How Settling Up is Hard to Do in a Mediation on Appeal

img_0182
From one court to the next . . . . and back again

By: Donald L. Swanson

When . . . an appeal is from the district court’s affirmance of a bankruptcy court order, a remand to the bankruptcy court for approval of settlement requires coordination between three courts.

Cox v. Nostaw, Inc. (In re Central Illinois Energy Coop.), Case No. 16-1389 (7th Cir., Feb. 8, 2017).

Background

A group of farmers create Central Illinois Energy Cooperative in 2001 to build and run an ethanol plant. The Coop contracts with Nostaw, Inc., to build a grain handling facility for the plant.  But the Coop cannot pay Nostaw’s invoices totaling $2.5 million. So, the Coop liquidates its assets, and Nostaw’s invoices are paid.

Then, an involuntary bankruptcy is filed against the Coop. And the Chapter 7 Trustee files a fraudulent transfer action against Nostaw to recover $900,000 of the invoice payments.

The Bankruptcy Court rules in favor of Nostaw on summary judgment and dismisses the case. The Trustee appeals to the District Court, which affirms. And the Trustee appeals to the Seventh Circuit Court of Appeals.

The Seventh Circuit, like most other Circuits, has a mandatory mediation program. So, the Cox v. Nostaw parties mediate and settle the dispute.

Then the hard part begins

Settlements of fraudulent transfer actions require bankruptcy court approval, after notice to creditors (see Fed.R.Bankr.P. 9019(a)).

Back to the Bankruptcy Court

Technically, a trial court loses jurisdiction over a dispute, once it’s on appeal. So, the parties file a “Joint Motion for Indicative Ruling” with the Bankruptcy Court, asking for an indication that the Bankruptcy Court would “enter an order approving” the mediated settlement agreement, subject to compliance with the notice requirements of Rule 9019(a).

Note:  There are, actually, rules on this.  Such an “indicative ruling” motion is authorized by:

 1)  Fed.R.Civ.P. 62.1, titled “Indicative Ruling on a Motion for Relief that is Barred by a Pending Appeal”;

 2) Fed.R.Bankr.P. 8008, titled “Indicative Ruling”; and

 3) Fed.R.App.P. 12.1, titled “Remand After an Indicative Ruling by the District Court on a Motion for Relief that is Barred by a Pending Appeal.”

The Bankruptcy Court then enters its “Indicative Ruling” as follows:

“the Court finds and indicates that, subject to the disposition of any objection filed by a creditor or the United States Trustee, the proposed settlement and compromise would be determined to be fair, reasonable and in the best interest of creditors and would be approved by the Court if remanded for that purpose.”

Return to the Seventh Circuit

Then, the parties return to the Seventh Circuit. The Chapter 7 Trustees files a “Motion to Dismiss and Remand,” which:

–Provides a copy of the Bankruptcy Court’s “Indicative Ruling”; and

–Asks the Seventh Circuit to dismiss the appeal and to “remand the case” to the District Court “with instructions to remand the case” to the Bankruptcy Court, ”with instructions that, subject to the disposition of any objection filed by a creditor or the United States Trustee, the court shall enter an order approving the Settlement.”

It’s in response to this “Motion to Dismiss and Remand” that the Seventh Circuit issues its “coordination between three courts” ruling quoted at the beginning of this article. And the Seventh Circuit adds the following explanation:

“To ensure that each of the coordinating courts agree, the proper procedure when asking this court to remand to the district court and then to the bankruptcy court is to obtain an indicative ruling from both courts that will need to act. Because Mr. Cox has not done this, his motion is DENIED without prejudice to renewal after obtaining an indicative ruling from the district court.”

Back to the District Court

So, the parties go back to the District Court and file their “Joint Motion for Indicative Ruling,” asking the District Court to issue a ruling “indicating that” it would “enter an order indicating that it would remand this case” to the Bankruptcy Court “for approval of the Settlement Agreement subject to compliance with Bankr. Rule 9019.”

The District Court then enters its “Order” that the “Joint Motion for Indicative Ruling” is “granted.”

Return to the Seventh Circuit

The Trustee then files another “Motion to Dismiss and Remand” in the Seventh Circuit, informing it of the “Indicative” rulings by both the Bankruptcy and District courts and asking the Seventh Circuit to send the case back to the District and Bankruptcy courts for next steps.

Finally, the settlement is approved — properly, fully and by all courts concerned.

Hypothetical Questions and Projected Answers

1. Hypothetical:  What happens if the Seventh Circuit sends the case back to the Bankruptcy Court, notice of the proposed settlement is given, and someone raises a meritorious objection?

Projected Answer: After all that’s happened in this case, there is no way on God’s green earth that the Bankruptcy Court would ever sustain an objection to this settlement. The settlement would be approved . . . period.

2. The Seventh Circuit’s ruling quoted at the beginning of this article is limited to an appeal from a “district court’s affirmance of a bankruptcy court order.”

–Hypothetical:  Does the ruling also apply to a reversal of a bankruptcy court order?
Projected Answer: Yes.

–Hypothetical:  Does the ruling also apply to an appeal through a bankruptcy appellate panel, instead of through the district court?
Projected Answer: Yes.

Conclusion

Wow.  That was hard.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Blog at WordPress.com.

Up ↑