘finali-
ty’ rule of §158(d) and the facts that each bankruptcy pro-
ceeding contains many claims and problems, each of which
may come to a final conclusion before the estate has been
wrapped up.’” In re Bulk Petroleum, 796 F.3d 667, 670 (7th
Cir. 2015), quoting In re Morse Electric Co., 805 F.2d 262, 264
(7th Cir. 1986). Neither party has contested jurisdiction at
this stage, but this court has an independent duty to ensure
that we have jurisdiction. Bulk Petroleum, 796 F.3d at 671.
    The current bankruptcy appeals statute authorizes ap-
peals as of right not only from final judgments in cases, but
from “‘final judgments, orders, and decrees … in cases and
proceedings.’” Bullard v. Blue Hills Bank, —U.S. —, 135 S. Ct.
1686, 1692, 191 L. Ed. 2d 621 (2015), quoting 28 U.S.C. §158(a).
Both parties’ jurisdictional statements claim jurisdiction un-
der 28 U.S.C. § 158(d)(1). Section 158(d)(1) “gives us jurisdic-
tion over appeals ‘from all final decisions, judgments, or-
ders, and decrees entered under subsections (a) and (b) of
[§158].’” In re McKinney, 610 F.3d 399, 401 (7th Cir. 2010),
quoting 28 U.S.C. §158(d)(1). We only have jurisdiction over
a bankruptcy appeal if both the bankruptcy court’s order
and the district court’s order reviewing the original order are
final decisions. Zedan v. Habash, 529 F.3d 398, 402 (7th Cir.
10                                                           No. 15-1894

2008). This appeal was taken from the district court, which
claimed jurisdiction under subsection (a) as an appeal from
the final judgment of the bankruptcy court, so, our jurisdic-
tion depends on whether what the district court heard was
an appeal from a final judgment or order of the bankruptcy
court. See McKinney, 610 F.3d at 401.
    Finality in a bankruptcy appeal is considerably more flex-
ible than in an ordinary civil appeal taken under 28 U.S.C.
§1291 and, in the bankruptcy context, does not require the
termination of the entire bankruptcy proceeding. Bullard, —
U.S. —, 135 S. Ct. at 1691–92; Zedan, 529 F.3d at 402. The con-
cept of “flexible finality” in bankruptcy “is based both on the
traditional approach to bankruptcy proceedings and the
common sense understanding that the breadth of bankrupt-
cy cases necessitates an approach that allows for the efficient
resolution of certain discrete disputes that may arise in a
given bankruptcy.” McKinney, 610 F.3d at 402.
    In determining finality, we look to see if the bankruptcy
and district courts’ decisions finally disposed of a discrete
dispute within the larger case. Bullard, — U.S. —, 135 S. Ct.
at 1692; Bulk Petroleum, 796 F.3d at 671. A decision that mere-
ly resolves a “contested matter”1 that arises during a bank-
ruptcy case is not necessarily final, because “the list of con-
tested matters is ‘endless’ and covers all sorts of minor disa-
greements.” Bullard, – U.S. —, 135 S. Ct. at 1694, quoting 10

1 Generally, disputes in bankruptcy are classified “as either ‘adversary
proceedings,’ which are essentially full civil lawsuits carried out under
the umbrella of the bankruptcy case, or ‘contested matters,’ an unrefined
catchall for other issues the parties dispute.” Bullard, — U.S. —, 135 S. Ct.
at 1694. The Bank’s objection to the bankruptcy court’s approval of the
settlement falls under the “contested matters” category.
No. 15-1894                                                 11

Collier on Bankruptcy ¶ 9014.01, at 9014-3 (16th ed. 2014).
“The concept of finality cannot stretch to cover, for example,
an order resolving a disputed request for extension of time.”
Bullard, — U.S. —, 135 S. Ct. at 1694. Therefore, “[w]hen we
talk about finality in bankruptcy we talk about proceedings
resolving disputes, not issues” because “‘[a] decision or or-
der that resolves only an issue that arises during the admin-
istration of a bankruptcy estate is too small a litigation unit
to justify treatment as a final judgment.’” McKinney, 610 F.3d
at 404, quoting In re Comdisco, 538 F.3d 647, 651 (7th Cir.
2008). Thus, the question for this court then becomes what is
a discrete dispute, and how does it differ from a merely
“discrete issue” within the dispute? Comdisco, 538 F.3d at
651.
    The test that has been endorsed by the Supreme Court,
and utilized by this court, to determine finality under
§158(d) is the “stand-alone test,” which asks whether an or-
der resolves a discrete dispute that, but for the continuing
bankruptcy, would have been a stand-alone suit by or
against the trustee. See Bullard, – U.S. —, 135 S. Ct. at 1692;
Zedan, 529 F.3d at 402. However, the stand-alone test “leaves
room for enough interpretation to make the ‘illustrative list
of orders that are either found to be final for purposes of ap-
peal under §158(d) or that are not considered final … dis-
mayingly long and inconsistent.’” McKinney, 610 F.3d at 402,
quoting Comdisco, 538 F.3d at 651 (citing to 16 Charles Alan
Wright, Arthur R. Miller & Edward H. Cooper, Federal Prac-
tice and Procedure §3926.2, at 298–324 (2d ed. 1996)). To be
“final,” the order, judgment, or decree in question must con-
clusively determine a separable dispute over a creditor’s
claim or priority. See Bullard, — U.S. —, 135 S. Ct. at 1692;
Comdisco, 538 F.3d at 651, citing In re Saco Local Dev. Corp.,
12                                                    No. 15-1894

711 F.2d 441, 445–46 (1st Cir. 1983). An order, even if not lit-
erally final, is appealable to this court if all that remains to be
done on remand to make it final is a “ministerial” ruling by
the lower court, i.e. a ruling unlikely to give rise to a contro-
versy that would trigger a further appeal, such as calculating
prejudgment interest when the amount of the judgment, the
interest rate, and the period over which the interest is to be
calculated are all uncontested. In re XMH Corp., 647 F.3d 690,
693–94 (7th Cir. 2011).
    The question before us is whether the approval of a par-
ticular settlement is a “stand-alone dispute” that would be
its own case outside of the bankruptcy. Bullard, — U.S. —,
135 S. Ct. at 1692. We find the answer, in this matter, to be no.
We first note that Debtor’s bankruptcy case is still ongoing,
and the bankruptcy court’s order does not say how much of
the estate the Bank, or any other creditor, ultimately re-
ceives. The bankruptcy court’s written order only approved
the settlement, nothing else. The question of who gets what
part of the settlement or any other asset appears, based on
the record before us, to be unresolved in the bankruptcy
court.
    At oral argument the Bank argued that its attempt to
pursue the transferred checks via a state court fraudulent
transfer action and its assertion that its security interest in
the checks trumped the estate’s interest constituted a “dis-
crete dispute.” We find, however, that, in the context of this
bankruptcy, those matters constitute a “discrete issue” of the
larger “discrete dispute.” The actual “discrete dispute” is
how much of the estate the Bank, as valid first priority-
secured creditor, receives, and, clearly, that dispute is very
much undecided. How can this order be final when the
No. 15-1894                                                   13

bankruptcy court, putting aside not having wrapped up the
entire estate, has not yet even wrapped up the Bank’s claim?
As noted at oral argument, we do not know what exactly the
Bank is getting out of the bankruptcy, and, for all this court
can ascertain from the bankruptcy court’s order, the Bank
could still receive every penny of Debtor’s estate. The bank-
ruptcy court noted, at the October 28, 2014, hearing, that the
Bank holds a “valid first priority security interest in virtually
all of the [D]ebtor’s assets[.]” Through the settlement, the
Trustee has recouped the full amount of the transferred
checks. The estate’s assets could still go toward satisfying
the Bank’s claims, although not in the direct manner at-
tempted by the Bank via the fraudulent transfer claim.
Nonetheless, the issue is still very much in doubt in the
bankruptcy court, and the Bank could still receive all or
some of the money recouped by the Trustee. The bankruptcy
court’s order merely addressed a “discrete issue” within the
larger “discrete dispute,”and thus is too small a litigation
unit to justify treatment as a final judgment. See Bullard, —
U.S. —, 135 S. Ct. at 1692; Bulk Petroleum, 796 F.3d at 671;
McKinney, 610 F.3d at 651.
   Even were the court to accept the Bank’s argument that
the issue addressed by the bankruptcy court’s October 30,
2014, order constituted its own “discrete dispute,” we find
that the bankruptcy court’s order was not “final” for pur-
poses of appellate jurisdiction. The Bank argues the order
determined the Bank’s security interest in the transferred
checks. This is not correct. The order approved the settle-
ment, but was silent as to the security interest. The Bank ar-
gues we must look to the reasons stated on the record at the
October 28, 2014, hearing, referenced in the October 30, 2014,
order, to get a full understanding of the bankruptcy court’s
14                                                 No. 15-1894

order. The bankruptcy court stated, on the record, that it was
continuing the matter for a status on November 18, 2014, for
the parties “to come back and tell [the court] how you want
to proceed at that point[.]” The notice of appeal to the dis-
trict court was filed by the Bank on November 13, 2014, five
days before the status conference to discuss how the parties
wished to proceed on the matter of tracing the proceeds of
the transferred checks. The bankruptcy court’s ruling fore-
closed one manner in which the Bank could pursue the
transferred checks, but did not resolve the ultimate question
of the Bank’s claims to Debtor’s assets, or even the particular
accounts receivables assets at issue. There is a fundamental
difference as to what is said by a judge on the record versus
what the judge actually decides. No matter what occurred in
this litigation with regard to statements made by the bank-
ruptcy court on the record, the only matter decided by the
bankruptcy court was that the settlement was approved, the
Bank’s objection was overruled, and the court was going to
hold a separate hearing at a later date on what the Bank
would receive. Before that hearing was held, the Bank filed
this appeal. Therefore, even if this court were to find that the
narrow matters addressed in the October 30, 2014, order
constituted a stand-alone “discrete dispute,” the order en-
tered by the bankruptcy court was by no means final.
                              III.
   We find that the resolution of these matters settled a
“discrete issue” within a “discrete dispute,” rather than a
“discrete dispute” itself, and such an order is not final for
purposes of appellate jurisdiction in a bankruptcy case. See
Bullard, — U.S. —, 135 S. Ct. at 1692; see also Comdisco, 538
F.3d at 651-52. This is not an order resolving an adversary
No. 15-1894                                                15

proceeding or confirming a Chapter 13 debtor’s repayment
plan. Such an order would be final. Bullard, — U.S. —, 135
S. Ct. at 1694. Rather, the Bank has objected to the Trustee’s
request that the bankruptcy court approve the settlement
with Hartford Jr., and “[a] decision rebuffing one objection
to another litigant’s request is not ‘final’ in the sense that
matters for appellate review.” Zedan, 529 F.3d at 407 (Easter-
brook, C.J., concurring). While the issue that the Bank cares
about may have been resolved, its basic dispute with the
bankrupt estate has not been resolved and therefore the
judgment below is not final. See McKinney, 610 F.3d at 404.
Further, even if the we accepted the argument that the bank-
ruptcy court ruled on a “discrete dispute,” the order entered
was not a final order for purposes of appellate jurisdiction
under §158(d).
   The appeal is DISMISSED for want of jurisdiction.