Sale Orders: Ignore at Your Peril, Even After the Bankruptcy Case is Closed

Bombart v. The Family Center at Sunrise, LLC, 520 B.R. 300 (S.D. Fla. 2014) –

The owner of assets purchased in a bankruptcy sale sought to reopen a closed bankruptcy case to obtain an order enjoining the owner of the debtor entities from pursuing state litigation requesting relief in contravention of the sale order.  The bankruptcy court agreed and ordered the owner of the debtors to withdraw the state court claims.  The debtors’ owner appealed.

In February 2007 an involuntary bankruptcy petition was filed against entities owned by Allen Bombart (Bombart).  In September 2007 Bombart’s father was appointed his emergency temporary guardian because he had been declared mentally incompetent.

About a year later the bankruptcy court authorized the sale of substantially all of the debtors’ assets to Bombart’s father or his designee.  Title to the assets was transferred to an entity owned by Bombart’s father.  Shortly after the sale the court approved a plan of reorganization for the debtors.

Around four years later Bombart filed a lawsuit pro se in state court against his father and his sister that included a request that title to the sold property be transferred to him.  He advanced a variety of theories including fraud, civil theft, and breach of fiduciary duty.  (Apparently the sister was a party because she had taken title to the purchased property shortly before the lawsuit, although this was allegedly an error and the property was retransferred to the entity owned by Bombart’s father.)

In response, Bombart’s father asked the bankruptcy court to reopen the bankruptcy case, alleging that Bombart was effectively seeking to invalidate the court’s sale order.  The court agreed and found that Bombart’s state lawsuit violated a prior injunction enforcing the sale order.  Consequently the court enjoined Bombart from interfering with the property and ordered him to withdraw his state court claims regarding the sold property.

On appeal Bombart characterized the state litigation as involving parties who were not part of the prior bankruptcy case litigating fraud-based claims with no connection to the bankruptcy estate.  In contrast, in the view of Bombart’s father, the state litigation involved violation of a bankruptcy court injunction and invoked the authority of the court to enforce its own injunction.

The bankruptcy court acknowledged that post-confirmation its jurisdiction was limited, since jurisdiction is tied to the bankruptcy estate and the estate ceases to exist after confirmation of a plan of reorganization.  However, a court “necessarily retains the power to enforce its own orders and its own injunctions.”

On appeal, the district court noted that a bankruptcy court’s interpretation of its own orders was entitled to substantial deference.  It agreed that Bombart was in effect trying to invalidate the sale order by seeking to have title to the purchased assets retransferred.  Theoretically there might have been a different result if he had only sought monetary damages.  However, that was not the facts before the court.

The plan confirmation order specifically enjoined any claims against released parties, which included the purchaser of the sale assets.  The bankruptcy court also retained  the “‘fullest and most extensive jurisdiction’ to accomplish the intents and purposes of the plan, which in turn implemented the general injunction that stated that all persons who held an equity interest that was discharged or terminated pursuant to the plan would be permanently enjoined from taking any action that did not comply or was inconsistent with the plan or the Confirmation Order.”

Bombart argued that the reservation of jurisdiction vanished when the bankruptcy case was closed.  He also argued that his father, and not the father’s entity that took title, was protected by the injunction.  The district court rejected these arguments out of hand.  Since the state court litigation was a collateral attack on the bankruptcy court sale order, it was within the scope of the prior injunction.

Bombart also argued that the bankruptcy court no longer had jurisdiction because a significant period of time had lapsed since the bankruptcy case was closed.  In response, the district court noted an 11th Circuit case admonishing that it would “wreak havoc” to leave enforcement of one court’s injunction to the “interpretive whims” of another court.  In that case, a delay of six years did not prevent a court from enforcing compliance with its own injunction.

The final question was whether the scope of the bankruptcy court’s censure was proper.  The bankruptcy court (1) enjoined Bombart from further interference with court orders or with the property that was sold, (2) held that actions taken with respect to the property were void, (3) ordered a discharge of the lis pendens that Bombart had filed against the property and withdrawal of all requests for relief in the state court case with respect to the property, and (4) granted attorneys’ fees and expenses to Bombart’s father.

The district court found support for the bankruptcy court’s actions under 28 USC §2283, which allows a federal court to stay state court proceedings when “necessary to protect or enforce federal judgments,” and 11 USC §105, which authorizes issuance of courts of orders that are “necessary and appropriate” to carry out provisions of the Bankruptcy Code.

Consequently, the district court affirmed the bankruptcy court decision.

There is a tendency of involved parties to view bankruptcy sale orders as providing all-encompassing protection.  However, that does not necessarily mean that everyone else will view matters the same way – particularly after a case is closed and the bankruptcy court is no longer actively involved with oversight of the debtor and matters that took place during the bankruptcy case.  When issues come up there is no assurance that a bankruptcy court will be willing to reopen a case and take steps to enforce compliance with its orders.  However, as illustrated by this case, sometimes that avenue can provide effective relief.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
This entry was posted in Bankruptcy Sales and tagged , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s