Woodlawn Cmty. Dev. Corp. v. Official Comm. of Unsecured Creditors (In re Woodlawn Cmty. Dev. Corp.)
| Decision Date | 13 March 2020 |
| Docket Number | No. 19 CV 1605,19 CV 1605 |
| Parties | IN RE WOODLAWN COMMUNITY DEVELOPMENT CORP., Debtor. WOODLAWN COMMUNITY DEVELOPMENT CORP., Appellant, v. OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Appellee. |
| Court | U.S. District Court — Northern District of Illinois |
Appeal from the United States Bankruptcy Court for the Northern District of Illinois, No. 18-29862.
MEMORANDUM OPINION AND ORDERFor almost 50 years, Dr. Leon Finney ran the Woodlawn Community Development Corporation, a nonprofit organization that provided affordable housing and advocated for social justice in the Woodlawn neighborhood on the south side of Chicago. The organization had a board of directors and senior-level managers in place, but, in practice, Finney singlehandedly ran the organization with nearly unlimited discretion. Among his decisions with dire consequences for the organization, Finney diverted over a million dollars in employee payroll taxes into Woodlawn's operating account. The IRS tax lien that followed then caused Woodlawn to file a Chapter 11 bankruptcy petition. Woodlawn's unsecured creditors moved the bankruptcy court to appoint a trustee under 11 U.S.C. § 1104(a) to take over management of the debtor's estate. The unsecured creditors' committee, the U.S. Trustee, and the Chicago Housing Authority, Woodlawn's largest client, all supported appointment of a trustee.
After three hearings, the bankruptcy judge granted the motion. She found that Finney's conduct amounted to gross mismanagement, fraud, and self-dealing. See 11 U.S.C. § 1104(a)(1). And although Woodlawn had hired a member of its board of directors to be its new CEO, the judge found that, overall, Woodlawn's management had continued largely unchanged. A trustee would be in the creditors' interest, according to the judge, because the creditors had lost confidence in Woodlawn's management. See 11 U.S.C. § 1104(a)(2). Woodlawn appeals the order appointing a trustee, insisting that the court insufficiently weighed Woodlawn's change in management. The bankruptcy judge did not abuse her discretion in appointing a trustee, and the order is affirmed.
A reviewing court assesses the bankruptcy court's factual findings for clear error and its legal conclusions de novo. In re Marcus-Rehtmeyer, 784 F.3d 430, 436 (7th Cir. 2015). Whether to appoint a trustee under § 1104(a) is a discretionary decision, affirmed unless it is an abuse of discretion. In re López-Muñoz, 866 F.3d 487, 495 (1st Cir. 2017); see Wiese v. Cmty. Bank of Cent. Wis., 552 F.3d 584, 589 (7th Cir. 2009).
A federal district court has jurisdiction to hear "appeals from final orders of a bankruptcy court." In re Sobczak-Slomczewski, 826 F.3d 429, 431 (7th Cir. 2016); see28 U.S.C. § 158(a)(1). A federal district court also has discretion to accept jurisdiction over interlocutory appeals under 28 U.S.C. § 158(a)(3).
Woodlawn asserts that the appointment of a Chapter 11 trustee is a final order, appealable as of right. The U.S. Trustee argues that the appointment of a Chapter 11 trustee is an interlocutory order, so this court has only discretionary jurisdiction, and urges dismissal of the appeal.1 Woodlawn does not respond to the Trustee's arguments about discretionary jurisdiction.
In the "strict sense," a Chapter 11 bankruptcy is not final "until a plan of reorganization is confirmed." In re UAL Corp., 411 F.3d 818, 821 (7th Cir. 2005). But the concept of finality in bankruptcy is "considerably more flexible" than in other civil appeals. Schaumburg Bank & Tr. Co. v. Alsterda, 815 F.3d 306, 312 (7th Cir. 2016). That is because bankruptcy cases involve "many claims and problems," each of which "may come to a final conclusion before the estate has been wrapped up." Id. at 311 (quoting In re Bulk Petro., 796 F.3d 667, 670 (7th Cir. 2015)); see also Bullard v. Blue Hills Bank, 135 S. Ct. 1686, 1692 (2015). To determine finality, courts look to whether the bankruptcy court's decision "finally disposed of a discrete dispute within the larger case." Schaumburg Bank, 815 F.3d at 312. If the court's order "conclusively resolves" the sort of dispute that would be a "stand-alone case outside of bankruptcy," the order is final. Matter of Anderson, 917 F.3d 566, 569 (7th Cir. 2019).
The Seventh Circuit, without specific analysis, included appointment of a trustee in a list of final, appealable orders from a bankruptcy court. Matter of Wade, 991 F.2d 402, 406 (7th Cir. 1993) (). Other circuits find that such an order is final because, once a bankruptcy court appoints a trustee, there is "nothing more for the bankruptcy court to do." Ritchie Special Credit Investments, Ltd. v. U.S. Tr., 620 F.3d 847, 852 (8th Cir. 2010). It makes little sense to delay reviewing the appointment of a trustee (or denying one) until the bankruptcy case is over. If a court on appeal were to reverse the appointment of a trustee, that decision could "jettison years of bankruptcy infighting, compromise and final determinations" only to "have the proceedings begin again from scratch." In re Marvel Entm't Grp., Inc., 140 F.3d 463, 470 (3d Cir. 1998); see also Ritchie, 620 F.3d at 853. Thus, the circuit courts to have considered the question categorize the appointment of a trustee as a final appealable order. Ritchie, 620 F.3d at 853; In re Marvel, 140 F.3d at 470; In re Plaza de Diego Shopping Ctr., Inc., 911 F.2d 820, 826 (1st Cir. 1990); Comm. of Dalkon Shield Claimants v. A.H. Robins Co., 828 F.2d 239, 241 (4th Cir. 1987).
I agree. The bankruptcy court's order here conclusively resolved a discrete dispute—whether Woodlawn's internal management or an independent trustee would oversee Woodlawn's reorganization. That decision had significant consequences for Woodlawn and the creditors going forward. Cf. Schaumburg Bank, 815 F.3d at 314 (). Moreover, treating the appointment of atrustee as final does not run the risk of piecemeal judgments, the concern that motivates finality rules in ordinary civil lawsuits. See Bullard, 135 S. Ct. at 1692. It makes sense to review the order shortly after the court decides it, rather than waiting until the Chapter 11 bankruptcy is technically final. As the Eighth and Third Circuits noted, to delay review would potentially upend years of work. Consistent with the liberal finality standards in bankruptcy law, an order appointing a trustee resolves a discrete dispute on the merits and is a final order.
The U.S. Trustee relies on Matter of Cash Currency Exch., Inc., 762 F.2d 542 (7th Cir.), cert. denied, 474 U.S. 904 (1985), which held that the appointment of a trustee under 11 U.S.C. § 1104 was interlocutory and not appealable as of right. But that same year, the Seventh Circuit heard an appeal from an order appointing a trustee without discussing jurisdiction. In re Reid, 773 F.2d 945 (7th Cir. 1985). A few years later, in In re Klein, 940 F.2d 1075, 1076-77 (7th Cir. 1991), the court questioned its holding in Cash Currency. It noted that, in light of the apparent conflict between Cash Currency and Reid, "the appealability of trustee appointments in Chapter 11 proceedings appears to be an open question in this circuit." Id. Two years later, the court included trustee appointments in its list of final orders in Wade. The court's treatment of the issue suggests that appointment of a trustee is a final, appealable order, and nothing indicates a considered choice to create a split among the circuits.
Because the bankruptcy court's order resolved a discrete dispute, the order was final and appealable as of right.
In 1960, 100 neighborhood associations, religious organizations, and civic groups created the Woodlawn Organization to revitalize the Woodlawn neighborhood on the south side of Chicago. [21-1] at 11.2 In 1972, Woodlawn Community Development Corporation (Woodlawn) formed to manage real estate development for the Woodlawn Organization. [21-1] at 11. Woodlawn later developed ten construction projects; by 2018, Woodlawn managed 4,800 public housing apartments across 14 properties. [21-1] at 11. Woodlawn owned some of the properties outright, and managed others that were owned by the Chicago Housing Authority, Woodlawn's largest client. [21-1] at 437, 457, 473. Until October 2018, Dr. Leon Finney was Woodlawn's President and CEO. [21-1] at 10.
Woodlawn owned a building at 1500 East 63rd Street. [21-1] at 142, 441, 460. A real estate company that Finney owned, Lincoln South Central Real Estate Corporation, managed that property. [121-1] at 142, 157, 186, 441, 460. Lincoln South collected rent from the tenants, and was supposed to pay that rent to Woodlawn. [121-1] at 157, 186. For about seven years, Lincoln South never paid Woodlawn any rent that it collected from that property. [21-1] at 143, 186, 233, 460, 468.3
Sometime around the beginning of 2017, Woodlawn changed payroll processors. [21-1] at 84, 268, 459. Woodlawn's CFO, Amy Mohammad, began handling payroll taxes internally. [21-1] at 84, 89. Finney told the new processor that Woodlawn would pay its employee payroll taxes itself. [21-1] at 135, 149, 185, 219, 459. Instead of paying employee payroll taxes, Finney moved the money from Woodlawn's payroll account into its operating account, and took $150,000 of that money to prevent foreclosure on one of Woodlawn's properties. [8] at 67-69, 220, 224, 268-69, 289, 457, 459. Woodlawn failed to pay payroll taxes for the second and fourth quarters of 2017 and the first quarter of 2018, and the IRS filed federal tax liens in the amount of $1.5 million to $1.8 million. [21-1] at 13, 185, 457.4
In October 2018, Finney told Woodlawn's board of directors that the organization had to file for bankruptcy, and that he was ill and could no longer serve as CEO. [21-1] at...
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