In re Inc.

Decision Date31 August 2011
Docket NumberNo. 10–2284.,10–2284.
Citation55 Bankr.Ct.Dec. 89,656 F.3d 82
PartiesIn re AMERICAN CARTAGE, INC., Debtor.City Sanitation, LLC, Appellant,v.Allied Waste Services of Massachusetts, LLC, et al., Appellees.
CourtU.S. Court of Appeals — First Circuit

OPINION TEXT STARTS HERE

Marshall F. Newman, with whom Newman & Newman, P.C. was on brief, for appellant.Euripides Dalmanieras and John A. Burdick, Jr., with whom Kenneth S. Leonetti, Foley Hoag LLP, D. Ethan Jeffery, and Murphy & King, P.C. were on consolidated brief, for appellees.Before HOWARD, SELYA and THOMPSON, Circuit Judges.SELYA, Circuit Judge.

This appeal is the culmination of a pitched battle between two waste-disposal firms, squabbling over the carcass of a third. The littered battlefield brings to mind the familiar adage that one man's trash is another man's treasure.

Telling the tale requires us to resolve questions of standing to prosecute claims arising out of a bankruptcy; questions of first impression as to the distinction between “commercial tort claims” and “proceeds” and as to the force and effect of Bankruptcy Rule 8006; and a question anent the fairness of a negotiated settlement. After careful consideration, we conclude that the disputed claims are commercial tort claims; that the trustee in bankruptcy had exclusive standing to pursue and settle those claims; that the appellant, by failing to comply with Bankruptcy Rule 8006, waived its theory of abandonment; and that the bankruptcy court's approval of the proposed settlement was within the realm of its discretion. Accordingly, we affirm the judgment below.

I. BACKGROUND

This case arises out of the ashes of American Cartage, Inc., a waste-disposal firm. During its halcyon days, American Cartage borrowed money from Financial Federal Credit, Inc. (FFC) to finance its operations and defray the cost of acquiring needed equipment. In return, it gave FFC promissory notes and a security interest in the purchased equipment (the Equipment Collateral). The security interest extended to

all goods, inventory, equipment, accounts, accounts receivable, chattel paper, documents, instruments, contract rights, general intangibles, investment property, securities entitlements, deposit accounts, fixtures and other property, wherever located, now or hereafter belonging to [American Cartage] ... and in all proceeds, insurance proceeds, substitutions, replacement parts, additions and accessions of and/or to all of the foregoing.

On July 23, 2003, American Cartage filed a voluntary bankruptcy petition under Chapter 11, see 11 U.S.C. § 301, and moved for leave to continue business operations during the reorganization period. The bankruptcy court granted replacement liens for the secured creditors (including FFC) and allowed the debtor to use a specified amount of cash collateral for payroll and other post-petition expenses.

Within two weeks, the United States Trustee filed an emergency motion seeking either to dismiss the case or to convert it to a straight Chapter 7 bankruptcy. See id. §§ 701–727. This motion was sparked by the debtor's failure to obtain commercial liability insurance covering its ongoing operations. The bankruptcy court responded by directing that a Chapter 11 trustee assume responsibility for the debtor's affairs. Soon thereafter, the court approved the appointment of John Burdick as trustee.

Up to this point, William Zoll had managed the debtor's day-to-day operations. The trustee sought and received the court's blessing to retain Zoll as a consultant. With Zoll's help, the trustee continued to run the business while attempting to construct a viable reorganization plan.

By January of 2005, the trustee had despaired of any reorganization and moved to convert the proceeding to a Chapter 7 liquidation. Zoll, with the trustee's assent, engaged Allied Waste Services of Massachusetts, LLC (Allied) to service the debtor's remaining customers during the wind-up period.

Faced with this new reality, FFC sought relief from the automatic stay, id. § 362, in order to take possession of the Equipment Collateral, including garbage trucks and industrial-sized trash containers. FFC wanted to sell this equipment to a rival trash hauler. The trustee did not oppose FFC's motion.

On February 7, 2005, the bankruptcy court converted the proceeding, assured continuity by appointing Burdick as the Chapter 7 trustee, lifted the automatic stay to the extent requested, and ordered the debtor to turn over the Equipment Collateral to FFC. With no further business to be done, the trustee terminated Zoll's contract. Zoll subsequently obtained employment with Allied.

Approximately one month later, FFC again moved for relief from the automatic stay. This time, it sought to take possession of, and sell, the remaining assets in which it held a security interest (the Other Collateral). FFC represented that it had found a buyer willing to pay $142,500 for the Equipment Collateral and the Other Collateral as a package. The trustee assented to the motion on the condition that the bankruptcy estate receive a $12,500 carve-out for administrative expenses. FFC agreed, and the bankruptcy court granted the motion, entering a form of order prepared by FFC.

FFC foreclosed on the assets and sold them to Todesca Equipment Company, which resold them to the appellant, City Sanitation, LLC (City).

In February of 2007, City filed a state court action against Allied and Zoll. Posturing itself as the debtor's successor in interest, it alleged that Zoll, while working for the debtor and acting in concert with Allied, had converted assets, interfered with contractual relationships, breached fiduciary duties, and conspired to commit these acts.1 Although those claims were lodged against both Allied and Zoll, for ease in exposition we refer to them as claims against Allied.

A series of procedural maneuvers followed, but none of them is relevant here. What matters is that the trustee, unaware of the pendency of the state court action, filed his final report, and the bankruptcy court—equally unaware of the state court action—closed the bankruptcy case. It was not until some eighteen months later that Allied brought the state court action to the trustee's attention. At that juncture, the trustee moved to reopen the bankruptcy case.

The bankruptcy court granted the motion and, over City's strenuous objection, authorized the trustee to take over the claims against Allied. The court reasoned that the claims were commercial tort claims, that they belonged to the estate, and that the trustee had exclusive standing to pursue them. In re Am. Cartage, Inc., No. 03–44308, 2009 WL 4780972, at *4–6 (Bankr.D.Mass. Dec. 11, 2009). With City continuing to object, the court then approved the trustee's proposal to settle the claims for $12,000. Id. at *7–8.

City took a first-tier appeal to the district court, which affirmed the bankruptcy court's orders. See City Sanit., LLC v. Burdick ( In re Am. Cartage, Inc.), 438 B.R. 1 (D.Mass.2010). This timely appeal ensued.

II. ANALYSIS

In bankruptcy cases, Congress has fashioned a two-tiered framework for appellate review as of right. Under this framework, litigants in the ordinary case must first appeal to the district court (or, in some circuits, a bankruptcy appellate panel). See 28 U.S.C. § 158(a)(b); Brandt v. Repco Printers & Lithographics, Inc. ( In re Healthco Int'l, Inc.), 132 F.3d 104, 107 (1st Cir.1997). The courts of appeals are then available as a second tier of appellate review. See 28 U.S.C. § 158(d)(1); Stornawaye Fin. Corp. v. Hill ( In re Hill ), 562 F.3d 29, 32 (1st Cir.2009). Despite this sequencing, we cede no special deference to the determinations made by the first-tier tribunal (whether a district court or a bankruptcy appellate panel), but assess the bankruptcy court's decision directly. Gannett v. Carp ( In re Carp ), 340 F.3d 15, 21 (1st Cir.2003). In that process, we review findings of fact for clear error and conclusions of law de novo. Groman v. Watman ( In re Watman ), 301 F.3d 3, 7 (1st Cir.2002).

In this second-tier appeal, City asseverates that it had standing to prosecute the claims against Allied and that, in all events, the settlement negotiated by the trustee should have been rejected. We address these contentions separately.

A. The Disputed Claims.

City argues that the claims against Allied are proceeds of the collateral that it acquired from FFC (through Todesca) and that, therefore, it has standing to pursue those claims. Allied asserts that the disputed claims are commercial tort claims, not proceeds, and as such, are not covered by FFC's security interest. We look to state law to resolve this issue.

“Creditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation.” Shamus Holdings, LLC v. LBM Fin., LLC ( In re Shamus Holdings, LLC ), 642 F.3d 263, 267 (1st Cir.2011) (quoting Raleigh v. Ill. Dep't of Rev., 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000)). Here, the underlying substantive law is the law of Massachusetts, a jurisdiction in which secured transactions are governed by a state-specific iteration of Article 9 of the Uniform Commercial Code (UCC). See Mass. Gen. Laws ch. 106, §§ 9–101 to 9–709. It is uncontradicted that, in this case, the debtor gave FFC a security interest in many of its assets. The question, then, is whether the claims asserted against Allied were caught up within the sweep of this security interest.

By its terms, Article 9 applies to transactions that “create[ ] a security interest in personal property or fixtures by contract” and to sales of “accounts, chattel paper, payment intangibles, or promissory notes.” Id. § 9–109(a)(1), (3). But this article does not apply to “an assignment of a claim arising in tort, other than a commercial tort claim.” Id. § 9–109(d)(12). A commercial tort claim is defined in relevant part as a “claim arising in tort with respect to...

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