582 F.3d 422 (2nd Cir. 2009), 07-1362-bk, In re Ames Dept. Stores, Inc.

Docket Nº:07-1362-bk.
Citation:582 F.3d 422
Opinion Judge:PER CURIAM:
Party Name:In re AMES DEPARTMENT STORES, INC., Debtor, v. Ames Department Stores, Inc., Debtor-Appellee. ASM Capital, LP, Appellant,
Attorney:ROBERT J. BUTLER (Rebecca L. Saitta, on the brief), Wiley Rein LLP, McLean, VA, for appellant. MARTIN J. BIENENSTOCK (Michele J. Meises, on the brief), Weil, Gotshal & Manges LLP, New York, NY, for debtor-appellee.
Judge Panel:Before CALABRESI and B.D. PARKER, Circuit Judges.[*]
Case Date:September 18, 2009
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 422

582 F.3d 422 (2nd Cir. 2009)


ASM Capital, LP, Appellant,


Ames Department Stores, Inc., Debtor-Appellee.

No. 07-1362-bk.

United States Court of Appeals, Second Circuit

September 18, 2009

Page 423

ROBERT J. BUTLER (Rebecca L. Saitta, on the brief), Wiley Rein LLP, McLean, VA, for appellant.

MARTIN J. BIENENSTOCK (Michele J. Meises, on the brief), Weil, Gotshal & Manges LLP, New York, NY, for debtor-appellee.

Before CALABRESI and B.D. PARKER, Circuit Judges.[*]


This appeal raises the question of whether section 502(d) of the Bankruptcy Code, which bars allowance of certain claims filed against the debtor's estate by alleged recipients of preferential transfers, also bars allowance to such a claimant of postpetition administrative expenses pursuant to

Page 424

section 503(b) of the Bankruptcy Code. We conclude that it does not, and consequently we vacate the order of the district court.


A. Facts

The debtor-appellee Ames Department Stores, Inc. was a large chain of department stores (collectively, " Ames" ), that commenced a voluntary case under chapter 11 of the Bankruptcy Code on August 20, 2001 by filing a petition in the United States Bankruptcy Court for the Southern District of New York (Gerber, J.). A year later, in August 2002, Ames's board of directors determined that the value of the bankruptcy estate could be best maximized through an orderly dissolution of Ames's affairs in chapter 11 and obtained an order from the bankruptcy court allowing Ames to close its businesses and sell its assets.

Appellant ASM Capital, LP (" ASM" ) is an investor in distressed debt. In 2002 and 2003, ASM acquired claims against Ames's bankruptcy estate from various of Ames's creditors, including two claims held by G & A Sales, Inc. (" G & A" ), a supplier to Ames: an administrative expense claim of $360,117.65, and a reclamation claim of $33,292.50 (collectively, the " G & A Claims" ).1 Administrative expenses are the " actual, necessary costs and expenses of preserving the estate," such as rent, wages, insurance, utilities, and trade credit, that arise during the pendency of the debtor's bankruptcy case. See 11 U.S.C. § 503(b)(1)(A). A reclamation claim provides a supplier with a right to reclaim goods that a customer received on credit while insolvent in the period just before commencement of bankruptcy proceedings. See 11 U.S.C. § 546(c); cf. U.C.C. § 2-702. At the time of Ames's bankruptcy filing, a court could deny reclamation to a seller with a section 546(c) reclamation claim by instead granting the seller's claim priority as a section 503(b) claim, or by securing the claim with a lien.2

Page 425

Ames had suspended payment on its administrative expense claims in 2002 when it abandoned its efforts to reorganize and decided to liquidate. Sometime thereafter, Ames filed adversarial proceedings (" Preference Actions" ) against several of its former suppliers and other creditors, including G & A, to recover alleged preferential transfers. In 2004, while Preference Actions were still pending, Ames began making interim distributions to holders of administrative expense claims, but refused to make distributions to holders who (a) were defendants in a Preference Action; (b) acquired their claims from a defendant in a Preference Action; or (c) would not agree to sign a release form fixing the amount of their administrative expenses. Ames refused to make interim distributions to ASM on the ground that ASM's predecessors in interest were defendants in Preference Actions.

ASM moved the bankruptcy court on April 6, 2005 for an order allowing its administrative expenses in the amount of $964,587 and compelling Ames to pay that amount within fifteen days of entry of the order or when Ames paid other administrative expense claim holders. Ames opposed the motion on the ground that section 502(d) of the Bankruptcy Code barred payments on ASM's claims until the return of any preferential transfers received by the creditors with whom the claims had originated, notwithstanding that ASM had not itself received any preferential transfers and was not a defendant in any Preference Action.

Before the bankruptcy court ruled on the motion in December 2005, the Preference Actions against nearly all of ASM's predecessors-in-interest were resolved, so that only the action against G & A remained outstanding. The bankruptcy court allowed ASM's claims that had originated with creditors who no longer were defending a Preference Action, but ruled that section 502(d) of the Bankruptcy Code barred allowance of the claims ASM had acquired from G & A until the Preference Action against G & A was resolved and G & A had paid or disgorged the amount, if any, for which G & A was liable to Ames.

ASM appealed the 2005 Order to the United States District Court for the Southern District of New York (Kaplan, J.), but the district court dismissed the appeal for lack of finality and failure to meet the requirements for interlocutory appeals. ASM tried again in September 2006, by moving the bankruptcy court to enter a supplemental order (i) disallowing ASM's administrative expenses pursuant to section 502(d) of the Bankruptcy Code; (ii) directing immediate payment of its reclamation claim; and (iii) declaring that the supplemental order was final and appealable. The bankruptcy court denied that motion in an order issued on December 1, 2006 (the " 2006 Order" ), but did make supplemental factual findings relating to finality.

In those findings, the bankruptcy court explained that it had intended its 2005 Order to mean that the G & A Claims held by ASM " would be temporarily disallowed until each of two things had happened: that (1) the [Preference Action] against G & A was ‘ resolved’ ; and (2) G & A had paid the amount (or turned over any property), if any, that had been judicially determined to be payable to the Ames estate." Since then, the court found, the Preference Action had finally been resolved by entry of a default judgment against G & A on June 19, 2006 in the amount of $825,138. But the bankruptcy court's disallowance pursuant to section 502(d) remained in effect because the repayment requirement " remains unsatisfied-as the judgment has not been collected upon." The court further found that the disallowance " will likely be permanent" because G & A had filed

Page 426

its own petition for Chapter 11 reorganization, suspended its business, and had transferred all of its assets to a secured creditor, thereby making it " highly unlikely" Ames would ever collect on the judgment.

ASM timely appealed the bankruptcy court's 2006 Order to the district court. This time, with the benefit of the bankruptcy court's additional findings, the district court concluded that, " while the disallowance of ASM's claim under section 502(d) of the code nominally is temporary, in practical effect it is final." 3 The district court then affirmed the bankruptcy court's order on the merits, stating that it was " in complete agreement" with the bankruptcy court that section 502(d) of the Bankruptcy Code applied to administrative expense claims. ASM moved the district court to certify an interlocutory appeal of its order, and simultaneously filed a petition with this Court for permission to appeal from the district court's order pursuant to Federal Rule of Appellate Procedure 5 and 28 U.S.C. § 1292(b). The district court denied ASM's certification motion without prejudice to renewal if this Court concluded that the order appealed from was not final. ASM then filed a Notice of Appeal to this Court. On May 8, 2007, a panel of this Court denied ASM's petition for permission to appeal, and directed the parties to address in their briefs whether the order appealed from is a final order.


A. Standard of Review

We exercise plenary review over the orders of a district court functioning in its capacity as an appellate court in a bankruptcy case. Thus, we independently review the factual findings and legal conclusions of the bankruptcy court. Momentum Mfg. Corp. v. Employee Creditors Comm. (In re Momentum Mfg. Corp.), 25 F.3d 1132, 1136 (2d Cir.1994). The bankruptcy court's legal conclusions are evaluated de novo; its findings of fact are subject to a clearly erroneous standard. Id. ; see also Fed. R. Bankr.P. 8013. We will determine that a finding is " clearly erroneous" when we are left with the definite and firm conviction that a mistake has been made. United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948).

B. Jurisdiction

We have jurisdiction pursuant to 28 U.S.C. § 158(d) to hear this appeal from a decision of the district court exercising its bankruptcy appellate jurisdiction because that decision and the underlying bankruptcy court decision both are final orders within the meaning of 28 U.S.C. § 158. See Shimer v. Fugazy (In re Fugazy Express, Inc.), 982 F.2d 769, 775 (2d Cir.1992) (" The district court's own decision of an appeal from the bankruptcy court is not a final decision for purposes of appeal to the court of appeals unless the order of the bankruptcy court was final." ).

It is true, as Ames argues, that the bankruptcy court's 2006 Order formally prevents ASM from pursuing its claim for administrative expenses only temporarily, until G & A Sales has satisfied the default judgment it owes to Ames. But " [i]t is sometimes appropriate that the requirement of finality be given a practical rather than a technical construction," In re Am. Preferred Prescription, Inc., 255 F.3d 87, 93 (2d Cir.2001) (quotation marks omitted), and the practical effect of the bankruptcy court's order here will be to permanently bar allowance of ASM's claim because it is not likely that Ames will ever recover its

Page 427

judgment against G & A. As Ames acknowledges, G & A filed for chapter 11...

To continue reading