In re USA BABY, INC., Debtor. Appeals of Scott Wallis

United States Court of Appeals for the Seventh Circuit2012-03-28No. Nos. 11-2018, 11-2026

674 F.3d 882

Summary · law.co

Holding. The court affirmed the bankruptcy judge's orders converting the case from Chapter 11 to Chapter 7 and denying Wallis's motion for reconsideration and equitable relief, holding that the bankruptcy court properly rejected Wallis's arguments regarding arbitration and the feasibility of reorganization.

USA Baby, a children's furniture franchisor, entered Chapter 11 bankruptcy reorganization after creditors initiated the proceeding. The bankruptcy trustee moved to convert the case to Chapter 7 liquidation, and the bankruptcy judge granted that motion. Scott Wallis, a 5 percent shareholder and former president, sought reconsideration and equitable relief to compel franchisees to pay withheld fees, arguing the company could achieve solvency. The bankruptcy judge denied both motions, finding Wallis had not presented persuasive evidence that reorganization was truly infeasible and noting that in Chapter 7 proceedings, individual shareholders cannot pursue claims on behalf of the debtor or assert personal claims against third parties.

Wallis appealed to the district court and then to the appellate court. The appellate court found it had jurisdiction because the conversion to Chapter 7 was practically final, as it eliminated the debtor's opportunity to reorganize and continue operations. On the merits, Wallis argued that arbitration clauses in the largest creditors' contracts stripped the bankruptcy court of jurisdiction. The court rejected this argument, finding no basis for believing arbitration destroys bankruptcy jurisdiction and noting that there was nothing to arbitrate since the amounts owed were undisputed. The court also found no support in applicable Supreme Court precedent for Wallis's position.

Summary generated by law.co from the public-domain opinion. The opinion text itself is public domain.

Key issues

Whether a bankruptcy court loses jurisdiction when creditor claims are subject to arbitration agreements
Whether a shareholder can pursue equitable relief on behalf of a debtor in Chapter 7 liquidation proceedings
Whether the conversion order from Chapter 11 to Chapter 7 was sufficiently final to permit appellate review
Whether Supreme Court precedent in Stern v. Marshall bars the bankruptcy court's determinations

Procedural posture

After the bankruptcy judge converted USA Baby's Chapter 11 reorganization case to Chapter 7 liquidation and denied Wallis's motions for reconsideration and equitable relief, Wallis appealed to the district court and then to the circuit court.

Authorities cited

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Opinion · public domain

majority opinion

POSNER, Circuit Judge.

Creditors forced USA Baby, which had been formed in 2003 to franchise stores that sell furniture and other products for children, into bankruptcy under Chapter 11 (reorganization). A trustee appointed by the bankruptcy court moved to convert the case to a Chapter 7 bankruptcy (liquidation). The bankruptcy judge granted his motion over the objection of Scott Wallis, a 5 percent shareholder who had been the company’s president when the trustee was appointed and took over the debtor’s management. Wallis moved for reconsideration of the bankruptcy judge’s order, accusing the trustee and franchisees of committing fraud; and in a second motion, contending that the company could regain solvency by collecting fees withheld by the franchisees, Wallis asked the bankruptcy court to grant “equitable relief’ compelling the franchisees to pay USA Baby what he claimed they owed it. The bankruptcy judge denied both motions. He explained that Wallis had not offered a persuasive reason to doubt the trustee’s judgment that reorganization was infeasible, and that in a Chapter 7 case Wallis could not bring claims on behalf of USA Baby or litigate personal claims against the franchisees. Wallis appealed to the district court and having lost there appeals to us.

Although the bankruptcy case has not been closed, we have jurisdiction over his appeals. Section 158(d)(1) of the Judicial Code empowers the courts of appeals to hear appeals “from all final decisions, judgments, orders, and decrees” of a district court under sections 158(a) and (b). The test for finality under section 158(d) is whether the challenged decision resolved a claim “that would be final as a stand-alone suit outside of bankruptcy.” In re Comdisco, Inc., 538 F.3d 647, 651 (7th Cir. 2008); see also In re ASARCO, LLC, 650 F.3d 593, 599-600 (5th Cir.2011). The first of the challenged rulings by the bankruptcy court, rejecting Wallis’s motion to rescind the conversion from Chapter 11 to Chapter 7, was final in the practical sense that a Chapter 7 proceeding results in liquidation, depriving the debtor of the chance he would have in a Chapter 11 proceeding to reorganize and continue as a going concern. In re Koerner, 800 F.2d 1358, 1360-61 (5th Cir.1986); see In re Rosson, 545 F.3d 764, 769-70 and n. 7 (9th Cir.2008); 16 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure § 3926.2, p. 299 n. 43 (2d ed. 1996). The denial of the mandatory injunction that Wallis sought is also appealable. In effect he seeks damages for breach of contract by the franchisees and for breach of trust by the trustee— claims that, outside bankruptcy, would be independent actions against the franchisees and the trustee.

On the merits, Wallis does not engage with the bankruptcy judge’s reasons for rejecting his claims, but instead argues that because the claims of the largest creditors were based on contracts that were subject to arbitration, they were outside the purview of the bankruptcy court and so that court lost jurisdiction over USA Baby. We cannot imagine why arbitration would destroy bankruptcy jurisdiction any more than lifting the automatic stay to permit the debtor to sue or be sued would. See, e.g., In re National Energy & Gas Transmission, Inc., 492 F.3d 297, 299 and n. 2 (4th Cir.2007); In re Electric Machinery Enterprises, Inc., 479 F.3d 791, 796-97 (11th Cir.2007). Anyway there was nothing to arbitrate, because no one disputed the amounts that USA Baby owed.

And nothing in Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), which Wallis cites repeatedly, affects our analysis. The Supreme Court held in that case that bankruptcy judges may not enter final judgments on common law claims that are independent of federal bankruptcy law; we cannot fathom what bearing that principle might have on the present case.

Wallis has filed eight appeals to the district court and five appeals to this court, all arising from USA Baby’s bankruptcy, all pro se and frivolous. Enough is enough. The next time he files a frivolous appeal he will be sanctioned.