In re: SCH Corp., v.

• Court: Court of Appeals for the Third Circuit
• Decided: February 24, 2015
• Docket: 14-2888
• Status: Unpublished

Opinion

NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _______________

No. 14-2888 _______________

In re: SCH CORP., et al.,

Debtors

CFI CLASS ACTION CLAIMANTS,

Appellant _______________

On Appeal from the United States District Court for the District of Delaware (D.C. Civil No. 1-12-cv-01576) District Judge: Hon. Sue L. Robinson ____________

Argued December 9, 2014

BEFORE: VANASKIE, GREENBERG, AND COWEN, Circuit Judges

(Filed: February 24, 2015) _______________

OPINION* _______________

_______________ * This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding precedent.

Irv Ackelsberg, Esq. (Argued) Howard I. Langer, Esq. Langer, Grogan & Diver 1717 Arch Street Suite 4130, The Bell Atlantic Tower Philadelphia, PA 19103

Christopher D. Loizides, Esq. Loizides 1225 King Street, Suite 800 Wilmington, DE 19801

Counsel for Appellant

Thomas H. Kovach, Esq. Anthony M. Saccullo, Esq. A.M. Saccullo Legal 27 Crimson King Drive Bear, DE 19701

John D. McLaughlin, Jr., Esq. (Argued) Ciardi, Ciardi & Astin 1204 North King Street Wilmington, DE 19801

Counsel for Appellee

COWEN, Circuit Judge.

For the second time, this Court must address an appeal filed by the “CFI

Claimants” with respect to post-confirmation bankruptcy proceedings arising out of the

Chapter 11 bankruptcy of SCH Corp., American Corrective Counseling Services, Inc., and

ACCS Corp. (“Debtors”). The District Court affirmed the order of the Bankruptcy Court

granting the motion filed by Appellee Carl Singley, the Debtors’ disbursing agent,

litigation designee, and responsible officer (“Responsible Officer”), to approve the

settlement he reached with the plan funder, National Corrective Group, Inc. (“NCG”),

2 pursuant to Federal Rule of Bankruptcy Procedure 9019. We determine that this

purported settlement really constituted a plan modification governed by 11 U.S.C. § 1127.

Accordingly, we will vacate the District Court’s order and remand with instructions for

the District Court to vacate the Bankruptcy Court’s order and to direct the Bankruptcy

Court to consider the purported settlement as a request for a plan modification pursuant to

§ 1127.1

I.

The Debtors were in the debt collection business when they filed for Chapter 11

bankruptcy in the District of Delaware in January 2009. Previously, class action

proceedings were filed against the Debtors in California, Florida, Indiana, and

Pennsylvania, alleging, inter alia, violations of the Fair Debt Collection Practices Act

(“FDCPA”). The plaintiffs in the class action cases filed in the Northern District of

California, the Middle District of Florida, and the Northern District of Indiana shared a

common legal team (“CFI Counsel”). These “CFI Claimants” constituted the largest

group of unsecured creditors in the bankruptcy cases.

On February 10, 2009, the Bankruptcy Court approved the Debtors’ motion to

conduct an auction for the sale of their operating assets. The Debtors then filed a motion

to approve the sale of substantially all of their assets to Levine Leichtman Capital Partners

1 Alternatively, the CFI Claimants argue that the Bankruptcy Court misapplied the standard governing the review of proposed settlements under Rule 9019 and approved a fundamentally flawed settlement. Because the purported settlement should have been treated as a request for a plan modification in the first place, we need not—and do not— reach their additional contentions. 3 III, L.P. (“LLCP”), an investment firm and the Debtors’ largest secured creditor. The CFI

Claimants objected and moved to dismiss the bankruptcy cases. On March 31, 2009, the

Bankruptcy Court denied the CFI Claimants’ motion to dismiss and authorized the transfer

of the Debtors’ assets to NCG. NCG is a subsidiary of LLCP. The sale was

consummated on April 11, 2009.

After the CFI Claimants rejected the initial proposed plan of liquidation because it

included third-party releases that would have barred claims against LLCP and NCG,

LLCP filed a proposed amended plan. With some changes, this revised plan was actively

supported by the CFI Claimants. The plan was confirmed by the Bankruptcy Court in a

November 2, 2009 order. LLCP served as the plan proponent and sponsor, while NCG

functioned as the plan funder. NCG agreed to pay up to $200,000 per year for five

years—with the first payment to be made in April 2010 and the final payment due in April

2014. However, these payments were subject to offsets for unpaid professional fees and

up to $500,000 for “Post-Sale Losses” incurred by LLCP or NCG in defending against

future consumer lawsuits. The Bankruptcy Court approved Singley’s appointment as the

Responsible Officer. It also expressly retained jurisdiction to administer and interpret the

plan’s provisions, modify any provisions of the plan to the extent permitted by the

Bankruptcy Code, and enter such orders as may be necessary or appropriate in furtherance

of the successful implementation of the plan.

CFI Counsel filed a lawsuit in the Northern District of California against NCG

(which was now operating the Debtors’ debt collection business) and LLCP, alleging,

4 inter alia, violations of the FDCPA. CFI Counsel also assisted in a class action lawsuit

filed in the Middle District of Pennsylvania against NCG and LLCP. “To their dismay,

based on their dual representation of the CFI Claimants and the plaintiffs in the new

California litigation, NCG moved to disqualify CFI Counsel in both the pre- and post-

bankruptcy litigation in that State. The motions in both cases were granted.” In re SCH

Corp., 569 F. App’x 119, 120 (3d Cir. 2014). The Ninth Circuit also denied CFI

Counsel’s petition for a writ of mandamus. CFI Counsel withdrew from both the

California and Pennsylvania proceedings. A CFI Class Claimant filed a class action

malpractice suit in the California state courts alleging conflicts of interest against several

members of the CFI legal team and their law firms, and the Responsible Officer

commenced a similar adversary action against CFI Counsel who filed the post-bankruptcy

California case against NCG and LLCP (as well as their clients). The Bankruptcy Court

subsequently dismissed this adversary proceeding.

NCG asserted its offset rights with respect to the annual Post-Sale Payments, and,

therefore, very little, if any, funds have been distributed to unsecured creditors under the

confirmed plan. In particular, it claimed offsets for litigation expenses reimbursed by

insurance. The CFI Claimants moved to dismiss the bankruptcy cases for lack of good

faith or, in the alternative, to enforce the terms of the confirmed plan. The Responsible

Officer filed a motion to approve a settlement he reached with NCG to resolve the funding

dispute. Under this proposed settlement, NCG’s payment obligation for the period ending

in April 2014 was fixed at $233,631. NCG also agreed to make three additional annual

5 payments of up to $100,000 in 2015, 2016, and 2017. Although NCG waived its rights to

take offsets for any expenses that may or have been reimbursed through insurance

coverage or to apply historic offset rights (i.e., those arising before the effective date of the

settlement) against the future payments, these future payments were still subject to offsets

for future litigation expenses “provided, however, that such Post-Sale Losses shall not

reduce the annual payment on the sixth, seventh and eighth anniversaries beyond a

$25,000 ‘floor.’” (A212 (emphasis omitted).) In addition, the Responsible Officer,

LLCP, and the Responsible Officer’s own counsel agreed to certain monetary concessions.

The CFI Claimants objected to the proposed settlement on a number of grounds.

According to them, “[t]he proposed three-year extension of the Plan is, in effect, a

proposed, post-confirmation request to modify the Plan” that “would be governed by 11

U.S.C. § 1127(b), and, by incorporation, 11 U.S.C. § 1129.” (A77.) Noting that the

Bankruptcy Court must review a proposed settlement under the four-factor standard

established by this Court in In re Martin, 91 F.3d 389 (3d Cir. 1999), the CFI Claimants

argued that “‘the paramount interest of the creditors’—the fourth Martin factor—would

not be furthered in any way by the compromise.” (A75.) The CFI Claimants also

questioned whether the settlement was the result of arms-length negotiations.2 The

2 It appears that Singley was “Of Counsel” to Ciardi, Ciardi & Austin (“CC & A”). CC&A previously represented LLCP in the bankruptcy proceedings. In connection with Singley’s appointment as the Responsible Officer, it was agreed that CC&A and LLCP would execute a conflicts waiver, CC&A would terminate its representation of LLCP in the bankruptcy cases, neither CC&A nor the Responsible Officer would represent LLCP in such cases, and, if a matter arises in these cases that may be adverse to LLCP, the Responsible Officer would obtain conflicts counsel. In a waiver letter, CC&A agreed not 6 Responsible Officer, in turn, moved to disqualify CFI Counsel. However, his motion was

subsequently withdrawn.

The Bankruptcy Court conducted an evidentiary hearing on the CFI Claimants’

motion to dismiss as well as the Responsible Officer’s motion to approve the settlement.

In an October 12, 2012 order, the Bankruptcy Court granted the Responsible Officer’s

motion, approved and authorized the parties to execute and implement the settlement, and

retained jurisdiction to interpret and enforce the settlement. It also entered a separate

order denying the CFI Claimants’ motion to dismiss. In an oral decision delivered by

telephone on September 14, 2012, the Bankruptcy Court considered the settlement under

the Martin standard (i.e., the probability of success in the underlying litigation, likely

collection difficulties, the complexity of the litigation as well as the expense,

inconvenience, and delay necessarily attending it, and the paramount interest of the

creditors). In addition to disposing of the CFI Claimants’ challenge to the “bonafieties

[phonetic] of the settlement as a threshold matter” (A109) and their contention that the

settlement should be rejected because “no distribution will ever be made to unsecured

to bring any causes of action against NCG (or its affiliates) on behalf of the Responsible Officer in the bankruptcy cases or in any other matter. Furthermore, “Ciardi will also not disclose any Confidential Information [which includes “all information of which unauthorized disclosure could be detrimental to the interests of NCG”] of NCG or information protected by the attorney-client privilege of NCG to Singley.” (A228.) CC&A represented LLCP as local counsel in litigation in the Middle District of Pennsylvania, represented LLCP as local counsel in the bankruptcy cases, and “currently represents LLCP on various matter that are not related to the Bankruptcy Case or the matters for which Singley has retained Ciardi.” (A229.) CC&A represented the Responsible Officer in the settlement negotiations (and has continued to represent the Responsible Officer in the post-confirmation Bankruptcy Court proceedings as well as in 7 creditors” (A112), the Bankruptcy Court determined that the Responsible Officer satisfied

the first, third, and fourth Martin factors (and indicated that the second factor likewise

weighed, at least in part, in his favor).

The CFI Claimants appealed to the District Court from the denial of their motion to

dismiss. The District Court dismissed the appeal as equitably moot in a July 8, 2013

order. On June 17, 2014, we vacated the District Court’s dismissal order and remanded

for further proceedings “[b]ecause the District Court dismissed the appeal despite a

finding that reversing the plan of liquidation would not result in any inequity, and because

our opinion [addressing the equitable mootness doctrine] in In re Semcrude, L.P., 728

F.3d 314 (3d Cir. 2013), came after the District Court’s decision in this case.” SCH

Corp., 569 F. App’x at 122. We also questioned whether the District Court considered the

full range of relief the CFI Claimants sought in their motion (e.g., enforcement of the

terms of the confirmed plan, removal of the Responsible Officer, and sanctions against

NCG) and the specific effect such relief would have on third parties.

The CFI Claimants likewise appealed to the District Court from the Bankruptcy

Court’s order granting the Responsible Officer’s motion to approve the settlement. On

April 2, 2014, the District Court dismissed their appeal and affirmed the order of the

Bankruptcy Court. According to the District Court, the Bankruptcy Court properly

applied the Martin factors to determine that the settlement at issue here was fair and

equitable and adequately addressed the CFI Claimants’ allegations of collusion as well as

the appellate proceedings before both the District Court and this Court). 8 their theory that “‘NCG began a multi-forum strategy to use the anticipated litigation and

plan provisions concerning offsets as weapons to drive a wedge between the CFI

consumers and their counsel.’” In re: SCH Corp., Bank. No. 09-10198 (BLS), Civ. Nos.

12-1576-SLR, 2014 WL 1340234, at *4 (D. Del. Apr. 2, 2014) (citation omitted). In a

footnote, the District Court disposed of the CFI Claimants’ argument that the settlement

was actually a plan modification subject to § 1127. According to the District Court, the

CFI Claimants offered little support for this argument, which “does not appear to have

been raised before.” Id. at *4 n.5. “[The Responsible Officer’s] response that the

settlement resolves a funding dispute and does not modify the amended plan is consistent

with the bankruptcy court’s statement that, ‘[t]rying the issue would therefore likely

involve witnesses’ recollections as to the parties’ intentions and expectations in

negotiations and a deal that is now three years past.’”3 Id. (quoting A110-A111).

II.

Under § 1127(b), the plan proponent or reorganized debtor may at any time modify

a confirmed plan “before substantial consummation of such plan.”4 However, “[s]uch

3 The CFI Claimants filed a motion for rehearing with the District Court. The District Court denied their motion in a May 7, 2014 order, explaining that it addressed “the CFI claimants’ argument that the bankruptcy court’s extension of the term of the confirmed plan violated 11 U.S.C. § 1127(d).” (A59 (citing SCH Corp., 2014 WL 1340234, at *4).) 4 The District Court had jurisdiction over the CFI Claimants’ appeal from the Bankruptcy Court’s order granting the Responsible Officer’s motion to approve the settlement pursuant to 28 U.S.C. § 158(a)(1). We possess appellate jurisdiction over their appeal from the District Court’s order under § 158(d)(1) and 28 U.S.C. § 1291. It is uncontested that bankruptcy court orders are generally reviewed under an abuse of discretion standard. “Our review of the District Court’s decision effectively amounts to 9 plan as modified under this subsection becomes the plan only if circumstances warrant

such modification and the court, after notice and a hearing, confirms such plan as

modified, under section 1129 of this title.” Although “‘modification’ is not defined in the

Bankruptcy Code, courts that have analyzed the issue of whether a subsequent change to a

confirmed plan of reorganization constitutes a ‘modification’ distinguish between the

courts’ inability to ‘modify’ a plan and their ability to ‘clarify a plan where it is silent or

ambiguous’; and/or ‘interpret’ plan provisions to further equitable concerns.’” 5 In re

review of the bankruptcy court’s opinion in the first instance.” In re Hechinger Inv. Co. of Del., 298 F.3d 219, 224 (3d Cir. 2002) (citing In re Telegroup, Inc., 281 F.3d 133, 136 (3d Cir. 133, 136 (3d Cir. 2002)). An abuse of discretion is committed if the bankruptcy court’s ruling “‘rests upon a clearly erroneous finding of fact, an errant conclusion of law, or an improper application of law to fact.’” In re 15375 Mem’l Corp., 589 F.3d 605, 616 (3d Cir. 2009) (citing In re SGL Carbon Corp., 200 F.3d 154, 159 (3d Cir. 1999)).

Evidently suggesting that this case is now moot, the Responsible Officer claims that “the ‘CFI’ acronym is no longer applicable” and that it is unclear what will happen to any funds that may be distributable to those purported CFI Claimants. (Appellee’s Brief at 16.) He notes that a final report was filed in the bankruptcy cases and that, on October 16, 2013, a final decree and order was entered administratively closing these cases. According to the Responsible Officer, the California pre-bankruptcy proceeding was dismissed with prejudice (and the class itself was de-certified), the Florida case was settled prior to class certification, and “the lone remaining class members are those in the class certified in [Indiana], which is currently dismissed pending re-opening.” (Id. at 17.) It appears that a settlement was approved in the post-bankruptcy lawsuit filed in California against NCG and LLCP (and that this settlement disposed of the Pennsylvania proceeding against these two entities). However, we agree with the CFI Claimants that such circumstances have not mooted their current appeal. The terms “CFI Class Actions,” “CFI Class Action Claimants,” and “CFI Action Monetary Claims” were expressly defined in the confirmed plan itself, and it appears that these categories were not made contingent on the outcome of the various class action proceedings. After all, any claims against the Debtors in the California, Florida, and Indiana cases were stayed as a result of their Chapter 11 filings, and these class action cases then went forward against the remaining co-defendants. 5 The District Court suggested that the CFI Claimants failed to raise their plan 10 Ampace Corp., 279 B.R. 145, 152-53 (Bankr. D. Del. 2002) (citing In re Beal Bank,

S.S.B., 201 B.R. 376, 380 (E.D. Pa. 1996); In re Harness, 218 B.R. 163, 166 (D. Kan.

1998)).

The Bankruptcy Court abused its discretion by failing to consider the purported

settlement as a modification of a confirmed plan governed by § 1127. According to the

Responsible Officer and the District Court, the proposed settlement simply resolved a

dispute concerning the interpretation of the plan confirmed by the Bankruptcy Court,

which was silent on the specific issue of whether insurance coverage would negate NCG’s

offset rights. The CFI Claimants acknowledge that, if the settlement merely provided for

compromised payments within the five-year time period specified in the confirmed plan,

such an agreement would not rise to the level of an impermissible plan modification.

However, the Responsible Officer and NCG actually negotiated what the Responsible

Officer calls an “extension of the plan funding period.” (Appellee’s Brief at 41.) In short,

the confirmed plan required NCG to make five annual payments, subject to offsets for

modification argument before the Bankruptcy Court, and the Responsible Officer likewise indicates that it was addressed only in passing at the District Court level. However, it is uncontested that (as the Responsible Officer put it), “the Appellant’s initial Objection contained a five-line single paragraph concerning this issue” and, “[i]n the 57 pages of briefing in the District Court, the Appellant addressed this issue in 3 paragraphs, which amount to approximately 2 pages.” (Appellee’s Brief at 39 n.12 (citing A77).) For his part, the Responsible Officer has addressed the merits of this plan modification issue before the Bankruptcy Court, the District Court, and this Court itself (and, in fact, the Responsible Officer does not expressly claim in the appellate brief he filed with this Court that it has been waived). The District Court disposed of the issue on its merits. Although the CFI Claimants could (and should) have addressed this plan modification issue in more detail before the Bankruptcy and District Courts, we follow the District Court’s example and address the merits of the CFI Claimants’ theory that the settlement constituted a plan 11 litigation expenses, by April 2014, while the purported settlement approved by the

Bankruptcy Court provided for three additional payments subject to the same basic offset

mechanism in 2015, 2016, and 2017. According to the Responsible Officer, this

arrangement did not modify any terms of the confirmed plan because it left unchanged the

basic nature of the economic relationship with NCG and allegedly provided the estate the

benefit of up to $300,000 that would have been otherwise offset by NCG under the

confirmed plan. However, a plan modification that allegedly provides greater economic

benefits for the estate and its creditors remains a plan modification governed by § 1127—

not a settlement to be reviewed under Rule 9109. According to the CFI Claimants, this

three-year extension of the plan funding period actually had the practical effect of

preventing CFI Counsel from litigating class action consumer claims against LLCP and

NCG for an additional three years. Given the circumstances, we believe that the extension

of (what the Bankruptcy Court at the evidentiary hearing called) “the life of the economic

relationships that we have” (A515) rises to the level of a plan modification subject to §

1127. In other words, turning a five-year plan into an eight-year plan constitutes a

modification of the plan itself.

Furthermore, the case law generally weighs in support of our determination that the

purported settlement at issue in this case really constituted a plan modification. See, e.g.,

In re Braniff Airways, Inc., 700 F.2d 935, 940 (5th Cir. 1983) (“This provision [of the

PSA agreement] not only changed the composition of Braniff’s assets, the contemplated

modification subject to § 1127. 12 result under [11 U.S.C.] § 363(b), it also had the practical effect of dictating some of the

terms of any future reorganization plan. The reorganization plan would have to allocate

the scrip according to the terms of the PSA agreement or forfeit a valuable asset. The

debtor and the Bankruptcy Court should not be able to short circuit the requirements of

Chapter 11 for confirmation of a reorganization plan by establishing the terms of the plan

sub rosa in connection with the sale of assets.”); Enterprise Fin. Group, Inc. v. Curtis

Mathes Corp., 197 B.R. 40, 45 (E.D. Tex. 1996) (concluding that, even if proposed

change more accurately reflected intent of plan, change that allowed reorganized debtor to

pursue some third-party claims modified material and unambiguous term of confirmed

plan that provided that all claims were retained by liquidating trust, and could not be

considered as mere clarification); In re Reserve Capital Corp., Nos. 03-60071 to 03-

60078, 2007 WL 1989285, at *2 (Bankr. N.D.N.Y. Jul. 6, 2007) (summarizing remand

order that directed bankruptcy court to evaluate whether approved settlement, although

found to be fair, reasonable, and in best interest of estate under Rule 9019, nevertheless

constituted improper post-confirmation modification of confirmed plan), aff’d sub nom.

Hawkins v. Chapter 11 Tr,, Dist. Ct. Civil Action No. 6:07-CV-0766 (LEK), 2009 WL

701115 (N.D.N.Y. Mar. 13, 2009); Ampace Corp., 279 B.R. at 151-54 (concluding that

extension of deadline for claim objections constituted plan modification under § 1127); In

re Concrete Designers, Inc., 173 B.R. 354, 355-59 (Bankr. S.D. Ohio 1994) (refusing to

confirm proposed second amended plan because second amended disclosure statement

provided for dividend to unsecured creditors of 100% over five years or lump sum

13 payment of 40% but second amended proposed plan provided for either dividend of 80%

over four years or lump sum payment of 50%).

The Responsible Officer turns for support to an unpublished ruling by the Ninth

Circuit as well as an Eastern District of Pennsylvania decision. Both opinions are

distinguishable, and, in any event, they are not binding on this Court (or, for that matter,

the Ninth Circuit). In in re Acequia, Inc., 996 F.2d 1223, 1993 WL 219865 (9th Cir.

1993) (memorandum) (unpublished opinion), the confirmed plan required the debtor to

execute an amended note with an eight-year maturity date in favor of its largest creditor,

but, due to state court litigation regarding the terms of the note, execution was delayed for

five years, id. at *1-*2. The debtor and the creditor entered a settlement agreement that

extended the maturity date. Id. at *1. The Ninth Circuit determined that the second

amended note executed pursuant to the settlement agreement did not constitute an

impermissible plan modification. Id. at *1-*3. According to the Acequia court, “‘the

Amended Note is of the same duration as called for in the Plan, and that since its creation

was anticipated in the Plan, it does not alter any material terms of the Plan and is not

subject to the provisions of § 1127.’” Id. at *2 (quoting district court opinion). Likewise,

the district court in In re Beal Bank, S.S.B., 201 B.R. 376 (E.D. Pa. 1996), upheld the

bankruptcy court’s exercise of its equitable powers to extend a payment deadline by a

relatively short period of time (i.e., for sixty days), noting that this extension did not alter

substantive rights or frustrate legitimate claims and that the objecting party shared some

responsibility for the delay, id. at 380. In contrast to the note with the same duration at

14 issue in Acequia as well as the brief extension of a payment deadline addressed in Beal

Bank, the purported settlement at issue in this case added three years to a five-year plan.

Such a drastic step should not be taken under the guise of either a plan interpretation, the

exercise of equitable powers, or a Rule 9019 settlement.

Because the purported settlement constituted a plan modification, we will remand

this matter to the Bankruptcy Court to consider this purported settlement as a modification

request pursuant to § 1127. The CFI Claimants question whether, “in the third year of a

five-year plan, with the plan funder (NCG) taking the position with Appellee that it had

fully complied with its payment obligations under the plan, that Appellee would argue that

the plan had not been ‘substantially consummated.’” (Appellants’ Brief at 38 (footnote

omitted).) They further observe that the Responsible Officer asked the District Court to

dismiss the CFI Claimants’ appeal from the order denying the motion to dismiss the

bankruptcy cases on the grounds that the plan had been consummated (and that the

District Court did dismiss the appeal as equitably moot). In addition to noting that the

substantial consummation determination would be made “as of the time of the

modification (i.e., the Settlement),” the Responsible Officer suggests in passing that this

Court “can determine that the requirements of Section 1127 of the Bankruptcy Code were

satisfied through the hearing before the Bankruptcy Court on the Settlement.” (Appellee’s

Brief at 40 n.13 (citing Beal Bank, 201 B.R. at 380 n.4).) However, we believe that it is

appropriate for the Bankruptcy Court to conduct the requisite inquiry under § 1127.

III.

15 We will vacate the District Court’s order and remand with instructions for the

District Court to vacate the Bankruptcy Court’s order and to direct the Bankruptcy Court

to consider the purported settlement as a request for a plan modification pursuant to §

1127.