904 F.3d 815
9th Cir.2018Background
- Hyun Um and Thomas Price (Debtors) filed individual Chapter 11 petitions; their cases were consolidated and a liquidating Chapter 11 plan (the Plan) was confirmed to sell all nonexempt individual and entity assets.
- Prepetition, Spokane Rock obtained a state-court judgment against the Debtors for fraud and misrepresentation; Spokane Rock sued in bankruptcy seeking nondischargeability and later sought denial of discharge under 11 U.S.C. § 1141(d)(3).
- The Plan labeled itself a liquidation plan; the Trustee was to liquidate estate assets and the Debtors retained only exempt assets; membership interests in various LLCs were treated as worthless by the Trustee.
- Bankruptcy court granted summary judgment for Spokane Rock, finding the § 1141(d)(3) conditions met and denying discharge; the district court affirmed.
- On appeal, Debtors conceded § 1141(d)(3)(C) (would be denied discharge under § 727(a) in Chapter 7) but argued (A) the Plan did not liquidate substantially all assets and (B) they engaged in business post-consummation (Um employed by Radiance Capital; Price employed part-time by the Plan Administrator).
- Ninth Circuit affirmed: Plan satisfied § 1141(d)(3)(A) (liquidation) and, regardless of whether § 1141(d)(3)(B) requires continuation of prepetition business, mere post-plan employment by others does not constitute "engaging in business" under § 1141(d)(3)(B).
Issues
| Issue | Plaintiff's Argument (Spokane Rock) | Defendant's Argument (Um/Price) | Held |
|---|---|---|---|
| Whether the Plan provided for liquidation of all or substantially all estate property under § 1141(d)(3)(A) | Plan is a liquidation; Trustee will sell assets and membership interests are worthless | Plan did not sell membership interests; postpetition income pledge negates liquidation | Held: Plan is a liquidation; membership interests will be worthless and pledge/payments do not defeat liquidation requirement |
| Whether Debtors "engaged in business" after plan consummation under § 1141(d)(3)(B) | Debtors did not engage in business; they ceased prepetition business activities | Post-plan employment (Um at Radiance; Price part-time with Plan Administrator) counts as engaging in business and entitles them to discharge | Held: Mere employment in another's business (even part-time) does not satisfy "engage in business"; Debtors did not meet § 1141(d)(3)(B) threshold to obtain discharge |
Key Cases Cited
- Toibb v. Radloff, 501 U.S. 157 (recognizing individual Chapter 11 filings)
- Suncrest Healthcare Ctr. LLC v. Omega Healthcare Inv’rs, Inc. (In re Raintree Healthcare Corp.), 431 F.3d 685 (standard of review for appeals from bankruptcy)
- Grausz v. Sampson (In re Grausz), [citation="63 F. App'x 647"] (interpreting § 1141(d)(3)(B) as related to continuation of prepetition business)
- Williams v. Taylor, 529 U.S. 420 (statutory construction—ordinary meaning of words)
- Robinson v. Shell Oil Co., 519 U.S. 337 (reading statutory language in broader context)
- U.S. Internal Revenue Serv. v. Deer Park, Inc. (In re Deer Park, Inc.), 136 B.R. 815 (complex Chapter 11 liquidation and orderly divestiture)