SC SJ Holdings LLC v.

• Court: Court of Appeals for the Third Circuit
• Decided: March 28, 2024
• Docket: 23-1731
• Status: Unpublished

Opinion

NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT ______________

No. 23-1731 ___________ In re: SC SJ HOLDINGS, LLC; FMT SJ, LLC, Appellants ______________

On Appeal from the United States District Court for the District of Delaware (D.C. Civ. No. 1-22-cv-00689) District Judge: Maryellen Noreika ______________

Submitted under Third Circuit L.A.R. 34.1(a) March 4, 2024 ______________

Before: SHWARTZ, RENDELL, and AMBRO, Circuit Judges.

(Filed: March 28, 2024)

______________

OPINION* ______________

RENDELL, Circuit Judge.

Appellants are debtors whose Chapter 11 reorganization compounded, rather than

resolved, their financial difficulties. They came to believe that this was due to erroneous

legal advice given to them by their former bankruptcy attorneys from the law firm of

* This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding precedent. Pillsbury Winthrop Shaw Pittman LLP (“Pillsbury”). Belatedly discovering this after

their reorganization plan was confirmed and consummated, Appellants wished to sue

Pillsbury for purported malpractice, but realized that such a suit would be barred by

release provisions that they agreed to as part of their Chapter 11 plan. Faced with this

legal hurdle, they requested that the Bankruptcy Court relieve them from these

provisions. It rejected their request as an untimely attempt to modify or revoke the plan.

The District Court affirmed. Perceiving no error in its well-reasoned opinion, we will

affirm.

I.

In 2018, Appellants obtained a loan of more than $150 million to purchase the

Fairmont Hotel in San Jose, CA. Under a Hotel Management Agreement (“HMA”), the

hotel would be operated by Accor Management US Inc. as a Fairmont-branded property.

During the COVID-19 pandemic, however, Appellants struggled to service the loan and

investigated options for securing new capital and a possible restructuring of the debt.

Accor refused to provide financing to Appellants and further would not permit them to

obtain financing from others if such financing would depend on rebranding the hotel in

violation of the HMA. Hampered by the HMA, and unable to obtain financing,

Appellants retained Pillsbury for advice.

According to Appellants, Pillsbury advised them that, to unburden themselves

from the HMA, they should file voluntary Chapter 11 petitions. Appellants allege that

Pillsbury lawyers explained that the bankruptcy process would permit termination of the

HMA, avoid arbitration, cost approximately $3.5 million in legal fees and damages, and

2 take just one hundred days to complete. Acting on this advice, Appellants filed Chapter

11 petitions. Contrary to Pillsbury’s purported assurances, however, the proceedings

lasted more than eight months, during which time Appellants were forced to arbitrate

with Accor and were ultimately required to pay more than $20 million in damages, fees,

and interest to Accor for breaching the HMA.

On August 18, 2021, the Bankruptcy Court confirmed Appellants’ Chapter 11

bankruptcy plan. It contained provisions “for mutual releases among numerous parties as

to any claims arising out of or related to the bankruptcy proceedings or to Debtors.

Those release provisions cover Debtors’ ‘Related Persons,’ defined to include their

‘attorneys . . . and other professionals.’” In re: SC SJ Holdings, LLC, 2023 WL 2598842,

at *2 (D. Del Mar. 22, 2023) (citation omitted). The provisions “also expressly exculpate

Debtors and their ‘Professionals’ from claims and causes of action arising out of post-

petition conduct, with the exception of claims of intentional fraud and willful

misconduct.” Id. (citation omitted). On November 8, 2021, the plan became effective

and was substantially consummated.

On February 28, 2022, more than six months after the Bankruptcy Court

confirmed the plan and more than three months after the plan had been substantially

consummated, Appellants filed a motion in the Bankruptcy Court seeking an order to

“reliev[e] [them] from certain aspects of the . . . Plan of Reorganization[.]” JA526.

Appellants requested that the Court “modify[]” the release provisions of the plan to

permit them to sue Pillsbury for malpractice. JA537. After reviewing the parties’

3 briefing and hearing oral argument, the Bankruptcy Court denied the motion. The

District Court later affirmed.

II.1

Appellants urge this Court to reverse the District Court and permit the

modification or revocation of the plan despite their admittedly untimely motion for such

relief. Alternatively, they assert that the District Court erred by not holding an

evidentiary hearing before ruling on their motion. We disagree.

As the District Court correctly concluded, Appellants’ failure to comply with the

strictures of 11 U.S.C. §§ 1127 and 1144 is fatal to their case. Section 1127 provides that

“the reorganized debtor may modify [a] plan at any time after confirmation of such plan

and before substantial consummation of such plan[.]” 11 U.S.C. § 1127(b). As both the

District Court and “Bankruptcy Court recognized . . . [,] § 1127(b) is ‘the exclusive

means by which to modify a [Chapter 11] plan.’” In re: SC SJ Holdings, 2023 WL

2598842, at *7 (citations omitted). Indeed, “[t]he parties do not dispute that Debtors’

motion for relief was filed after the Plan had been substantially consummated.” Id.

Thus, Appellants’ motion was untimely. While Appellants attempt to circumvent the

requirement of § 1127 by disclaiming any intent to “modify” the plan, the District Court

1 The Bankruptcy Court had jurisdiction under 11 U.S.C. § 101. et seq. The District Court had jurisdiction under 28 U.S.C. § 158(a). This Court has jurisdiction under 28 U.S.C. § 1291.

We review a district court’s legal conclusions de novo. In re Trans World Airlines, 145 F.3d 124, 131 (3d Cir. 1998). We review a district court’s decision on whether to hold an evidentiary hearing for abuse of discretion. See, e.g., In re Orthopedic Bone Screw Prod. Liab. Litig., 246 F.3d 315, 320 (3d Cir. 2001). 4 rightly focused on the “substance rather than the form of the requested relief” in deciding

that § 1127 controlled. Id. at *5 (citation omitted). As Appellants sought permission to

sue Pillsbury for malpractice in connection with the Chapter 11 proceedings—a claim

that was specifically released under the plain terms of the plan, the District Court rightly

concluded that Appellants sought a “modification.” Id.

Section 1144 is also controlling, as it limits the time in which a debtor may seek

revocation of a confirmed plan. Under § 1144, “[o]n request of a party in interest at any

time before 180 days after the date of the entry of the order of confirmation, and after

notice and a hearing, the court may revoke such order if and only if such order was

procured by fraud.” 11 U.S.C. § 1144. The District Court recognized that even if

Appellants’ request for relief from the release provisions did not entail “modification” of

the plan, it could be considered a partial or wholesale “revocation.” In re: SC SJ

Holdings, 2023 WL 2598842, at *7. Thus, the Court rightly concluded that “[t]o the

extent Debtors’ motion for relief can be read as a motion for revocation of the

Confirmation Order, Debtors have not complied with the strict requirements of § 1144.”

Id. Appellants failed to file their request within 180 days of confirmation.2 JA22.

On appeal, Appellants rehash an argument that was rejected by the District Court,

namely, that §§ 1127 and 1144 do not “provide the exclusive procedural means of relief”

in this case. Appellants’ Br. 25. Instead, they contend that Bankruptcy Rule of Civil

2 Section 1144 would allow revocation of the plan if it was procured by fraud, but Appellants did not make that allegation. 5 Procedure 9024 and Federal Rule of Civil Procedure 60 permit modification or

revocation of the plan independent of these two statutory provisions.3 We disagree.

As the District Court succinctly explained, it is well established that “a rule of

procedure cannot ‘negate the substantive impact of [a] restriction contained’ in a

provision of the Bankruptcy Code or ‘validly provide’ a movant ‘with a substantive

remedy that would be foreclosed by’ such a statutory provision.” In re: SC SJ Holdings,

2023 WL 2598842, at *6 (quoting In re Fesq, 153 F.3d 113, 116-17 (3d Cir. 1998)).

Here, to permit Appellants to modify or revoke their plan under Rule 9024 or Rule 60

would simply “produce a result at odds with the specific provisions of” the Bankruptcy

Code. Id. (quoting In re Rickel & Assocs. Inc., 260 B.R. 673, 676 (Bankr. S.D.N.Y.

2001)) (internal quotation marks omitted).

As we agree with the District Court’s legal conclusion that Appellants’ request

was untimely, we see no error in the District Court’s decision not to grant Appellants a

full evidentiary hearing. Because they could not establish entitlement to relief as a matter

of law, there was no need for an evidentiary hearing, and the District Court did not abuse

its discretion in denying Appellants’ request for one.

III.

For these reasons, we will affirm the District Court’s order.

3 These rules relate to procedures for seeking relief from a final judgment. They do not supersede the Code’s provisions, and Rule 9024 specifically refers to § 1144 in any event. For the same reason, Appellants also cannot use the Rules of Professional Conduct to undermine the statute’s requirements. 6