UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
August 3, 2012
IN RE: VALLEY HEALTH SYSTEM, DEBTOR. JESSICA LOPEZ, APPELLANT,
POST-EFFECTIVE DATE COMMITTEE OF CREDITORS; ALVAREZ & MARSAL HEALTHCARE INDUSTRY GROUP, LLC, AS DISBURSING AGENT, APPELLEES.
Appeal from the United States Bankruptcy Court for the Central District of California Honorable Peter H. Carroll, Chief Bankruptcy Judge, Presiding Bk. No. 07-18293-PC
SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
Argued and Submitted on July 19, 2012 at Pasadena, California
Filed - August 3, 2012
Before: MARKELL, DUNN and KIRSCHER, Bankruptcy Judges.
Jessica Lopez ("Lopez") is a former employee of Valley Health System ("VHS") and was a participant in the Valley Health System Retirement Plan ("VHS Retirement Plan").*fn2 Lopez filed a proof of claim in VHS's bankruptcy case seeking a distribution from that bankruptcy based on her claimed entitlement to benefits under or from the VHS Retirement Plan. But VHS's confirmed chapter 9*fn3 plan of adjustment ("Chapter 9 Plan") specified, among other things, that any claims held by VHS Retirement Plan participants ("Participants") against VHS would "not be entitled to receive any distributions" under the Chapter 9 Plan.
A Post-Effective Date Committee of Creditors and a disbursing agent appointed under the Chapter 9 Plan (jointly, the "Committee Parties") objected to Lopez's proof of claim. The bankruptcy court sustained the objection and entered an order disallowing Lopez's claim. Lopez appealed, and we AFFIRM.
A. VHS, its bankruptcy case, and its Chapter 9 Plan.
VHS is a public agency and a local healthcare district formed in 1946, under the California Local Health Care District Law, Cal. Health & Safety Code § 32000, et seq. VHS owned and operated one skilled nursing facility and three acute health care facilities in Riverside County, California. VHS filed a chapter 9 bankruptcy petition in December 2007, and the bankruptcy court entered an order for relief in February 2008.
Pursuant to § 943, the bankruptcy court confirmed VHS's first amended plan of adjustment ("Chapter 9 Plan") by order entered April 26, 2010 ("Confirmation Order"). The Chapter 9 Plan was based on the sale of substantially all of VHS's remaining assets to another entity known as Physicians for Healthy Hospitals, Inc. Among other things, the Chapter 9 Plan provided for the discharge of VHS's prepetition debts and also enjoined claimants from pursuing any action or proceeding on account of such debts.
1 The Chapter 9 Plan classified general unsecured claims as 2 Class 2A claims and generally provided for the pro rata 3 distribution of $17 million to the holders of allowed Class 2A 4 claims. The plan then separately classified the Participants as 5 Class 2C claimants and provided no distribution for them. 6 Instead, the Chapter 9 Plan expected the Class 2C claimants to 7 look to the assets left for them, along with their other rights 8 and entitlements, under the VHS Retirement Plan.*fn5 9 The asset sale had expressly excluded all these VHS 10 Retirement Plan assets. As a consequence, the Chapter 9 Plan 11 specified that the Participants as Class 2C claimants would not 12 have recourse as against VHS or its assets, and would not be 13 entitled to any distribution under the Chapter 9 Plan.
14 This was expressly stated in the Chapter 9 Plan: 15 Defined Benefit Plan Participants will be entitled to the same rights and benefits to which such participants 16 are currently entitled under the VHS Retirement Plan and the MetLife Group Annuity Contract, and such 17 participants shall have no recourse to the District or to any assets of the District, and shall not be 18 entitled to receive any distributions under this Plan. Instead, all unallocated amounts held by MetLife Group, 19 pursuant to the VHS Retirement Plan and the MetLife Group Annuity Contract, will continue to be made 20 available to provide retirement benefits for participants in the manner indicated under the 21 provisions of the VHS Retirement Plan and the MetLife Group Annuity Contract. Accordingly, the treatment of 22 Allowed Class 2C claim holders set forth herein shall not affect any legal, equitable or contractual rights 23 to which the VHS Retirement Plan participants are entitled.
25 Chapter 9 Plan (Dec. 17, 2009) at 16:13-22.
Based on this treatment, the Chapter 9 Plan characterized the Class 2C claimants - the Participants - as unimpaired. As unimpaired claim holders, they were deemed to have accepted the Chapter 9 Plan, and were thus not allowed to vote to accept or reject it. § 1126(f).
The record reflects that Lopez was served with advance notice of: (1) the claims bar date, (2) the court approval of the first amended disclosure statement, and (3) the confirmation hearing on the Chapter 9 Plan. The accuracy of the record is supported by the fact that Lopez filed her proof of claim on time, and before the plan confirmation. The record further indicates that Lopez was sent copies of the Chapter 9 Plan and the first amended disclosure statement at the same time she was served with notice of the confirmation hearing.
But Lopez did not object to VHS's Chapter 9 Plan. According to Lopez, she and other Participants were lulled into a false sense of security regarding the VHS Retirement Plan because VHS's representatives, and the Chapter 9 Plan itself, indicated that the VHS Retirement Plan and the Participants would not be affected by either the bankruptcy case or the Chapter 9 Plan.*fn6 On October 14, 2010, VHS issued a notice that the asset sale had closed on October 13, 2010, and that October 13, 2010, was the effective date of the Chapter 9 Plan.
B. Lopez's proof of claim and the Committee Parties' claim objection
Lopez timely filed her proof of claim in VHS's bankruptcy case on August 22, 2008. On its face, the Proof of Claim stated that it was based on Lopez's alleged entitlement to a "retirement benefit."*fn7 A single page is attached to the Proof of Claim: a copy of Lopez's VHS Retirement Plan employee benefit statement for the year ending December 31, 1996. This statement estimated that, if Lopez continued her employment with VHS until her designated retirement date in 2018 and continued to participate in the VHS Retirement Plan, she would receive a monthly pension benefit upon retirement of $3,761.43 per month.*fn8
On April 8, 2011, the Committee Parties filed a motion to disallow Lopez's proof of claim. According to the the Committee Parties, Lopez was a Class 2C creditor who was not entitled to any distribution under the Chapter 9 Plan, and thus her claim was subject to disallowance. On September 14, 2011, Lopez filed a voluminous response to the Committee Parties' claim objection. Lopez did not contest that, under the terms of the Chapter 9 Plan, she was not entitled 1 to a share of the funds set aside for distribution to other 2 unsecured creditors of VHS. Indeed, Lopez essentially conceded 3 that she qualified as a Class 2C creditor under the Chapter 9 4 Plan and that the Chapter 9 Plan provided for no distribution to 5 Class 2C creditors.
6 Rather, Lopez argued that the Chapter 9 Plan was subject to 7 being set aside under § 1144 or under § 105(a) based on fraud in 8 the procurement and based on inadequate notice. In essence, 9 Lopez argued that, in order to lull the Participants into a false 10 sense of security so that none of them would object to 11 confirmation of the Chapter 9 Plan, VHS and its representatives 12 on numerous occasions represented that the Participants did not 13 need to worry about VHS's bankruptcy case and would not be 14 affected by the Chapter 9 Plan. Lopez further claimed that VHS 15 and its representatives concealed from the Participants the true 16 state of affairs until the July 7, 2010 meeting held shortly 17 after confirmation: (1) that VHS had underfunded the VHS 18 Retirement Plan and/or had raided the monies set aside for 19 funding the plan; (2) that VHS wrongfully had exercised control 20 over the VHS Retirement Plan and effectively was preventing the 21 VHS Retirement Plan's fiduciaries from fulfilling their duties to 22 ensure that the VHS Retirement Plan was adequately funded; and 23 (3) that VHS secretly intended to terminate the VHS Retirement 24 Plan well before it confirmed its Chapter 9 Plan, but it 25 concealed this fact in order to avoid any additional impediments 26 to confirmation of its Chapter 9 Plan.
27 Meanwhile, Lopez's contentions regarding inadequate notice 28 were twofold. On the one hand, Lopez complained that some 7 1 Participants, unlike herself, received no notice whatsoever of 2 VHS's bankruptcy. On the other hand, Lopez complained that the 3 notice she received was ineffective in light of the alleged acts 4 of concealment and misinformation referenced above. 5 Lopez also spent a great deal of time and effort outlining 6 the various alleged statutory and contractual duties VHS 7 supposedly breached. But Lopez never really tied this discussion 8 to any relief that Lopez contends she might have been entitled to 9 on account of her proof of claim, which only sought a 10 distribution based on her claimed entitlement to retirement 11 benefits. At most, Lopez argued that the bankruptcy court should 12 hold in abeyance its decision on Lopez's proof of claim until 13 after Lopez and others had commenced and prosecuted an action 14 against VHS, which in part would have sought modification and/or 15 revocation of VHS's Chapter 9 Plan.
16 Lopez also focused on her allegation that VHS and the VHS 17 Retirement Plan were separate entities, with separate boards and 18 separate agents for service of process. According to Lopez, the 19 VHS Retirement Plan, as a separate entity, was not properly 20 subject to VHS's control, and thus her entitlement to benefits 21 from the VHS Retirement Plan could not have been validly affected 22 by either VHS or its Chapter 9 Plan. However, Lopez never 23 explained how this allegation, even if true, would have entitled 24 her to a distribution from VHS on account of her proof of claim 25 for retirement benefits, when VHS's Chapter 9 Plan explicitly 26 precluded Lopez from receiving such a distribution.
27 On September 21, 2011, the Committee Parties filed a reply 28 in support of their claim objection. In it, the Committee 1 Parties emphasized (1) that Lopez had notice of the VHS 2 bankruptcy and an opportunity to object to its Chapter 9 Plan, 3 (2) that the Chapter 9 Plan, which the bankruptcy court had 4 confirmed, specified that Class 2C creditors would not be 5 entitled to any distribution, and (3) that Lopez's claim 6 constituted a Class 2C claim, a claim seeking a distribution on 7 account of Lopez's alleged entitlement to benefits under the VHS 8 Retirement Plan. According to the Committee Parties, the 9 doctrine of claim preclusion barred Lopez from collaterally 10 attacking the Chapter 9 Plan, and neither § 1144 nor § 105(a) 11 afforded Lopez with a proper basis to seek either modification or 12 revocation of the Chapter 9 Plan.
13 After holding a hearing on the claim objection, the 14 bankruptcy court issued a memorandum decision in which it 15 essentially agreed with the Committee Parties' arguments.
16 Accordingly, on November 8, 2011, the bankruptcy court entered an 17 order sustaining the Committee Parties' claim objection and 18 disallowing Lopez's claim. Lopez timely filed a notice of appeal 19 on November 18, 2011.
21 The bankruptcy court had jurisdiction under 28 U.S.C. 22 § 157(b)(2)(B), and we have jurisdiction under 28 U.S.C. § 158(b) 23 as this is a final order from the resolution of a proof of claim.
25 Whether the bankruptcy court erred when it disallowed 26 Lopez's proof of claim.
27 STANDARDS OF REVIEW
28 Orders resolving claims objections can raise legal issues, which we review de novo, as well as factual issues, which we review under the clearly erroneous standard. See Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 918 (9th Cir. BAP 2011).
The key to this appeal is Lopez's proof of claim. The principal purpose of that proof of claim, as with any proof of claim, is to assert an entitlement to a share of any assets designated for distribution. See 4 Collier on Bankruptcy ¶ 501.01 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2012).*fn9
Here, Lopez based her proof of claim on her claimed entitlement to benefits under the VHS Retirement Plan, but VHS's Chapter 9 Plan specified that Participants under the VHS Retirement Plan would have no recourse against either VHS or its assets and would not be entitled to any distribution under the Chapter 9 Plan. Lopez indisputably had actual notice of the Chapter 9 Plan and its contents, and had an opportunity to object, but did not do so before the plan was confirmed.
Under these circumstances, Lopez is precluded from now objecting to how VHS's Chapter 9 Plan treated her retirement 1 benefits claim. See § 944(a); see also United Student Aid Funds, 2 Inc. v. Espinosa, --- U.S. ----, 130 S.Ct. 1367, 1374-75, 176 3 L.Ed.2d 158 (2010) (confirmed chapter 13 plan discharged student 4 loan debt); Stratosphere Litigation L.L.C. v. Grand Casinos, 5 Inc., 298 F.3d 1137, 1143 (9th Cir. 2002) (confirmed chapter 11 6 plan released third party from funding obligation arguably owed 7 to debtor); Great Lakes Higher Educ. Corp. v. Pardee (In re 8 Pardee), 193 F.3d 1083, 1086-87 (9th Cir. 1999) (confirmed 9 chapter 13 plan discharged post-petition interest on student 10 loan); Trulis v. Barton, 107 F.3d 685, 691 (9th Cir. 1995) 11 (confirmed chapter 11 plan released all claims of country club 12 members against debtor country club's founders, directors and 13 attorneys).
14 As she argued in the bankruptcy court, Lopez argues on 15 appeal that she was not given adequate notice of the Chapter 9 16 Plan's impact on her. According to Lopez, the misleading 17 statements regarding the effect of the Chapter 9 Plan on 18 Participants like her amounted to a violation of her due process 19 rights. Consequently, she argues, she should not be bound by the 20 terms of the Chapter 9 Plan.
21 We disagree. The Chapter 9 Plan was not misleading 22 regarding how the claims of Participants would be treated: it 23 unequivocally stated that they would receive nothing from VHS, 24 its assets, or its Chapter 9 Plan.
25 Moreover, due process does not require that any notice given 26 explain the potential legal and practical effects of proposed 27 judicial action; rather, as long as a party is given notice of 28 the action and is afforded an opportunity to object, due process 1 requirements are satisfied. Espinosa v. United Student Aid 2 Funds, Inc., 553 F.3d 1193, 1203 (9th Cir. 2008), aff'd, --- U.S. 3 ----, 130 S.Ct. 1367; Berry v. U.S. Trustee (In re Sustaita), 4 438 B.R. 198, 210 (9th Cir. BAP 2010), aff'd, 460 Fed. Appx. 627 5 (9th Cir. 2011); see also Acequia, Inc. v. Clinton (In re 6 Acequia, Inc.), 787 F.2d 1352, 1359-60 (9th Cir. 1986) 7 (concluding that shareholder had adequate notice that evidence of 8 his misconduct was relevant to, and would be considered at, plan 9 confirmation hearing, where disclosure statement filed in support 10 of plan outlined allegations of shareholder's misconduct); 11 Lawrence Tractor Co. v. Gregory (In re Gregory), 705 F.2d 1118, 12 1122-23 (9th Cir. 1983) (holding that notice given to unsecured 13 creditor, even though incomplete and ambiguous, satisfied due 14 process requirements because it was sufficient to give the 15 creditor inquiry notice of the actions the debtor sought to take 16 pursuant to his proposed plan).
17 Lopez also argues on appeal that the bankruptcy court erred 18 when it denied her request to continue the hearing on its 19 disposition of her proof of claim until she brought and 20 prosecuted an action that in part would seek to modify or revoke 21 the Chapter 9 Plan. But we agree with the bankruptcy court that, 22 on the record presented, no delay was necessary because any 23 action to modify or revoke the Chapter 9 Plan would have been 24 futile.
25 Lopez contended that modification or revocation could have 26 been granted under either § 1144 or under § 105(a), but neither 27 of these statutes would have justified either revocation or 28 modification here. We will address each statute in turn.
1 Section 1144 applies in chapter 9 cases. See § 901(a). 2 That section is the only remedy available for revocation of an 3 order confirming a plan, and only permits revocation when 4 confirmation of the plan was procured by fraud. Dale C. Eckert 5 Corp. v. Orange Tree Assocs., Ltd. (In re Orange Tree Assocs., 6 Ltd.), 961 F.2d 1445, 1447 (9th Cir. 1992). Section 1144(a) sets 7 a six-month limitation period for seeking plan revocation, and 8 that limitation period begins to run from plan confirmation.
9 Furthermore, even if the grounds for claiming fraud are not 10 discovered until after the limitations period has run, the Ninth 11 Circuit has held that such belated discovery of the fraud does 12 not toll the § 1144(a) limitations period. In re Orange Tree 13 Assocs., Ltd., 961 F.2d at 1447; see also Duplessis v. Valenti 14 (In re Valenti), 310 B.R. 138, 145 (9th Cir. BAP 2004) (stating 15 that cognate statute under chapter 13 similarly limits complaints 16 to revoke confirmation of a chapter 13 plan). See also Collier, 17 supra, ¶ 1144.02 ("The 180-day deadline applies even if the fraud 18 is not discovered until after expiration of the 180-day 19 period."); 680 Fifth Ave. Assocs. v. EGI Co. Servs., Inc. (In re 20 680 Fifth Ave. Assocs.), 209 B.R. 314, 323 (Bankr. S.D.N.Y. 21 1997).
22 While the parties here dispute whether the alleged fraud was 23 discovered before or after the § 1144(a) limitations period ran, 24 that issue is not material to our resolution of Lopez's 25 revocation argument. It is undisputed that Lopez did not 26 commence an action before the limitations period ran, so Lopez 27 cannot avail herself of any relief under § 1144(a).
28 Meanwhile, § 105(a) facilitates the authority the Bankruptcy 1 Code grants to bankruptcy courts by generally authorizing them to 2 "issue any order, process, or judgment that is necessary or 3 appropriate to carry out the provisions of this title." § 105(a) 4 (emphasis added). But this authorization does not allow 5 bankruptcy courts to depart from the Bankruptcy Code's statutory 6 scheme or to take acts inconsistent with it. See Saxman v. Educ. 7 Credit Mgmt. Corp. (In re Saxman), 325 F.3d 1168, 1174-75 (9th 8 Cir. 2003) (holding that § 105(a) does not give bankruptcy court 9 a "roving commission to do equity" but rather only authorizes the 10 court to act within the confines otherwise set by the Bankruptcy 11 Code); Johnson v. TRE holdings LLC (In re Johnson), 346 B.R. 12 190, 196 (9th Cir. BAP 2006) (same); In re Valenti, 310 B.R. at 13 145-46 (holding that § 105(a) "is not an independent basis for 14 relief beyond the scope of the other sections of the Bankruptcy 15 Code.").
16 Simply put, Congress made it abundantly clear in § 1144(a) 17 that a revocation action must be brought within six months of 18 confirmation, and § 105(a) does not permit the bankruptcy court 19 to depart from the statutory scheme and extend the § 1144(a) time 20 limit.
21 The bankruptcy court was exercising its discretion when it 22 declined to delay its ruling on the claim objection, In re 23 Sustaita, 438 B.R. at 211, and we will not disturb that exercise 24 of discretion absent a showing of prejudice. Id. Because 25 postponing the decision on the claim objection so that Lopez 26 could pursue relief under § 1144(a) and § 105(a) would have been 27 futile, the bankruptcy court could not have abused its discretion when it declined to delay its decision on the claim objection.*fn10 Lopez makes a number of other arguments in her appeal briefs, but none of them have any merit. They all hinge on the premise that the VHS Retirement Plan was a separate entity from VHS and that neither the bankruptcy court nor VHS properly could have affected the VHS Retirement Plan's assets or obligations. Even if we were to assume that the VHS Retirement Plan was a separate entity, nothing that Lopez argues explains why this would alter Lopez's rights as against VHS on account of the proof of claim that Lopez filed against VHS. If, as Lopez contends, the VHS Retirement Plan is a separate entity and the VHS Retirement Plan (rather than VHS) is obligated to provide to her retirement benefits,*fn11 these facts tend to undermine rather than enhance any argument that Lopez holds an allowable claim for retirement benefits against VHS. In short, regardless of whether the VHS Retirement Plan is a separate entity from VHS, none of 1 Lopez's arguments explain why Lopez is entitled to a distribution 2 for retirement benefits under VHS's Chapter 9 Plan.
4 For all of the reasons set forth above, we AFFIRM the 5 bankruptcy court's order sustaining the Committee Parties' claim 6 objection and disallowing Lopez's claim.