Contributed by Lacey Laken
A recent decision issued by the United States Court of Appeals for the Tenth Circuit raises a novel question about who has authority to pursue an appeal on behalf of a corporate debtor after a chapter 7 trustee has been appointed. In C.W. Mining Co. v. Aquila, Inc. (In re C.W. Mining Co.), Case Nos. 10-4023 and 10-4033, 2011 U.S. App. LEXIS 2819 (10th Cir. Feb. 14, 2011), the Tenth Circuit found that following appointment of a chapter 7 trustee in a corporate debtor’s bankruptcy, the company’s former management could not appeal an adverse bankruptcy court ruling on the debtor’s behalf. Instead, the chapter 7 trustee was the only person authorized to bring the appeal because the company’s managers were “completely ousted” when the trustee was appointed.
In C.W. Mining Co., creditors filed an involuntary chapter 11 petition under section 303(b) of the Bankruptcy Code against C.W. Mining Company, a coal mine operator. One of the creditors filed a motion for summary judgment seeking a ruling that it and another of the creditors were considered “qualifying petitioning creditors.” The bankruptcy court granted the creditor’s motion and ordered involuntary chapter 11 relief against the company, over the company’s objection. Shortly thereafter, the company’s managers filed a motion to reconsider the summary judgment ruling, but before the bankruptcy court was able to rule on the company’s motion, one of the petitioning creditors moved to appoint a chapter 11 trustee or, alternatively, to convert the case to chapter 7. Upon testimony from the company’s president that he wished to convert the case to chapter 7 because there was no possibility of reorganizing, the court granted the creditor’s motion, and, shortly thereafter, appointed a chapter 7 trustee. Subsequently, the bankruptcy court denied the company’s motion to reconsider the order for relief and the company’s former managers then appealed to the Tenth Circuit Bankruptcy Appellate Panel, which affirmed the bankruptcy court’s decision. The managers then appealed further to the Tenth Circuit.
The primary issue considered by the Tenth Circuit was whether the managers had the authority to appeal on the company’s behalf. The chapter 7 trustee asserted that only he had authority to bring an appeal on the company’s behalf because the managers had been “completely ousted” when the bankruptcy was converted to a chapter 7 case and a trustee appointed. Disagreeing, the managers sought to distinguish between involuntary and voluntary bankruptcy proceedings, claiming that the company was forced into bankruptcy and consequently, “[e]quity demands that an involuntary debtor have standing to appeal both the involuntary petition [and] bankruptcy court orders for relief where the debtor has been placed into bankruptcy against its will.” The Court of Appeals dismissed this argument as unresponsive to the chapter 7 trustee’s contention regarding the managers’ right to appeal, reasoning that the legal issue was not whether the debtor had standing to appeal, but rather who controlled the appeal – the trustee or the debtor’s former management.
The Tenth Circuit opined that, once a chapter 7 trustee has been appointed in a bankruptcy proceeding, the trustee’s role is closest to that of the debtor’s management and, specifically in a chapter 7 proceeding, former management’s only role is to turn over corporate property to the trustee and provide certain information to the trustee and creditors. The court therefore concluded that, following the appointment of a trustee in a corporate chapter 7 bankruptcy, the company’s former managers were not authorized to bring the appeal on the company’s behalf, even if the appeal contested the initiation of the bankruptcy itself.
The Court of Appeals did, however, note several limitations on its holding. The Tenth Circuit specifically notes that its holding did not imply that a bankrupt corporation’s managers never have authority to bring the corporation’s appeal, because prior to the appointment of a trustee, control of the corporation does, in fact, remain vested in its managers. In chapter 11 cases, the court noted, a trustee “takes up” the fiduciary duties of management and has an interest in reorganizing the company for the benefit of shareholders and creditors. When a case is converted to chapter 7, however, a “sea change” occurs and the trustee’s focus shifts to protecting creditors. The court specified that the company’s former managers could have contested the chapter 7 conversion until the time that a trustee was appointed, but observed that the managers failed to do so and could not “atone for their mistake” by appealing other determinations over the chapter 7 trustee’s objections. Finally, the court also pointed out that its holding would not apply to individual debtors and former managers would retain the right to appeal in their own right (for example, if the former managers personally suffered pecuniary damages).
The C.W. Mining Company decision deals with a chapter 7 debtor, so its implications for chapter 11 cases, if any, are not clear. While the circuit court distinguished the role of trustees appointed in chapter 11 cases versus those appointed in chapter 7 cases, it was not explicit as to whether a chapter 11 debtor’s management or equity holders may also lose standing to appeal adverse decisions, such as those relating to an involuntary petition or the appointment of a trustee, upon the appointment of a chapter 11 trustee. There is little case law on this issue in the chapter 11 context, but in one chapter 11 case, In re Innovative Commc’ns, 50 V.I. 969 (D.V.I. Dec. 24, 2008), the United States District Court for the District of the Virgin Islands held that, following the appointment of a chapter 11 trustee, only the trustee could pursue an appeal on behalf of a debtor, but it did so under a unique set of facts. In Innovative Communications, the debtor’s board was removed and terminated one week prior to the bankruptcy court’s appointment of the chapter 11 trustee. After the chapter 11 trustee was appointed, an attorney filed an application to be retained as the debtor’s counsel and simultaneously appealed various orders previously entered by the bankruptcy court (including the order appointing the chapter 11 trustee). The attorney, however, later revealed that he was not hired as an attorney by Innovative Communications, but, instead, by the company’s board before it was removed. The attorney also admitted that he had never signed a formal retention agreement. It was against this backdrop that the court held that the attorney could not prosecute the appeal, only the trustee could do so.
It seems obvious that a trustee is unlikely to contest entry of an order for relief in most involuntary cases, and a virtual certainty that no trustee will seek reversal on appeal of the order appointing himself or herself. Accordingly, a decision that only the trustee can appeal these orders could mean that they effectively are unreviewable. We anticipate the decision in C.W. Mining will spur further litigation of this unusual issue.