In re AJ Mackay Co.
| Decision Date | 27 June 1985 |
| Docket Number | Civ. No. C-84-1236W. |
| Parties | In re A.J. MACKAY COMPANY, Debtor. BILL RODERICK DISTRIBUTING, INC., Appellant, v. A.J. MACKAY COMPANY, Appellee. |
| Court | U.S. District Court — District of Utah |
Everett E. Dahl, Ronald E. Kunz, Midvale, Utah, for appellant.
William Thomas Thurman, Joel T. Marker, Salt Lake City, Utah, for appellee.
This case is an appeal from the bankruptcy court. Appellant Bill Roderick Distributing, Inc., ("Roderick") claims that the bankruptcy court erred in staying Roderick's debt collection proceedings against Clayton Mackay, a non-bankrupt codebtor with appellee A.J. Mackay Co. ("Mackay Co.") on the debt to Roderick. Appellant Roderick is represented by Everett E. Dahl and Ronald E. Kunz. Appellee Mackay Co. is represented by William Thomas Thurman and Joel T. Marker. Both sides have briefed the issues on appeal, and neither side requested oral argument. The court has carefully considered the briefs submitted by counsel and various relevant authorities. The court now renders the following decision.
Clayton Mackay was previously a principal of Mackay Co., and currently works as a consultant to the company. In July, 1982, Mr. Mackay signed as a personal guarantor for a line of credit extended to Mackay Co. by Roderick. Mackay Co. subsequently drew on this line of credit.
On January 21, 1983, Mackay Co. filed for bankruptcy under Chapter 11. Clayton Mackay did not file for bankruptcy. Subsequent to Mackay Co.'s filing, Roderick obtained a state court default judgment against Clayton Mackay on the debt Mackay Co. had incurred by drawing on the line of credit. Rather than execute on the entire judgment immediately, Roderick agreed to allow Clayton Mackay to pay the judgment in monthly installments of $500.
Amended Plan ¶ 4.21, at R. 76 (), as amended by the Order Confirming Plan of Reorganization, at R. 115 (June 4, 1984). The plan later gives this same protection to all codebtors of Mackay Co.
As long as Debtor is current on its payments under this Plan, no creditor shall have any rights to proceed against third parties who may be obligated on a debt provided for under this Plan.
Amended Plan ¶ 5.4, at R. 79.
Relying on the terms of the confirmed plan, Clayton Mackay ceased making payments to Roderick. In August, 1984, Roderick resumed state court action against Mr. Mackay by requesting an Order in Supplemental Proceedings in state court. On August 15, 1984, Mackay Co. filed a motion in federal bankruptcy court requesting an Order Staying Creditor. Mackay Co. asked the bankruptcy court to prevent Roderick from pursuing its claim against Clayton Mackay by forcing Roderick to abide by the terms of the confirmed plan.
The bankruptcy court granted Mackay Co.'s motion, staying Roderick from pursuing its claim against Clayton Mackay. The bankruptcy court found that both the proposed plan and the disclosure statement clearly stated that Mr. Mackay would be protected under the plan. Transcript of Sept. 25, 1984, Proceedings, at 13 hereinafter cited as "Trans." The court further found that Roderick had notice of the plan and did not object to it. Id. Finally, the court found that Roderick had effectively accepted the plan and was therefore bound by its terms, since a confirmed plan has the force of a judgment. Id.
The issue on appeal is whether the bankruptcy court properly stayed Roderick from pursuing its claim against Clayton Mackay. Appellant Roderick argues that the bankruptcy court had no jurisdiction to stay Roderick's pursuit of Mr. Mackay. Appellee Mackay Co. counters by arguing that Roderick should have argued the jurisdictional issue at the confirmation hearing, and that it is barred by res judicata from raising the issue now. This court agrees with appellant Roderick, and therefore reverses the bankruptcy court's order staying Roderick from pursuing its judgment against Clayton Mackay. The court also holds that the contested provisions of the confirmed plan must be deleted, since they go beyond the bankruptcy court's jurisdiction.
Although the issue of res judicata is discussed by both parties, it is not an issue in this case. Res judicata acts as a bar only when a court is asked to take an action which would effectively modify or reverse the judgment of another court in a case the first court is not reviewing on appeal. That is not the case here. The bankruptcy court is not barred by res judicata from modifying its own prior decision in the same case. Nor is this court barred by res judicata when reviewing a case on appeal.
It is true that there are limits on a bankruptcy court's power to revoke a plan it has previously confirmed. See, e.g., 11 U.S.C. § 1144.1 This court is also limited in what issues and orders it can review on appeal from bankruptcy court. See, e.g., 28 U.S.C. § 1334(b); Bankr. R. 8002. Although these limitations are similar to res judicata, they are independent of it. Res judicata itself is simply not an issue in this case.
The case appellee Mackay Co. most heavily relies on, Levy v. Cohen, 19 Cal.3d 165, 137 Cal.Rptr. 162, 561 P.2d 252, cert. denied, 434 U.S. 833, 98 S.Ct. 119, 54 L.Ed.2d 94 (1977), is a proper application of res judicata. In that case, a state court was faced with an issue that had already been finally decided by a federal bankruptcy court. The Levy court held that none of the issues that were decided, or could have been decided, in the bankruptcy court could be relitigated in state court. That classic example of res judicata is not repeated in this case. No court has been asked in this case to decide an issue that has been finally decided by a different court. Consequently, Levy is inapplicable. There is no bar of res judicata in this case.
The first issue that must be addressed is whether a Chapter 11 plan can be modified after it has been confirmed. The circumstances under which a confirmed plan can be revoked are extremely limited.
11 U.S.C. § 1144. Moreover, Fed.R.Civ.P. 60(b), which allows revocation of prior judgments and orders, cannot be used to bypass the strict requirements of § 1144. See Bankr.R. 9024. However, both § 1144 and Rule 9024 expressly prohibit only revocation of the confirmed plan. It is unclear whether they also prevent any and all modifications to a confirmed plan. This court holds that they do not.
A bankruptcy proceeding where a chapter 11 reorganization plan is confirmed differs markedly from a typical civil case in federal district court. Once a judgment is rendered in a typical case, the case is over. The court rendering the judgment generally has jurisdiction over only a few ancillary administrative matters, such as attorney's fee awards, once a final judgment has issued. In a bankruptcy case, however, the confirming of a plan of reorganization is in some ways only the beginning of the case. The bankruptcy court generally retains broad jurisdiction over a case even after a plan has been confirmed. See, e.g., Amended Plan Art. VIII, at R. 80-81. This jurisdiction is necessary to settle disputes concerning the administration of the plan as they arise, and to ensure that changes in the reorganized debtor's financial condition are handled equitably.
Because a bankruptcy case continues after a plan has been finally confirmed, the need for opportunity to correct mistakes in the confirmed plan is greater than in a federal civil action where the case terminates after a final judgment is entered.
The bankruptcy principles previously stated . . . may be distinguished from those obtaining in federal civil actions because of the distinctive nature of bankruptcy proceedings. A bankruptcy proceeding is one continuous, often long, proceeding, within which many other controversies and proceedings occur during the course of administration. There is practical utility in the application of a rule which permits the vacation or modification of bankruptcy orders where subsequent events presented during administration demonstrate the necessity therefor; and to do so would not be inequitable. Nor does the relatively unlimited power thus invoked raise any unanswerable objections of hardship or uncertainty when it is applied pursuant to well established bankruptcy principles. (Footnotes omitted.)
In re Texlon Corp., 596 F.2d 1092, 1101 (2d Cir.1979) (quoting 7 Moore, Federal Practice ¶ 60.18, at 215 (2d ed. 1978)).
If a bankruptcy court later finds that a plan it earlier confirmed contains an error, the court should not be required to slavishly follow its earlier mistake. Finality of judgments is indeed important, but so is correctness. There are times and circumstances which justify sacrificing finality for correctness. As Judge Learned Hand pointed out, there is no reason why all bankruptcy court judgments must be final as...
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