Wiese v. Community Bank of Cent. Wis.

• Decision Date: 08 January 2009
• Docket Number: No. 07-3753.,07-3753.
• Citation: 552 F.3d 584
• Parties: In re Walter George WIESE and Carla Kay Wiese, Debtors-Appellees, v. Appeal of COMMUNITY BANK OF CENTRAL WISCONSIN, Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

552 F.3d 584

In re Walter George WIESE and Carla Kay Wiese, Debtors-Appellees, v. Appeal of COMMUNITY BANK OF CENTRAL WISCONSIN, Appellant.

No. 07-3753.

United States Court of Appeals, Seventh Circuit.

Argued September 8, 2008.

Decided January 8, 2009.

Susan Lacava (argued), Madison, WI, for Debtors-Appellees.

James E. Bartzen (argued), Boardman, Suhr, Curry & Field, Madison, WI, for Appellant.

Before POSNER, KANNE, and TINDER, Circuit Judges.

TINDER, Circuit Judge.

Walter and Carla Wiese are dairy farmers, and they borrowed money from Community Bank of Central Wisconsin to expand their dairy operation by building a new barn and buying additional cows. Unfortunately, the expansion of the dairy operation was not profitable. When the Wieses defaulted on the loan repayment, the Bank commenced foreclosure and replevin actions in state court on the collateral in which the Bank held security interests. The Wieses then filed for Chapter 12 bankruptcy, a voluntary type of bankruptcy specifically designed for family farmers. As part of the Wieses' confirmed plan of bankruptcy, the Wieses and the Bank made certain concessions, one of which (and the reason for this appeal's existence) required the Wieses to release their purported "lender liability" claims against the Bank, arising from the Bank's advice in connection with the loan and the construction of the barn. The Wieses later decided to have the bankruptcy case dismissed, as they had a statutory right to do—but the bankruptcy court determined that there was "cause" for the terms of the confirmed plan to remain binding on the parties. The Wieses appealed to the district court, which reversed the decision of the bankruptcy court. Now the Bank appeals from the district court's decision, and the Wieses seek sanctions against the Bank for bringing this appeal.

I. Background

Chapter 12 bankruptcy was created "to give family farmers facing bankruptcy a fighting chance to reorganize their debts and keep their land." In re Fortney, 36 F.3d 701, 703 (7th Cir.1994) (quoting In re Kerns, 111 B.R. 777, 788 (S.D.Ind.1990)). After a debtor chooses to file a Chapter 12 petition for bankruptcy, creditors file proofs of claim with the bankruptcy court. See 11 U.S.C. § 501(a). The debtor must file a reorganization plan that sets out how the various claims will be paid, and the plan must meet certain statutory requirements. Id. §§ 1221-22. The court then holds a confirmation hearing, and a party in interest can object to the confirmation of a plan. Id. § 1224. A plan cannot be confirmed without the consent of a holder of a secured claim where the holder does not accept the plan or the debtor does not surrender the collateral, unless (1) the plan provides that the holder retain the lien securing the claim; and (2) the value of property to be distributed to the debtor or trustee under the plan with respect to that claim is not less than the allowed amount of the claim. Id. § 1225(a)(5); In re Krause, 261 B.R. 218, 222 (8th Cir. BAP 2001). Once the plan is confirmed, it is binding on the debtor and the creditors. 11 U.S.C. § 1227(a). However, a debtor can request at any time that the court dismiss the case (unless it has been converted to a Chapter 7 or Chapter 11 bankruptcy), and the court must dismiss it. Id. § 1208(b). The debtor cannot waive his right to dismiss the case. Id. A dismissal reinstates avoided transfers or voided liens made under certain provisions of the bankruptcy code, vacates certain types of orders made under the code, and "revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case," unless the bankruptcy court orders otherwise for "cause." Id. § 349(b).

In this case, the Wieses filed for Chapter 12 bankruptcy on January 13, 2006, after the Bank commenced state court foreclosure and replevin actions. The state actions were stayed, and the Bank filed a proof of claim with the bankruptcy court a few months later. Over the next several months, the Wieses filed a reorganization plan, an amended plan, and a second amended plan. The Bank objected to each plan, and the plans could not be confirmed because the Bank either would not retain all its liens securing the claim or the Bank would not receive the full value for the claim. In November 2006, the Wieses filed an adversary proceeding objecting to the Bank's proof of claim and asserting several pre-petition "lender liability" claims against the Bank. The parties reached an agreement on a third amended plan, which the bankruptcy court confirmed on December 7, 2006.

The reorganization plan included the following terms: the Wieses agreed to release the lender liability claims against the Bank, and the Bank agreed to release a lien held on funds in escrow, forgive default interest, set a cap on attorneys' fees and out-of-pocket expenses, allow a four-month delay prior to the Wieses' re-commencing payment, and re-calculate the Wieses' loan at the contract rate of interest rather than at the higher default rate of interest. Certain liquidation procedures were required if the Wieses defaulted under the plan.

Less than a week after the plan's confirmation, the Wieses filed a motion to vacate the confirmed order and liquidate their assets because a loan program they thought would be available to them was not. In March 2007, the court denied the motion, as well as another motion that the Wieses filed to amend the confirmed plan, noting that "the parties reached an agreement which was placed on the record with full awareness that the debtors might not qualify for the loan program in question." Consequently, in April 2007, the Wieses moved to dismiss the case, as was their right under § 1208(b). The court granted the motion to dismiss. In determining what effect a post-confirmation dismissal had on the parties' rights and obligations, the bankruptcy court noted that 11 U.S.C. § 349(b) governed and explained that for "cause" to be ordered, there must be an acceptable reason for altering the normal impact of § 349(b). The court concluded:

"Cause" in this context is usually geared toward protecting rights acquired in reliance upon the bankruptcy.... When a debtor seeks the dismissal of a case, the court may properly consider the interests of creditors or other third parties which were gained in the course of, or in reliance upon, the bankruptcy. In this case, the debtors and the creditor negotiated a confirmed plan after a series of contested hearings. The creditor granted the debtors certain concessions, and the debtors agreed to the release of certain claims and various liquidation provisions in the event of a default. To the extent that § 349 might affect the rights obtained as a result of the confirmed plan, the Court finds sufficient "cause" to order otherwise.

In re Wiese, No. 06-10053-12, slip op. at 2-3 (Bankr.W.D. Wisc. June 6, 2007) (internal citations omitted).

The Wieses appealed the order. The district court agreed that § 349(b) governed the rights of the parties in a post-confirmation dismissal, and it cited the legislative history to determine that the purpose of subsection (b) "`is to undo the bankruptcy case, as far as practicable, and to restore all property rights to the position in which they were found at the commencement of the case.'" Wiese v. Cmty. Bank of Central Wisc., 2007 WL 5445862, at *1 (W.D.Wis.2007) (quoting H.R.Rep. No. 95-595, at 338 (1977)). The district court noted that we held in In re Sadler, 935 F.2d 918, 921 (7th Cir.1991), that attempting to avoid the effect or purpose of a statute is not an acceptable reason for finding "cause." Wiese, 2007 WL 5445862, at *2. Allowing a confirmed plan to remain binding on the parties after dismissal would rob the debtors of § 1208's unqualified right to dismiss the case—it would essentially serve as a waiver, even though an actual waiver is not permitted by statute. Id. Accordingly, since the purpose of the statute would be nullified, the district court concluded that the bankruptcy court's "cause" determination must be vacated. Id. The district court noted that now "debtors-appellants are free to pursue any legal claims they may have including those addressed in the confirmed plan." Id.

II. Analysis

In reviewing the district court's decision to reverse the bankruptcy court, we employ the same standard of review that the district court itself used. Corporate Assets, Inc. v. Paloian, 368 F.3d 761, 767 (7th Cir.2004). Therefore, we review the bankruptcy court's determinations of law de novo and findings of fact for clear error. In re ABC-Naco, Inc., 483 F.3d 470, 472 (7th Cir.2007). But where the bankruptcy code commits a decision to the discretion of the bankruptcy court, we review that decision only for an abuse of discretion. Fortney, 36 F.3d at 707 (citing In re Leventhal & Co., 19 F.3d 1174, 1177 (7th Cir.1994)). "[A] court abuses its discretion when its decision is premised on an incorrect legal principle or a clearly erroneous factual finding, or when the record contains no evidence on which the court rationally could have relied." Corporate Assets, Inc., 368 F.3d at 767.

The bankruptcy court's "cause" determination was a decision committed to its discretion. The bankruptcy court did not discuss the underlying legal question—whether § 349(b) would have invalidated the release (or, to use the terms of § 349(b)(3), "revest[ed] the property of the estate in the entity in which such property was vested immediately before the commencement of the case") in the absence of a "cause" determination. Instead it held that "[t]o the extent that § 349 might affect the rights obtained as a result of the confirmed plan, the Court finds sufficient `cause' to order otherwise." In re Wiese, No. 06-10053-12, slip op. at 3 (emphasis added). The parties' filings prior to the bankruptcy court's order did not address this question in any substantive way either, though the Bank did...