Contributed by Debra McElligott
Section 350(b) of the Bankruptcy Code provides that a case may be reopened to administer assets, to accord relief to the debtor, or for “other cause.” Although reopening a case might have serious implications, the Bankruptcy Code offers little guidance regarding the application of section 350(b). In its recent opinion in Harbour Trust Co. v. Aaron (In re PlusFunds Grp., Inc.), the United States District Court for the Southern District of New York explored the application of section 350(b) by the United States Bankruptcy Court for the Southern District of New York, upholding Judge Peck’s analysis of several factors in his decision to deny a trustee’s motion to reopen.
In March of 2006, the PlusFunds group, a financial services provider, filed for chapter 11 relief. The liquidation plan, confirmed in 2007, created a trust relating to one of the debtor’s investment vehicles. The purpose of the trust was to pursue certain causes of action against creditors and counterparties so that any value realized could be distributed to the trust’s beneficiaries. In 2008, the trustee filed an action against the defendants, who were creditors and/or counterparties to executory contracts with the debtor. The bankruptcy court closed the bankruptcy case in 2010, and the trust expired in September of 2012. Later that year, the defendants moved for summary judgment in the trustee’s action on the grounds that the trustee lacked standing to prosecute the actions after failing to seek an extension of the trust prior to its expiration. On February 22, 2013, the trustee moved to reopen the bankruptcy case so that the court could consider the trustee’s motion to approve an amendment to the trust agreement that retroactively extended the trust. The defendants objected to the motion. Judge Peck found that the defendants had no standing to object and then denied the trustee’s motion.
On appeal, the district court upheld the bankruptcy court’s decision that the defendants did not have standing to object, as they were not parties in interest to the bankruptcy proceedings. The district court then upheld Judge Peck’s denial of the motion to reopen the case, finding that the bankruptcy court did not abuse its discretion in rejecting the trustee’s arguments. First, the district court considered the trustee’s argument that the case should be reopened under section 350(b) to administer assets. The district court noted that a case can be closed under section 350(a) only after an estate’s assets have been “fully administered.” As a result, a bankruptcy case should only be reopened to administer newly discovered assets, not assets known to the debtor at the time the case closed. The district court thus agreed with Judge Peck’s finding that administration of assets was an insufficient justification to reopen the case under section 350(b), as the assets in the trustee’s case not only were known at the time of closing in 2010, but also were the primary reason the trust was created.
The district court also upheld Judge Peck’s rejection of the trustee’s argument that “other cause” existed to reopen the case, noting that courts “may consider numerous factors, including equitable concerns, and should emphasize substance over technical considerations” in determining whether cause exists. Judge Peck held that the case could not be reopened “for cause” under the factors outlined in In re Easley-Brooks. Among these factors are the length of time the case was closed, whether a non-bankruptcy forum could determine the issue, whether prior litigation determined that state court would be the appropriate forum, whether any parties would suffer prejudice, and the extent of the relief to the debtor (or alternatively, whether it is clear that reopening would not give relief to the debtor). In particular, three of the factors set forth in Easley-Brooks tipped the scales in favor of keeping the PlusFunds case closed. First, there was a non-bankruptcy forum capable of addressing issues related to the trust, as the relevant causes of action were all pending in the district court. Second, there was no showing of prejudice resulting from denial of the trustee’s request to reopen the case. The trustee’s ability to pursue the causes of action in the district court indicated that there would be no clear prejudice if the motion to reopen was denied. Finally, there was no clearly articulated benefit to the debtor in reopening the case, as the trustee acknowledged that it would pursue the causes of action on behalf of the trust beneficiaries regardless of whether its motion was denied in the bankruptcy court. Notably, both courts highlighted another issue not addressed by the Easley-Brooks factors: that the trustee failed to provide a reasonable explanation for its six-month delay in acting to extend the trust after it expired. Overruling the trustee’s arguments to the contrary, the district court held that the bankruptcy court acted well within its discretion in considering this factor, as bankruptcy courts may consider all relevant facts and circumstances in determining whether cause exists to reopen a case.
The Harbour Trust case sheds light on how the general factors outlined in Easley-Brooks may be applied to grant or deny a motion to reopen a case under section 350(b). The decision also demonstrates the important role that specific facts may play in a given case: the judges in Harbour Trust found the trustee’s failure to act significant, even though that action itself does not fall within the purview of the factors outlined in Easley-Brooks.
More from the Bankruptcy Blog
Copyright © 2020 Weil, Gotshal & Manges LLP, All Rights Reserved. The contents of this website may contain attorney advertising under the laws of various states. Prior results do not guarantee a similar outcome. Weil, Gotshal & Manges LLP is headquartered in New York and has office locations in Beijing, Boston, Dallas, Frankfurt, Hong Kong, Houston, London, Miami, Munich, New York, Paris, Princeton, Shanghai, Silicon Valley, and Washington, D.C.