Saturday, February 13, 2016

In re O & S Trucking, Inc.

Opinion handed down April 7, 2015

In May 2012, O & S Trucking, Inc. (“O&S”) filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Western District of Missouri.[1]  During its bankruptcy proceedings, there was some dispute about the valuation of certain trucks O&S owned but in which a third party had a security interest.  O&S sought to appeal interlocutory orders valuating the trucks, but the Bankruptcy Court confirmed O&S’s allegedly erroneous bankruptcy plan. O&S then sought to appeal the court order confirming its plan, but the Bankruptcy Appellate Panel for the U.S. Court of Appeals for the Eighth Circuit dismissed the appeal, holding that O&S did not have standing to appeal a court order confirming O&S’s own plan, and that O&S’s arguments were moot.

I.  Facts and Holding

 At the time it filed for bankruptcy, O&S owned and operated a fleet of trucks, trailers, and other equipment used for hauling throughout the United States.[2]  The Company had a program whereby independent contractor drivers could lease and later acquire ownership of trucks.[3]  Several of the trucks that were a part of this lease/purchase program were financed or leased by Mercedes Benz Financial Services USA d/b/a Daimler Truck Financial (“Daimler”).[4]  At the time O&S filed for bankruptcy, Daimler was the lessor of 14 trucks and held a security interest in 99 additional trucks that were being used by O&S or its drivers.[5]  Daimler also held a security interest in any driver lease payments and other proceeds generated by O&S through the use of Daimler’s trucks.[6]
Subsequent to O&S’s petition for bankruptcy, on June 14, 2012, Daimler filed a motion for “Adequate Protection, or in the Alternative, to Prohibit Use of Cash Collateral and Grant Relief from the Automatic Stay”; additionally, on June 26, 2012, Daimler filed a “Motion to Prohibit Unauthorized Use and for Sequestration of Cash Collateral.”[7]  Through these motions, Daimler argued that O&S was using cash collateral comprised of the driver lease payments and other proceeds without Daimler’s consent.[8]  Daimler requested that its cash collateral be set apart and that the court prohibit its use.[9]  Immediately thereafter, Daimler and O&S began negotiations to resolve the motions.[10]

In August 2012, the parties submitted an agreed order for the court’s approval.[11]  This order provided that: (1) O&S would deliver possession of twenty-one trucks to Daimler; (2) Daimler would sell the twenty-one trucks and give O&S credit for the net proceeds received; (3) O&S would retain eighty trucks subject to Daimler’s security interest; and (4) O&S would make “adequate protection payments to ‘Daimler equal to 2% of the NADA values of the trucks, as set forth in Exhibit A.’”[12]  Exhibit A included a list of the make, model, VIN, and NADA value of the eighty trucks retained by O&S and the two percent payment figures.[13]  This Order did not make mention of Daimler’s security interest in the driver lease payments and other proceeds generated by the use of Daimler’s trucks.[14]

Subsequently, Daimler filed an amended proof of claim showing a higher amount than previously claimed: $2,743,171.94; O&S objected.[15]  O&S argued that the values assigned to the trucks in Exhibit A of the agreed order was a binding valuation, which would be used for the entire remainder of the case.[16]  O&S also contended that because the agreed order did not specifically provide for the segregation of the proceeds attributable to Daimler’s trucks, Daimler’s security interest in those proceeds was lost.[17]

In May 2014, the court entered an order that sustained O&S’s objection in part and determined the status of the secured claim.[18]  The court found that as of May 5, 2014, only twenty-three of the vehicles retained in O&S’s possession.[19]  Additionally, the court determined that at that time O&S had made adequate protection payments in the amount of $1,577,488.01.[20]  The court credited those payments toward the total amount of debt owed, prior to making a determination as to how much of the debt was secured.[21]  The court ultimately found that Daimler had allowed a secured claim in the amount of $1,425,309.40 and an unsecured claim totaling $819,183.48, less any proceeds received by Daimler from the sale of vehicles previously surrendered by O&S.[22]  The court noted,
[Section] 552(b) of the Bankruptcy Code provides that if the debtor and a creditor entered into a security agreement before the filing of the petition, and if the security interest extends to proceeds, products, offspring, or profits of the collateral, then such security interest continues in any proceeds, products, offspring, or profits generated post-petition.[23] 

Further, the court determined that twenty-five percent of O&S’s operating fleet was comprised of Daimler’s collateral;[24] thus, the court found that Daimler was entitled to a security interest in twenty-five percent of the total amount of funds in O&S’s accounts, which equaled $51,909.40.[25]
O&S made a motion for reconsideration of the court’s order.[26]  O&S argued that the court erred in making a valuation of the trucks that was lower than the parties’ agreed valuation.[27]  O&S argued that as a result of the lower valuation, it had paid an extra $25,980 in adequate protection payments – because the payments were calculated using the truck values.[28]  The opinion points out that if the court’s values were lower, the payments would have been smaller.[29]  O&S explained its position, stating that the adequate protection payments were made to compensate Daimler for the eroding value of the trucks, such that any payments made in excess of the erosion value should be credited against the secured portion of Daimler’s claim.[30]  The court denied O&S’s motion for reconsideration in June 2014.[31]

O&S then filed a notice of appeal of the interlocutory orders relating to Daimler.[32]  The U.S. Bankruptcy Appellate Panel of the Eighth Circuit dismissed the appeal for lack of jurisdiction in September 2014, because the orders were interlocutory, and O&S did not request nor meet the requirements for a grant of leave to appeal.[33] 

While the appeal had been pending, however, O&S had proposed a third plan of reorganization in the Bankruptcy Court below.[34]  This plan was confirmed in October 2014.[35]  O&S filed a notice of appeal once again,[36] this time appealing three orders – the May order,[37] the June order,[38] and the October order.[39]  O&S “describe[d] its appeal as a controversy that ‘arose as to the application of the excess adequate protection payments inasmuch as the debtor clearly overpaid for the erosion in the value of the trucks.’”[40]  O&S also argued that the bankruptcy court erred when it supplemented Daimler’s secured claim with an award of $51,909.40 as proceeds from the use of Daimler’s trucks.[41]

II.  Legal Background

Fundamental to jurisdiction are the concepts of finality, standing, and a live controversy; where these three concepts are absent, a court is without jurisdiction and lacks the authority to hear and decide a particular case.  While these concepts often arise and can present complexities under the facts of a particular case, they are procedural in nature and well defined in the law.

First, the United States Code provides for the requirement of finality.[42]  Under Title 28, Section 158, courts of the United States have jurisdiction to hear appeals “from final judgments, orders, and decrees” and from certain interlocutory orders where leave of the court has been given.[43]  This authority to hear appeals is extended to bankruptcy appellate panels by Section 158(b)(1).[44]  Next, standing is a well-rooted and widely recognized requirement.  For standing to exist under Article III of the U.S. Constitution, there must be an injury-in-fact, causation, and redressability.[45]  In addition, certain prudential considerations must be examined.[46]  It is important to note that standing in bankruptcy cases is often construed more narrowly than standing under Article III.[47]  Lastly, the Constitution requires the presence of a live controversy: “A federal court may only exercise jurisdiction over cases and controversies and lacks authority over moot issues.”[48]  Without finality, standing, and a live controversy, there is no jurisdiction.

III.  Instant Decision

The U.S. Bankruptcy Appellate Panel of the Eighth Circuit dismissed O&S’s appeal for lack of jurisdiction.[49]
  1. Final Orders
First, the court recognized that jurisdiction to hear appeals is only present where the order is final or the order is interlocutory and the court’s leave has been granted.[50]  The court noted, “An order is considered final if ‘(1) it leaves the bankruptcy court nothing to do but execute the order, (2) delay in obtaining review would prevent the aggrieved party from obtaining effective relief, and (3) a later reversal on that issue would require recommencement of the entire proceeding.’”[51]

        The court proceeded to examine whether the orders challenged by O&S were appealable, and it ultimately determined that only one of the three orders was a final, appealable order.[52]  The May order and the June order were found not to be final orders; the October confirmation order, on the other hand, was found to be final.[53]  The court noted, “The fact that the confirmation order is now a final order does not render the May 13 and June 6 orders final: They are still interlocutory.  Those orders, standing alone, are not appealable.”[54]  The court then explained that though those two orders were not appealable, their propriety might be reviewed, but that review would be limited to the extent that those orders affected the final order.[55]
  1. Standing
Next, the court examined O&S’s standing.[56]  It noted that standing is essential to an appeal and requires the appellant to be the person aggrieved.[57]  The court pointed out that a party cannot bring an appeal from a judgment in its favor, and more importantly, “[A] party may not appeal from a judgment or decree in his favor, for the purpose of obtaining a review of findings he deems erroneous which are not necessary to support the decree.”[58]

The court determined that O&S was not an aggrieved party, such that it did not have standing to appeal the final order, confirming O&S’s plan.[59]  The court recognized that, despite appealing the confirmation order, O&S alleged no error in that order.[60]  The court further noted that O&S proposed its plan, sought its confirmation, and received such confirmation.[61]  This led the court to determine that O&S did not seek a review of the confirmation order; rather, it sought review of the bankruptcy court’s valuation and application of adequate protection payments.[62]  The court emphasized that these two determinations, the valuation and payments, were not necessary to support the confirmation order actually being appealed.[63]

The court clarified its position by explaining a procedure employed by the Eighth Circuit.[64]  This procedure, used in the scenario presented by the case in the context of Chapter 13 bankruptcies, allows a debtor who is unable to secure confirmation of his preferred plan to propose a plan and object to that plan.[65]  Where the debtor objects to his own plan, the debtor may be an aggrieved party with standing to appeal the confirmation of such plan.[66]  Applying this to Chapter 11 bankruptcy cases, the court determined that a debtor would be required to propose a desired plan, then, after its confirmation is denied, propose a different plan, object to its confirmation, and subsequently appeal.[67]  The court stated that O&S did none of this; rather, O&S presented a plan and obtained confirmation.[68]  Therefore, the court found that O&S was not an aggrieved party and did not have standing to appeal the order confirming O&S’s plan.[69] 
  1. Mootness
Finally, the court stated, “A federal court may only exercise jurisdiction over cases and controversies and lacks authority over moot issues.”[70]  A case is moot when there is no longer a controversy present to which the court can grant meaningful relief that restores the parties to their original positions.[71]

The court determined that the issues presented by the case were moot.[72]  First, the court noted that at the time of the appeal, O&S no longer possessed any of Daimler’s trucks; thus, there was no meaningful relief to be granted.[73]  Second, the court rejected the idea that the case presented a live controversy on the basis of disagreement as to the valuation of the trucks.[74]  Specifically, the court found the valuation of the vehicles to be irrelevant or, if relevant, moot.[75]  The court explained that the order itself was not a valuation of the trucks and that a valuation can change through the course of a case.[76]  Further, the court explained that the value of a secured claim must be determined as of the date of confirmation, whereby valuations in the agreed order did not present an issue for appeal.[77]

IV.  Comment

Jurisdiction is fundamental, and the requirements of finality, standing, and a live controversy are essential.  The court applied these well-rooted concepts and correctly precluded O&S from appealing a decision rendered in its favor.

-  Lynsey Russell

[1] In re O & S Trucking, Inc., 529 B.R. 711 (B.A.P. 8th Cir. 2015).
[2] Id. at 713.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id. at 714.
[18] Id.
[19] Id.  The other trucks had been surrendered to Daimler.  Id.
[20] Id.
[21] Id.
[22] Id.
[23] Id.
[24] Id.
[25] Id.
[26] Id. This action was taken pursuant to Federal Rule of Bankruptcy Procedure 9023.  Id.
[27] Id.
[28] Id.
[29] Id.
[30] Id.
[31] Id.
[32] Id.
[33] Id.
[34] Id.
[35] Id. at 715.
[36] Id.
[37] Id.  (“Order Sustaining in part, Debtor’s objection to Claim of Mercedes Benz Financial Services USA, LLC d/b/a Daimler Truck Financial and Determining Secured Status of Daimler’s Claim”)
[38] Id.  (“Order Denying Debtor’s Motion for Reconsideration of the Order Sustaining in part, Debtor’s objection to Claim of Mercedes Benz Financial Services USA, LLC d/b/a Daimler Truck financial and Determining Secured Status of Daimler’s Claim”)
[39] Id.  (“Order Confirming Final Approval of Third Amended Disclosure Statement and Confirming Third Amended Plan of Reorganization (As Modified).”)
[40] Id.
[41] Id.
[42] 28 U.S.C. § 158 (2012).
[43] Id. at § 158(a).
[44] Id. at § 158(b)(1).
[45] Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).
[46] Id.
[47] In re AFY, 734 F.3d 810, 819 (8th Cir. 2013).
[48] IRS v. Ealy, 396 B.R. 20, 22 (8th Cir. 2008) (citing US Const. art. III, § 2, cl. 1).
[49] In re O & S Trucking, Inc., 529 B.R. 711, 717 (B.A.P. 8th Cir. 2015).
[50] Id. at 715.
[51] Id. (citing Nebraska v. Strong, 293 B.R. 764, 767 (B.A.P. 8th Cir. 2003)).
[52] Id. at 716.
[53] Id. at 715-16.
[54] Id. at 716.
[55] Id.
[56] Id.
[57] Id.
[58] Id.
[59] Id.
[60] Id.
[61] Id.
[62] Id.
[63] Id.
[64] Id.
[65] Id.
[66] Id.
[67] Id.
[68] Id.
[69] Id.
[70] Id. at 716-17.
[71] Id. at 717.
[72] Id.
[73] Id.
[74] Id.
[75] Id.
[76] Id.
[77] Id.