In re Silverman v. Tracar

Citation255 F.3d 87
Decision Date20 March 2001
Docket NumberDocket No. 00-5072
Parties(2nd Cir. 2001) In Re: AMERICAN PREFERRED PRESCRIPTION, INC., Debtor. KENNETH P. SILVERMAN, ESQ., Trustee-Appellant, v. TRACAR, S.A., Appellee. August Term 2000 Argued:
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Appeal from the September 26, 2000, amended memorandum and order of the United States District Court for the Eastern District of New York (Denis R. Hurley, District Judge), reversing an order of the Bankruptcy Court (Dorothy Eisenberg, Bankruptcy Judge), which had denied Appellee's motion to vacate the post-confirmation appointment of a trustee.

Reversed and remanded.

Anthony C. Acampora, Silverman, Perlstein & Acomparo, Jericho, N.Y., on the brief, for trustee-appellant.

Thomas R. Newman, Luce, Forward, Hamilton & Scripps LLP, New York, NY, on the brief, for debtor-appellee.

Before: FEINBERG, NEWMAN, and SACK, Circuit Judges.

JON O. NEWMAN, Circuit Judge.

This appeal concerns the narrow issue of whether, in a Chapter 11 reorganization proceeding, a creditor who fails to appeal a post-confirmation order appointing a trustee is precluded from challenging the trustee's appointment when the trustee subsequently obtains an order affecting the creditor's interests. This issue arises on an appeal by Kenneth P. Silverman, trustee for the debtor American Preferred Prescription ("APP") from the September 26, 2000, order of the District Court for the Eastern District of New York (Denis R. Hurley, District Judge) reversing an order of the Bankruptcy Court (Dorothy Eisenberg, Bankruptcy Judge). The Bankruptcy Court had denied the motion of Tracar, S.A., ("Tracar"), a creditor, to remove Silverman as trustee. The District Court ruled that the Bankruptcy Court lacked jurisdiction to appoint a trustee after the confirmation of the debtor's reorganization plan. We conclude that Tracar had an opportunity to challenge the appointment of Silverman by appealing the post-confirmation appointment order giving him full trustee powers, and, having failed to do so, is now precluded from challenging his authority. We therefore reverse and remand.

Facts

APP operates a mail order pharmaceutical service. In June 1993, APP filed a Chapter 11 reorganization petition. In March 1996, the Bankruptcy Court confirmed APP's plan of reorganization ("Plan"), which provided for the full payment of all allowed claims with interest. In the order confirming the Plan, the Court also "reserve[d] and retain[ed] jurisdiction in accordance with Articles 4.6 and 11 of the Plan and the provisions of the Bankruptcy Code and Bankruptcy Rules" and retained the authority to "make such Orders to aid in the consummation of the Plan or in accordance with said Plan as the Court shall deem appropriate."

The confirmed Plan contains a lengthy "retention of jurisdiction" section. This section provides: "The Court shall retain jurisdiction of this Chapter 11 case pursuant to and for the purposes set forth in Section 1127(b) of the Code," and then sets out a broad list of reserved tasks and powers, including the power "to make such orders as are necessary or appropriate to carry out the provisions of the Plan, including but not limited to orders interpreting, clarifying or enforcing the provisions thereof," Article 10.1(q). However, the Plan does not contain a clause explicitly authorizing the court to appoint a trustee.

Appointment of the Trustee. The post-confirmation appointment of a trustee for APP arose out of developments in the Chapter 11 proceeding of American Prescription Plan, Inc. ("AP Plan"). Cost Controls, Inc. ("Cost Controls"), a creditor of AP Plan, discovered that AP Plan was trying to evade its bankruptcy obligations by funneling assets to APP. Cost Controls then brought an adversary action against APP in APP's Chapter 11 proceeding. That action was adjudicated by Bankruptcy Judge Francis G. Conrad, who ruled in Cost Controls' favor, finding that APP and AP Plan were alter egos and that the common principals of both companies were fraudulently diverting assets from AP Plan to APP to bypass AP Plan's creditors. He entered judgment in favor of Cost Controls against APP for compensatory and punitive damages.

Apprehending that APP's principals would defraud APP's creditors, as they had done to the creditors of AP Plan, Cost Controls asked Judge Eisenberg to appoint a trustee to monitor APP's assets pending the execution of the Plan.

On April 11, 1997, Judge Eisenberg appointed Silverman as trustee, rejecting APP's objection that section 1104 of the Bankruptcy Code authorizes the appointment of a trustee only before confirmation of a reorganization plan. She ruled that she had authority to appoint a trustee by virtue of the Court's broad equitable powers codified in section 105 of the Bankruptcy Code. However, she indicated that she envisioned the trustee operating "merely in a watchdog capacity."1 She emphasized that APP appeared to be operating profitably, and that she hesitated to jeopardize this success by inserting an operating trustee with full powers.

She therefore ruled that she would continue a previously issued temporary restraining order prohibiting the debtor from transferring any of its property outside its ordinary course of business, and she authorized the trustee to look at all of the company's expenditures and have access to all of its books and records. However, she did not give the trustee the power to veto any expenditures implicating "substantial business decisions" or "anything out of the ordinary course" without first obtaining Court approval. No appeal was taken from the April 11, 1997 order.2

Expansion of the Trustee's Powers. The Bankruptcy Court expanded the Trustee's powers twice in the ensuing months. The first expansion came after Silverman's initial report in June of 1997 detailed further instances of wrongdoing by APP and its principals. APP's creditors (among them Cost Controls) requested that Silverman's powers be expanded to include the authority to investigate and settle claims. The Court granted this motion, emphasizing that Silverman's settlements would not be binding without an order of the Court. No appeal was taken from this order.

The second expansion occurred in the aftermath of an adversary proceeding, filed by the Trustee, seeking the consolidation of APP with its parents and affiliates, and proposing a settlement of the Cost Controls claim. The Court ordered Silverman to negotiate with APP and its affiliates. These negotiations resulted in the Secured Guarantee and Subordination Agreement, approved November 26, 1997. In this Agreement, the APP, its affiliates, and some of its subordinated lenders (called "Subordinated Guarantors"), including Tracar, pledged their assets for the payment of the allowed claims, subordinated their claims to APP's other creditors, and "irrevocably consent[ed] to the continuing jurisdiction of the United States Bankruptcy Court... in connection with any dispute arising hereunder, and waive[d] any right to object to such jurisdiction on the basis of forum non conveniens, or otherwise." Subordination Agreement §12(g).

Shortly after the effective date of the Subordination Agreement, the Trustee reported to the Court that APP and the other guarantors had breached the agreement in several respects. The Court held extensive hearings, and concluded that they had breached the Agreement by, among other things, diverting profitable business to an affiliate. On June 19, 1998, the Court granted the Trustee's request to substantively consolidate APP and the Subordinated Guarantors, including Tracar.

On June 24, 1998, the Bankruptcy Court "enlarged the Trustee's powers to that of a full operating trustee," in light of evidence of rampant fraud and diversion of assets that had been uncovered during the hearings of the previous few months. The parties seem to agree that at this point, the Trustee had powers equivalent to those of a trustee appointed pursuant to 11 U.S.C. § 721. No appeal was taken from this order ("the June 24 order").

Silverman sought and received permission to sell the assets of the consolidated debtors. In the course of hearings in the Bankruptcy Court concerning the sale, questions arose as to the validity of Tracar's claims. The Court extended the Trustee's time to object to claims. The Trustee then moved to expunge Tracar's claims as fraudulent. After holding hearings, the Court granted the motion, finding that the loan documents supporting Tracar's claims were fabricated by one of APP's principals.

Challenges to the Trustee. APP twice filed papers challenging the Trustee. In May 1997, before the first expansion of the Trustee's powers, APP contended that, because of changed circumstances, the Trustee was no longer necessary. In January 1998, after the initial expansion of the Trustee's powers, APP sought the Trustee's removal for alleged malfeasance. Tracar, the Appellee in the pending appeal, participated in the hearing on this second application. The Bankruptcy Court rejected both challenges, neither of which was appealed.

On May 17, 1999, eleven months after the June 24 order giving Silverman full trustee powers, Tracar filed a motion with the Bankruptcy Court challenging the Court's authority to appoint the Trustee. Judge Eisenberg denied the motion. Tracar appealed to the District Court, which reversed the Bankruptcy Court. Judge Hurley concluded that the Bankruptcy Court had tried to "sidestep" section 1104(a) of the Bankruptcy Code, which authorizes the appointment of a trustee "[a]t any time after the commencement of the case but before confirmation of a plan." 11 U.S.C. § 1104(a) (emphasis added). He noted that section 1123(b)(3)(B) of the Code authorizes the insertion of a clause in the reorganization plan permitting the appointment of a trustee, but that APP's Plan lacks such a clause. Judge Hurley rejected the Bankruptcy Court's reliance on ...

To continue reading

Request your trial
56 cases
  • Amara v. Cigna Corporation
    • United States
    • U.S. Court of Appeals — Second Circuit
    • November 10, 2022
    ...regarding piecemeal review carry less force during such proceedings." Yalincak , 853 F.3d at 636 ; see also In re Am. Preferred Prescription, Inc. , 255 F.3d 87, 93 (2d Cir. 2001) ; United States v. Ray , 375 F.3d 980, 986 (9th Cir. 2004) ; Nat'l Football League Players’ Concussion Inj. Lit......
  • In re Pt-1 Communications, Inc.
    • United States
    • U.S. Bankruptcy Court — Eastern District of New York
    • March 31, 2009
    ...Second Circuit's determination that the confirmation of a plan is given res judicata effect. See Silverman v. Tracar, S.A. (In re Am. Preferred Prescription), 255 F.3d 87, 92 (2d Cir.2001); Bousa, 2006 WL 2864964, at *5; Katz v. I.A. Alliance Corp. (In re I. Appel Corp.), 300 B.R. 564, 567 ......
  • United States v. Bond
    • United States
    • U.S. District Court — Eastern District of New York
    • September 17, 2012
    ...as a party, and therefore are not instructive on the issue of sovereign immunity. See, e.g., Silverman v. Tracar, S.A. (In re Am. Preferred Prescription), 255 F.3d 87, 92 (2d Cir.2001); Daewoo Int'l (Am.) Corp. Creditor Trust v. SSTS Am. Corp., No. 02 Civ. 9629, 2003 WL 21355214, 2003 U.S. ......
  • United States v. Bond
    • United States
    • U.S. Court of Appeals — Second Circuit
    • August 13, 2014
    ...(such as the Liquidating Trustee here) can wield the powers of a trustee in bankruptcy. See In re Am. Preferred Prescription, Inc., 255 F.3d 87, 90–92 (2d Cir.2001). We need not decide this question, and so do not. 6. The legislative history contains virtually no discussion of the meaning o......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT