Sherman v. Harbin , 486 F.3d 510 ( 2007 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: JOHN ALAN HARBIN, 
Debtor.
JEFFREY SHERMAN,
Plaintiff-Appellee, No. 04-56799
v.  D.C. No.
JOHN ALAN HARBIN, 04-CV-0209-BTM
Defendant-Appellant,
and
INDYMAC BANK FSB,
Defendant.

In re: JOHN ALAN HARBIN, 
Debtor.
No. 04-56865
JEFFREY SHERMAN,
Plaintiff-Appellant,  D.C. No.
04-CV-0209-BTM
v.
OPINION
JOHN ALAN HARBIN; INDYMAC
BANK FSB,
Defendants-Appellees.

Appeals from the United States District Court
for the Southern District of California
Barry T. Moskowitz, District Judge, Presiding
Argued and Submitted
November 17, 2006—Pasadena, California
4551
4552 IN RE: HARBIN
Filed April 25, 2007
Before: Richard D. Cudahy,* Susan P. Graber, and
Sandra S. Ikuta, Circuit Judges.
Opinion by Judge Ikuta;
Partial Concurrence and Partial Dissent by Judge Cudahy
*The Honorable Richard D. Cudahy, Senior United States Circuit Judge
for the Seventh Circuit, sitting by designation.
IN RE: HARBIN 4555
COUNSEL
John L. Morrell and Paul J. Leeds, Higgs, Fletcher & Mack
LLP, San Diego, California, for defendant-appellant John A.
Harbin.
4556 IN RE: HARBIN
Lon B. Isaacson and Larry D. Johnson, Lon B. Isaacson Asso-
ciates, Los Angeles, California, for plaintiff-appellee/cross-
appellant Jeffrey Sherman.
David R. Zaro and Jeanne M. Jorgensen, Allen Matkins Leck
Gamble & Mallory LLP, Irvine, California, for defendant-
appellee IndyMac Bank, F.S.B.
OPINION
IKUTA, Circuit Judge:
In this case we resolve two questions of first impression in
our bankruptcy jurisprudence. First, we hold that a bankruptcy
court considering the feasibility of a plan of reorganization
under 11 U.S.C. § 1129(a)(11) must evaluate the possible
effect of a debtor’s ongoing civil case with a potential credi-
tor, whether that litigation is pending at the trial level or on
appeal. Second, we conclude that under limited circum-
stances, a bankruptcy court may exercise its equitable powers
to grant retroactive approval of a post-petition financing trans-
action pursuant to 11 U.S.C. § 364(c)(2).
FACTUAL AND PROCEDURAL BACKGROUND
In 1996, Jeffrey Sherman sold his law practice to Harbin
APC (the professional corporation of John Harbin) through an
asset purchase and consulting agreement. The terms of the
agreement are not part of the record on this appeal. However,
it is undisputed that as part of the deal, Harbin APC agreed
to pay Sherman $5,000 a month for ten years in exchange for
his consulting services. In 2000, Harbin APC stopped making
the consulting payments to Sherman.
A.
Sherman sued Harbin, Harbin APC, and others in Califor-
nia state court for breach of contract (among other things).
IN RE: HARBIN 4557
Harbin filed a cross-complaint for a declaratory determination
that he was not personally liable for any breach of the consult-
ing agreement. Following the first phase of the trial, the jury
rendered a special verdict holding both Harbin and Harbin
APC liable for breach of contract in the amount of
$414,003.87 (plus interest, costs, and attorneys’ fees). While
the trial court’s ruling on Harbin’s declaratory judgment
motion was still pending, Harbin filed a voluntary Chapter 7
bankruptcy petition, triggering the automatic stay provision of
11 U.S.C. § 362.
In June 2002, the trial court set aside the jury’s original ver-
dict and held that Harbin was not personally liable for breach
of the consulting agreement. Harbin then moved to dismiss
his Chapter 7 petition. When the bankruptcy court denied the
motion, Harbin converted the case to Chapter 11. In the mean-
time, Sherman appealed the trial court’s ruling holding Harbin
not personally liable.1
B.
While his state appeal was pending, Sherman filed both an
adversary action for breach of contract and a proof of claim
in the amount of $716,092.65 (the jury’s original state court
verdict, plus interest, costs, and attorneys’ fees) in Harbin’s
bankruptcy case. In the adversary action, the bankruptcy court
granted Harbin’s summary adjudication motion and dismissed
Sherman’s claims for relief based on collateral estoppel.
While dismissing the adversary action, the bankruptcy court
ruled that Sherman could seek to reinstate that action if the
state appellate court ruled in his favor. The bankruptcy court
also sustained Harbin’s objection to Sherman’s proof of
claim, again noting that Sherman could seek to reinstate his
claim should he prevail on his state court appeal.
1
The bankruptcy court granted Sherman’s request for relief from the
automatic stay so he could pursue this appeal to the California Court of
Appeal. See 11 U.S.C. § 362(d).
4558 IN RE: HARBIN
On December 11, 2003, before the state appellate court
decided Sherman’s appeal, the bankruptcy court confirmed
Harbin’s Second Amended Plan of Reorganization. The plan
required Harbin to pay his listed creditors 100 percent of their
claims following confirmation. The bankruptcy court found
the plan feasible under 11 U.S.C. § 1129(a)(11) because Har-
bin’s allowed creditors were to be paid in full.2 Sherman, as
a party in interest, objected to the confirmation. Sherman
argued that Harbin’s plan was not feasible under section
1129(a)(11) because it did not reserve an allowance for Sher-
man’s claim should he prevail on appeal. In such event, Sher-
man argued, Harbin would not have sufficient assets to cover
Sherman’s claim and would be forced into further liquidation
or reorganization.
The bankruptcy court rejected this argument on several
grounds. The bankruptcy court reasoned that because it had
previously disallowed Sherman’s claim, it could not make any
provision for the claim or consider the claim in its feasibility
evaluation. Additionally, the court concluded that the Rooker-
Feldman doctrine precluded it from considering the likely
outcome of Sherman’s state court appeal. However, the bank-
ruptcy court stated that it would not discharge Sherman’s
claim. The court’s confirmation order provided that if Sher-
man prevailed on his state court appeal, he could file a motion
for reconsideration in the bankruptcy court pursuant to Cobe
v. Smith (In re Cobe), 229 B.R. 15, 18 (B.A.P. 9th Cir. 1998).3
2
Section 1129(a)(11) requires, as a condition of confirmation, that the
bankruptcy court find: “Confirmation of the plan is not likely to be fol-
lowed by the liquidation, or the need for further financial reorganization,
of the debtor or any successor to the debtor under the plan, unless such liq-
uidation or reorganization is proposed in the plan.”
3
Cobe approved a bankruptcy court’s summary judgment in favor of a
creditor who had won a judgment against the debtor in state court, but held
that the debtor could seek reconsideration under Rule 60(b)(5) of the Fed-
eral Rules of Civil Procedure, as incorporated by Rule 9024 of the Federal
Rules of Bankruptcy Procedure, if the state trial court’s judgment in favor
of the creditor was later overturned on appeal. 229 B.R. at 18.
IN RE: HARBIN 4559
C.
At the time it confirmed Harbin’s plan, the bankruptcy
court also granted nunc pro tunc approval of a previously
unauthorized, post-petition refinancing of Harbin’s home.4 In
January 2003, Harbin’s wife applied for a loan to refinance
the above-market mortgage on their Coronado residence.
Although Harbin’s interest in the residence was an asset of the
bankruptcy estate, his wife’s loan application listed her as the
sole borrower. To facilitate the loan transaction, Harbin exe-
cuted a quitclaim deed granting his interest in the residence to
his wife, so that his wife would appear on the title to the resi-
dence as the sole owner. After the refinancing lender, Indy-
Mac Bank, F.S.B. (“IndyMac”), funded the loan, Harbin’s
wife quitclaimed her interest in the residence back to herself
and Harbin, as joint tenants, thereby returning Harbin’s inter-
est in the residence back to the bankruptcy estate.
4
Use of the phrase “nunc pro tunc” approval in this context is a misno-
mer:
Nunc pro tunc amendments are permitted primarily so that errors
in the record may be corrected. The power to amend nunc pro
tunc is a limited one, and may be used only where necessary to
correct a clear mistake and prevent injustice. It does not imply the
ability to alter the substance of that which actually transpired or
to backdate events to serve some other purpose. Rather, its use
is limited to making the record reflect what the . . . court actually
intended to do at an earlier date, but which it did not sufficiently
express or did not accomplish due to some error or inadvertence.
United States v. Sumner, 226 F.3d 1005, 1009-10 (9th Cir. 2000) (internal
quotation marks and citations omitted); see also In re Singson, 41 F.3d
316, 318 (7th Cir. 1994) (observing that the Latin phrase, “nunc pro tunc”
authorization, literally “now for then,” refers to situations in which the
court, after discovering that its records do not accurately reflect its actions,
corrects the records to show what actually happened). Therefore, it is more
accurate to refer to the bankruptcy court’s approval of the post-petition
refinancing of Harbin’s residence as “retroactive approval.”
Nevertheless, given the prevalent use of “nunc pro tunc” in the bank-
ruptcy context to refer to retroactive authorization, we will continue to use
this customary formulation here.
4560 IN RE: HARBIN
Harbin filed with the bankruptcy court a motion for nunc
pro tunc approval of the refinancing after it was completed.
In a declaration supporting his motion, Harbin stated, “I am
aware that I should have obtained court approval prior to con-
ducting this refinancing transaction.”
IndyMac joined Harbin’s motion for nunc pro tunc
approval and filed its own motion seeking the same. Indy-
Mac’s declarations submitted to the court stated it had not
been aware that Harbin’s interest in the residence was an asset
of his bankruptcy estate and had inadvertently overlooked the
title report notation indicating that Harbin was in bankruptcy
at the time he conveyed his interest in the residence to his
wife.
IndyMac argued that the completed refinancing benefitted
the bankruptcy estate. The Harbins used the $707,000 loan
from IndyMac to retire the $647,000 above-market mortgage
on the Coronado residence, thus reducing Harbin’s mortgage
payments by more than $300 per month. The Harbins also
paid off outstanding property taxes of $3,934. Finally, the
refinancing provided $53,896.05 to fund Harbin’s Second
Amended Plan of Reorganization which, if confirmed, would
have paid all of Harbin’s creditors in full.
Sherman objected to both parties’ motions for nunc pro
tunc approval. Sherman argued that Harbin and his wife acted
in bad faith and that IndyMac had constructive knowledge of
the bankruptcy proceedings through the title report. More-
over, Sherman claimed that the refinancing did not benefit the
bankruptcy estate because it merely lowered Harbin’s
monthly mortgage payments which were paid out of Harbin’s
post-petition earnings.
Applying a test similar to that set forth in Atkins v. Wain,
Samuel & Co. (In re Atkins), 69 F.3d 970, 976 (9th Cir. 1995),
the bankruptcy court granted nunc pro tunc approval of the
refinancing transaction. Specifically, the bankruptcy court
IN RE: HARBIN 4561
ruled: (1) it would have approved the refinancing had Harbin
made a timely prior application; (2) the refinancing benefitted
the bankruptcy estate; (3) IndyMac had a good faith belief
that it could enter into the refinancing transaction; and
(4) “[c]ompelling equities and the absence of prejudice to
interested parties” supported the grant of nunc pro tunc
approval.5
D.
Sherman appealed both the bankruptcy court’s confirma-
tion of the plan and its grant of nunc pro tunc approval to the
district court. While this appeal was pending, the California
Court of Appeal resolved Sherman’s state court appeal by
reinstating Harbin’s personal liability on the original jury ver-
dict. The district court took judicial notice of the Court of
Appeal’s decision and held that in light of this “changed cir-
cumstance,” the plan proposed by Harbin was no longer feasi-
ble. The district court thus vacated the bankruptcy court order
confirming the plan and remanded the case to the bankruptcy
court for further proceedings. The district court also affirmed
the bankruptcy court’s grant of the nunc pro tunc approval of
the refinancing.
Harbin now appeals the district court’s decision holding
that his plan is not feasible. Sherman cross-appeals the district
court’s affirmance of the bankruptcy court’s grant of nunc pro
tunc approval of the refinancing transaction. IndyMac
responds to Sherman’s cross-appeal.
JURISDICTION AND STANDARDS OF REVIEW
We have jurisdiction over the final order of the district
court reviewing the final order of the bankruptcy court. 28
U.S.C. § 158(d).
5
Before granting nunc pro tunc approval, the bankruptcy court ordered
Harbin to reimburse the bankruptcy estate for all transaction costs relating
to the refinancing transaction.
4562 IN RE: HARBIN
“Because we are in as good a position as the district court
to review the findings of the bankruptcy court, we indepen-
dently review the bankruptcy court’s decision.” Pizza of
Hawaii, Inc. v. Shakey’s, Inc. (In re Pizza of Hawaii, Inc.),
761 F.2d 1374, 1377 (9th Cir. 1985). “The issue whether a
plan is feasible—is not likely to be followed by liquidation or
further reorganization—is one of fact, which we review under
the clearly erroneous standard.” Id. The bankruptcy court’s
application of the Rooker-Feldman doctrine is a question of
law, which we review de novo. See id. We review the bank-
ruptcy court’s decision to grant nunc pro tunc approval for
abuse of discretion or erroneous application of the law.
Atkins, 69 F.3d at 973.
DISCUSSION
A.
We first address the question whether the bankruptcy court
erred in confirming Harbin’s Second Amended Plan of Reor-
ganization. To confirm a plan, a bankruptcy court must find
that the plan is feasible, meaning that “[c]onfirmation of the
plan is not likely to be followed by the liquidation, or the need
for further financial reorganization, of the debtor.” 11 U.S.C.
§ 1129(a)(11).
[1] To be feasible for purposes of section 1129(a)(11), a
plan must take into account the possibility that a potential
creditor may, following confirmation, recover a large judg-
ment against the debtor. Pizza of Hawaii, 761 F.2d 1374. In
Pizza of Hawaii, Pizza, the debtor in the bankruptcy proceed-
ings, was embroiled in contractual and trademark litigation
with Shakey’s, a national franchiser of fast-food outlets. Id. at
1375. Before the extent of Pizza’s potential liability to
Shakey’s was resolved in the civil action, the bankruptcy
court confirmed Pizza’s plan of reorganization, expressly
finding the plan feasible notwithstanding the fact that it failed
to provide for the possibility that Shakey’s would recover a
IN RE: HARBIN 4563
large judgment. Id. at 1376, 1382. As approved, the plan pro-
vided only that should the civil action be decided in Shakey’s
favor, “there shall be no further distributions to claimants in
the class to which [Shakey’s] claim belongs, or to junior
classes of claimants, until [Shakey’s] has received the money
or property to which it would have been entitled from the date
of confirmation of this Plan, had its claim initially been
allowed in the amount finally determined.” Id. at 1382 (quot-
ing the confirmed plan) (alteration in Pizza of Hawaii).
The district court ruled that “the bankruptcy court’s finding
of feasibility was clearly erroneous because the plan failed to
provide for the possibility that Shakey’s would recover a large
judgment in the civil case.” Id. Therefore, the district court
vacated the plan and remanded to the bankruptcy court “to
reconsider the plan’s feasibility in light of its estimate of
Shakey’s claim.” Id. We agreed, noting that if Shakey’s pre-
vailed in the civil action and attempted to collect under the
plan, “Pizza would be unable to pay one-fourth of its claims.”
Id. Alternatively, if Shakey’s prevailed in the civil action after
Pizza had paid all its claims, Shakey’s efforts to collect its
claim could likely force Pizza into Chapter 7. Id.
[2] Under Pizza of Hawaii, a bankruptcy court cannot ade-
quately determine a plan’s feasibility for purposes of section
1129(a)(11) without evaluating whether a potential future
judgment may affect the debtor’s ability to implement its
plan. Id. A bankruptcy court’s failure to consider such a possi-
bility in discharging its duties under section 1129(a)(11) is
clear error. Id.; see also Brutoco Eng’g & Constr. Co. v. Den-
nis Ponte, Inc. (In re Dennis Ponte, Inc.), 61 B.R. 296, 300
(B.A.P. 9th Cir. 1986).
Here, the bankruptcy court concluded that it could not con-
sider the effect of Sherman’s pending appeal in its feasibility
analysis for several reasons. We find none of them persuasive.
[3] First, the bankruptcy court distinguished Pizza of
Hawaii because the creditor’s claim in that case had not been
4564 IN RE: HARBIN
reduced to judgment in state court. This distinction is irrele-
vant. Our reasoning in Pizza of Hawaii was not based on the
fact that the claim was pending in the state trial court. Instead,
we held generally “that the bankruptcy court’s finding of fea-
sibility was clearly erroneous because the plan failed to pro-
vide for the possibility that Shakey’s would recover a large
judgment in the civil case.” 761 F.2d at 1382 (emphasis
added). Under Pizza of Hawaii, the bankruptcy court’s obliga-
tion to evaluate the effect of a pending claim on the feasibility
of a plan does not hinge on whether the claim is pending in
the state trial court rather than in the state appellate court.
[4] Second, the bankruptcy court reasoned that it could not
consider the effect of Sherman’s claim on the plan because it
had previously conditionally disallowed this claim, whereas
the bankruptcy court had not disallowed Shakey’s claim in
Pizza of Hawaii. However, under the bankruptcy court’s rul-
ings, Sherman’s claim could significantly affect the plan’s
feasibility in the future. For example, the bankruptcy court
held that Sherman’s claim was not being discharged, and
Sherman could move to have his claim reinstated if he pre-
vailed on appeal. As in Pizza of Hawaii, if Sherman prevailed
on appeal before Harbin’s cash reserves were paid out, and
Sherman successfully reinstated his bankruptcy claim, Harbin
could not satisfy the plan’s obligations to other creditors. See
id. If Sherman prevailed on appeal after Harbin’s cash
reserves had been paid out, Sherman could force Harbin into
liquidation or further reorganization. See id. Because Sher-
man’s claim could affect the feasibility of Harbin’s plan not-
withstanding the bankruptcy court’s conditional disallowance
of the claim, the bankruptcy court was still obliged to con-
sider the claim under section 1129(a)(11).
Third, the bankruptcy court concluded that the Rooker-
Feldman doctrine precluded the court from taking into consid-
eration the possibility that Sherman could prevail on appeal.
The bankruptcy court deemed Sherman’s challenge to the fea-
sibility of Harbin’s plan to be a “collateral attack on the litiga-
IN RE: HARBIN 4565
tion pending in state court,” because it would, in effect,
nullify the state trial court’s determination that Sherman had
no claim.
[5] The bankruptcy court’s conclusion on this point reflects
a misunderstanding of the scope of the Rooker-Feldman doc-
trine. The Rooker-Feldman doctrine arises from the “unre-
markable” observation that Congress has not given district
courts general appellate jurisdiction over state court judg-
ments. Gruntz v. County of Los Angeles (In re Gruntz), 202
F.3d 1074, 1078 (9th Cir. 2000) (en banc). Briefly stated, the
Rooker-Feldman doctrine bars a losing party in state court
“from seeking what in substance would be appellate review of
the state judgment in a United States district court, based on
the losing party’s claim that the state judgment itself violates
the loser’s federal rights.” Johnson v. De Grandy, 512 U.S.
997, 1005-06 (1994). Accordingly, the Rooker-Feldman doc-
trine “is confined to . . . cases brought by state-court losers
complaining of injuries caused by state-court judgments ren-
dered before the district court proceedings commenced and
inviting district court review and rejection of those judg-
ments.” Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544
U.S. 280, 284 (2005).
[6] Sherman’s challenge to the feasibility of Harbin’s plan
did not implicate the “narrow ground occupied by Rooker
Feldman,” id., because Sherman was asking the bankruptcy
court only to consider the possibility that the state appellate
court would reinstate the original jury verdict, not to make
any substantive state-law ruling or to review and reject the
state trial court’s judgment. Congress has explicitly given the
bankruptcy court jurisdiction to consider questions concerning
confirmation of a debtor’s plan, and in doing so to estimate
the various claims and interests against the debtor’s estate.
See 28 U.S.C. § 157(b)(2)(B) & (L); see also Gruntz, 202
F.3d at 1079 (when Congress gives a federal court express
jurisdiction over state court matters, for example, by giving
the bankruptcy court authority to void, modify, or discharge
4566 IN RE: HARBIN
state court judgments, the Rooker-Feldman doctrine has no
application). The bankruptcy court thus erred in concluding
that the Rooker-Feldman doctrine prevented it from consider-
ing the consequences of Sherman’s appeal.6
[7] Because the bankruptcy court failed to consider the con-
sequences of Sherman’s potential success on appeal, it clearly
erred in failing to discharge its obligations under section
1129(a)(11). See Pizza of Hawaii, 761 F.2d at 1382; In re
Dennis Ponte, 61 B.R. at 300 (B.A.P. 9th Cir. 1986). There-
fore, we affirm the district court’s ruling vacating the bank-
ruptcy court’s confirmation of Harbin’s Second Amended
Plan. In doing so, we emphasize the limited reach of our hold-
ing. Under the plain language of section 1129(a)(11) and our
6
Harbin relies on the Bankruptcy Appellate Panel’s decision in Audre,
Inc. v. Casey (In re Audre, Inc.), 216 B.R. 19 (B.A.P. 9th Cir. 1997), and
the district court’s decision in In re Keenan, 201 B.R. 263 (Bankr. S.D.
Cal. 1996), to advance a broader reading of the Rooker-Feldman doctrine.
Audre and Keenan considered a debtor’s motion to disallow or estimate
at a low value a judgment obtained by a creditor in state trial court, and
concluded that the Rooker-Feldman doctrine prevented the bankruptcy
court from granting such a motion. Audre, 216 B.R. at 23-30; Keenan, 201
B.R. at 266-67. The continuing viability of these decisions is highly ques-
tionable in light of the Supreme Court’s recent clarification of the narrow
ground occupied by the Rooker-Feldman doctrine, as well as our recent
jurisprudence in this area. See Exxon Mobil, 544 U.S. 280, Gruntz, 202
F.3d 1074, Noel v. Hall, 341 F.3d 1148 (9th Cir. 2003); Sasson v. Sokoloff
(In re Sasson), 424 F.3d 864 (9th Cir. 2005) (as amended), cert. denied,
126 S. Ct. 2890 (2006). Moreover, Audre and Keenan are distinguishable
from the situation before us. A debtor’s request to a bankruptcy court to
reject or reduce a creditor’s valid state court judgment against the debtor
on the basis of alleged errors in the state court decision bears some rela-
tion to the situation contemplated by the Rooker-Feldman doctrine, i.e., a
state court loser inviting federal court “review and rejection” of a state
court judgment. However, a creditor’s request that a bankruptcy court sim-
ply evaluate the feasibility of a debtor’s plan in light of the creditor’s
potential success on appeal (the situation in this case) does not fall within
the Rooker-Feldman framework. For these reasons, Audre and Keenan do
not apply to our analysis of the applicability of the Rooker-Feldman doc-
trine here.
IN RE: HARBIN 4567
decision in Pizza of Hawaii, a bankruptcy court must evaluate
the possible impact of the debtor’s ongoing civil litigation on
the feasibility of the proposed plan. However, our decision
today does not dictate the conclusion a bankruptcy court
should reach after conducting such an evaluation; rather, the
bankruptcy court must exercise its sound discretion in consid-
ering how such litigation may affect the feasibility of any spe-
cific plan.7
[8] We thus affirm the district court’s vacature of the bank-
ruptcy court’s order of confirmation without reaching the
7
The dissent contends that “the majority seems to be announcing a rule
that the bankruptcy court must always wait, no matter how long, for the
resolution of an appeal to be decided before confirming a plan.” Dissent
at 4575. This mischaracterizes our holding. Although the bankruptcy court
here could have elected to delay confirming Harbin’s plan in light of Sher-
man’s pending civil litigation, it had no obligation to do so. However, sec-
tion 1129(a)(11) did impose an obligation on the bankruptcy court to
consider the likelihood of Sherman’s success on appeal and the impact of
such potential success on the feasibility of Harbin’s plan. Due to its mis-
understanding of Pizza of Hawaii and the Rooker-Feldman doctrine, the
bankruptcy court erroneously failed to discharge its obligations under this
section.
The dissent would have us approve the bankruptcy court’s decision to
value Sherman’s claim at zero, because the state trial court’s ruling “was
the law at that time.” Dissent at 4577. This repeats the error made by the
bankruptcy court, which considered itself bound by the state trial court’s
ruling under the Rooker-Feldman doctrine. While our decision would not
have prevented the bankruptcy court from valuing Sherman’s claim at
zero, the bankruptcy court had the duty to exercise its own judgment in
reaching such a conclusion, taking into account the possibility that the
state appellate court would reinstate the jury’s original verdict.
We also disagree with the dissent’s contention that our ruling “under-
mines the importance of finality in the bankruptcy proceeding.” Dissent at
4577. Rather, the application of Pizza of Hawaii to this case furthers the
interests of finality by requiring the bankruptcy court to take into account
all likely future events that could impact the feasibility of a plan, including
pending litigation, in determining whether a proposed plan is likely to be
final and not followed by liquidation, or the need for further financial reor-
ganization.
4568 IN RE: HARBIN
question whether a plan that was feasible when confirmed
may, due to changed circumstances on appeal, subsequently
become infeasible. See Padilla v. Terhune, 309 F.3d 614, 618
(9th Cir. 2002) (this court “may affirm the district court on
any ground supported by the record, even if it differs from the
reasoning of the district court”). Although we hold that the
bankruptcy court failed to comply fully with the requirements
of section 1129(a)(11), we cannot conclude, without the bene-
fit of the bankruptcy court’s analysis of the issue, whether the
plan was in fact feasible when confirmed. The bankruptcy
court is best situated to evaluate, in the first instance, how the
potential outcome of Sherman’s state appeal might affect the
feasibility of Harbin’s plan. Therefore, we affirm the district
court’s ruling vacating the bankruptcy court’s confirmation of
the plan and remand for further proceedings consistent with
this opinion.8
B.
We next turn to the bankruptcy court’s nunc pro tunc
approval of the secured post-petition refinancing of Harbin’s
residence pursuant to section 364(c)(2). On appeal, Sherman
contends that the bankruptcy court abused its discretion in
granting nunc pro tunc approval and seeks to set aside that rul-
ing.9
8
The reality of the changed circumstances at this stage in the litigation
is not lost on us: the California Court of Appeal has reinstated Sherman’s
jury verdict, Sherman v. Harbin, No. B164417, 2004 Cal. App. Unpub.
LEXIS 7608 (Aug. 18, 2004), review denied, 2004 Cal. LEXIS 10877
(Nov. 10, 2004) (No. S128088), and we have little doubt that, on remand,
Sherman will move for reconsideration pursuant to the bankruptcy court’s
August 6, 2003 order and Rule 9024 of the Federal Rules of Bankruptcy
Procedure. See In re Cobe, 229 B.R. at 18. We thus recognize that, on
remand, the bankruptcy court will not need to address the feasibility of
Harbin’s plan in light of a pending state judgment.
9
Sherman’s appeal of the bankruptcy court’s nunc pro tunc ruling is not
moot under 11 U.S.C. § 364(e), which provides, in pertinent part:
IN RE: HARBIN 4569
We begin with the underlying rule that Chapter 11 debtors
in possession are required to obtain the approval of the bank-
ruptcy court when they wish to incur secured debt. See 11
U.S.C. § 364(c)(2), 364(c)(3);10 Thompson v. Margen (In re
McConville), 110 F.3d 47, 50 (9th Cir. 1997). This obligation
stems from section 362 of the Bankruptcy Code, which pro-
hibits post-petition encumbrances on the bankruptcy estate.
After a debtor files for bankruptcy, an automatic stay goes
into effect prohibiting, among other actions, “any act to
create, perfect, or enforce any lien against property of the
estate.” 11 U.S.C. § 362(a)(4); see also Schwartz v. United
States (In re Schwartz), 954 F.2d 569, 571 (9th Cir. 1992).
The reversal or modification on appeal of an authorization under
this section to obtain credit or incur debt . . . does not affect the
validity of any debt so incurred . . . to an entity that extended
such credit in good faith . . . unless such authorization and the
incurring of such debt . . . were stayed pending appeal.
11 U.S.C. § 364(e). Here, the bankruptcy court did not give Harbin “au-
thorization . . . to obtain credit or incur debt” pursuant to section 364.
Rather, IndyMac extended credit purportedly secured by a lien on property
of the bankruptcy estate without any such authorization. By its plain lan-
guage, section 364(e) is not applicable to debt incurred without bank-
ruptcy court authorization, even if the bankruptcy court subsequently
approves the financing transaction retroactively. This interpretation is con-
sistent with the policy goals of section 364(e) “to overcome a good faith
lender’s reluctance to extend financing in a bankruptcy context by permit-
ting reliance on a bankruptcy judge’s authorization.” Burchinal v. Central
Wash. Bank (In re Adams Apple, Inc.), 829 F.2d 1484, 1488 (9th Cir.
1987) (acknowledging the “Congressional intent of fostering private
investment in failing companies by promoting reliance on a bankruptcy
court’s authorization”). Obviously, IndyMac did not insist on bankruptcy
court authorization as a condition to extending financing in this case.
10
Although section 364(c) refers to a trustee obtaining credit, it applies
with equal force to debtors in possession prior to the appointment of a
trustee. McConville, 110 F.3d at 50. This is consistent with 11 U.S.C.
§ 1107(a), under which a debtor in possession has all of the rights and
powers of a trustee. Cukierman v. Uecker (In re Cukierman), 265 F.3d
846, 849 (9th Cir. 2001).
4570 IN RE: HARBIN
Section 364(c)(2) provides an exception to this prohibition
against creating a lien on property of the bankruptcy estate.
Specifically, section 364(c)(2) provides that “the court, after
notice and a hearing, may authorize the obtaining of credit or
the incurring of debt — . . . (2) secured by a lien on property
of the estate that is not otherwise subject to a lien.” 11 U.S.C.
§ 364(c)(2).
[9] We have interpreted section 364(c)(2) as requiring a
debtor to obtain the bankruptcy court’s authorization before
incurring secured debt. McConville, 110 F.3d at 50. McCon-
ville held that if the debtor fails to obtain prior authorization,
the bankruptcy court may exercise its corrective power to
rescind the transaction. Id. However, McConville also stressed
that “[t]he exercise of this corrective power . . . should not
occur without regard to the equities of the situation.” Id.
Where the debtor incurs debt without first obtaining court
authorization, the bankruptcy court may exercise its equitable
discretion to develop an appropriate remedy, provided, of
course, that the chosen remedy is consistent with the provi-
sions of the Bankruptcy Code. Id.
[10] Nunc pro tunc authorization with concurrent relief
from the automatic stay is one such available remedy. Apply-
ing principles of equity, we have recognized the bankruptcy
court’s equitable discretion to grant retroactive authorization
in other contexts where such relief was necessary or appropri-
ate to carry out the provisions of the Code. See, e.g., Atkins,
69 F.3d at 973-74; Pac. Shores Dev., LLC v. At Home Corp.
(In re At Home Corp.), 392 F.3d 1064, 1070-72 (9th Cir.
2004); see also 11 U.S.C. § 105(a) (granting bankruptcy
courts the equitable power to issue any order “that is neces-
sary or appropriate to carry out the provisions of [the Bank-
ruptcy Code]”). Under the right circumstances, retroactive
validation of a post-petition refinancing transaction will fur-
ther the provisions of the Code. The bankruptcy court’s grant
of retroactive approval may provide a significant benefit to
IN RE: HARBIN 4571
the debtor’s estate, or otherwise assist the debtor in funding
a successful plan for reorganization.
[11] Moreover, nothing in the language of the Bankruptcy
Code precludes the court from considering nunc pro tunc
authorization of the refinancing as one possible remedy in
response to the “equities of the situation” before it. See Nor-
west Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988)
(“whatever equitable powers remain in the bankruptcy courts
must and can only be exercised within the confines of the
Bankruptcy Code”). Section 364(c)(2) does not, by its express
terms, require the bankruptcy court to authorize the financing
transaction before the debt is incurred. Therefore, should a
debtor improperly obtain secured financing without prior
court authorization, a bankruptcy court’s exercise of its equi-
table discretion in granting nunc pro tunc approval pursuant
to section 364(c)(2) will not be “inconsistent” with the
express provisions of the Bankruptcy Code.
In this case, although the post-petition refinancing transac-
tion of Harbin’s residence did not comply with the prior
authorization requirement imposed on section 364(c)(2) by
our case law, McConville, 110 F.3d at 50, the bankruptcy
court elected to exercise its equitable discretion to grant nunc
pro tunc approval of the transaction. In doing so, the bank-
ruptcy court applied the standards set forth in Atkins, 69 F.3d
at 976.
Although decided in a different context, Atkins provides
useful guidance on the circumstances that warrant an equita-
ble exception to the prior authorization requirement. Atkins
involved a violation of 11 U.S.C. § 327(a), which we inter-
preted as requiring prior court authorization of professional
services rendered to the bankruptcy estate. 69 F.3d at 973. We
noted that “bankruptcy courts . . . possess the equitable power
to approve retroactively a professional’s valuable but unau-
thorized services,” but limited that retroactive approval “to
situations in which ‘exceptional circumstances’ exist.” Id. at
4572 IN RE: HARBIN
973-74; see also Okamoto v. THC Fin. Corp. (In re THC Fin.
Corp.), 837 F.2d 389, 392 (9th Cir. 1988); Fanelli v. Hensley
(In re Triangle Chems., Inc.), 697 F.2d 1280, 1289 (5th Cir.
1983) (cautioning that the availability of an equitable excep-
tion should not invite the general non-observance of the prior
authorization requirement, and that nunc pro tunc approval
should be limited to “exceptional circumstances”). We held
that “[t]o establish the presence of exceptional circumstances,
professionals seeking retroactive approval must satisfy two
requirements: they must (1) satisfactorily explain their failure
to receive prior judicial approval; and (2) demonstrate that
their services benefitted the bankrupt estate in a significant
manner.” Atkins, 69 F.3d at 974. In addition, we held that
retroactive authorization may be granted only where the
untimely request otherwise satisfies the express requirements
for such approval prescribed by the Code. Id. at 976.
The criteria for retroactive approval set forth in Atkins are
generally consistent with the equitable principles identified in
McConville. McConville, like the case before us, addressed a
lender’s failure to obtain prior authorization under section
364(c)(2). 110 F.3d at 50. McConville noted that in tailoring
an appropriate equitable remedy for a violation of section
364(c)(2), a court should consider whether the lender has ade-
quately explained its failure to seek prior authorization (thus
demonstrating its good faith) and whether the loan transaction
provided a benefit to the bankruptcy estate. Id.
[12] From our decisions in McConville and Atkins, we dis-
till four factors that the bankruptcy court should consider in
determining whether to exercise its equitable discretion to
grant nunc pro tunc approval of post-petition financing under
section 364(c)(2): (1) whether the financing transaction bene-
fits the bankruptcy estate; (2) whether the creditor has ade-
quately explained its failure to seek prior authorization or
otherwise established that it acted in good faith when it failed
to seek prior authorization; (3) whether there is full compli-
ance with the requirements of section 364(c)(2); and (4)
IN RE: HARBIN 4573
whether the circumstances of the case present one of those
rare situations in which retroactive authorization is appropri-
ate. See McConville, 110 F.3d at 50; Atkins, 69 F.3d at 974.
Provided that these criteria are met, the bankruptcy court may,
but need not, grant an application for nunc pro tunc authoriza-
tion.
[13] Under this standard, the bankruptcy court did not
abuse its discretion in granting nunc pro tunc approval of Har-
bin’s refinancing transaction. First, on the record before us,
the bankruptcy court’s finding that the refinancing benefitted
the bankruptcy estate was not clearly erroneous. The refinanc-
ing benefitted Harbin’s bankruptcy estate by providing the
necessary cash infusion to fund Harbin’s Second Amended
Plan of Reorganization. This was a substantial benefit to the
estate because, as originally intended, the cash infusion was
sufficient to pay Harbin’s allowed creditors in full, without
requiring further delay or subsequent liquidation.
Second, the bankruptcy court’s conclusion that IndyMac
offered a satisfactory explanation for its failure to seek prior
court approval is not clearly erroneous. Although IndyMac
was indisputably negligent in overlooking the title report
showing Harbin’s status in bankruptcy proceedings at the time
he quitclaimed his interest in the residence to his wife, the
bankruptcy court acted within its discretion in concluding that
IndyMac acted in good faith and would not have proceeded
with the refinancing transaction had it been aware of the need
to obtain prior court approval.
Third, we note that the bankruptcy court complied with the
requirements of section 364(c)(2). Prior to filing his motion
for nunc pro tunc approval, Harbin and his wife used the pro-
ceeds of the IndyMac loan to pay off Washington Mutual’s
lien on the residence. Accordingly, on Harbin’s and Indy-
Mac’s subsequent motions for retroactive approval under sec-
tion 364(c)(2), the bankruptcy court authorized IndyMac to
take a security interest “on property of the estate that [was]
4574 IN RE: HARBIN
not otherwise subject to a lien.” 11 U.S.C. § 364(c)(2). The
bankruptcy court granted this authorization only after ensur-
ing that the requisite notice and hearing requirements were
satisfied. See id.; 11 U.S.C. § 102(1); Fed. R. Bankr. P. 2002.
Finally, the bankruptcy court did not abuse its discretion in
determining that the circumstances of this case presented one
of those rare situations where retroactive authorization should
be granted. The bankruptcy court ruled that “[c]ompelling
equities and the absence of prejudice to interested parties”
favored the grant of IndyMac’s nunc pro tunc motion. Given
the competitive terms of the loan, the fact that the loan, as
approved, was intended to fund Harbin’s plan of reorganiza-
tion, and the fact that all transaction costs incurred in the refi-
nancing were returned by Harbin to the bankruptcy estate, we
cannot conclude that the bankruptcy court erred.
Accordingly, we hold that the bankruptcy court did not
abuse its discretion in granting nunc pro tunc approval of the
refinancing transaction.11
C.
For the foregoing reasons, we affirm the district court’s
vacatur of the order confirming Harbin’s plan and remand to
the bankruptcy court for further proceedings. We also affirm
the district court’s conclusion that the bankruptcy court did
not abuse its discretion in granting nunc pro tunc approval of
Harbin’s post-petition refinancing.
11
In so holding, we do not consider the effect, if any, of the November
17, 2003 stipulation whereby the United States Trustee agreed not to
oppose IndyMac’s motion for nunc pro tunc authorization of its loan con-
ditioned on Harbin’s reorganization plan being confirmed with full pay-
ment to all unsecured creditors. The United States Trustee reserved the
right to file an opposition to the motion for nunc pro tunc authorization
if the reorganization plan were modified. If Harbin’s reorganization plan
is modified on remand, the bankruptcy court should exercise its discretion
in considering any renewed objections of the United States Trustee to the
nunc pro tunc authorization.
IN RE: HARBIN 4575
The judgment of the district court is AFFIRMED.
CUDAHY, Circuit Judge, concurring in part, dissenting in
part:
I concur in Part B of the majority’s opinion which affirms
the district court’s determination that the bankruptcy court did
not abuse its discretion in granting nunc pro tunc approval. I
respectfully dissent, however, as to Part A of the majority
opinion. I believe this court should reverse the district court’s
decision to vacate the bankruptcy court’s order confirming
Harbin’s plan and that the discretion of the bankruptcy court
should be sustained in its finding of feasibility.
Although the issue of feasibility is certainly close under the
circumstances, I do not agree that the bankruptcy court’s
judgment of the matter here was clearly erroneous. There is
an important element of discretion in reaching a practical
judgment here, and the majority seems to be announcing a
rule that the bankruptcy court must always wait, no matter
how long, for the resolution of an appeal to be decided before
confirming a plan.1 Depending on how long the matter has
already been left open for a decision on appeal and on the
bankruptcy court’s estimate of the chances of reversal on
appeal (and other factors), the totality of the circumstances
may favor an earlier confirmation of the plan or they may not.
To postpone confirmation until the result on appeal is finally
known is to lose all account of finality, which is generally a
consideration of importance in bankruptcy. Here the fact that
the judgment was actually reversed on appeal makes this an
1
The majority requires a bankruptcy court to “evaluate the possible
effect of a debtor’s ongoing civil case with a potential creditor.” (Op. at
4556.) Given that the bankruptcy court already provided for relief pursu-
ant to Cobe v. Smith (In re Cobe), 229 B.R. 15, 18 (B.A.P. 9th Cir. 1998),
practically speaking the only option available to the bankruptcy court
appears to be to delay confirmation.
4576 IN RE: HARBIN
unusual case, since only a small fraction of trial court judg-
ments are reversed.2 That possibility, it seems to me, should
not provide the pattern for dealing with this problem.
In fact, the bankruptcy court considered the impact of Sher-
man’s request to delay confirmation on finality and rejected
this request finding it unreasonable to delay distributions until
Sherman’s appeal ran its course. In making this decision, the
court considered not only Sherman’s interests but those of all
parties involved in the bankruptcy proceeding: “He has other
creditors to deal with. . . . There are professionals out there.
There’s a Chapter 7 trustee out there.” (ER at 175.)
The real basis for the majority’s decision seems to me to be
the bankruptcy court’s reliance on the Rooker-Feldman
doctrine—a reliance which I also believe to be erroneous.
However, I see Rooker-Feldman to be a make-weight and its
invocation harmless error in the context of a basic finding of
infeasibility. The bankruptcy court’s finding on Rooker-
Feldman is simply not necessary to the outcome. The bank-
ruptcy court was aware of the likely amount of the judgment
if successful on appeal and of Sherman’s concern that Harbin
would not preserve his house to be available for distribution.
The court factored these concerns into the decision to confirm
the plan and provided Sherman with relief if successful on
appeal.
I am also troubled by the majority’s application of Pizza of
Hawaii, Inc. v. Shakey’s Inc. (In re Pizza of Hawaii, Inc.), 761
F.2d 1374 (9th Cir. 1985). This case is clearly distinguishable
from the present case. Unlike in Pizza of Hawaii, the state
trial court issued a judgment at the time the bankruptcy court
confirmed Harbin’s plan. The state court had valued Sher-
2
Title 11 U.S.C. § 1129 (a)(11) defines feasible as “confirmation of the
plan is not likely to be followed by the liquidation, or the need for further
financial reorganization, of the debtor . . . .” Most appeals are not success-
ful, and therefore not “likely” to render a plan infeasible.
IN RE: HARBIN 4577
man’s judgment at $0. Accordingly, the bankruptcy court had
disallowed Sherman’s claim. The state court judgment was
the law at that time. In Pizza of Hawaii, there was not yet a
judgment at the state trial level, nor was there a claim in the
bankruptcy court. To expand the rule in Pizza of Hawaii to the
present case undermines the importance of finality in the
bankruptcy proceeding.
The majority also seems to have lost sight of the specific
arrangements the bankruptcy court made for a reversal on
appeal, namely allowing Sherman to return to the court to
reopen his disallowed claim pursuant to Cobe v. Smith (In re
Cobe), 229 B.R. 15, 18 (B.A.P. 9th Cir. 1998). The majority
derogates this provision by suggesting the funds will not be
available to satisfy Sherman’s claim if distribution has been
made to other creditors. This is a possibility—but not a
certainty—but a contrary solution ignores the rights of other
creditors, who must wait indefinitely for satisfaction until
Sherman’s appeal is decided.