2009 Chapter 11 Recent Developments (Part II)

was an unauthorized use of the Bank's cash collateral in violation of § 363(c)(2). Ultimately, an order (the "Order") - which was represented to the court as being fully consensual - approving the use of the Bank's cash collateral was entered. Buried in the Order was Paragraph 7, which granted the Bank's request to stop payment on the Cashier's Check. NPS had neither agreed to its treatment in the Order nor received notice of the cash collateral motions. A couple of months later, the UST filed a motion to dismiss the case, which was granted - the case was dismissed and closed in January 2008. Post-dismissal, NPS assigned the Cashier's Check to Inlander. When the Bank still refused to honor the Cashier's Check, Inlander sued the Bank in state court and the Bank defended itself by citing to the Order and the state lawsuit was dismissed. Inlander then filed a motion to reopen the bankruptcy case (the "Motion to Reopen") and to vacate Paragraph 7 of the Order (the "Motion to Vacate," and, collectively, the "Motions"). The bankruptcy court originally granted Inlander's Motions and the Bank filed motions for reconsideration under Rule 59. The bankruptcy court originally granted Inlander's Motions and the Bank filed motions for reconsideration under Rule 59. The bankruptcy court treated the Bank's motions as having been brought under Rules 59 and 60

Issues: Whether the court was correct to: (1) reopen the Debtor's bankruptcy case for the sole purpose of vacating Paragraph 7 of the Order and (2) vacating Paragraph 7 of the Order.

Rules: (1) "[T]he court has jurisdiction to vacate its own unappealed order if entered in error... [which] may be implemented under Rule 60(b)(6)."

(2)

Rule 60(b)(3) provides that an order may be vacated but a movant must show that: "(1) it maintained a meritourious claim at trial; and (2) because of the fraud, misrepresentation or misconduct of the adverse party; (3) it was prevented from fully and fairly presenting its case at trial." "Rule 60(b)(3)... applies to both intentional and unintentional misrepresentations."

(3)

Rule 60(b)(4) states that an order may be vacated if it is void; and the "failure or inadequacy of notice raises due process issues and may render a judgment void." Notably, "the Court has no discretion regarding motions to vacate void judgments under Rule 60(b)(4)... a void order must be vacated...and is generally not subject to any period of limitations and laches cannot be raised as a bar to the challenge."

Holding: (1) The Motion to Reopen is granted. The order dismissing the Debtor's bankruptcy case is vacated under Rule 60(b)(6) and the clerk is directed to reopen the case for the purpose of docketing the orders of these proceedings. (2) The Motion to Vacate is granted.

Reasoning: (1) Although the case was never closed pursuant to § 350(a), there is authority to treat a motion to reopen a non-closed case as a motion to vacate the order of dismissal. And, moreover, the court felt that the "... or for other cause..." language of § 350(b) provided the court with authority to exercise its equitable powers with respect to elevating substance over form in 'reopening' a bankruptcy case to prevent a substantial injustice. The court also noted that to the extent it is moving under Rule 60(b) sua sponte, it is doing so because it believes that Paragraph 7 of the Order is void. In fact, under § 105(a), the court is authorized to initiate on its own motion any motion for relief that a party in interest may initiate. With regard to the Bank's argument that it did not have notice that the Motion to Reopen would be treated as a Rule 60(b) motion, the court denied such argument for two reasons: the Bank itself characterized the Motion to Reopen as a motion to vacate and the court specifically requested additional briefing as to its authority to treat the Motion to Reopen as a motion to vacate under Rule 60(b). As for the merits, "the Bank's misrepresentation to the court that the Order was consented to by all interested parties, and its egregious failure to follow the statutory and procedural requirements for recovering property and to provide basic due process notice of the relief sought against NPS, provides the exceptional circumstances necessary to justify exercising discretion to vacate the dismissal and then vacate the unlawful part of the... Order."

(2) Rule 60(b)(3): The Bank did not take any steps to inform the presiding judge that Paragraph 7 existed in the Order and that it affected NPS's substantive rights. Bankruptcy judges are assigned thousands of cases each year and are certainly entitled to rely on what the parties represent in court proceedings. Here, the Bank misrepresented "that all parties to be affected by the purportedly agreed Order had received notice and stipulated to entry thereof." (And, notably, whether the Bank's misrepresentations were intentional is irrelevant.)