Petition for Writ of Certiorari — Robert Rael, et ux., Petitioners v. Patrick S. Layng, United States Trustee, Region 19
Supreme Court briefApr 22, 2019
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No.
IN THE
Supreme Court of the United States
_________
ROBERT RAEL; LISA RAEL, PETITIONERS
v.
PATRICK S. LAYNG, UNITED STATES TRUSTEE FOR
REGION 19
_________
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT
_________
PETITION FOR WRIT OF CERTIORARI
_________
STEPHEN R. WINSHIP
Counsel of Record
Winship & Winship, PC
145 N. Durbin Street Suite 201
Casper, WY 82601
steve@winshipandwinship.com
(307) 234-8991
i
QUESTIONS PRESENTED
This case presents a conflict as to the subject
matter jurisdiction of bankruptcy courts. It also
presents conflicts as to whether an order entered by
a court without subject matter jurisdiction is
enforceable and the standard for determining what
constitutes a willful disobeyance of a “lawful” order
under 11 U.S.C. § 727(a)(6)(A).
In the Tenth Circuit, a bankruptcy court’s
subject matter jurisdiction now includes the
allowance of sales of property of the bankruptcy
estate free and clear of liens after a Chapter 11 plan
has been confirmed (even though the plan vested
said property in the debtor).
1. Whether a bankruptcy court’s subject matter
jurisdiction over what was property of the
bankruptcy estate continues after the
confirmation of a Chapter 11 plan, which
plan vested said property in the debtor?
2. Whether matters under 11 U.S.C. §
727(a)(6)(A) are to be construed strictly
against the party objecting to the bankruptcy
discharge and liberally in favor of the debtor
such that the debtor must be shown to have
willfully and intentionally disobeyed an
order?
3. If a bankruptcy court entered an order on a
matter that it did not have subject matter
jurisdiction, is the order void only if the
bankruptcy court plainly usurped its power?
ii
TABLE OF CONTENTS
QUESTIONS PRESENTED…………………….………i
TABLE OF AUTHORITIES…………………………...iv
OPINIONS BELOW……………………………………..1
JURISDICTION………………………………………….1
RELEVANT PROVISIONS INVOLVED……………..1
STATEMENT………………………………………….….5
1. Background…………………………………….….5
2. Bankruptcy Court Order on Jurisdiction Over
Parcel……..…………………..…………………....9
3. Bankruptcy Court Amended Opinion
(§ 727(a)(6)(A))..………………………....………10
4. District Court Order on Appeal.………………11
5. Tenth Circuit Judgment….………………..…..12
6. Tenth Circuit Order Denying Petition for
Rehearing….……………………………..………14
REASONS FOR GRANTING THE PETITION…….15
I.
The Circuit Courts' Conflicts Over "Related
To" Bankruptcy Court Subject Matter
Jurisdiction Post-Confirmation Should Be
Resolved……………………………...……...…15
iii
II.
In Deciding § 727(a)(6)(A) Proceedings, All
Courts Should Apply a Standard of Strict
Construction Against the Objecting Party
and Liberal Construction in Favor of Debtor
Such That a Debtor's Mistake or Failure to
Explain the Disobeyance of an Order Does
Not Result in a Denial of Bankruptcy
Discharge……………………………..………..21
III. The Standard for Determining a Court's
Subject Matter Jurisdiction Should Not
Change Depending on When In the
Litigation This Issue is Raised Such That a
Jurisdictional Error Will Always Render a
Judgment Void ………….……………….….28
CONCLUSION………………………………………….32
APPENDIX
Circuit Order and Judgment…………………….1a
District Court Order on Appeal.………………..19a
Bankruptcy Court Judgment …...……………...50a
Bankruptcy Court Amended Opinion………….51a
Bankruptcy Court Order Denying Debtor's
Motion to Set Aside Sale Order (D.E. 451)……63a
Partial Transcript of Hearing on Debtor's Motion
to Set Aside Sale Order………………………….64a
Circuit OrderDenying Rehearing………………74a
iv
TABLE OF AUTHORITIES
Cases
Arbaugh v. Y & H Corp., 546 U.S. 500, 514 (2006)…
................................................................................ 30
Celotex Corp. v. Edwards, 514 U.S. 300, 308, n. 6
(1995) ................................................................ 14, 15
Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253
(1992) ...................................................................... 20
Gschwind v. Cessna Aircraft Co., 232 F.3d 1342,
1346 (10th Cir. 2000) ............................................. 30
GTE Sylvania, Inc. v. Consumers Union of the U.S.,
Inc., 445 U.S. 375 (1980) ....................................... 32
Henderson ex rel. Henderson v. Shinseki, 562 U.S.
428, 434 (2011) ....................................................... 30
Hunter v. Underwood, 362 F.3d 468 (8th Cir. 2004) . 30
IAL Aircraft Holding, Inc. v. F.A.A., 216 F.3d 1304,
1306 (11th Cir. 2000) ........................................ 30, 32
In re Altmeyer, 2014 WL 4959146 at * 2 (Bankr. S.D.
Ill. Oct. 2, 2014) ...................................................... 19
In re Binder, 224 B.R. 483, 489-90(Bankr. D. Colo.
1998) .........................................................................8
In re Cary Metal Prod., Inc., 23 F.3d 1159, 1164 (7th
Cir. 1994) ................................................................ 18
In re CF & I Fabricators of Utah, Inc., 150 F.3d 1233,
1237 (10th Cir. 1998) .............................................. 16
In re Craig’s Stores of Texas, Inc., 266 F.3d 388, 390
(5th Cir. 2001) ......................................................... 17
In re Ener1, Inc., 558 B.R. 91, 95 (Bankr. S.D. N.Y.
2016) ....................................................................... 20
In re Farmland Indus., Inc., 567 F.3d 1010, 1020 (8th
Cir. 2009) ................................................................ 16
In re Fatsis, 435 B.R. 814, 818 (Bankr. D. Mass.
2010) ....................................................................... 23
v
In re Fustolo, 896 F.3d 76, 86-87 (1st Cir. 2018) ....... 27
In re Golf, LLC, 322 B.R. 874, 877 (Bankr. D. Neb.
2004) ....................................................................... 19
In re Greektown Holdings, LLC, 728 F.3d 567, 578
(6th Cir. 2014) ......................................................... 17
In re Harmon, 379 B.R. 182, 187 (Bankr. M.D. Fla.
2007) ....................................................................... 22
In re Hicks, 2006 WL 6810987 at * 8 (9th Cir. BAP,
Feb. 1, 2006) ........................................................... 22
In re Houlik, 481 B.R. 661 (10th Cir. BAP 2012) . 8, 15,
20
In re Jordan, 521 F.3d 430, 433 (4th Cir. 2008) . 22, 23,
25, 26, 27
In re Kirkland, 600 F.3d 310, 317 (4th Cir. 2010) ..... 16
In re Layton, 480 B.R. 392, 399 (Bankr. N.D. Fla.
2012) ....................................................................... 19
In re Leone, 463 B.R. 229, 242 (Bankr. N.D. N.Y.
2011) ....................................................................... 22
In re Matos, 267 Fed.Appx. 884, 886 (11th Cir. 2008)
.................................................................... 23, 25, 27
In re Osborne, 476 B.R. 284, 292 (Bankr. D. Kan.
2012) ....................................................................... 22
In re Pegasus Gold Corp., 394 F.3d 1189, 1194 (9th
Cir. 2005) ................................................................ 16
In re Pettibone Corp. v. Easley, 935 F.2d 120, 122 (7th
Cir. 1991) ................................................................ 16
In re Pratt, 462 F.3d 14, 21 (1st Cir. 2006)................ 25
In re Rael, 2017 WL 4083128 (Bankr. D. Wyo. Sept.
14, 2017) ...................................................................1
In re Rael, 527 B.R. 799 (10th Cir. BAP 2015) ............8
In re Resorts Int’l, Inc., 372 F.3d 154, 165 (3rd Cir.
2004) ................................................................. 15, 16
In re Taggart, 888 F.3d 438 (9th Cir. 2018)............... 25
In re United Operating, LLC, 540 F.3d 351, 355 (5th
Cir. 2008) ................................................................ 19
vi
In re Western Integrated Networks, LLC, 329 B.R.
334, 341 (Bankr. D. Colo. 2005)............................. 19
In re Wolverine Radio Co., 930 F.2d 1132, 1140-43
(6th Cir. 1991) ......................................................... 16
Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998) .......... 24
Kontrick v. Ryan, 540 U.S. 443, 455 (2004) .............. 29
Maness v. Meyers, 419 U.S. 449 (1975) ..................... 31
Matter of Munford, Inc., 97 F.3d 449, 454 (11th Cir.
1994) ....................................................................... 17
Matter of Xonics, Inc., 813 F.2d 127, 131-32 (7th Cir.
1987) ....................................................................... 20
Miller v. J.D. Abrams, Inc., 156 F.3d 598, 603-04 (5th
Cir. 1998) ................................................................ 24
Parmalat Capital Fin. Ltd. v. Bank of Am. Corp., 639
F.3d 572, 579 (2nd Cir. 2011).................................. 16
Phoenix Petroleum, v. U.S., 215 F.3d 1345 at * 5
(Fed. Cir. 1999) ...................................................... 16
Rael v. Layng, 753 Fed.Appx. 649 (10th Cir. 2018).....1
Standiferd v. United States Trustee, 641 F.3d 1209
(10th Cir. 2011) ................................................. 22, 23
Taggart v. Lorenzen, Case No. 18-489 (cert. accepted
Jan. 4, 2019) ........................................................... 24
Tele-Communications, Inc. v. CIR, 104 F.3d 1229,
1232-33 (10th Cir. 1997) ......................................... 27
U.S. Catholic Conf. v. Abortion Rights Mobilization,
Inc., 487 U.S. 72, 76 (1988) .................................... 29
U.S. v. Harchar, 371 B.R. 254, 267 (N.D. Ohio 2007) 8
United Student Aid Funds, Inc. v. Espinosa, 559 U.S.
260, 291 (2010) ....................................................... 29
Utility Air Reg. Group v. E.P.A., 573 U.S. 302, 328
(2014) ...................................................................... 21
Vallely v. Northern Fire & Marine Ins. Co., 254 U.S.
348, 353 (1920) ....................................................... 29
Valley Historic Ltd. Partnership v. Bank of New
York, 486 F.3d 831, 828 (4th Cir. 2007) ................. 18
vii
Walker v. City of Brimingham, 388 U.S. 307 (1967) 31
Wendt v. Leonard, 431 F.3d 410 (4th Cir. 2005) ....... 30
Zerand-Bernal Group, Inc. v. Cox, 23 F.3d 159, 162
(7th Cir. 1994) ......................................................... 20
Statutes
11 U.S.C. § 1107 ........................................................ 19
11 U.S.C. § 1107(a) .............................................. 12, 19
11 U.S.C. § 1123(a)(5)(D)........................................... 18
11 U.S.C. § 1141(b) .............................. 8, 12, 14, 18, 20
11 U.S.C. § 1141(c) .................................................... 18
11 U.S.C. § 1142 ........................................................ 14
11 U.S.C. § 1143 ........................................................ 14
11 U.S.C. § 1334 ........................................................ 15
11 U.S.C. § 362(a) ...................................................... 24
11 U.S.C. § 363 ................................................ 9, 18, 19
11 U.S.C. § 363(b) ................................................ 18, 20
11 U.S.C. § 363(f) ................................................. 12, 18
11 U.S.C. § 363(h) ...................................................... 12
11 U.S.C. § 523(a) ...................................................... 25
11 U.S.C. § 523(a)(6) .................................................. 24
11 U.S.C. § 727(a) ...................................................... 25
11 U.S.C. § 727(a)(6) ............................................ 21, 27
11 U.S.C. § 727(a)(6)(A) .................................................
.............................. 5, 9, 10, 14, 22, 23, 25, 26, 29, 30
28 U.S.C. § 1254(1) ......................................................1
28 U.S.C. § 1334(b) .................................................... 15
28 U.S.C. § 157(a) ...................................................... 20
28 U.S.C. § 157(b) ...................................................... 20
28 U.S.C. § 157(b)(2)(N) ............................ 9, 12, 13, 19
Other Authorities
U.S. Const. Art. I, § 8, cl. 4 ........................................ 21
viii
Rules
Fed. R. Bankr. P. 6004 .................................. 12, 13, 19
Fed. R. Bankr. P. 9024(b)(4)...................................... 29
Fed. R. Civ. P. 60(b)(4) .................. 9, 11, 13, 29, 31, 32
1
OPINIONS BELOW
The Judgment of the Tenth Circuit is reported
at Rael v. Layng, 753 Fed.Appx. 649 (10th Cir. 2018)
(App. 1a). The order of the United States District
Court for the District of Wyoming (“District Court”)
is unreported, but is available at App. 11a. The
Amended Opinion of the United States Bankruptcy
Court for the District of Wyoming (“Bankruptcy
Court”) is reported at In re Rael, 2017 WL 4083128
(Bankr. D. Wyo. Sept. 14, 2017). The Bankruptcy
Court’s Order Denying Debtor’s Motion to Set Aside
Order is unreported, but is available at App. 64a.
JURISDICTION
The Order and Judgment of the Tenth Circuit
was entered on December 7, 2018 (App. 1a). A
petition for rehearing was denied on January 25,
2019 (App. 10a). This Court has jurisdiction under
28 U.S.C. § 1254(1).
RELEVANT PROVISIONS INVOLVED
11 U.S.C. § 350(a) and (b)
Closing and reopening cases: (a) After an
estate is fully administered and the court has
discharged the trustee, the court shall close
the case. (b) A case may be reopened in the
court in which such case was closed to
administer assets, to accord relief to the
debtor, or for other cause.
2
11 U.S.C. § 363(b)(1)
The Trustee, after notice and a hearing, may
use, sell or lease, other than in the ordinary
course of business, property of the estate…
11 U.S.C. § 363(f)
Use, sale or lease of property: (f) The trustee
may sell property under subsection (b) or (c) of
this section free and clear of any interest in
such property of an entity other than the
estate, only if--(1) applicable nonbankruptcy
law permits sale of such property free and
clear of such interest; (2) such entity consents;
(3) such interest is a lien and the price at
which such property is to be sold is greater
than the aggregate value of all liens on such
property; (4) such interest is in bona fide
dispute; or (5) such entity could be compelled,
in a legal or equitable proceeding, to accept a
money satisfaction of such interest.
11 U.S.C. § 727(a)(6)(A)
The court shall grant the debtor a discharge,
unless--(6) the debtor has refused, in the case-(A) to obey any lawful order of the court, other
than an order to respond to a material
question or to testify…
11 U.S.C. § 1107(a)
3
Rights, powers, and duties of debtor in
possession: (a) Subject to any limitations on a
trustee serving in a case under this chapter,
and to such limitations or conditions as the
court prescribes, a debtor in possession shall
have all the rights, other than the right to
compensation under section 330 of this title,
and powers, and shall perform all the
functions and duties, except the duties
specified in sections 1106(a)(2), (3), and (4) of
this title, of a trustee serving in a case under
this chapter.
11 U.S.C. § 1141(b)
Effect of confirmation: (b) Except as otherwise
provided in the plan or the order confirming
the plan, the confirmation of a plan vests all of
the property of the estate in the debtor.
28 U.S.C. § 157(b)(1) and (2)(N)
Bankruptcy judges may hear and determine
all cases under title 11 and all core
proceedings arising under title 11, or arising
in a case under title 11, referred under
subsection (a) of this section, and may enter
appropriate orders and judgments, subject to
review under section 158 of this title. (2) Core
proceedings include, but are not limited
to…(N) orders approving the sale of property
other than property resulting from claims
brought by the estate against persons who
have not filed claims against the estate…
4
28 U.S.C. § 1334(a) and (b)
Bankruptcy cases and proceedings: (a) Except
as provided in subsection (b) of this section,
the district courts shall have original and
exclusive jurisdiction of all cases under title
11. (b) Except as provided in subsection (e)(2),
and notwithstanding any Act of Congress that
confers exclusive jurisdiction on a court or
courts other than the district courts, the
district courts shall have original but not
exclusive jurisdiction of all civil proceedings
arising under title 11, or arising in or related
to cases under title 11.
Fed. R. Bank. P. 6004(c)
(c) Sale Free and Clear of Liens and Other
Interests.
A motion for authority to sell
property free and clear of liens or other
interests shall be made in accordance with
Rule 9014 and shall be served on the parties
who have liens or other interests in the
property to be sold. The notice required by
subdivision (a) of this rule shall include the
date of the hearing on the motion and the time
within which objections may be filed and
served on the debtor in possession or trustee.
Fed. R. Bankr. P. 9024(b)(4) (Fed. R. Civ. P. 60(b)(4))
(b) Grounds for Relief from a Final Judgment,
Order or Proceeding. On motion and just
terms, the court may relieve a party or its
5
legal representative from a final judgment,
order, or proceeding for the following
reasons…(4) the judgment is void…
STATEMENT
1.
Background.
This case presents the important and
recurring question in federal bankruptcy law of what
subject matter jurisdiction remains in the
bankruptcy court after a Chapter 11 plan is
confirmed. This issue has divided lower courts for
years. Related to this controversial and unresolved
issue of subject matter jurisdiction is the applicable
standard for reviewing § 727(a)(6)(A) complaints, and
particularly the meaning of the term “willful” as that
term is used in bankruptcy law.
Robert and Lisa Rael (“Raels”) were the
principals of several Wyoming based business
entities of which Wells Fargo Bank N.A. (“Wells
Fargo”) was the principal secured creditor thereof.
Raels personally guaranteed these business loans by,
inter alia, granting mortgages in favor of that bank
against their many real estate holdings located
throughout Big Horn County, Wyoming. When the
business loans went into default, these businesses
filed for protection in the Bankruptcy Court under
Chapter 11 of the Bankruptcy Code. In response to
these bankruptcy filings, Wells Fargo sought to
collect the defaulted obligations from the Raels
personally, which precipitated their Chapter 11 filing
on May 1, 2008.
6
Raels’ Amended Chapter 11 Plan of
Reorganization (“Plan”) was confirmed on January
20, 2010. It did not provide that any property of the
estate would remain under the jurisdiction of the
Bankruptcy Court. As part of the Plan, the IRS
payroll tax obligation was to be paid through the
previously confirmed Chapter 11 plan of one of Raels’
business entities – Professional Contractors, Inc.
Wells Fargo’s claim, insofar as it pertained directly
to Raels, was to be satisfied under the Plan by
partial payments and the sale or surrender of several
of the real estate parcels that secured Wells Fargo’s
deficiency claim.
The case was closed after
confirmation of the Plan and a final decree was
entered.
The Raels subsequently defaulted on their
payments and other performance called for under the
Plan. (Professional Contractors, Inc. also defaulted.)
Starting on November 28, 2011, Wells Fargo filed
complaints in state court against Raels in order to
obtain judgments on the amounts they owed to Wells
Fargo and to foreclose on its pre-petition mortgages.
(These complaints were filed without having
obtained relief from the automatic stay from the
Bankruptcy Court.) A judgment was obtained by
Wells Fargo against Raels (and their related entities)
on September 6, 2012. To enforce the judgment,
Wells Fargo attached Raels’ bank accounts and filed
its judgment as a lien in the Big Horn County,
Wyoming real estate records on October 3, 2012
against Raels’ real property interests.
7
More than three years after the Plan was
confirmed, Raels reopened their bankruptcy case.
Afterwards, the Bankruptcy Court approved, under §
363(f)1, the sale of some of Raels’ real estate
(“Parcel”) that had, inter alia, been a subject of and
treated in Raels’ Plan (“Sale Order”). The Sale Order
provided that the proceeds from the sale of the Parcel
were to be turned over to Wells Fargo (which was
based on the mutual mistake of both the Bankruptcy
Court and Raels that Wells Fargo held a mortgage
against the Parcel).
The sale of the Parcel was closed on April 4,
2014 at which time the sale proceeds check was made
out only to the Raels by the title insurance company
in the amount of $122,283.81. By the time of the
closing on the Parcel, it had been discovered that the
lien interest of Wells Fargo arose from a judgment
lien, which had expired by the time of the closing.
Because of the uncertainty that had developed as to
Wells Fargo’s lien interest in these proceeds since the
original sale motion had been filed, Raels held onto
the sale check without cashing or depositing it in
their bank account until March 9, 2015.
With the understanding that the Bankruptcy
Court had jurisdiction over the Parcel (and Raels’
other property), Raels sought to enforce the
automatic stay against Wells Fargo’s lawsuits and
collection efforts against them through contempt
1. All citations are to the United States Code, Title 11, unless
otherwise noted.
8
motions.2 The Bankruptcy Court denied these stay
violation motions. Relying upon § 1141(b) and In re
Houlik, 481 B.R. 661 (10th Cir. BAP 2012), the
Bankruptcy Court determined that this Parcel was
not property of the estate, and therefore the
Bankruptcy Court did not have “related to”
jurisdiction over matters concerning the Parcel.
(App. at 54a.) Specifically, the Bankruptcy Court,
using the “close nexus” standard for determining
“related to” jurisdiction, found that it “…has
jurisdiction over disputes regarding alleged property
of the bankruptcy estate at the outset of the case.
When property leaves the bankruptcy estate,
however, the bankruptcy court’s jurisdiction [over
the] proceeding comes to an end.” (App. at 59a.) The
Bankruptcy Court concluded that the matters
relating to Wells Fargo’s judgment lien could be
decided in state court.
After the Bankruptcy Court’s ruling had been
affirmed on appeal,3 the Raels (and their counsel)
understood the Sale Order to have been rendered
null and void by the determination that there was no
Bankruptcy Court jurisdiction over the Parcel after
the Plan had been confirmed. Accordingly, the Raels,
on advice of their counsel, disbursed the proceeds of
2. Because individual Chapter 11 bankruptcy case law looks to
Chapter 13 precedent, Raels argued that bankruptcy courts
retain jurisdiction over property of the estate post-confirmation.
See e.g. U.S. v. Harchar, 371 B.R. 254, 267 (N.D. Ohio 2007)
and In re Binder, 224 B.R. 483, 489-90 (Bankr. D. Colo. 1998).
3. In re Rael, 527 B.R. 799 (10th Cir. BAP 2015).
9
the now consummated Parcel sale to administrative
expenses. With the original purpose for reopening
their Chapter 11 case having been thwarted, the
Raels converted their case to Chapter 7.
The United States Trustee (“UST”) objected to
the Raels’ Chapter 7 discharge under § 727(a)(6)(A)
by contending that the Sale Order was still
enforceable and therefore Raels had willfully violated
the Bankruptcy Court’s Sale Order. Raels sought to
dismiss this complaint on the basis that because the
Bankruptcy Court had previously ruled that it had
no jurisdiction over the Parcel, the Sale Order was no
longer in effect. Alternatively, Raels sought to have
the Sale Order voided under Rule 60(b)(4). Both
motions were denied.
2.
Bankruptcy Court Order on Jurisdiction
Over Parcel.
Relying upon the Bankruptcy Court’s earlier
conclusion in the contempt matters that it had no
subject matter jurisdiction over the Parcel, Raels
requested that the Sale Order be considered void and
should therefore be vacated. The Bankruptcy Court
denied this Rule 60(b)(4) motion by reasoning that
there was in fact jurisdiction because property sales
are “core proceedings” under 28 U.S.C. §
157(b)(2)(N), and that § 363 authorized such a sale.
(App. at 70a)
Related to that holding, the
Bankruptcy Court found that the Parcel sale
“affected the estate being administered in
bankruptcy.”
(App. at 71a.)
Further, the
Bankruptcy Court held that a judgment is void for
10
lack of jurisdiction only if the exercise of such
jurisdiction “is a plain usurpation of power” and that
“a court does not usurp its power when it erroneously
exercises jurisdiction.” (App. at 70a.)
3.
Bankruptcy Court Amended Opinion (§
727(a)(6)(A)).
After a trial of the matter, the Bankruptcy
Court determined that the Raels did not willfully
disobey the Sale Order. In its Amended Opinion, the
Bankruptcy Court emphasized that a debtor’s
mistake as to the subject order is insufficient to deny
a discharge under § 727(a)(6)(A):
Debtors testified that they relied on
counsel’s advice. In this instance, a
number of events combined to call into
question the legitimacy of the order. In
its first contempt order, the court found
that its jurisdiction over property that
leaves the bankruptcy estate “comes to
an end.” The
Bankruptcy Appellate Panel found that
the property pledged to Wells Fargo
“was not estate property.” When
combined with advice from counsel, it
was not unreasonable for Debtors to
have faith in Mr. Winship or have any
reason
to
believe
he
was
in
error…Debtors established their actions
were not willful as they reasonably
relied on the advice of counsel.
Revocation
of
discharge
is
not
11
appropriate given the principal [sic]
that the exceptions to the general policy
favoring
discharge
be
narrowly
construed.
(App. at 59a.)
4.
District Court Order on Appeal
The UST appealed the Bankruptcy Court’s
Opinion, and Raels cross-appealed on, inter alia, the
denial of their Rule 60(b)(4) motion. The District
Court reversed the Bankruptcy Court’s Opinion
based on its independent determination of Raels’
intent to violate the Sale Order (App. at 34a), but
affirmed the denial of Raels’ Rule 60(b)(4) motion.
On an issue raised for the first time at the appellate
level, the UST argued that Raels had not provided
any evidence that they had relied on advice of
counsel from the time that the sale of the Parcel
closed until the approximate time that the
Bankruptcy Appellate Panel for the Tenth Circuit
affirmed the Bankruptcy Court’s Contempt Order or
approximately eight months (“Gap Period”).
Specifically, the District Court found “the
bankruptcy court did not discuss the period between
the sale of the Cowley property and the 2015 advice
[of counsel].” (App. at 32a.) The District Court then
went on to conclude that “…the bankruptcy court’s
reasoning does not support a finding that the Raels
relied on their counsel’s advice.” (App. at 34a.)
The District Court affirmed the Bankruptcy
Court’s denial of Rael’s Rule 60(b)(4) motion because,
12
under 28 U.S.C. § 157(b)(2)(N), “…the bankruptcy
court was statutorily within its jurisdiction to enter
the order.” (App. at 44a.) Even if there had been an
error of subject matter jurisdiction in entering the
Sale Order, the District Court ruled that it would not
have represented a “plain usurpation of power” and
therefore was enforceable. (App. at 44a.)
5.
Tenth Circuit Judgment
The Tenth Circuit affirmed the District Court
by holding that bankruptcy courts continue to retain
the power to grant asset sales pursuant to § 363 after
a Chapter 11 plan had been confirmed. (App. at 7a8a.) The Tenth Circuit relied upon § 1107(a), 28
U.S.C. § 157(b)(2)(N) and Fed. R. Bankr. P. 6004 for
this expansion of a bankruptcy court’s jurisdiction.
(App. at 7a-8a.) The Judgment’s jurisdictional ruling
is notable by the absence of any reference to §
1141(b):
…The case had been reopened before
the Sale Order was entered. And,
because entry of a sale order is a core
proceeding, the bankruptcy court was
statutorily within its jurisdiction to
enter an order-again, at the Raels'
request-authorizing them to sell the
property. See 11 U.S.C. §§ 363(f)-(h)
(setting forth circumstances under
which trustee may sell property in the
bankruptcy estate); 11 U.S.C. §
1107(a) (providing that, subject to
limitations not applicable here, a
13
debtor in possession has the same
rights and powers as the trustee); 28
U.S.C. § 157(b)(2)(N) (providing that
bankruptcy court may hear and
determine all core proceedings, which
include “orders approving the sale of
property”); Fed. R. Bankr. P. 6004
(establishing procedure for obtaining
bankruptcy court order authorizing
sale of property).
App. at 7a-8a.
This fundamental jurisdictional holding
proved to be the “hinge” or basis for most of the
remaining portions of the Judgment. For instance,
the Judgment held as to Raels’ Rule 60(b)(4)
arguments:
All of the Raels' Rule 60(b) arguments
are based on their challenge to the
bankruptcy court's jurisdiction to enter
the
Sale
Order
and
their
mischaracterization of the rulings in the
Contempt Orders and BAP Order.
Having already concluded that the
bankruptcy court had jurisdiction to
enter the Sale Order and that neither
the Contempt Orders nor the BAP
Order suggested otherwise, we find no
error in the bankruptcy court's denial of
the Rule 60(b) motions on the same
basis.
14
App. at 9a (emphasis added).
While it would seem that § 1141(b) (and §§
1142 and 1143) read in conjunction with the
admonition in Celotex Corp. v. Edwards, 514 U.S.
300, 308, n. 6 (1995) that “bankruptcy courts have no
jurisdiction over proceedings that have no effect on
the estate of the debtor,” would have resolved the
jurisdictional
disputes
that
the
Judgment
exemplifies, that clearly has not been the case. The
Sale Order was therefore a “lawful order.”
As to the specific § 727(a)(6)(A) claim, the
Judgment found that even if Raels were mistaken in
their belief that the Sale Order was rendered null
and void by the Bankruptcy Court’s subsequent
jurisdictional ruling (as part of the contempt orders),
that failure to obey the Sale Order was an unexcused
refusal to obey it for purposes of denying their
discharge (App. at 10a-17a.) Further, the Judgment
affirmed the District Court’s findings that Raels’
neglect or failure in explaining their noncompliance
with the Sale Order in the Gap Period was the
equivalent of a willful violation of the Sale Order.
(App. at 12a-14a.)
6.
Tenth Circuit Order Denying Petition for
Rehearing
Raels argued that the Tenth Circuit’s
Judgment was contrary to its prior jurisdictional
ruling on a bankruptcy court’s subject matter
jurisdiction post-confirmation. (§ 1141(b) was also
reemphasized and the Judgment’s overruling, in
15
practical effect, of Houlik.) Raels also argued that its
reasoning on the § 727(a)(6)(A) standards, and
particularly its reliance on the Gap Period, was
contrary to its own rulings regarding raising issues
for the first time on appeal, and that such
evidentiary gaps should be subject to remand for
further fact finding. Raels’ Petition for Rehearing
was denied.
REASONS FOR GRANTING THE PETITION
I.
THE CIRCUIT COURTS’ CONFLICTS OVER
“RELATED
TO”
BANKRUPTCY
COURT
SUBJECT MATTER JURISDICTION P OSTCONFIRMATION SHOULD BE RESOLVED.
A bankruptcy court exercises subject matter
jurisdiction over civil proceedings that, inter alia,
arise in a bankruptcy case or that relate to a
bankruptcy case. 28 U.S.C. § 1334(b). While § 1334
does not expressly limit the bankruptcy court’s postconfirmation jurisdiction, most courts agree that once
confirmation occurs, the bankruptcy court’s
jurisdiction shrinks. See e.g. In re Resorts Int’l, Inc.,
372 F.3d 154, 165 (3rd Cir. 2004). This Court has
made clear that bankruptcy courts, being court of
limited jurisdiction, “…have no jurisdiction over
proceedings that have no effect on the estate of the
debtor” and that “related to jurisdiction cannot be
limitless.” Celotex, 514 U.S. at 308, n. 6.
The interpretation of a bankruptcy court’s
“related to” jurisdiction post-confirmation has
created a direct and intolerable conflict over this
16
recurring and important issue of bankruptcy law.
The circuit courts are divided whether, after
confirmation of a Chapter 11 plan, the “conceivable
effect” test or the “close nexus” test applies as to
“related to” jurisdiction. The Second Circuit has
explained that a case is “related to” a bankruptcy
proceeding “if the action’s outcome might have any
conceivable effect on the bankruptcy estate.”
Parmalat Capital Fin. Ltd. v. Bank of Am. Corp., 639
F.3d 572, 579 (2nd Cir. 2011).
This expansive
jurisdictional interpretation is also followed by the
Eighth Circuit. See In re Farmland Indus., Inc., 567
F.3d 1010, 1020 (8th Cir. 2009). The Tenth, Sixth
and Federal Circuits also follow the “any conceivable
effect” test. See In re CF & I Fabricators of Utah,
Inc., 150 F.3d 1233, 1237 (10th Cir. 1998); In re
Wolverine Radio Co., 930 F.2d 1132, 1140-43 (6th Cir.
1991) and Phoenix Petroleum, v. U.S., 215 F.3d 1345
at * 5 (Fed. Cir. 1999). Even a contingent outcome
post-confirmation can satisfy the “conceivable effects”
test. Parmalat, 639 F.3d at 579. Other circuits take
a narrower view of “related to” subject matter
jurisdiction by requiring that the matter have a
“close nexus” to the bankruptcy plan (or proceeding),
and that “the confirmed plan must provide for the
retention of the jurisdiction over the dispute.” See In
re Kirkland, 600 F.3d 310, 317 (4th Cir. 2010); In re
Pegasus Gold Corp., 394 F.3d 1189, 1194 (9th Cir.
2005); In re Resorts Int’l, Inc., 372 F.3d at 166-67.
An even narrower interpretation of the bankruptcy
court’s post-confirmation jurisdiction is represented
by the Seventh and Fifth Circuits. In In re Pettibone
Corp. v. Easley, 935 F.2d 120, 122 (7th Cir. 1991), the
Seventh Circuit held that “[o]nce the bankruptcy
17
court confirms a plan of reorganization, the debtor
may go about its business without further
supervision or approval. The firm also is without the
protection of the bankruptcy court. It may not come
running to the bankruptcy judge every time
something unpleasant happens.” This interpretation
is followed by the Fifth Circuit as well. In re Craig’s
Stores of Texas, Inc., 266 F.3d 388, 390 (5th Cir.
2001).
The Sixth Circuit explained its adherence to
the “any conceivable effect” test:
The “related to” inquiry asks not
whether the assertion of the claims
would effect [sic] the bankruptcy estate
but whether the outcome of the claims
would
effect
[sic]
the
estate.
Furthermore, the “related to” inquiry
asks not whether there is a nexus
between the other proceeding and the
settlement agreement but whether there
is a nexus between the other proceeding
and the bankruptcy case.
In re Greektown Holdings, LLC, 728 F.3d 567, 578
(6th Cir. 2014) (internal citations omitted). That
opinion went on to criticize the Eleventh Circuit’s
interpretation of related to jurisdiction in Matter of
Munford, Inc., 97 F.3d 449, 454 (11th Cir. 1994) as
being “subject matter jurisdiction by consent.” 728
F.3d at 578.
18
The Tenth Circuit’s adoption of the “any
conceivable effect” interpretation as a basis for
jurisdiction is the probable explanation for the Tenth
Circuit’s refusal to acknowledge the impact of §
1141(b) on post-confirmation jurisdiction in this case.
Under § 1141(b), once a Chapter 11 plan is
confirmed, what was property of the bankruptcy
estate, vests back into the (reorganized) debtor
unless the plan specifically provides otherwise.
Contrast that with § 363(b), which provides in
relevant part: “[t]he trustee, after notice and a
hearing, may use, sell or lease, other than in the
ordinary course of business, property of the estate…”
(emphasis added). In other words, there is no
“property of the estate” remaining after a Chapter 11
plan is confirmed, and thus §363 is inapplicable to
post-confirmation sales.
The confirmation of a
Chapter 11 plan causes the cessation of
administration of the bankruptcy estate because the
estate’s property has been distributed or vested back
into the reorganized debtor. Valley Historic Ltd.
Partnership v. Bank of New York, 486 F.3d 831, 828
(4th Cir. 2007). See also In re Cary Metal Prod., Inc.,
23 F.3d 1159, 1164 (7th Cir. 1994).
Specific to the survival of § 363 powers postconfirmation that the Judgment permits, one court
explained that §363(b) and (f) control asset sales
prior to plan approval while § 1123(a)(5)(D) and §
1141(c) govern sales made pursuant to a Chapter 11
plan, and found that it had “no continuing
jurisdiction with regard to the type of sale that is
before the court [under § 363(f)], because Section
363(f) is not operational once the plan is confirmed.”
19
In re Golf, LLC, 322 B.R. 874, 877 (Bankr. D. Neb.
2004).
Similarly, another court looked to § 1141(b)
and determined that Ҥ 363 has no applicability after
a Chapter 11 plan is confirmed.” Upon confirmation
and consummation of a plan, “…the property’s
relationship to the estate, and therefore the
bankruptcy court’s jurisdiction over the property
ends.” In re Western Integrated Networks, LLC, 329
B.R. 334, 341 (Bankr. D. Colo. 2005). See also In re
Altmeyer, 2014 WL 4959146 at * 2 (Bankr. S.D. Ill.
Oct. 2, 2014).
Confirming the basic jurisdictional error
represented by the above referenced portions of the
Judgment is its reliance upon § 1107(a), which refers
to the powers of a “debtor-in-possession.” (App. at
7a.) Similar to the effect of plan confirmation on
property of the bankruptcy estate, the debtor loses
its debtor-in-possession powers under § 1107 when a
Chapter 11 plan is confirmed. See In re United
Operating, LLC, 540 F.3d 351, 355 (5th Cir. 2008).
The Judgment’s reference to core proceeding
as a basis for jurisdiction (App. at 8a) is equally
erroneous. 4 While 28 U.S.C. § 157(b)(2)(N) refers to
property sales as “core proceedings,” that provision
does not confer post-confirmation jurisdiction on
4. It is puzzling that the Judgment cites to Fed. R. Bankr. P.
6004 as a basis for jurisdiction considering the limited
substantive effect to be accorded to the Federal Rules of
Bankruptcy Procedure under 28 U.S.C. § 2075. See e.g. In re
Layton, 480 B.R. 392, 399 (Bankr. N.D. Fla. 2012).
20
bankruptcy courts. See Zerand-Bernal Group, Inc. v.
Cox, 23 F.3d 159, 162 (7th Cir. 1994). Unlike 28
U.S.C. § 157(a), the subsection addressing “core
proceedings,” 28 U.S.C. § 157(b), does not include the
phrase “related to.” A proceeding is not a core
proceeding if it does not impact upon property of the
estate. Matter of Xonics, Inc., 813 F.2d 127, 131-32
(7th Cir. 1987). See also In re Ener1, Inc., 558 B.R.
91, 95 (Bankr. S.D. N.Y. 2016).
It is ironic that the instant matter had its
origins with the Bankruptcy Court’s reliance upon
the jurisdictional ruling in Houlik, which after
acknowledging the impact of § 1141(b), adopted the
“close nexus” rule for post-confirmation jurisdiction
issues. 481 B.R. at 675. By finding that postconfirmation a bankruptcy court continues to have
jurisdiction to order the sale of property under §
363(f), the Tenth Circuit appears to have effectively
reversed Houlik in order to allow an expansive postconfirmation jurisdiction for bankruptcy courts.
In summary, the Judgment has the effect of
allowing sales of assets free and clear of liens after a
Chapter 11 plan is confirmed, even though there is
no remaining bankruptcy estate. Allowing such a
powerful “tool” while the debtor is no longer under
the supervision of the bankruptcy court is an
invitation to erode the concept that bankruptcy
courts are courts of limited jurisdiction.
More
important, the Judgment impermissibly renders §
1141(b) superfluous.
See Conn. Nat’l Bank v.
Germain, 503 U.S. 249, 253 (1992).
Indeed the
Judgment effectively rewrites § 363(b) so as to omit
21
the phrase “property of the estate.” See Utility Air
Reg. Group v. E.P.A., 573 U.S. 302, 328 (2014)
(rewriting or supplementing statutes under the guise
of interpretation is improper). The effect of this
jurisdictional ruling in the Judgment was to
determine that the Sale Order was a “lawful order”
as that term is used in § 727(a)(6).
Review by this Court is necessary to ensure
the Bankruptcy Code’s efficient administration in the
crucial area of bankruptcy courts’ jurisdiction once a
Chapter 11 plan is confirmed. There is an overriding
importance of achieving national “uniform[ity]” in
the bankruptcy context. See U.S. Const. Art. I, § 8,
cl. 4. Particular to this case and the need for
uniformity, is that it is likely Raels would have
prevailed in a circuit that adhered to a narrower
jurisdictional view as represented by those courts
following the close nexus test for post-confirmation
jurisdiction. The conflict over the extent of the
bankruptcy courts’ jurisdiction post-confirmation will
persist until this court intervenes.
II.
IN DECIDING § 727(a)(6)(A) PROCEEDINGS ,
ALL COURTS SHOULD APPLY A STANDARD
OF STRICT CONSTRUCTION AGAINST THE
OBJECTING
PARTY
AND
LIBERAL
CONSTRUCTION IN FAVOR OF DEBTOR S UCH
THAT A DEBTOR’S MISTAKE OR FAILURE TO
EXPLAIN THE DISOBEYANCE OF AN ORDER
DOES NOT RESULT IN A DENIAL OF
BANKRUPTCY DISCHARGE.
22
In § 727(a)(6)(A) proceedings, most courts
recognize that a denial of discharge is a harsh and
extraordinary measure, which is contrary to the
general policy of the Bankruptcy Code of giving
Chapter 7 debtors a “fresh start.” See e.g. In re
Jordan, 521 F.3d 430, 433 (4th Cir. 2008); In re
Osborne, 476 B.R. 284, 292 (Bankr. D. Kan. 2012).
To foster that policy, most courts agree that in all §
727 proceedings, the law is to be construed strictly
against those who object to the debtor’s discharge
and liberally in favor of the debtor. Jordan, 521 F.3d
at 433; In re Hicks, 2006 WL 6810987 at * 8 (9th Cir.
BAP, Feb. 1, 2006); In re Leone, 463 B.R. 229, 242
(Bankr. N.D. N.Y. 2011); In re Harmon, 379 B.R. 182,
187 (Bankr. M.D. Fla. 2007). However, it does not
appear that the Tenth Circuit applies this statutory
construction principle to § 727(a)(6)(A) proceedings.
As to the instant case, it is quite clear this judicial
policy was not a consideration in the Judgment.
In
the
Judgment’s
evaluation
of
§
727(a)(6)(A)’s application hereto, the Tenth Circuit
relied upon its earlier precedent in Standiferd v.
United States Trustee, 641 F.3d 1209 (10th Cir. 2011).
While Standiferd looked in part to the Fourth
Circuit’s decision in Jordan for much of its analysis
of § 727(a)(6)(A), it notably did not include or adopt
that part of Jordan which held that “[t]he statute is
construed strictly against the party seeking
revocation and liberally in the debtor’s favor.”
Jordan, 521 F.3d at 433. Consistent with Standiferd,
the Judgment in this case only requires that a
debtor’s “refusal” to obey an order be found to be
“willful” without explaining the criteria for
23
determining such an ambiguous term (App. at 10a).
Indeed after referencing the “willful” standard, the
Judgment emphasizes its prior holding in Standiferd
that “the Code does not grant the ‘substantial benefit’
of discharge ‘indiscriminately’…” (App. at 10a).
Contrast that with the Fourth Circuit’s explanation
that “[t]he term used in § 727(a)(6)(A) is refused not
failed.” Jordan, 521 F.3d at 433. That decision went
on to favorably cite other precedent requiring the
“showing of a willful or intentional act” in order to
show that the debtor refused to obey the lawful
order. Id. at 434. To refine that standard, the
Fourth Circuit quoted from a lower court: “[t]he
trustee must show more than mere failure to obey
the court's order that results from inadvertence,
mistake, or inability to comply...” Id. (Emphasis
added, internal citations omitted.)
Similarly,
another circuit court determined that “[a] mere
failure to obey the order, resulting from
inadvertence, or an ability to comply, is insufficient;
the party seeking revocation must demonstrate some
degree of violation or willfulness on the part of the
debtor.” In re Matos, 267 Fed.Appx. 884, 886 (11th
Cir. 2008). See also In re Fatsis, 435 B.R. 814, 818
(Bankr. D. Mass. 2010) (scienter must be shown).
Contrast these decisions with the Judgment, which
effectively held that a “failure” to explain
disobeyance of the order results in the denial of
discharge.
The Judgment in this instant case does not
reflect that any of the above factors were considered.
A liberal construction applied to this matter would
have mandated that Raels’ discharge would not have
24
been denied especially if the Tenth Circuit would
have recognized that a “mistake” negates
“willfulness.” In the Judgment, the Tenth Circuit
held that “[a] party acts willfully when he fails to
comply with a court order even if he subjectively
believes the order was invalid.” (App. at 11a.) Such
a position negates the defense of mistake or
inadvertance by a debtor as is recognized by the
Fourth and Eleventh Circuits.
“Willful” is not defined in the Bankruptcy
Code. (Nor is “refused.”) However, in Kawaauhau v.
Geiger, 523 U.S. 57, 61 (1998), this court has had
occasion to examine that term as is used in §
523(a)(6). In that decision, this Court likened the
willful standard to a subjective motive to do harm
when it stated that § 523(a)(6) “triggers in the
lawyer’s mind the category ‘intentional torts,’ as
distinguished from negligent or reckless torts.” Id. at
61. See also Miller v. J.D. Abrams, Inc., 156 F.3d
598, 603-04 (5th Cir. 1998). While the circuit courts
(and lower courts) are divided post-Geiger as to the
amount of subjectivity that is necessary to except a
debt from discharge under § 523(a)(6), Geiger is clear
that negligence and even recklessness will not satisfy
the willfulness standard. This Court will also likely
determine the issue of subjective intent for purposes
of § 362(a) violations in Taggart v. Lorenzen, Case
No. 18-489 (cert. accepted Jan. 4, 2019). Similar to
this case, Taggart is likely to resolve the circuit court
split as to what the standard is for a willful violation
of the automatic stay if there is knowledge of the stay
and the creditor intended the actions which
constitute the violation or whether a good faith belief
25
precludes a finding of willful violation. (See In re
Pratt, 462 F.3d 14, 21 (1st Cir. 2006) (objective
standard) and In re Taggart, 888 F.3d 438 (9th Cir.
2018) (subjective standard).) This Court should
resolve the meaning of “willful” as that term is used
in bankruptcy law.
The courts are seemingly unified that under §
727(a)(6)(A), “the party objecting to discharge
satisfies this burden [refused to obey] by
demonstrating the debtor received the order in
question and failed to comply with its terms.”
Jordan, 521 F.3d at 433. However, contrary to the
line of cases suggesting a showing of a debtor’s
subjective intent as part of the willfulness
requirement is required, the burden shifts to the
debtor “to explain noncompliance.” According to this
standard, it is apparently presumed in the Tenth
Circuit that there was a willful and intentional
violation of an order if the debtor for whatever reason
does not explain noncompliance with the order. This
construction of § 727(a)(6)(A) is improper under the
liberal construction standard normally accorded to §
727(a) cases, as is illustrated by the instant case. In
other words, contrary to other § 727(a) (and § 523(a)),
conjecture or a technical omission by debtor could
cause the loss of the discharge under this position.
In the § 727(a)(6)(A) context, the Eleventh Circuit
noted that “[t]he reason for denying a discharge must
be real and substantive, not merely conjectural.”
Matos, 267 Fed.Appx. at 886. In the instant case, the
Tenth Circuit presumed that because there was
allegedly nothing in the trial record to indicate that
Raels relied on advice of counsel during the Gap
26
Period, the Raels must have been relying only upon
themselves in their alleged violation of the Sale
Order or simply because they did not pay Wells
Fargo, they willfully violated the Sale Order. The
Judgment displays the “conjectural or technical”
analysis the Eleventh Circuit warned against. This
is willfulness by default, and hardly comports with a
liberal construction of the law and facts in this
matter.
The District Court found, and the Tenth
Circuit affirmed, that because Raels had only
addressed their reasons for withholding payment to
Wells Fargo after the Gap Period, they had failed to
meet their burden of proof under § 727(a)(6)(A), and
therefore willfully and intentionally violated the Sale
Order. (App. at 33a-36a.) However, the standard is
“refused” not “failed.” Jordan, 521 F.3d at 433. The
District Court assumed the fact finding role by
inferring Raels’ willful and intentional violation of
the Sale Order merely because its review of the
record did not find that there had been a sufficient
explanation by the Raels for not turning over the
proceeds when the sale closed. In other words,
silence actually means a willful violation.
The
District Court found the advice of counsel defense did
not become applicable until approximately eight
months later even though they were represented by
the same attorney during the Gap Period. Not only
did the District Court decide factual issues de novo
(Raels’ willfulness in the Gap Period), it based its
ruling on an argument that had never been raised by
the United States Trustee in the Bankruptcy Court.
This new argument as to the lack of advice of counsel
27
should not have been considered at the appellate
level. Tele-Communications, Inc. v. CIR, 104 F.3d
1229, 1232-33 (10th Cir. 1997). By not raising this
issue during the trial, neither the Bankruptcy Court
nor Raels were given an opportunity to address any
advice of counsel provided in the Gap Period. More
important, Raels were precluded from pointing out
during the trial the evidence that showed the advice
of counsel defense was applicable for all periods of
time. This constitutes a lack of fair notice as to this
new contention. In re Fustolo, 896 F.3d 76, 86-87 (1st
Cir. 2018) (reversal based on lack of fair notice of
new claim relating to § 727(a)(6)).
There is nothing about the above scenario that
reflects a willful and intentional violation of the Sale
Order by Raels. Rather, the District Court and the
Tenth Circuit inferred a willful and intentional
violation merely because there was, arguendo,
silence by Raels’ counsel (or lack of explanation) as to
the Sale Order during the Gap Period. It represents
at most a mere failure. Under the Jordan and Matos
standard, this strict liability type result would not
have occurred. As Jordan indicates “…the word
‘refused’ does in fact require the showing of a willful
or intentional act, not merely the showing of a
mistake or inability to comply.” Jordan, 521 F.3d at
434. Not only is the Judgment devoid of any such
analysis, it in fact implies that the element of
willfulness requires only knowledge of the order and
that the debtor intended the actions that constitute
the violation of the order.
28
In the instant case, the rules shifted for Raels.
They were denied relief against Wells Fargo for a
stay violation because there was no subject matter
jurisdiction over the Parcel that gave rise to the Sale
Order. Relying on that holding, they understood that
the Sale Order was null and void because the
Bankruptcy Court ruled that it did not have subject
matter jurisdiction over the Parcel, and accordingly
Raels distributed the sale proceeds in a manner that
was contrary to the Sale Order (and also because it
was discovered that Wells Fargo had no lien against
the sale proceeds). Then the rules changed again
and the courts decided that the Bankruptcy Court
did have subject matter jurisdiction over the Parcel.
This is the sort of “mistake” that courts (other than
the Tenth Circuit) would recognize as being
insufficient to invoke the “death penalty” in
bankruptcy law – denial of discharge.
Uniformity of bankruptcy law also compels
that this Court grant the petition on this issue as
well. The conflicting views as to what is a “willful”
act under bankruptcy law is ripe for this Court’s
review. Most important, is that Raels’ discharge
hangs in the balance. In the instant case, the Tenth
Circuit equates the failure or absence of explanation
for the violation of a lawful order as being willful,
which conflicts with most other courts including the
Fourth and Eleventh Circuits.
III.
THE STANDARD FOR DETERMINING A
COURT’S SUBJECT MATTER JURISDICTION
SHOULD NOT CHANGE DEPENDING ON WHEN
IN THE LITIGATION THIS ISSUE IS R AISED
29
SUCH THAT A JURISDICTIONAL ERROR WILL
ALWAYS RENDER A JUDGMENT VOID.
Section 727(a)(6)(A) requires a showing of
debtor’s refusal to obey a “lawful” order. Even if this
Court determines that the Bankruptcy Court did not
have the “related to” jurisdiction to enter the Sale
Order, the Raels could nevertheless still have their
discharge denied for their failure (or neglect) in
obeying it. Generally the enforceability of an order
or judgment entered by a court without jurisdiction is
void or unenforceable. Because of the Bankruptcy
Court’s finding that it did not have subject matter
jurisdiction to find Wells Fargo in contempt (almost 6
months after the Sale Order was entered), Raels
sought to have the Sale Order determined to be void
under Fed. R. Bankr. P. 9024(b)(4) (Fed. R. Civ. P.
60(b)(4)). This motion was denied by all three courts
reviewing it by finding there was subject matter
jurisdiction for the Sale Order.
A court must refrain from taking any action
regarding the merits of a case if subject matter
jurisdiction is lacking. Kontrick v. Ryan, 540 U.S.
443, 455 (2004).
It follows then that “[a]
jurisdictional error will render a judgment void.”
United Student Aid Funds, Inc. v. Espinosa, 559 U.S.
260, 291 (2010). See also Vallely v. Northern Fire &
Marine Ins. Co., 254 U.S. 348, 353 (1920) (orders
issued when there is no jurisdiction are “nullities”).
In other words, if there was never a jurisdictional
basis for the Sale Order, the Sale Order should have
been vacated. In U.S. Catholic Conf. v. Abortion
Rights Mobilization, Inc., 487 U.S. 72, 76 (1988), this
30
Court reversed a contempt order by holding that “…if
a district court does not have subject-matter
jurisdiction over the underlying action, and the
process was not issued in aid of determining that
jurisdiction, then the process is void…”
The
Eleventh
Circuit
acknowledges
this
basic
jurisdictional principle:
“[a]lthough it is rather
unusual for a court to learn…that its prior decision
lacked a jurisdictional basis, the few courts
confronting this issue uniformly have vacated their
prior decision.” IAL Aircraft Holding, Inc. v. F.A.A.,
216 F.3d 1304, 1306 (11th Cir. 2000).
The Bankruptcy and District Courts held that
the Sale Order was a “lawful” order for purposes of §
727(a)(6)(A) because any jurisdictional error
regarding the Sale Order was not “a plain usurpation
of power” citing to Gschwind v. Cessna Aircraft Co.,
232 F.3d 1342, 1346 (10th Cir. 2000). The “court does
not usurp its power when it erroneously exercises
jurisdiction.” Id. (App. at 43a and 70a.) See also
Wendt v. Leonard, 431 F.3d 410 (4th Cir. 2005) and
Hunter v. Underwood, 362 F.3d 468 (8th Cir. 2004).
Clearly the plain usurpation doctrine is driven by
other policies than subject matter jurisdiction.
Nevertheless there are few judicial policies that enjoy
a higher priority than determining subject matter
jurisdiction. See Arbaugh v. Y & H Corp., 546 U.S.
500, 514 (2006).
Issues of subject matter jurisdiction may be
raised at any time. Henderson ex rel. Henderson v.
Shinseki, 562 U.S. 428, 434 (2011). However, as
demonstrated by Raels’ appeal, what constitutes
31
subject matter jurisdiction and its effect on the
underlying case will vary in the Tenth Circuit
depending on when and how the jurisdiction issue
was raised. In those courts requiring a showing of
“plain usurpation of power,” the meaning of subject
matter jurisdiction becomes much more flexible when
the issue is raised later in the case (such as under
Rule 60(b)(4)). Such floating standards, which have
no statutory basis, should not be condoned by this
Court on such a fundamental and basic issue as a
court’s subject matter jurisdiction.
The Judgment cited to Maness v. Meyers, 419
U.S. 449 (1975) for the proposition that parties must
obey an order until it is reversed by orderly and
proper proceedings. However, that rule was made
contingent on the court having jurisdiction. The
court in Maness held that “[t]he orderly and
expeditious administration of justice by the courts
requires that an order issued by a court with
jurisdiction over the subject matter and person must
be obeyed by the parties until it is reversed by
orderly and proper proceedings.”
Id. at 459.
(Emphasis added, internal citations omitted.)
In like manner, this Court conditioned the
enforceability of a judgment or order on subject
matter jurisdiction in Walker v. City of Brimingham,
388 U.S. 307 (1967), which the Tenth Circuit also
relied upon. Walker made clear in that case that the
jurisdiction of the district court that was enforcing an
injunction through its contempt power was not an
issue. The Judgment’s reliance upon GTE Sylvania,
Inc. v. Consumers Union of the U.S., Inc., 445 U.S.
32
375 (1980) is similarly misapplied: “There is no
doubt that the Federal District Court in Delaware
had jurisdiction to issue the temporary restraining
order and preliminary injunction.” Id. at 386.
The circuit courts are divided as to what
constitutes a “void” judgment for purposes of Rule
60(b)(4). As reflected in IAL Aircraft Holding, the
Eleventh Circuit considers federal court jurisdiction
as much narrower than the Tenth Circuit (and other
circuits). This judge made law of having to prove the
nearly impossible (and subjective) standard of “plain
usurpation of power” has created a hollow remedy
that ignores the basic constitutional principle that
federal courts are courts of limited jurisdiction. It is
necessary that this Court intervene in order to clarify
the subject matter jurisdiction of federal courts
insofar as it relates to “lawful” orders.
CONCLUSION
For these reasons, the petition for a writ of
certiorari should be granted.
Respectfully submitted,
Stephen R. Winship
Winship & Winship, P.C.
145 S. Durbin Street, Suite 201
Casper, WY 82601
(307) 234-8991
steve@winshipandwinship.com
Counsel for Petitioners
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