Court Opinion

ID: 3044299
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:13:31.703432+00
Date Added: 2024-06-11T12:39:38.523145
License: Public Domain

United States Bankruptcy Appellate Panel
                         FOR THE EIGHTH CIRCUIT

                                     No. 07-6058
                                     No. 07-6059

In re:                                    *
                                          *
Racing Services, Inc.,                    *
                                          *
         Debtor.                          *
                                          *
                                          *
Kip Kaler, as Bankruptcy Trustee          *        Appeal from the United States
for Racing Services, Inc., and the        *        Bankruptcy Court for the
State of North Dakota, et al.,            *        District of North Dakota
                                          *
         Appellants,                      *
                                          *
               v.                         *
                                          *
Susan Bala,                               *
                                          *
         Appellee.                        *

                            Submitted: March 20, 2008
                               Filed: April 25, 2008

Before KRESSEL, Chief Judge, MAHONEY, and McDONALD, Bankruptcy
Judges.

McDONALD, Bankruptcy Judge.
      Kip Kaler, Chapter 7 Trustee for the estate of Racing Services, Inc. (“Trustee”),
and the State of North Dakota et al. (“North Dakota”) appeal from an order of the
bankruptcy court1 that granted a motion to vacate part of an order that equitably
subordinated the claims of Susan Bala (“Bala”). We have jurisdiction over this appeal
pursuant to 28 U.S.C. § 158(b). For the reasons set forth below, we affirm.

                                          I.

      Bala was the founder, chief executive officer, president and sole shareholder of
Racing Services, Inc. (“RSI”). RSI filed a Chapter 11 bankruptcy petition on
February 3, 2004, in the United States Bankruptcy Court for the District of Delaware.
Shortly thereafter, the Delaware court transferred the case to the District of North
Dakota. On June 15, 2004, the bankruptcy court converted RSI’s case to one under
Chapter 7 and the Trustee was appointed to administer RSI’s estate.

      RSI maintained its principal offices at 901 28th Street SW, Fargo, North Dakota.
Bala owned the building and leased it to RSI. After the case converted to Chapter 7,
the Trustee took control and occupied the building until December 10, 2004, when
Bala sold it.

      On June 10, 2005, Bala filed an application for allowance of administrative
expense claims in RSI’s case in the aggregate amount of $110,218.54 (“Application”).
These claims were for post-petition rents due to Bala by RSI and the Trustee. The
Trustee and North Dakota filed objections to the Application asserting that the claims
should be subordinated to all other claims under § 510(c) of the Bankruptcy Code or
denied in their entirety. The Trustee and North Dakota based their objections and
requests to subordinate on federal criminal convictions and forfeiture judgments that
were entered against Bala and RSI in July of 2005 (“Criminal Orders”). On

1
  The Honorable William A. Hill, United States Bankruptcy Judge for the District
of North Dakota.

                                          2
September 5, 2005, the bankruptcy court granted the Application in the amount
requested, but subordinated Bala’s claims for purposes of distribution to all other
allowed claims (“Subordination Order”) based on the Criminal Orders.

       Bala appealed to the Eighth Circuit Bankruptcy Appellate Panel. On April 4,
2006, we affirmed the Subordination Order. In our order, we found that the Criminal
Orders were sufficient to support a claim for equitable subordination. As a result, we
held that the bankruptcy court did not abuse its discretion. Bala v. Kaler (In re Racing
Servs., Inc.), 340 B.R. 73 (B.A.P. 8th Cir. 2006).

       Meanwhile, Bala and RSI appealed the Criminal Orders. On March 6, 2007,
the Eighth Circuit Court of Appeals (“Circuit Court”) reversed. United States v. Bala,
489 F.3d 334 (8th Cir. 2007). Based on the reversal, Bala filed a motion to vacate that
portion of the bankruptcy court’s Subordination Order that subordinated her claims
(“Motion to Vacate”). The Trustee and North Dakota filed objections to the Motion
to Vacate. The bankruptcy court conducted a hearing on August 30, 2007, and on
September 6, 2007, it granted the Motion to Vacate. This appeal followed.

                                          II.

        We review a motion for relief from a judgment or order under Fed. R. Civ. P.
60(b)(5) made applicable to this proceeding by Fed. R. Bankr. P. 9024 for an abuse
of discretion. Agostini v. Felton, 521 U.S. 203, 238 (1997); Prudential Ins. Co. of
America v. National Park Medical Center, Inc. 413 F.3d 897, 903 (8th Cir. 2005). An
abuse of discretion occurs when there are clearly erroneous factual findings or an
erroneous legal conclusion. Kieffer v. Riske (In re Kieffer-Mickes, Inc.), 226 B.R. 204,
208 (B.A.P. 8th Cir. 1998). We must have “a definite and firm conviction that the
bankruptcy court committed a clear error of judgment in the conclusion it reached
upon a weighing of the relevant factors” to overturn its decision. Nelson v. Siouxland
Fed. Credit Union (In re Nelson), 223 B.R. 349, 352 (B.A.P. 8th Cir. 1998) (quoting

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Beguelin v. Volcano Vision, Inc. (In re Beguelin), 220 B.R. 94, 97 (B.A.P. 9th Cir.
1998)).

                                         III.

       The Trustee and North Dakota believe that the bankruptcy court erred in
granting the Motion to Vacate and they advance two arguments in support of their
position. First, they contend that Bala improperly brought the Motion to Vacate under
Fed. R. Civ. P. 60(b)(5). Second, they argue that despite the reversal of the Criminal
Orders, there is sufficient evidence in the record to support a finding of equitable
subordination.

A.    Bala properly made the Motion to Vacate under Fed. R. Civ. P. 60(b)(5).

        The Trustee and North Dakota assert that the reversal of the Criminal Orders
amounts to “newly discovered evidence” placing the Motion to Vacate under Fed. R.
Civ. P. 60(b)(2) rather than Rule 60(b)(5). Federal Rule of Civil Procedure 60(b)
states:

             [o]n motion and upon such terms as are just, the court may
             relieve a party…from a final judgment, order or
             proceeding…for the following reasons:…(2) newly
             discovered evidence which by due diligence could not have
             been discovered in time to move for a new trial under Rule
             59(b);…(5) a prior judgment upon which it is based has
             been reversed or otherwise vacated...

The Trustee and North Dakota argue that since a Rule 60(b)(2) motion must be made
within one year of entry of the original order, the bankruptcy court was required to
deny Bala’s Motion to Vacate on procedural grounds because she filed it on March
27, 2007, well past the one-year deadline. Fed. R. Civ. P. 60(c)(1). We disagree.

                                          4
      The reversal of the Criminal Orders was hardly newly discovered evidence.
Indeed, the district court convicted Bala and RSI and entered the forfeiture orders on
July 20, 2005. Bala and RSI appealed these orders and the Circuit Court did not
decide the case until March 6, 2007. The Trustee and North Dakota were certainly
aware of these proceedings and the possibility that the Criminal Orders might be
overturned on appeal. Yet, they did not seek to have the Subordination Order
amended to include additional findings of fact in case the Circuit Court reversed.

      Even assuming arguendo that the reversal of the Criminal Orders was newly
discovered evidence, the Trustee and North Dakota essentially ask us to hold Bala
responsible for the time it took the Circuit Court to decide her appeal. We decline to
do so. Consequently, we hold that Bala properly made the Motion to Vacate under
Fed. R. Civ. P. 60(b)(5).

B.    There was insufficient evidence in the record to support a claim for equitable
      subordination once the Circuit Court reversed the Criminal Orders.

      The Trustee and North Dakota next argue that despite the reversal of the
Criminal Orders, there was sufficient evidence in the record to support equitable
subordination. We have adopted a three-part test to determine whether or not the
claim for equitable subordination is appropriate under § 510(c) of the Bankruptcy
Code:

             (i)     The claimant must have engaged in some type of
                     inequitable conduct.
             (ii)    The claimant’s misconduct resulted in injury to the
                     creditors of the bankrupt or conferred an unfair
                     advantage on the claimant; and
             (iii)   Equitable subordination must not be inconsistent
                     with the provisions of the Bankruptcy Code.

                                          5
In re Racing Servs., Inc., 340 B.R. at 76 (citing Bergquist v. Anderson-Greenwood
Aviation Corp. (In re Bellanca Aircraft Corp.), 850 F.2d 1275, 1282 (8th Cir. 1988)).
The proponent of equitable subordination has the burden of proving each element.
Central Cooperatives, Inc. v. Irwin (In re Colonial Poultry Farms), 177 B.R. 291, 301
(Bankr. W.D. Mo. 1995).

       In granting the Trustee and North Dakota’s request to subordinate Bala’s
claims, the bankruptcy court relied wholly on the Criminal Orders to satisfy the first
two elements of equitable subordination and further noted that equitable subordination
was not inconsistent with the provisions of the Bankruptcy Code, thus satisfying the
third prong of the test. There were no additional findings of inequitable conduct in
the Subordination Order.

       On appeal, we also used the Criminal Orders to support the first two elements
of equitable subordination. To satisfy the third element, we noted that “any exercise
of authority under Section 510(c)(1) of the Bankruptcy Code is not inconsistent with
the Code unless it ignores the Code’s language.” In re Racing Servs., Inc., 340 B.R.
at 78. Since the bankruptcy court decided the case under § 510(c)(1), it was not
inconsistent with the Bankruptcy Code. We made no other references to inequitable
conduct in our order.

       The bankruptcy court had another chance to consider the record at the hearing
on the Motion to Vacate on August 30, 2007. The Trustee and North Dakota
attempted to direct the bankruptcy court to facts already in the record that would
satisfy the test for equitable subordination without relying on the Criminal Orders.
The bankruptcy court was not persuaded by their arguments. Neither are we.

      It is clearly evident that at all stages of this litigation, each court relied on the
Criminal Orders as the sole basis for subordinating Bala’s claims. Once the Circuit
Court vacated these orders, there was no basis in fact or law to equitably subordinate

                                            6
them. The Trustee and North Dakota devised a trial strategy that simply did not
include the possibility of the reversal of the Criminal Orders. To ask us to put
nebulous facts together to satisfy the test for equitable subordination at this point is
both untimely and unreasonable. Therefore, we hold that there is insufficient evidence
in the record to support a claim of equitable subordination.

                                          IV.

       The bankruptcy court was in the best position to determine the basis of its own
order. We are not left with a definite and firm conviction that the bankruptcy court
erred, and therefore, it did not abuse its discretion in granting the Motion to Vacate.
Accordingly, we affirm the judgment of the bankruptcy court.

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