In Re: Aquatic Development Group, Inc., Debtor.carolyn S. Schwartz, Appellant, v. Aquatic Development Group, Inc., Appellee, 352 F.3d 671 (2d Cir. 2003)

In this appeal, we are asked to decide whether the United States Bankruptcy Court for the Northern District of New York (Littlefield, B.J.) was both acting within its statutory authority and properly exercising its discretion when, relying on its equitable powers, it entered a nunc pro tunc order in December 2000 that retroactively closed the bankruptcy estate of debtor-appellee Aquatic Development Group, Inc. ("ADG") as of December 1996. The effect of the Bankruptcy Court's order was to relieve ADG of its obligation to pay certain statutory fees that had been billed by appellant Carolyn Schwartz, the United States Trustee for the Northern District of New York ("Trustee"), prior to the effective date of the nunc pro tunc order. In the Trustee's appeal from the Bankruptcy Court's order, the United States District Court for the Northern District of New York (Scullin, C.J.) concluded that the Bankruptcy Court had acted within its statutory authority and had not abused its discretion in granting the nunc pro tunc relief requested by ADG.

For the reasons set forth below, we find that the Bankruptcy Court did abuse its discretion in granting nunc pro tunc relief here. In light of this conclusion, we decline to reach the issue of whether Congress has divested bankruptcy courts of the equitable authority to enter nunc pro tunc orders retroactively relieving debtors of their obligations to pay statutory bankruptcy trustee fees. Accordingly, we vacate the judgment of the District Court and remand the case for further proceedings consistent with this opinion.

BACKGROUND

In September 1995, ADG and several of its affiliates filed voluntary petitions in the Bankruptcy Court for relief under Chapter 11 of the federal Bankruptcy Code. The Bankruptcy Court subsequently consolidated these cases and, in February 1996, confirmed a reorganization plan. The confirmed reorganization plan provided, in relevant part, that the Bankruptcy Court would retain jurisdiction "until there [was] substantial consummation of the plan," and the order confirming the plan stated that "substantial confirmation" would be achieved "only when all payments to the holders of general unsecured claims under the plan [had] been made."¹  The confirmation order also directed ADG, in conformity with § 28 U.S.C. § 1930(a) (6), to pay all fees then owed to the Trustee within ten days and, from that point forward, to pay all fees due to the Trustee on a timely basis.

While this case was pending in the Bankruptcy Court, the Trustee submitted quarterly bills to ADG, pursuant to § 1930(a) (6). Section 1930(a) (6) was amended on January 26, 1996 — eight days after the confirmation hearing on ADG's reorganization plan, but almost three weeks before the Bankruptcy Court entered its final order confirming ADG's reorganization plan. Prior to this amendment, the statute required debtors to pay quarterly fees to the Trustee "until a plan [was] confirmed or the case [was] converted or dismissed." 28 U.S.C. § 1930(a) (6) (1994) (emphasis added). The current version of the statute no longer contains the underscored text quoted above and thus requires debtors to pay fees to the United States Trustee "for each quarter ... until the case is converted or dismissed."²  28 U.S.C. § 1930(a) (6) (2000).

In September 1996, Congress enacted an additional statutory provision to clarify the meaning and effect of the January 1996 amendment. The clarifying legislation provided that, "notwithstanding any other provision of law, the fees under 28 U.S.C. § 1930(a) (6) shall accrue and be payable from and after January 27, 1996, in all cases (including, without limitation, any cases pending as of that date), regardless of confirmation status of their plans." Pub. L. No. 104-208, § 109(d), 110 Stat. 3009, 3009-19 (1996).

In February 1996, the Trustee mailed pro forma notices to all debtors in pending bankruptcy cases — including ADG³  — to inform them of the statutory change the previous month. The notices stated, in relevant part: "Effective January 27, 1996, all cases with confirmed reorganization plans which are pending before the Bankruptcy Court will be required to make quarterly fee payments based on disbursements until the case is converted to another chapter of the Code, dismissed by the Court, or closed by Court order."⁴  In June 1996, the Trustee sent ADG a bill for $11,000 for fees due since the inception of the case. Two months later, ADG paid the bill. In a cover letter accompanying this payment, ADG's attorney wrote: "I understand there will be some additional fees." Thereafter, the Trustee sent ADG a bill every quarter, but ADG made only two more fee payments, the last of which was in November 1996.

On August 21, 1996, in accordance with the confirmed reorganization plan, the required cash payments were made and preferred stock was issued directly to ADG's secured creditors and to its bankruptcy counsel on behalf of its unsecured creditors. In early December 1996, ADG completed the post-confirmation financing on which its reorganization plan was contingent. At that point, its plan had been substantially consummated. ADG continued to receive bills from the Trustee in 1997. As directed by the instructions printed on each bill, ADG consulted with counsel to determine whether the quarterly fees should be paid. Counsel advised ADG that it was "out of bankruptcy," and, based on this advice and the fact that there was no follow-up by the Trustee as to the status of the reorganization plan or its implementation, ADG believed that all matters pertaining to its bankruptcy had been concluded. Accordingly, ADG did not pay the Trustee's bills.

In or about June 1999, after reviewing her records, the Trustee discovered that ADG's bankruptcy estate apparently was still open and that none of the quarterly bills that she had sent to ADG had been paid since November 1996. After making three written inquiries to ADG's counsel regarding the status of ADG's reorganization plan, the Trustee in September 1999 moved in the Bankruptcy Court for an order compelling ADG to pay approximately $110,000 in overdue fees and for a status report regarding the consummation of ADG's reorganization plan. In response, ADG moved for an order nunc pro tunc closing the case as of December 5, 1996, on the ground that the reorganization plan had been substantially consummated as of that date, thereby relieving ADG of its obligation to pay any subsequent quarterly Trustee fees.

In a fifteen-page, unpublished memorandum decision and order dated December 21, 2000, the Bankruptcy Court entered a nunc pro tunc order granting the relief requested by ADG. In its decision granting this relief, the Bankruptcy Court evaluated ADG's motion under the framework of our decision in Cushman & Wakefield of Connecticut, Inc. v. Keren Limited Partnership (In re Keren Limited Partnership), 189 F.3d 86 (2d Cir. 1999) (per curiam). In particular, the Bankruptcy Court quoted from In re Keren's statement that " [n]unc pro tunc approval should only be granted in narrow situations and requires that (i) if the application had been timely, the court would have authorized the [relief], and (ii) the delay in seeking [the relief requested] resulted from extraordinary circumstances." Id. at 87. The Bankruptcy Court concluded that both of these requirements had been satisfied. First, the Bankruptcy Court found that it could have entered a final decree if it had been asked to do so in December 1996, even though an adversary proceeding was pending at that time. The Bankruptcy Court rejected the Trustee's argument that, because the reorganization plan and confirmation order defined "substantial confirmation" as requiring payments to the holders of general unsecured claims, the fact that those cash payments were not completed until January 2000 meant that the requirements of the plan were not satisfied until that time. In rejecting this contention, the Bankruptcy Court noted that, in August 1996, ADG had transferred stock intended for the unsecured creditors to its counsel, who, the court concluded, had been acting as the agent of the unsecured creditors; therefore, the Bankruptcy Court concluded, the stock transfer to ADG's counsel had satisfied the payment requirement.

Second, the Bankruptcy Court, relying on the text and Advisory Committee Notes to Federal Rule of Bankruptcy Procedure 3022,⁵  concluded that it would have closed ADG's bankruptcy case in December 1996 if it had been asked to do so, since by "that time the confirmation order had become final because the refinancing had been completed; the deposits had been paid, the stocks and cash had been transferred to the agents of the creditors [,] the payments had commenced ... [,and ADG] had assumed management of the business."

Furthermore, the Bankruptcy Court concluded that ADG's failure to seek a final decree in December 1996 was due to extraordinary circumstances, which included "the prolonged nature of this plan and the timing of the amendment of ... § 1930; the consequences of that change; and the failure of the parties to adequately monitor the progress of this case." In particular, the Bankruptcy Court determined that payment of the fee to the Trustee would not have been equitable and would not have "serve [d] the Code's underlying purposes of providing deserving debtors a free start," especially since the continued accumulation of fees had not been possible under the version of § 1930 in effect at the time the reorganization plan had been filed. Moreover, the Bankruptcy Court found that ADG's failure to respond to the bills it had received from the Trustee was excusable because the Trustee had "not contact [ed] the Debtor for payment of the fees." II. Proceedings in the District Court

The Trustee timely appealed the Bankruptcy Court's order. In its appeal to the District Court, the Trustee argued that the Bankruptcy Court had abused its discretion in granting ADG's application for nunc pro tunc relief, because (i) the clear language of § 1930 required the payment of quarterly Trustee fees in all pending cases and thus the Bankruptcy Court lacked the statutory authority to grant the equitable relief sought by ADG; and (ii) even if the Bankruptcy Court had the authority to grant the equitable relief requested by ADG, the Bankruptcy Court erred in concluding that ADG had met the requirements for nunc pro tunc relief. In an unpublished, sixteen-page memorandum decision and order dated July 25, 2002, the District Court affirmed the Bankruptcy Court's order.

First, the District Court rejected the Trustee's argument that § 1930 divested the Bankruptcy Court of its equitable authority to grant the nunc pro tunc relief requested by ADG. In particular, the District Court relied on In re Rhead, 232 B.R. 175, 181 (Bankr.D. Ariz. 1999), where the bankruptcy court concluded that the debtor had not sufficiently alleged the extraordinary circumstances required for nunc pro tunc relief but did not explicitly find that it lacked the authority to grant such equitable relief. Moreover, the District Court also relied on the language in Section 105(a) of the Bankruptcy Code, 11 U.S.C. § 105(a), which provides that a bankruptcy court "may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Code]," in concluding that the Bankruptcy Court had the authority to grant the equitable relief requested by ADG.

Second, the District Court concluded that the Bankruptcy Court had not abused its discretion in concluding that ADG had satisfied the requirements for nunc pro tunc relief. In particular, the District Court agreed with the reasons provided by the Bankruptcy Court in support of the latter's conclusions that (i) it could and would have granted a request for a final decree had ADG made one in December 1996, and (ii) ADG had successfully shown that extraordinary circumstances existed to justify nunc pro tunc relief. Final judgment was entered shortly after the issuance of the District Court's decision, and this timely appeal followed.

DISCUSSION

In this appeal, the Trustee offers the same alternative bases to set aside the District Court's judgment as previously put forth by her when she asked the District Court to set aside the Bankruptcy Court's order, i.e., (i) that § 1930 divested the the Bankruptcy Court of authority to grant the equitable relief sought by ADG; and (ii) even if the Bankruptcy Court had the authority to grant such relief, ADG has not met the requirements for nunc pro tunc relief. For the reasons set forth below, we conclude that the Bankruptcy Court abused its discretion in concluding that ADG was entitled to nunc pro tunc relief. Consequently, we need not — and do not — decide whether Congress' 1996 amendment of § 1930 strips bankruptcy courts of their equitable authority to grant nunc pro tunc relief where doing so would allow debtors to avoid paying quarterly trustee fees that the debtors would otherwise be required to pay.

As noted above, our decision in In re Keren provides a yardstick against which we may measure whether a bankruptcy court should have granted nunc pro tunc relief. There, we articulated a two-pronged test for determining the "narrow" circumstances under which such relief should be granted: (i) if the application for relief had been timely made, the bankruptcy court would have granted the relief requested; and (ii) the delay in seeking relief resulted from "extraordinary circumstances." 189 F.3d at 87. Moreover, " [w]e review a bankruptcy court's decision regarding such approval for abuse of discretion," id. at 88, which we have defined as (i) a decision "rest [ing] on an error of law (such as application of the wrong legal principle) or a clearly erroneous factual finding," or (ii) a decision that, "though not necessarily the product of a legal error or a clearly erroneous factual finding [,] cannot be located within the range of permissible decisions," Zervos v. Verizon N.Y., Inc., 252 F.3d 163, 169 (2d Cir. 2001).

Turning to the first prong of the In re Keren test, we agree with the District Court that the Bankruptcy Court did not abuse its discretion in concluding that the latter could and would have granted a request to close the bankruptcy case had ADG made such a request in December 1996. Notwithstanding the adversary proceeding that was pending and the fact that ADG's unsecured creditors had not received from the bankruptcy estate all the payments that the estate was required to make under the reorganization plan as of December 1996, the Bankruptcy Court could have ordered dismissal and closure at that time. As both the Bankruptcy Court and the District Court correctly noted, we have permitted a bankruptcy court to retain jurisdiction over an adversary proceeding after it has dismissed the bankruptcy case. See Porges v. Gruntal & Co., Inc. (In re Porges), 44 F.3d 159 (2d Cir. 1995). Moreover, even though the confirmation order defined "substantial consummation" as occurring when "all payments to be made to the holders of general unsecured claims . . . have been made," the Bankruptcy Court concluded that this requirement had been satisfied when, in August 1996, ADG issued stock to its counsel, who was acting as the agent for ADG's unsecured creditors. Again, we agree with the District Court that the Bankruptcy Court's interpretation of the term "payments" in its confirmation order was not an abuse of discretion. See Casse v. Key Nat'l Bank Ass'n (In re Casse), 198 F.3d 327, 333 (2d Cir. 1999) ("The bankruptcy court [is] in the best position to interpret its own orders.") (internal quotation marks omitted).⁶ 

Turning to the second prong of In re Keren, we part company with the District Court and conclude that the Bankruptcy Court abused its discretion in concluding that ADG's failure to seek an order closing the bankruptcy case in December 1996 resulted from extraordinary circumstances. As discussed above, the Bankruptcy Court identified three circumstances that it characterized as being both extraordinary and the cause of ADG's delay in seeking to have the case closed: (i) the unusual length of time required to consummate the reorganization plan; (ii) the timing of the effective date of the amendment to § 1930 and the financial consequences of the amendment; and (iii) the parties' failure to monitor the progress of the case. We address each of these circumstances seriatim.

First, the unusual length of time required to consummate the reorganization plan (due to the fact that ADG was not scheduled to begin redeeming stock from its unsecured creditors until 2000) may well have been extraordinary, but there is no evidence in the record that the time required to consummate the plan caused ADG to delay its request to close the bankruptcy case. Indeed, as noted above, the Bankruptcy Court would have been acting well within its discretion if had closed the case in December 1996.

Second, both the timing of the amendment to § 1930(a) (6) and its attendant financial consequences may also have been extraordinarily unfortunate — as they had the potential to add unforeseen thousands of dollars of quarterly Trustee fees to the transaction costs of ADG's reorganization plan — but the amendment and the financial consequences flowing from it can in no way be characterized as a cause of ADG's delay in moving to close the case. Indeed, the unique provisions of the reorganization plan, coupled with the amendment to § 1930(a) (6), should have stirred ADG to act diligently in seeking closure.

Finally, we turn to the parties' failure to monitor the closure of the case. Granting nunc pro tunc relief on this basis constituted an abuse of discretion for two reasons. First, " [s]imple neglect" on the part of a debtor in failing to take timely action does not constitute the "extraordinary circumstances" necessary to justify nunc pro tunc relief. Land v. First Nat'l Bank of Alamosa (In re Land), 943 F.2d 1265, 1268 (10th Cir. 1991).⁷  Thus, the dilatory conduct of both the Trustee and ADG in monitoring the progress of this case can only tenuously be characterized as an extraordinary circumstance. As the Bankruptcy Court noted, the Trustee merely let this case "slip [] through the cracks." ADG, on the other hand, regularly received substantial bills over a period of three years and, on the advice of counsel, simply ignored them. While it may be the case (as ADG argues on appeal) that ADG "took every step that it could possibly take to carry out its reorganization plan," the relevant inquiry in deciding whether to grant nunc pro tunc relief is not whether ADG was diligent in consummating its reorganization plan but rather whether ADG exercised diligence in closing a case that was costing it approximately $35,000 a year to keep open. Plainly, by allowing the Trustee's bills to pile up for several years before taking any action whatsoever, ADG failed to exercise reasonable diligence. Second, characterizing ADG's neglectful conduct as an extraordinary circumstance justifying nunc pro tunc relief mistakes cause for effect — ADG's failure to act was itself the delay, rather than a "circumstance" leading to it.

In sum, the record does not support the Bankruptcy Court's conclusion that ADG's delay "resulted" from any circumstances sufficiently extraordinary to justify the rare and powerful relief of retroactive closure. Accordingly, the nunc pro tunc relief granted by the Bankruptcy Court "cannot be located within the range of permissible decisions" granting such relief, Zervos, 252 F.3d at 169, and the decision to grant such relief here was an abuse of discretion.

CONCLUSION

For the foregoing reasons, we vacate the judgment and remand the case to the District Court for further proceedings consistent with this opinion.

STRAUB, Circuit Judge, concurring.

I agree fully with the majority's application of the In re Keren test to the facts of this case. But I write separately because I also conclude that the Bankruptcy Court lacked authority to utilize equitable powers to issue the nunc pro tunc closure order in the first instance, and thus, fundamentally, application of the In re Keren factors is both inappropriate and unnecessary.

As the majority points out, Congress amended the quarterly fee statute, 28 U.S.C. § 1930(a) (6), in January 1996 to mandate the payment of post-confirmation fees until a Chapter 11 case is closed, converted, or dismissed. See Balanced Budget Downpayment Act, I, Pub. L. No. 104-99, Title II, § 211 (1996). Because Congress eliminated plan confirmation as one of the events terminating liability for continued fee payments, "uncertainty developed as to whether the amendment applied retroactively to already pending cases with confirmed plans." In re Jamko, Inc., 240 F.3d 1312, 1315 n. 4 (11th Cir. 2001). To define the scope of § 1930(a) (6), Congress enacted a clarifying provision in September 1996, explicitly stating that: "notwithstanding any other provision of law, the fees under 28 U.S.C. § 1930(a) (6) shall accrue and be payable from and after January 27, 1996, in all cases (including, without limitation, any cases pending as of that date), regardless of the confirmation status of their plans." Omnibus Consolidated Appropriations Act for Fiscal Year 1997, Pub. L. No. 104-208, § 109(d) (1996) (emphasis added). Given the plain language of the clarifying provision, I do not understand how Congress could have made its intention to mandate the payment of quarterly fees in all pending Chapter 11 cases any more clear or explicit than with the singularly broad phrase, "notwithstanding any other provision of law."

Of course, it is axiomatic that bankruptcy courts are "courts of equity, empowered to invoke equitable principles to achieve fairness and justice in the reorganization process." In re Momentum Mfg. Corp., 25 F.3d 1132, 1136 (2d Cir. 1994). Specifically, section 105(a) of the Bankruptcy Code grants bankruptcy courts the "equitable power to `issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.'" In re Dairy Mart Convenience Stores, Inc., 351 F.3d 86, 91 (2d Cir. 2003) (quoting 11 U.S.C. § 105(a)). Nonetheless, this Court has repeatedly cautioned that § 105(a) "does not `authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law, or constitute a roving commission to do equity.'" Id. (quoting United States v. Sutton, 786 F.2d 1305, 1308 (5th Cir. 1986)). While perhaps expansive, " [t]he equitable power conferred on the bankruptcy court by section 105(a) is the power to exercise equity in carrying out the provisions of the Bankruptcy Code" not the broader power to invoke equity "to further the purposes of the Code generally, or otherwise to do the right thing." Id. (emphasis in original); see also In re Barbieri, 199 F.3d 616, 620-21 (2d Cir. 1999) (warning that the "equitable powers emanating from § 105(a) ... are not a license for a court to disregard the clear language and meaning of the bankruptcy statutes and rules") (alteration in original; internal quotation marks omitted).

Thus, the general grant of equitable power contained in section 105(a) cannot trump specific provisions of the Bankruptcy Code, but must instead be exercised within the parameters of the Code itself. See generally Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S. Ct. 963, 99 L. Ed. 2d 169 (1988) (" [W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code"); see also In re Dairy Mart Convenience Stores, Inc., 351 F.3d at 92, 2003 WL 22860275 at *5. In this case, Congress has specifically provided that Chapter 11 debtors pay fees under § 1930(a) (6) until the bankruptcy case is closed, converted, or dismissed, "notwithstanding any other provision of law." Pub. L. No. 104-208 § 109(d) (1996). Plainly, the grant of equitable power contained in § 105(a) is another "provision of law." Accordingly, the clarifying provision to § 1930(a) (6) must be read as mandating the payment of quarterly fees, irrespective of the confirmation status of a Chapter 11 case, "notwithstanding" the bankruptcy court's usual power to issue equitable relief in the form of a nunc pro tunc order. Here, the Bankruptcy Court was indisputably issuing the nunc pro tunc closure order not to effectuate the terms of the fee statute, but to relieve the debtor from the burdens of the statute's application, an exercise of equitable power that contradicts the express terms of the clarifying provision to § 1930(a) (6) and inappropriately construes the breadth of § 105(a)'s grant of equitable authority.¹ 

In addition, while I agree with the majority that ADG fails to satisfy the requirements for nunc pro tunc closure even assuming that the Bankruptcy Court had the power to issue such equitable relief — I am substantially troubled by the Bankruptcy Court's suggestion that the Trustee's diligence, or lack thereof, in monitoring the progress of a particular bankruptcy case should somehow factor into the analysis of whether a debtor is entitled to equitable relief from fees. As the majority notes, § 1930(a) (6) assesses fees according to a graduated scale based on the amount of quarterly disbursements paid to creditors, and " [t]hese fees bear no relation to [the] particular services performed by the Trustee." The purpose of amending § 1930(a) (6) to mandate post-confirmation fee payments was to raise revenue, not to charge debtors for the Trustee's monitoring services. By issuing nunc pro tunc relief, the Bankruptcy Court was not only circumventing the congressional mandate that fees be assessed in all pending Chapter 11 cases, but also disturbing the detailed statutory fee schedule specifically chosen by Congress. Whatever powers bankruptcy courts may otherwise exercise, " [c]ourts of equity cannot, in their discretion, reject the balance that Congress has struck in a statute" or override legislative policy judgments by independently weighing the advantages and disadvantages of fully enforcing a statute. United States v. Oakland Cannabis Buyers' Coop., 532 U.S. 483, 497-98, 121 S. Ct. 1711, 149 L. Ed. 2d 722 (2001).

In sum, I believe the Bankruptcy Court lacks legal authority to grant equitable relief to exempt a debtor from quarterly fees under § 1930(a) (6). Moreover, the kind of fact specific analysis that the majority undertakes in applying the In re Keren test for issuing nunc pro tunc relief looks to factors that are wholly extraneous to the statutory fee scheme imposed by § 1930(a) (6), for Congress could have chosen to make an "extraordinary circumstances" exception to the payment of quarterly fees, yet it chose not to. For all of these reasons, I concur in the ultimate judgment, but would directly hold that the Bankruptcy Court exceeded its authority in this case in clear contradiction of the statute.