Justice v. Carter

• Decision Date: 14 August 1992
• Docket Number: 91-3376,Nos. 91-3232,s. 91-3232
• Citation: 972 F.2d 951
• Parties: Bankr. L. Rep. P 74,928, 36 Fed. R. Evid. Serv. 930 Richard H. JUSTICE and Bonnie L. Justice, Appellants/Cross-Appellee, v. David O. CARTER, Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 951

972 F.2d 951

Bankr. L. Rep. P 74,928, 36 Fed. R. Evid. Serv. 930

Richard H. JUSTICE and Bonnie L. Justice, Appellants/Cross-Appellee, v. David O. CARTER, Appellee/Cross-Appellant.

Nos. 91-3232, 91-3376.

United States Court of Appeals,

Eighth Circuit.

Submitted May 14, 1992.

Decided Aug. 14, 1992.

Jonathan K. Van Patten, Vermillion, S.D., argued (Bruce M. Ford, Sioux Falls, S.D. on the brief), for appellants.

Paul Thomas Barnett, Sioux Falls, S.D., argued, for appellee.

Before BOWMAN and BEAM, Circuit Judges, and LARSON, ^* Senior District Judge.

LARSON, Senior District Judge.

Richard and Bonnie Justice appeal from the Judgment entered on a jury verdict in favor of respondent David Carter. The district court ¹ denied the Justices' Motion for New Trial without further comment or explanation. On appeal, the Justices challenge the court's decision, alleging error 1) in the submission of Jury Instruction 16A, 2) in the court's refusal to admit certain evidence, and 3) in the denial of the Justices' Motion in Limine, seeking to enlarge the time for identification of expert witnesses who would testify regarding emotional damages. Carter cross-appeals. We affirm the judgment of the district court.

I.

The Justices were farmers in South Dakota from 1962 until approximately 1987. Encountering financial difficulties in the early 1980's, the Justices made no payments on their land mortgage, held by Prudential Insurance Company, in 1984, 1985, and 1986. In May of 1986, Prudential initiated a mortgage foreclosure action. In July of 1986, Prudential received a foreclosure judgment, and in August the land was sold at a sheriff's sale. In early 1987, Valley National Bank (the operating lender) foreclosed on all of the Justices' chattel. In February of 1987, the Justices filed for protection as family farmers under Chapter 12 of the Bankruptcy Code. Prudential and Valley National vigorously opposed the Justices' reorganization plan. The Justices' arguments that a plan of reorganization could be filed and confirmed during the redemption period and, thus, that the use of cash collateral should be approved, was rejected by the bankruptcy court, the district court, and ultimately by this court. See Justice v. Valley National Bank, 849 F.2d 1078 (8th Cir.1988). The Justices' bankruptcy filing was then converted to a Chapter 7 liquidation case and all property was liquidated. In August of 1989, the Justices filed this legal malpractice action against their attorney, David Carter. The intervening events were the subject of much dispute at trial.

Carter met with the Justices on May 2, 1986, the day after the Justices received the mortgage foreclosure notice. Carter discussed with the Justices the procedure, benefits, and risks of filing for bankruptcy. Carter advised the Justices to file for bankruptcy prior to the foreclosure judgment. On May 20, 1986, and on June 30, 1986, Carter wrote to the Justices, reiterating his advice. Shortly before the summary judgment foreclosure hearing on July 7, 1986, Carter again discussed bankruptcy with the Justices, and again stressed the importance of filing prior to foreclosure. The Justices however, repeatedly rejected Carter's advice, choosing instead to rely upon their own efforts to refinance the entire farming operation through independent sources. The Justices expressed concern that a bankruptcy filing would have an adverse impact upon their refinancing opportunities. Unbeknownst to Carter, the Justices signed an agreement securing a "finders fee" on a 1.5 million dollar loan on July 1, 1986. It was represented to the Justices by the independent lenders that they were certain to receive the loan. At the July 7 meeting, Carter responded in the affirmative to the Justices' inquiries whether there was a "chance" of recovering their property if they filed for bankruptcy after foreclosure. In October of 1986, Carter again wrote to the Justices, confirming their decision not to pursue bankruptcy. The Justices continued negotiations with the independent lenders. When Valley National commenced foreclosure proceedings in early 1987, the Justices finally authorized Carter to file a bankruptcy petition, leading to the adverse decision in Justice v. Valley National Bank.

The Justices testified at trial that Carter failed to advise them of the adverse consequences arising from failure to file bankruptcy prior to the foreclosure judgment and sheriff's sale. Pointing to various correspondence from Carter, the Justices alleged that Carter did not fully understand the timing or the import of the various decisions, allowing the Justices to reach the point of no return without adequate warning. The Justices also alleged that Carter advised them that they could recover their land through a bankruptcy proceeding even after the sheriff's sale.

II.

A. Jury Instruction 16A

The critical issue at trial, and the issue upon which many of the alleged errors on appeal turn, is the feasibility of the Justices' hypothetical Chapter 11 reorganization effort. In other words, would the Justices reorganization plan have been filed, confirmed, and successful, but for attorney Carter's negligence?

Jury Instruction 16A states:

A plan of reorganization under Chapter 11 of the Bankruptcy Code will be confirmed if it appears reasonably probable that the farmer can pay the restructured debt, over a reasonable period of time, at a reasonable rate of interest, in light of farm prices and farm programs as of the date of confirmation; and, that the Plan requires the farmer to pay the full face value of the debt with accrued principal and interest.

Simply because a Plan of reorganization is confirmed does not mean that the Plan will be successful. In order for the Plan of reorganization to be successful, the farmer must, in fact, repay all of the restructured debt according to the terms of the Plan of reorganization.

Authority for this instruction is 11 U.S.C. § 1129(b)(2)(B)(ii), which states with regard to plan confirmation:

(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:

....

(B) With respect to a class of unsecured claim--

....

(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.

Referred to as the absolute priority rule, this section of the Bankruptcy Code provides that unsecured creditors have absolute priority over any junior equity interest to receive all money or property distributed, until the unsecured creditors are paid in full under the reorganization plan.

The Justices do not claim that the jury instruction is an incorrect statement of the law but, rather, that the eighth circuit's interpretation of the Bankruptcy Code, as pronounced in In re Ahlers, 794 F.2d 388 (8th Cir.1986), rev'd sub nom., Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988), was the binding law at the time of their hypothetical reorganization. (The respective dates of the eighth circuit and the Supreme Court decisions are July 2, 1986, and March 7, 1988.) Petitioners in In re Ahlers argued that the absolute priority rule barred the feasibility, and ultimately the confirmation, of any plan which allowed respondents to retain an equity interest in their farm, an interest junior to creditors' unsecured claims. The eighth circuit held that,

[T]he absolute priority rule did not bar respondents from retaining their equity interest if they contributed 'money or money's worth' to the reorganized enterprise, and that their yearly contributions of 'labor, experience, and expertise' would constitute such a contribution, therefore permitting confirmation of a reorganization plan over petitioners' objections.

Norwest Bank Worthington, 485 U.S. at 197, 108 S.Ct. at 963. The eighth circuit thus carved out an exception to the absolute priority rule for farm reorganizations. The Supreme Court, however, reversed the eighth circuit, stating that the absolute priority rule was applicable and that respondents' promise of future labor warranted no exception to the operation of the rule. "Relief from current problems facing farm families cannot come from a misconstruction of the bankruptcy laws...." Id. at 198, 108 S.Ct. at 964.

The Justices' contention that we must adhere to the statutory law as it was interpreted by the courts at the time of the parties' actions is inviting. The Justices' arguments of legal certainty and justifiable reliance are particularly appealing. However, the Supreme Court has instructed us that a high court decision construing a statute as Congress intended it be construed should be given full retroactive effect, except in certain rare instances. United States v. Estate of Donnelly, 397 U.S. 286, 90 S.Ct. 1033, 25 L.Ed.2d 312 (1970). The district court in that case, 295 F.Supp. 557 (E.D.Mich.1967), affirmed by the Court of Appeals for the Sixth Circuit, 406 F.2d 1065 (6th Cir.1969), held, in part, that respondents were entitled to rely upon the prevailing interpretation of a federal statute as it appeared in Youngblood v. United States, 141 F.2d 912 (6th Cir.1944). Conceding that the sixth circuit's interpretation had been rejected by the Supreme Court in an unrelated opinion one year after respondents' good faith purchase of land encumbered by a federal tax lien, the district court nevertheless concluded that the high court decision should not be applied retroactively, thus upsetting respondents' allegedly justifiable expectation of unclouded title. Estate of Donnelly, 397 U.S. at 291, 90 S.Ct. at 1036. The Supreme Court reversed. In its decision, the Court distinguished an earlier, apparently contrary decision, Chicot County Drainage District v. Baxter State Bank, 308 U.S. 371, 60 S.Ct. 317, 84 L.Ed. 329 (1940), in which the subsequent, unrelated...