United States v. Bros. Materials Ltd. (In re Bros. Materials Ltd.)

• Decision Date: 20 October 2017
• Docket Number: CIVIL ACTION NO. 5:17–CV–0020
• Citation: 580 B.R. 475
• Parties: IN RE: BROTHERS MATERIALS LTD., a Texas Limited Partnership, Debtor United States of America, Appellant v. Brothers Materials Ltd., a Texas Limited Partnership, Appellee
• Court: U.S. District Court — Southern District of Texas

580 B.R. 475

IN RE: BROTHERS MATERIALS LTD., a Texas Limited Partnership, DebtorUnited States of America, Appellant

v.Brothers Materials Ltd., a Texas Limited Partnership, Appellee

CIVIL ACTION NO. 5:17–CV–0020

United States District Court, S.D. Texas, Laredo Division.

Signed October 20, 2017

Thomas M. Herrin, Department of Justice, Dallas, TX, for Appellant.

Carl Michael Barto, Attorney at Law, Laredo, TX, for Debtor.

MEMORANDUM AND ORDER

Marina Garcia Marmolejo, United States District Judge

This case is about finality. "The truth is incontrovertible. Malice may attack it, ignorance may deride it, but in the end, there it is." Winston Churchill.

Although the IRS seeks to collaterally attack the Bankruptcy Court's order confirming the Debtor's Chapter 11 Bankruptcy Plan, the incontrovertible truth of this case is that the IRS did not object to the Plan or directly appeal the confirmation order. Yet when the Debtor filed a motion to enforce an unambiguous Plan provision in the Bankruptcy Court, the IRS changed course, asserting for the first time the Court's alleged lack of jurisdiction to confirm the Plan. The Court agrees with the Bankruptcy Court's holding that the time to make such a challenge has long since passed and that its confirmation order was res judicata. The judgment of the Bankruptcy Court is hereby AFFIRMED .

I. BACKGROUND

In 2014, Brothers Materials, Ltd. (the Debtor) filed for Chapter 11 bankruptcy. (Dkt. No. 2–12 at 3). Brothers Materials is owned by Ramon and Rogelio Soliz, both of whom owe federal income tax to the IRS. (Dkt. No. 2–9 at 1). Their tax liabilities are secured, in part, by a lien on a 10.8619 acre tract of land (the Property), which is jointly owned by the Soliz Brothers, not Brothers Materials. (Id. ).

In an indirect effort to collect the Soliz Brothers' tax liabilities, the IRS actively participated in the Debtor's bankruptcy proceedings. It filed a proof of claim, responded to the Debtor's objections to its claim, and appeared at numerous hearings. (Dkt. Nos. 2–3 at 3; 2–6 at 7; 2–13; 2–15). In November 2015, the Debtor filed its First Amended Combined Plan and Disclosure Statement (the Plan). (Dkt. No. 2–6 at 14). The IRS received the Plan and the hearing date for the Plan's confirmation. (Dkt. Nos. 2–3 at 3; 2–9 at 1). It, however, declined to attend the hearing, and the Plan was confirmed without objection. (Dkt. Nos. 2–3 at 3–4; 2–9 at 1). The IRS did not appeal the confirmation order. (Dkt. No. 2–9 at 2).

The Plan explains that the Soliz Brothers will contribute the Property to the Plan but emphasizes that it is not itself a bankruptcy-estate asset. (Dkt. No. 2–10 at 8, 15). The Plan also states that the Property will be sold, and the proceeds will be used to first pay administrative expenses and then the Debtor's creditors, including the IRS:

The Plan provides that the Debtor will sell all of its remaining assets as part of a plan of liquidation. Proceeds from the sale of the Debtor's assets, as well as property contributed to the plan by the Debtor's equity shareholders will be paid, after the payment of costs of administration (including professional fees and U.S. Trustee's fees), to the payment of allowed third party claims in the order of their priority until such funds are exhausted.

....

The only amounts the Debtor will pay on the I.R.S. claim, will be any proceeds from the sale of equipment or personal property assets that are in excess of administrative expenses, and any amounts necessary to pay the Bank debt in full.

The balance of the I.R.S. debt will be the subject of a settlement between the I.R.S. and the Soliz Brothers. The Soliz Brothers have agreed that the proceeds from the sale of the 10.8619 acres will be paid first to satisfy administrative expenses, then the Debtor's obligation to the bank, and then to pay the I.R.S. settlement.

(Id. at 7–8, 21).

In July 2016, the Debtor filed a motion to enforce the Plan, seeking to use approximately $69,000 from the anticipated sale of the Property to pay attorney's fees as a part of the administrative expenses. (Dkt. No. 2–7). The Bankruptcy Court granted the motion over the IRS's objection. (Dkt. No. 2–3). Relying on United Student Aid Funds, Inc. v. Espinosa , 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010), the Court held that "the IRS is bound to the terms of the Plan because the IRS received notice, was afforded the opportunity to litigate the terms of the Plan, and chose not the utilize that opportunity to object nor appeal." (Dkt. No. 2–3 at 22). The IRS then asked the Bankruptcy Court to reconsider its opinion, but it declined. (Dkt. No. 2–5). This appeal followed.

II. STANDARD OF REVIEW

This Court reviews the Bankruptcy Court's factual findings for clear error. In re San Patricio Cty. Cmty. Action Agency , 575 F.3d 553, 557 (5th Cir. 2009). The Bankruptcy Court's rulings on legal questions, as well as mixed questions of fact and law, are reviewed de novo. Id. Whether the Bankruptcy Court has jurisdiction to hear a controversy is a legal conclusion reviewed de novo. In re Bass , 171 F.3d 1016, 1021 (5th Cir. 1999).

III. ANALYSIS

The thrust of the IRS's appeal is couched in jurisdictional terms. It argues that the Bankruptcy Court did not have subject-matter jurisdiction to enforce the Plan provisions allowing proceeds from the Property's sale to be used to pay administrative expenses before paying the IRS's claim. As a direct attack on the Bankruptcy Court's subject-matter jurisdiction to enforce the Plan, the IRS's argument must fail because the "Bankruptcy Court plainly ha[s] jurisdiction to interpret and enforce its own prior orders." Travelers Indent. Co. v. Bailey , 557 U.S. 137, 151, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009).¹ In truth, the IRS must be arguing that the Plan cannot be enforced because the Bankruptcy Court exceeded its jurisdiction when it originally confirmed the Plan.

In the IRS's view, the Plan should not have been confirmed because the Bankruptcy Court lacked subject-matter jurisdiction over the Property, which is a non-estate asset owned by non-debtors, or alternatively, because it lacked jurisdiction to strip away the IRS's secured interest in the Property. (Dkt. No. 5 at 12). The IRS, however, did not appeal the confirmation order on this ground (or any grounds for that matter) and allowed it to become final. (Dkt. No. 2–9 at 1–2). As a final judgment, it is res judicata, and the IRS has failed to explain why the Court should not give it the preclusive effect that confirmation orders are normally entitled to.

A. The Nature of a Bankruptcy Case

The IRS believes that res judicata does not apply because it is not collaterally attacking the confirmation order. Rather, it asserts that subject-matter-jurisdiction arguments can be raised at any time in a civil action. (Dkt. No. 5 at 15). This point, while correct, is based on the underlying assumption that this appeal from the Bankruptcy Court's enforcement order is a part of the same civil action as the prior confirmation order. This assumption is false. Bankruptcy cases are unique in that they can involve several distinct civil actions and final judgments. Any order that "ends a discrete judicial unit in the larger case concludes a bankruptcy proceeding and is a final judgment." In re Kitty Hawk, Inc. , 204 Fed.Appx. 341, 343 (5th Cir. 2006) (per curiam) (quoting Orix Credit All., Inc. v. Heard Family Trucking, Inc. (In re Heard Family Trucking, Inc. ), 41 F.3d 1027, 1029 (5th Cir. 1995) ). Orders confirming bankruptcy plans and orders enforcing those plans both constitute final judgments under this rule. See Espinosa , 559 U.S. at 269, 130 S.Ct. 1367 (addressing a confirmation order); Kitty Hawk , 204 Fed.Appx. at 343 (addressing an enforcement order).

The IRS believes that it can hijack this enforcement proceeding to directly attack the Bankruptcy Court's original jurisdiction to confirm the Plan, but the IRS lost that ability when the time to appeal the Bankruptcy Court's confirmation order expired. That order marked the end of the confirmation proceeding. This appeal of the enforcement order is a separate controversy or civil action. Thus, the IRS's arguments directed at the validity of the confirmation order in this enforcement action are properly viewed as collateral attacks on that order.

B. Res Judicata and Collateral Attack

Absent a timely appeal, a confirmed plan is res judicata and cannot easily be undermined once it becomes final. 8 COLLIER ON BANKRUPTCY ¶ 1141.02 (16th ed. 2011). In two recent cases, the Supreme Court has reaffirmed this time-honored principle of bankruptcy law. First, in Travelers Indemnity Co. v. Bailey , Johns–Manville Corporation, the largest supplier of asbestos products in the United States, filed for bankruptcy in light of the overwhelming litigation against it for asbestos-related injuries. 557 U.S. 137, 140, 129 S.Ct. 2195, 174 L.Ed.2d 99 (2009). As part of the reorganization plan, Travelers, one of Manville's insurers, agreed to contribute $80 million to the bankruptcy estate on the condition that the bankruptcy court would enjoin all persons from filing suit against Travelers for any policy claims related to Manville. Id. at 141–42, 129 S.Ct. 2195. The bankruptcy court obliged Travelers and issued an insurance-settlement order granting the requested injunction in 1986, which was then incorporated into the court's order confirming Manville's reorganization plan. Id. Both the insurance-settlement order and confirmation order (the 1986 Orders) were affirmed on appeal. Id. at 142, 129 S.Ct. 2195.

Nonetheless, over ten years later several plaintiffs filed asbestos-related actions against Travelers. Id. On Travelers' request, the bankruptcy court enforced the 1986 injunction against the new group of plaintiffs. Id. at 143, 129 S.Ct. 2195. On appeal, the Second Circuit held that the bankruptcy court could not enforce the 1986 Orders because the court did not originally have subject-matter jurisdiction to enter...