Kham & Nate's Shoes No. 2, Inc. v. First Bank of Whiting, No. 89-3001

• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)
• Writing for the Court: Before WOOD, Jr., and EASTERBROOK, Circuit Judges, and ESCHBACH; EASTERBROOK
• Citation: 908 F.2d 1351
• Decision Date: 12 October 1990
• Docket Number: No. 89-3001
• Parties: , 23 Collier Bankr.Cas.2d 1118, 20 Bankr.Ct.Dec. 1305, Bankr. L. Rep. P 73,565 KHAM & NATE'S SHOES NO. 2, INC., Debtor-Appellee, v. FIRST BANK OF WHITING, Defendant-Appellant.

Page 1351

908 F.2d 1351 59 USLW 2166, 23 Collier Bankr.Cas.2d 1118,
20 Bankr.Ct.Dec. 1305, Bankr. L. Rep. P 73,565 KHAM & NATE'S SHOES NO. 2, INC., Debtor-Appellee,
v.
FIRST BANK OF WHITING, Defendant-Appellant. No. 89-3001. United States Court of Appeals,
Seventh Circuit. Argued May 31, 1990.
Decided July 19, 1990.
Rehearing and Rehearing En Banc
Denied Oct. 12, 1990.

Page 1353

John T. Cusack, Gordon B. Nash, Jr., Brian A. Bosch, Gardner, Carton & Douglas, Chicago, Ill., for plaintiff-appellant.

JoAnn M. Hornak, Lord, Bissell & Brook, James H.M. Sprayregen, Rudnick & Wolfe, Chicago, Ill., for debtor-appellee.

Before WOOD, Jr., and EASTERBROOK, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

EASTERBROOK, Circuit Judge.

Kham & Nate's Shoes No. 2, Inc., ran four retail shoe stores in Chicago. It has been in bankruptcy since 1984, operating as a debtor in possession. First Bank of Whiting, one of Kham & Nate's creditors, appeals from the order confirming its plan of reorganization. This order not only reduces the Bank's secured claim to unsecured status but also allows Khamolaw Beard and Nathaniel Parker, the debtor's principals, to retain their equity interests despite the firm's inability to pay its creditors in full. The bankruptcy judge subordinated the Bank's claims after finding that it behaved "inequitably", and he allowed Beard and Parker to retain their interests on the theory that their guarantees of new loans to be made as part of the reorganization are "new value".

I

The Bank first extended credit to the Debtor in July 1981. This $50,000 loan was renewed in December 1981 and repaid in part in July 1982. The balance was rolled over until late 1983, when with interest it came to $42,000. In September 1983 Bank issued several letters of credit in favor of Debtor's customers. Debtor furnished a note to support these letters of credit; the Bank's security interest was limited to the goods the suppliers furnished. In late 1983 Debtor, experiencing serious cash-flow problems, asked for additional capital, which Bank agreed to provide if the loan could be made secure. That was hard to do, for Debtor had lost money the previous two years and owed more than $440,000 to tax collectors; any new loan from Bank would stand behind the back tax liabilities. The parties discussed two ways to make Bank secure: a guarantee by the Small Business Administration, and a bankruptcy petition followed by an order giving a post-petition loan super-priority.

While waiting for the SBA to act on its application, Debtor filed its petition under Chapter 11 of the Bankruptcy Code in January 1984. Judge Toles granted its application for an order under 11 U.S.C. Sec. 364(c)(1) giving a loan from Bank priority even over the administrative expenses of the bankruptcy. Debtor and Bank then signed their loan agreement, which opens a $300,000 line of credit. The contract provides for cancellation on five days' notice and adds for good measure that "nothing provided herein shall constitute a waiver of the right of the Bank to terminate financing at any time".

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The parties signed the contract on January 23, 1984, and Debtor quickly took about $75,000. Suppliers began to draw on the letters of credit. On February 29 Bank mailed Debtor a letter stating that it would make no additional advances after March 7. Although the note underlying the line of credit required payment on demand, Bank did not make the demand. It continued honoring draws on the letters of credit. Debtor's ultimate indebtedness to Bank was approximately $164,000: $42,000 outstanding on the loan made in 1981, $47,000 on the letters of credit, and $75,000 on the line of credit. Debtor paid $10,000 against the line of credit in April 1985 but has made no further payments. Debtor did not ask the court to order Bank to make further advances or to grant super-priority to another creditor to facilitate loans from another source.

There matters stood until the spring of 1988, when Debtor proposed its fourth plan of reorganization. Although the previous three plans had called for Bank to be paid in full, the fourth plan proposed to treat Bank's claims as general unsecured debts. This fourth plan also proposed to allow the shareholders to keep their stock, in exchange for guaranteeing new loans to Debtor.

Bankruptcy Judge Coar held an evidentiary hearing and concluded that Bank had behaved inequitably in terminating the line of credit and inducing Debtor's suppliers to draw on the letters of credit. These draws, the judge concluded, converted Bank from an unsecured lender (the position it held before the bankruptcy) to a super-secured lender under Judge Toles' financing order. Judge Coar first vacated the financing order and then subordinated Bank's debt, on the authority of 11 U.S.C. Sec. 510(c). Finally, Judge Coar confirmed the plan of reorganization, including the provision allowing the stockholders of Debtor to retain their interests. He found that their guarantees were "new value" equivalent to the worth of the interests they would retain, which the judge thought small. The district judge affirmed, 104 B.R. 909 (N.D.Ill.1989).

II

Appellate jurisdiction is our initial hurdle. Bank filed an appeal but now contends that we lack jurisdiction. It observes that although Judge Coar has confirmed the plan of reorganization, he has not quantified Bank's entitlements. Debtor filed a counterclaim against Bank, contending that it is entitled to more than $300,000 in damages because of Bank's refusal to provide extra credit. After Bank stopped making loans, Debtor closed its head office in a snazzy building on Michigan Avenue; a deterioration in the prestige of its address made suppliers less willing to deliver shoes on credit, Debtor insists, with the result that it shrunk from four stores (two in ritzy locations) to one on Chicago's south side. Judge Coar entered an order finding Bank liable to Debtor, essentially for the reasons he subordinated Bank's claims. After taking evidence on Debtor's damages in the spring of 1990, however, the judge issued an order requiring the parties to brief anew the question whether the finding of liability--and implicitly the subordination of Bank's claims--was proper. Pending counterclaims usually prevent a bankruptcy order from being final, see In re Berke, 837 F.2d 293 (7th Cir.1988), so Bank asks us to dismiss the appeal. (Why does Bank not just withdraw its notice of appeal? Appellate jurisdiction in bankruptcy cases is a murky subject. Bank fears that if the order confirming the plan turns out to be "final" after all, then it will forfeit its rights if it does not press all claims now. But see In re Kilgus, 811 F.2d 1112 (7th Cir.1987).)

Because of the counterclaim, questions closely related to those on appeal could return to the court. As a rule, the failure to liquidate a creditor's claim means no appellate jurisdiction. See In re Morse Electric Co., 805 F.2d 262 (7th Cir.1986). An order confirming the plan of reorganization, however, marks the termination of any distinctive bankruptcy proceeding and is therefore appealable. In re Xonics, Inc., 813 F.2d 127 (7th Cir.1987). The amount of the claim in Xonics was not in dispute, making it an easy case for finality

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and hence appeal under 28 U.S.C. Sec. 158(d). Still, because the debtor may proceed at once to carry out a confirmed plan, the existence of severable disputes does not prevent finality. A plan may be revoked only for fraud, and then only within six months. 11 U.S.C. Sec. 1144. It is as close to the final order as any the bankruptcy judge enters.

Bank's claim against Debtor has been quantified. Because no one objected, Bank's claim was allowed in full automatically. 11 U.S.C. Sec. 502(a). Nothing in the plan is contingent on the resolution of Debtor's counterclaim against Bank. As a practical matter, Debtor's request for damages against Bank is a separate piece of commercial litigation, demanding a remedy for breach of contract. Just as the final disposition of a controversy that would be a stand-alone dispute outside of bankruptcy is appealable, see Morse and In re Jartran, Inc., 886 F.2d 859, 862 (7th Cir.1989), so the persistence of a separate adversary proceeding that would be a stand-alone dispute outside of bankruptcy does not prevent an appeal from an order confirming the plan of reorganization. We need not decide whether a decision to subordinate a claim would be appealable in advance of quantification; here the subordination was accomplished as part of the plan, and the confirmation order is always appealable.

III

Subordination of Bank's claim required two steps: setting aside Judge Toles' financing order, followed by the application of Sec. 510(c). Bank does not object to the first of these on the merits; it says only that Debtor tarried beyond the time allowed by Fed.R.Civ.P. 60(b) for modifying a judgment. This is a curious contention--not only because Rule 60(b) does not apply to bankruptcy cases save to the extent it has been incorporated into the bankruptcy rules, but also because it applies only to final decisions. Kapco Mfg. Co. v. C & O Enterprises, Inc., 773 F.2d 151 (7th Cir.1985). The financing order of 1984 was not a final judgment. Whether it may be vacated in 1988 is a question of the law of the case, not of Rule 60(b). Judge Coar was entitled to revisit Judge Toles' orders. Delay did not prejudice Bank; nothing would be different had Debtor proposed subordination some years earlier in its initial plan of reorganization.

Setting aside the order is one thing; proceeding to equitable subordination under Sec. 510(c) is quite another. There is an intermediate step, suggested by Sec. 364(e), which provides that the reversal or modification of a financing order on appeal "does not affect the validity of any debt so incurred, or any priority or lien so granted, to an entity that extended such credit in good faith". In other...