William Needler v. Internal Revenue Service ( 2011 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
_______________
No. 10-6085
_______________
In re: Richard Burival, doing business
*
as Burival Brothers, a partnership; *
Phillip Burival, also known as *
Burival Brothers, a partnership; *
Gary M. Burival, also known as *
B & B Farms, also known as Burival *
Farms; Joyce A. Burival, also known as
*
B&B Farms, also known as *
Burival Farms, * Appeal from the United States
* Bankruptcy Court for the
Debtors * District of Nebraska
*
William L. Needler, *
*
Objector - Appellant *
*
v. *
*
Internal Revenue Service; *
Nebraska Department of Revenue, *
*
Claimants - Appellees *
*
Rick D. Lange, *
*
Trustee - Appellee *
_______________
Submitted: May 3, 2011
Filed: June 10, 2011
_______________
Before KRESSEL, Chief Judge, FEDERMAN and VENTERS, Bankruptcy Judges
FEDERMAN, Bankruptcy Judge
William L. Needler, the Debtors’ attorney, as a holder of an administrative
claim for his attorney fees in the case, appeals from the Bankruptcy Court’s1 Order
denying his motion to reconsider an Order denying his Rule 60(b) motion. Those
motions challenged the Bankruptcy Court’s earlier Orders allowing the Trustee to pay
federal and state capital gains and income taxes incurred in connection with the sale
of the Debtors’ property as a surcharge against the proceeds of the sale. For the
reasons that follow, we AFFIRM.
FACTUAL BACKGROUND
Gary and Joyce Burival and their sons, Richard and Phillip Burival, who were
engaged in interrelated farming operations, filed Chapter 11 bankruptcy cases on
November 29, 2007. The cases were administratively consolidated and are being
jointly administered. William L. Needler, through his law firm, William L. Needler
& Associates, Ltd., is the attorney for all of the Debtors.
On February 26, 2009, over the Debtors’ objection, the Bankruptcy Court
granted the request by several of the Debtors’ creditors that a Chapter 11 Trustee be
appointed pursuant to 11 U.S.C. § 1104(a), finding, inter alia, that the Debtors’
management of the estate had resulted in continuing operating losses and hundreds of
thousands of dollars of unpaid administrative expenses.2 The Order approving the
appointment of the Trustee provided, in relevant part:
1
The Honorable Thomas L. Saladino, Chief Judge, United States
Bankruptcy Court for the District of Nebraska.
2
Order (Doc. #996) (Feb. 26, 2009).
2
The parties involved in such an appointment should be aware that in light
of the financial position of this estate, the Court will not authorize the
appointment unless the application represents that all creditors secured
by assets to be sold by the trustee have agreed that the fees of the trustee
and expenses of sale can be surcharged against the first proceeds of
each sale.3
No one appealed the orders authorizing the appointment of a Chapter 11 Trustee, nor
did anyone object to the language regarding surcharge. Rick D. Lange was appointed
as the Trustee.4 The final Order appointing him provided that, subject to subsequent
application and approval by the Court, the Trustee would be entitled to an
administrative expense claim for all of his administrative expenses, and that such
claim shall be paid out of the proceeds of the sale of real estate in which the Bank had
a lien, “prior to the payment of the Bank’s secured claim or any other claims or liens
with regard to the real estate.”5
On March 12, 2009, the Trustee filed a motion to sell, free and clear, the
Debtors’ real estate in Holt County, Nebraska.6 That motion expressly provided that
taxes, which were defined to include federal and state ordinary income tax and capital
gains taxes, would be paid from the sale proceeds. It further provided that the
property being auctioned would be surcharged to pay those items including the taxes,
and that those items would “have priority over all liens, encumbrances, and claims of
3
Order (Doc. # 996) at p. 4 (emphasis added).
4
See Order (Doc. #1005) (March 2, 2009) (granting appointment on interim
basis), and Order, Doc. #1034 (March 10, 2009) (final order appointing the
Trustee).
5
Order (Doc. #1034) at p. 2 (March 10, 2009).
6
Motion for Approval of Auction Sale and Surcharge (Doc. #1040) (March
12, 2009).
3
every type and kind (secured, administrative, or otherwise).”7 The Debtors objected
to the motion to sell, but solely on the ground that the motion did not provide for the
treatment of their homestead exemption and provided no living expenses to the
Debtors.8 The Trustee filed a similar motion, with the surcharge language, pertaining
to the sale of the Debtors’ crops.9
On March 26, 2009, the Bankruptcy Court entered an order approving the
Trustee’s motion to sell the real estate, and authorizing the Trustee to surcharge the
sale proceeds for payment of federal and state ordinary income taxes and capital gains
taxes as described in the motion.10 On April 10, 2009, the Court approved the sale of
the crops, also with the surcharge.11 No one appealed from those Orders.
After selling the real estate and certain other property, the Trustee filed, on July
2, 2009, a detailed motion to distribute the sale proceeds. The motion provided, in
relevant part:
Based upon available information, the Trustee allocated the net sale
proceeds . . . before reserves for taxes and expenses as follows . . . . The
Trustee then deducted from this amount projected income taxes
(including capital gains taxes) and a reserve. The taxes deducted are the
estimated amount attributable to the Gross Proceeds from the sale of the
7
Id. at ¶¶ 7 and 10.
8
Debtor/Farmers’ Response, Objection and Resistance to Trustee’s Motion
to Sell Real Property Free and Clear of Liens (Doc. #1051) (March 19, 2009).
9
Motion for Approval of Private Sales of Crops Free and Clear of Liens,
and for Surcharge (Doc. #1053) (March 20, 2009).
10
Order Approving Trustee’s Motion for Approval of Public Auction Sale
Free and Clear of Liens and for Surcharge (Doc. #1067) (March 26, 2009).
11
Text Order (Doc. #1096) (April 10, 2009).
4
Real Estate and Associated Property; and the reserve is principally an
allowance for funds in the event taxes are higher than projected and for
payment of administrative expenses . . . . At present it is anticipated that
there will be excess reserve funds available for further distributions to
secured claims (although there can be no assurances of such), which
excess will be determined in due course after tax liabilities and
administrative costs are finalized, at which time such excess can be
distributed per a subsequent motion and Court Order.12
The Debtors filed a response to the motion to distribute, requesting additional detail,
including on the payment of taxes.13 A hearing was set for August 18, 2009.
At this point, Needler belatedly realized that the estate was not going to be left
with funds sufficient to pay his fees and other administrative expenses. Therefore, on
August 15, 2009, Needler filed, on his own behalf, a motion to vacate the portions of
the prior Orders allowing the surcharge of taxes on the sale of real estate and crops,
claiming that the surcharge violated the Bankruptcy Code, and that all administrative
claimants must be treated alike.14 He asserted that the Orders were “entered through
‘mistake’ and ‘inadvertence’”15 and should be vacated pursuant to Rule 60(b).16
12
Motion to Approve Distribution of Sale Proceeds (Doc. # 1214) at ¶ 4
(July 2, 2009).
13
Debtor/Farmers’ Response, Objection and Resistance to Trustee’s
Motion to Approve Distribution of Sale Proceeds (Doc. #1227) (July 21, 2009).
14
Motion of Administrative Claimant William L. Needler to Partially
Revoke and Vacate Prior Orders as to the Chapter 11 Trustee’s Surcharge of Real
Estate and Crop Proceeds for Payment of Taxes as a Result of These Sales (Doc.
#1269) at ¶¶ 7, 9, 18 (August 15, 2009).
15
Id. at ¶ 17.
16
Fed. R. Civ. P. 60(b), made applicable to bankruptcy cases by Fed. R.
Bankr. P. 9024.
5
On August 18, 2009, the Court entered an Order approving the distribution of
real estate sale proceeds as requested in the July 2, 2009 motion, “without prejudice
to . . . any party in interest objecting to or otherwise contesting any surcharge and/or
proposed payment by the Trustee to taxing authorities for federal and state income
taxes (including but not limited to capital gains taxes).”17
On August 31, 2009, the Trustee objected to Needler’s motion to vacate,
stating:
The Trustee made the surcharge requests in the Sale Motions because it
was the Trustee’s understanding that the actively involved creditors in
these cases desired to have the Trustee promptly liquidate the real estate
[and associated] property and crops rather than abandon them, and
because the Chapter 11 Trustee Handbook provides in part that: “ . . .
the Trustee may be held personally liable when an estate does not have
sufficient funds to pay the taxes due from the sale of the estate assets.”
The Trustee proceeded after consultation with the Office of the United
States Trustee.18
The Court entered an Order deferring its ruling on Needler’s motion until the taxing
authorities had had an opportunity to respond,19 which they did on December 31,
2009.20
17
Order (Doc. #1275) (August 18, 2009).
18
Resistance to Motion to Vacate (Doc. #1283) (August 31, 2009).
19
Text Order (Doc. #1332) (October 15, 2009).
20
United States’ Resistance to Motion to Vacate and Partially Revoke Prior
Orders No. 1061 and 1071 as to the Chapter 11 Trustee’s Surcharge of Real Estate
and Crop Proceeds for Payment of Taxes as a Result of These Sales (Doc. #1357)
(Dec. 31, 2009), and Resistance by Nebraska Department of Revenue to
Administrative Claimant’s Motion to Vacate (Doc. #1359) (Dec. 31, 2009).
6
On July 28, 2010, the Trustee again requested authority to distribute funds, once
again requesting an Order authorizing the surcharge.21
On September 8, 2010, the Bankruptcy Court denied Needler’s motion to vacate
the surcharge.22 On September 15, 2010, the Bankruptcy Court entered an Order
granting the Trustee’s motion to distribute funds, stating: “In connection with the
distributions the principal amount payments for the 2009 state and federal taxes shall
be paid by surcharging the funds on hand, with these payments per the Motion to be
in full and complete satisfaction of the principal amounts of the 2009 tax claims.”23
On September 18, 2010, Needler filed a motion to reconsider the Court’s
September 8 Order denying the vacation of the surcharge and approving additional
distribution of funds.24 On November 9, 2010, Needler filed an affidavit in support
of his motion to reconsider, in which he accused the Trustee of misleading the
creditors and the Court and claimed that the Trustee had continually assured the
Administrative Claimants, the Court, and others that there was plenty of money and
that they need not worry about the IRS claims being ahead of them.25 The Trustee
21
Motion to Approve Additional Distributions of Funds and Treatment of
Certain Claims (Doc. #1500) (July 28, 2010).
22
Text Order (Doc. #1555) (September 8, 2010).
23
Order (Doc. # 1558) at ¶ 2 (September 15, 2010).
24
Joint Motion of Various Administrative Claimants . . . to Reconsider,
Vacate, Amend and Modify the Court’s Order of 9/8/2010 at Docket #1555 Which
Denied an Administrative Claimants’ the [sic] Federal Rule 60(b) Motion and This
Orders [sic] Failure to Address Other Hearing Issues (Doc. #1563) (Sept. 18,
2010).
25
Sworn Declaration of William L. Needler . . . in Support of his Amended
Joint Motion to Reconsider, Vacate, Amend and Modify this Court’s Orders of 9-8-
2010 at Docket #1555 Which Denied an Administrative Claimant’s the [sic]
7
asserted, and still asserts, that this statement was false. He maintains that he never
made any such assurances that administrative claims would be paid.
On November 10, 2010, the Court denied Needler’s motion to reconsider.26
Needler appeals the Order denying the motion to reconsider.
DISCUSSION
Rule 60(b) provides, in relevant part, that “[o]n motion and just terms, the court
may relieve a party or its legal representative from a final judgment, order, or
proceeding for . . . (1) mistake, inadvertence, surprise, or excusable neglect; (2) newly
discovered evidence that, with reasonable diligence, could not have been discovered
in time to move for a new trial under Rule 59(b); . . . or (6) any other reason that
justifies relief.”27
We review the denial of a Rule 60(b) motion for abuse of discretion.28
“Reversal of a district court’s denial of a Rule 60(b) motion is rare because Rule 60(b)
authorizes relief in only the most exceptional of cases.”29
Federal Rule 60(b) Motion and Approved the Payment of Priority Surcharge Taxes
and the Court’s Order Dated 9/15/2010 at Docket #1558 (Doc. #1596) (Nov. 9,
2010).
26
Text Order (Doc. #1599) (Nov. 10, 2010).
27
Fed. R. Civ. P. 60(b)(1), (2), and (6), made applicable here by Fed. R.
Bankr. P. 9024.
28
Noah v. Bond Cold Storage, 408 F.3d 1043, 1045 (8th Cir. 2005).
29
Id. (citation omitted).
8
Although Needler argues here that the Bankruptcy Court erred in ordering the
Debtors’ property to be liquidated in the first place, and then in allowing the taxing
authorities to be paid first from the proceeds, “[a]n appeal from the denial of a Rule
60(b) motion does not raise the underlying judgment for our review but only the
question of whether the district court abused its discretion in ruling on the Rule 60(b)
motion.”30 As a result, we will not consider whether the Court erred in allowing the
liquidation or in granting the surcharge.31
Needler’s Motion to Vacate implicated Rule 60(b)(1), which permits a court to
grant relief from a judgment on the grounds of “mistake, inadvertence, surprise, or
excusable neglect.” Needler says that he failed to object to the motions seeking the
surcharge, and to appeal from the surcharge Orders, because he did not understand the
ramifications of allowing the surcharge. He offers two reasons for that lack of
understanding. First, he says that he did not realize at the time that the Bankruptcy
Code does not authorize such a surcharge or superpriority. We do not decide here
whether the Code authorizes such a surcharge because, even if it does not, in the
Eighth Circuit, a mistake of law does not constitute excusable neglect under Rule
30
Id.31
A question has been raised as to whether the payment of the taxes was
actually a surcharge against the sale proceeds, or the grant of a superpriority
administrative expense status. It would appear from a Stipulation filed by the
Trustee on March 19, 2009, that it was more akin to a surcharge because the taxes
were to be paid even before the secured creditors were paid. Stipulation (Doc.
#1049) (March 19, 2009). However, because we are not deciding the propriety of
the grant of the surcharge orders themselves, that distinction is not important to
this decision.
9
60(b)(1).32 In other words, Rule 60(b) cannot be used as a substitute for a timely
appeal from the Orders authorizing the surcharge.33
Second, Needler says he thought his client’s property would bring a price that
would pay all of the administrative claims in full. In other words, while Mr. Lange
only agreed to take the appointment as Trustee and sell the property if the Court orders
protected him in the event the estate turned out to be insolvent, Needler should be
allowed to undo those orders and collect his fees even though he – an experienced
bankruptcy attorney34 – did not consider the possibility that his client’s estate might
turn out to be insolvent. The fact that the Trustee repeatedly requested the surcharge
placed squarely on the table the question of whether the sale of the property would
bring enough to pay the taxes along with all of the other administrative claims. In
other words, by requesting the surcharge, the Trustee was obviously concerned about
the administrative solvency of the case. Clearly, that was an issue which Needler
should have also considered at the time. The fact that he neglected to do so is not the
type of exceptional circumstance that would warrant granting a Rule 60(b) motion.35
The determination as to whether neglect is excusable is an equitable one,
taking into account all relevant circumstances surrounding the party’s
omission. However, relief under Rule 60(b) is an extraordinary remedy.
32
Noah v. Bond Cold Storage, 408 F.3d at 1045.
33
In re Yukon Energy Corp., 227 B.R. 150, 152 (B.A.P. 8th Cir. 1998)
(citing Kocher v. Dow Chemical, 132 F.3d 1225, 1228 (8th Cir.1997)).
34
See Application to Employ Attorneys (Doc. #5) (Nov. 29, 2007) (“William
L. Needler and the firm of William L. Needler and Associates, have considerable
experience in Chapter 11 proceedings and especially Farmer/Debtor Chapter 11's
and are well qualified to provide representation in these proceedings.”).
35
Noah v. Bond Cold Storage, 408 F.3d at 1045 (“It is generally held that
‘excusable neglect’ under Rule 60(b) does not include ignorance or carelessness on
the part of an attorney.”).
10
Factors to consider in this determination include (1) the danger of
prejudice to the [other parties]; (2) the length of the delay and its
potential impact on judicial proceedings; (3) the reason for the delay,
including whether it was within the reasonable control of the movant;
and (4) whether the movant acted in good faith.36
Here, the prejudice to the other parties and potential impact on the bankruptcy
case are paramount. It was plain, even before the Trustee was appointed, that the
parties were concerned about the payment of the taxes incurred through the sale.
Initially, the Trustee requested the surcharge in part because he believed he might be
exposed to personal liability for the taxes if they were not paid from the sale proceeds.
Needler now asserts that that was incorrect – the Trustee was never exposed to
personal liability. Had Needler been able to so demonstrate at the time the orders
were originally entered, and before the parties relied on them, that might have been
an argument for the Court to consider in determining whether to give the Trustee
authority to pay those taxes first. In any event, the Trustee, as well as the taxing
authorities and other parties, relied on the surcharge Orders when he proceeded to sell
the property. As the Bankruptcy Court pointed out at the hearing on this matter, since
the property has been sold in reliance on the surcharge Orders, the horse is out of the
barn, so to speak, and neither the Trustee, nor the taxing authorities, should have to
bear the consequences of Needler’s failure to understand the ramifications of the
surcharge.
Next, Needler asserts that the surcharge Orders should be vacated due to newly
discovered evidence under Rule 60(b)(2). Again, the “newly discovered evidence”
he points to is the fact that the sale of the property did not turn out to bring a price
sufficient to pay all of the administrative claims. We question whether this constitutes
“evidence,” as that term is contemplated by the Rule in the first place. “The only
36
In re President Casinos, Inc., 397 B.R. 468, 473 (B.A. P. 8th Cir. 2008)
(citing Pioneer Investment Servs. Co. v. Brunswick Assoc. L.P., 507 U.S. 380, 381,
113 S.Ct. 1489, 1490-91, 123 L.Ed.2d 74 (1993); additional citations omitted).
11
evidence that qualifies as ‘newly discovered’ evidence within the meaning of the rule
justifying setting the judgment aside is evidence of facts that were in existence at the
time of the original trial or that relate directly to the facts that were tried.”37 The sale
price was a fact which was not in existence at the time the surcharge Orders were
entered. When a bankruptcy court authorizes the future sale of property in a context
such as this, no one can be certain what the sale price will be. That is precisely why
parties ask for protective orders such as a minimum price or, as in this instance, a
surcharge to pay taxes. As a result, the “newly discovered evidence” of the sale price
did not warrant relief from the surcharge Orders.
Finally, Rule 60(b)(6) provides that the Court may relieve a party from an order
for the catch-all “any other reason that justifies relief.” The Eighth Circuit has said
that this provision allows a court to “inject equity and revive an otherwise lifeless
claim.”38 However, a motion under Rule 60(b)(6) is only granted in rare
circumstances, and only if brought within a reasonable time.39 “What constitutes a
reasonable time is dependent on the particular facts of the case in question and is
reviewed for abuse of discretion.”40 While Needler may have filed his Motion to
Vacate soon after realizing he would not be paid all of his attorney’s fees, the sales
had already occurred in reliance on the surcharge. Again, for that reason, the Court
did not abuse its discretion in concluding that Needler was not entitled to the
extraordinary relief he requested.
37
12 Moore’s Federal Practice 3d ¶ 60.42[3][a].
38
Watkins v. Lundell, 169 F.3d 540, 544 (8th Cir. 1999).
39
Fed. R. Civ. P. 60(c).
40
Watkins v. Lundell, 169 F.3d at 544.
12
For the foregoing reasons, the Bankruptcy Court did not err in denying
Needler’s motion to vacate the surcharge Orders. The Bankruptcy Court’s Orders are,
therefore AFFIRMED.
13