In re Neuman
| Decision Date | 18 January 1991 |
| Docket Number | No. 89 Civ. 6995 (KMW).,89 Civ. 6995 (KMW). |
| Parties | In re Carl H. NEUMAN, d/b/a Lydia E. Hall Hospital, Syosset Hospital, and Long Island Food Company, Debtor. SARAH R. NEUMAN FOUNDATION, INC., Plaintiff-Appellee, v. James GARRITY, Trustee, Defendant, and United States of America, Intervenor-Appellant. James GARRITY, Trustee, Plaintiff, and United States of America, Intervenor-Appellant, v. SARAH R. NEUMAN FOUNDATION, INC., et al., Defendants-Appellees. James GARRITY, Trustee, Plaintiff, v. HOSPITAL CONSULTANTS, INC., et al., Defendants-Appellees. |
| Court | U.S. District Court — Southern District of New York |
Nancy Kilson, Asst. U.S. Atty., U.S. Attorney's Office, New York City, for plaintiff-appellant USA.
Andrew D. Gottfried, Zalkin, Rodin & Goodman, New York City, for defendant-appellee James L. Garrity.
Eugene I. Farber, Katz, Kleinbaum, Farber & Karson, White Plains, N.Y., for Carl Neuman, Sarah Neuman Found., Con. Care, LBN, LBN Consultants, James Square & related parties.
Barry Silberzweig, Graubard, Mollen, Dannett & Horowitz, New York City, for Edward Leffler.
Edward P. Zujkowski, Emmet, Marvin & Martin, New York City, for defendant-appellant Bank of N.Y.
Intervenor-appellant the United States of America ("the Government") appeals from the August 21, 1989 order of the United States Bankruptcy Court for the Southern District of New York, the Honorable Prudence B. Abram, United States Bankruptcy Judge, granting a motion to: (1) vacate a January 29, 1987 order permitting the Government to intervene in two adversary proceedings pending in the bankruptcy court, and (2) declare that the Government may not intervene in a third adversary proceeding. The bankruptcy court's decision is reported at 103 B.R. 491 (S.D.N.Y. 1989). The Government also seeks to have this court remand this action to the bankruptcy court with a direction that the clerk reassign this case to a new, randomly-selected bankruptcy judge. For the reasons set forth below, this court reverses the bankruptcy court's decision regarding intervention but denies the Government's application with respect to reassignment.
Debtor Carl Neuman filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C.A. § 1101 et seq. (the "Code"), in the bankruptcy court on December 11, 1984. Judge Abram has noted that the Government appears to be the "single largest creditor of the estate." In re Neuman, supra 103 B.R. at 493. The Government claims that, as a result of overpayments, both pre- and post-petition, received by Neuman in his capacity as sole proprietor of the now-defunct Lydia E. Hall Hospital, the Health Care Financing Administration of the United States Department of Health and Human Services has a claim in the range of $9,000,000.
From the time Neuman's Chapter 11 petition was filed until March, 1986, Neuman acted as debtor-in-possession. On March 18, 1986, James L. Garrity, Sr. was nominated, approved and qualified as the Chapter 11 Trustee. The Trustee was initially represented by his own law firm, Garrity, Connolly, Lewis, Lowry, Grimes & Silverman. In October 1988, Zalkin, Rodin & Goodman succeeded as counsel to the Trustee.
In December, 1986, the Trustee commenced an adversary proceeding against appellee Sarah R. Neuman Foundation, Inc. (the "Foundation") (James Garrity, Trustee, v. Sarah R. Neuman Foundation, Inc., Adv.Pro. No. 86-5815A), and the Foundation commenced an adversary proceeding against the Trustee (Sarah R. Neuman Foundation, Inc. v. James Garrity, Trustee, Adv.Pro. No. 86-5856A). The bankruptcy court, on January 30, 1987, granted the Government's motion to intervene in those proceedings. In March 1988, the Trustee commenced a third adversary proceeding, entitled James Garrity, Trustee v. Hospital Consultants, Inc., et al. (Adv.Pro. No. 88-5210A), in which the Government has participated without a formal order of intervention. The adversary proceedings concern, inter alia, the validity and enforceability of certain leases for and mortgages on the Sarah R. Neuman Nursing Home and Pavilion. Neuman, 103 B.R. at 493.
By motion dated December 20, 1988, Neuman and various related individuals and entities moved for an order vacating the January 30, 1987 order granting the Government status as a party-intervenor in the first two adversary proceedings and declaring that the Government is not permitted to intervene in the third adversary proceeding. The motion was supported by Edward Leffler, James Square Nursing Home, Inc., James Square Associates, James Square II Realty Corporation, Westcliff Manor Associates, Westcliff Manor Realty Corp. and Hospital Consultant, Inc. (collectively referred to as the "Leffler defendants"), who are among the defendants in the first and third adversary proceeding. The Government, along with the Trustee, opposed the motion below.
On August 21, 1989, the bankruptcy court granted the motion. The Government's appeal followed.1 The appeal is opposed by the Leffler defendants and by Neuman, his wife, Loretta B. Neuman and other Neuman-related entities.2
This appeal raises the question whether a pre-petition unsecured creditor or an administration creditor has either an absolute or a conditional right to intervene in an adversary proceeding commenced by a Chapter 11 Trustee. The court has jurisdiction over this bankruptcy appeal pursuant to 28 U.S.C. § 158(a). In reviewing a bankruptcy court's decision, findings of fact are reviewable only for clear error, but legal questions are subject to plenary review. Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 85 (3d Cir.1988).
Although the Second Circuit has not yet faced the issue, several courts have addressed the question whether Bankruptcy Code § 1109(b) gives creditors an absolute right to intervene. The Third Circuit, in In re Marin Motor Oil, Inc., 689 F.2d 445 (3d Cir.1982), cert. denied, 459 U.S. 1206, 103 S.Ct. 1196, 75 L.Ed.2d 440 (1983), answered the question in the affirmative. As Judge Abram noted in her opinion, see Neuman, 103 B.R. at 496, a number of decisions have followed Marin or cited it with approval.
The Marin court began its analysis with the language of § 1109(b). See Marin, 689 F.2d at 449. That section states as follows: "A party in interest, including the debtor, the trustee, a creditor's committee, an equity security holders' committee, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter." 11 U.S.C. § 1109(b) (emphasis added). Appellants in that action urged the court to adopt a narrow interpretation of the term "case" so as to exclude "adversary proceedings" from its definition. The court noted that "neither the term `case' nor the term `adversary proceeding' is defined by the Bankruptcy Code; indeed, the Code makes no mention of `adversary proceedings.'" 689 F.2d at 450.3 The court noted further, however, that "most litigated matters in a bankruptcy case are adversary proceedings; consequently the appellants' proposed reading of section 1109(b) would drastically restrict the rights of parties to appear and be heard." Id. (citation omitted). The court went on to state that " Id. at 451 (quoting S.Rep. No. 95-989, 95th Cong., 2nd Sess. 116 (1978), reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5902 (emphasis added in Marin).
Former § 206 was discussed by Judge Duffy in In re Duplan Corp., 450 F.Supp. 790 (S.D.N.Y.1978), where he held that it provided an indenture trustee with the right to intervene in an adversary proceeding without first requesting the court's leave to do so. Former Section 206 of the Bankruptcy Act provided that "`the debtor, the indenture trustee, and any creditor or stockholder of the debtor shall have the right to be heard on all matters arising in a proceeding under this chapter.'" Duplan, 450 F.Supp. at 791 (quoting former 11 U.S.C. § 606). Judge Duffy noted that Id. at 791. As the court noted in Marin, "the statutory provision which section 206 replaced had given creditors and stockholders an absolute right to be heard on only a limited number of issues, and it was to remedy perceived deficiencies in this system of limited rights that section 206 was enacted." Marin, 689 F.2d at 451.
I agree with the Marin court that "there is no basis for concluding that by changing the statutory language from `all matters arising in a proceeding under this chapter' to `any issue in a case under this chapter' Congress meant to effect a sweeping restriction in the right of interested parties to participate in litigated matters connected with bankruptcy reorganizations." Id. at 453.
The Fifth Circuit, however, in Fuel Oil Supply & Terminaling v. Gulf Oil Corp., 762 F.2d 1283 (5th Cir.1985), reached a different result with respect to the question whether § 1109(b) provides an absolute right to intervene. Although noting that "based on the Bankruptcy Code alone . . . the argument that § 1109(b) creates an absolute right to intervene in adversary proceedings appears strong," id. at 1286, the court went on to find that "this argument loses much of its force . . . when juxtaposed with the procedural rules governing intervention." Id. at 1286. Fed.R....
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