Sixth Circuit Court of Appeals Struggles with Issues Following Bankruptcy David A. Domina

Sixth Circuit Court of Appeals Struggles with Issues Following Bankruptcy David A. Domina

Domina Law Group pc llo’s arguments to the United States Court of Appeals for the Sixth Circuit produced a split decision, in a complex legal area involving bankruptcy procedure. Curry’s of Nebraska versus United Producers, Inc., F3d (6th Cir May 2008) required the court to determine whether the doctrine of equitable muteness should be applied to protect a bankruptcy organization plan approved by the US Bankruptcy Court for the Southern District of Ohio. The bankruptcy came about after DLGpc clients won two (2) jury verdicts against the Ohio cooperative. Both asserted fraud in this representation.

After the adverse verdicts, totaling nearly 20 million dollars, the co-op sought bankruptcy. The successful judgment creditors, holding their verdicts, contested the bankruptcy to the extent it sought to protect the jobs of the management team that had guided the company into bankruptcy earlier. Contested hearings were held, a substantial dispute unfolded at the trial court level. Eventually, the bankruptcy judge elected against removing the management group, and affirmed its reorganization plan. This left DLGpc’s clients confronting the need to appeal, but in a circumstance in which they could not post a bond for appellate purposes because they were financially wrenched by the large losses they eventually sued for, and won jury verdicts for. They asked the bankruptcy court to remove management, allow an opportunity to improve profitability, and provide for payments over a term of years, audit future earnings, to protect them and their interests.

They appealed the bankruptcy judge’s order. Initially, they prevailed. The bankruptcy appellate panel required that the case be remanded for more trial proceedings. This occurred, but, once again, the bankruptcy judge decided to leave management in place.

A second appellate decision was required. Again, DLGpc’s clients decided to proceed to the appellate court, but recognized they could not post a bond or seek a stay. In fact, had they been able to do so, the effect would have been to prevent other farmers from securing payment for their business dealings with the cooperative. DLGpc’s clients openly noted they had no desire to harm other producers. They simply wanted a management team put in place in the cooperative that would not jeopardize its activities going forward, and would move it to a new business model assuring greater profitability.

The second appeal was docketed. The bankruptcy appellate panel, on this occasion, affirmed the bankruptcy court, so DLGpc’s clients appealed again – this time to the Sixth Circuit.

In the United States Court of Appeals, the issue was this:

May a party with a right to appeal lose that right after confirmation of a bankruptcy plan where appellate relief becomes impractical, imprudent or inequitable because others would be adversely affected if the appellate relief were granted?

A handful of cases across the country deal with the equitable muteness doctrine. The Sixth Circuit noted that appellate procedures involving bankruptcy are peculiar, and equitable muteness cases are rare, generally speaking. The appellate court acknowledged that the creditors could not seek a stay, it noted this circumstance was not controlling:

“Although Creditors attribute their omission to their poverty which was caused by Debtor’s actions, the reason for the absence of a stay is immaterial to the equitable muteness analysis.”

Ultimately, two judges of the Sixth Circuit concluded, that their novo review of the bankruptcy appellate panel yielded a decision that the panel should be affirmed.

One Circuit judge concurred in the result, but disagreed with the application of the doctrine and its standard of review. He noted that, “The Standard of Review in this case is a complicated question. First, this case is unlike other bankruptcy appeals from the VAP or a district court because that forum will be deciding the issue of equitable muteness for the first time…as best I can tell, this is the only type of case where the VAP will be deciding an issue for the first time.”

The concurring judge believed an Abuse of Discretion Standard might be applicable, but argued the decision should not be made in this case.

“I am heartened by the Sixth Circuit’s sensitive treatment of this complicated issue,” Dave Domina said. “Our clients were genuinely wiped out by what occurred in the bankruptcy court. They lost all their invested funds in a fraudulent scheme, sought to recover against the company whose employees pulled off the wrong delinquent participation and consent, recovered hard fought judgments for large amounts of money, and had them taken away by bankruptcy. The officers who oversaw the wrong doing were not allowed to keep their jobs.” Domina continued, “At least the Sixth Circuit understood the facts, saw the injustice, and I respect that the court decided the case against us because of its obvious fear that a different result in this case could lead to substantial complications in future lawsuits.”

Domina Law Group pc llo is a firm of trial lawyers. We specialize in complex litigation on a national basis. Our lawyers are ethical, aggressive, and committed to providing spirit and vitality to the judicial system and our client’s legal rights.