In the case of Sherman v. Harbin (In re Harbin), the Ninth Circuit decided that in determining feasibility of a plan under Bankruptcy Code Section 1129(a)(11), a court must evaluate the possible impact of pending litigation whether at the trial level or on appeal.

The appellant in this action was an aggrieved creditor that had filed a state court action, obtained a judgment and had that judgment overturned. The creditor appealed the reversal, and filed a proof of claim and an adversary proceeding in the bankruptcy case. The bankruptcy court ruled against the creditor and denied the creditor a claim on the basis of the ruling in the state court action, but left open the possibility of allowing the creditor a claim if the creditor was ultimately successful on the appeal. The creditor ultimately was successful on appeal.

The Ninth Circuit ruled that the Bankruptcy Court had erred in not evaluating the impact and likelihood of a successful appeal on the feasibility of the Debtor’s plan of reorganization. The Court seemingly expanded their decision in Pizza of Hawaii, Inc. v. Shakey’s, Inc. (In re Pizza of Hawaii), 761 F2d 1374 (9th Cir. 1985) to require the court to evaluate not only open and unresolved litigation, but also to include an evaluation of litigation that is final but subject to appeal, when determining feasibility of a plan of reorganization.

The dissent pointed out that the lower court made a proper determination of feasibility based on the law at the time of confirmation and stated that the majority’s ruling could undermine the importance of finality in bankruptcy proceedings.

Authored by:

Kyle J. Mathews

(213) 617-4236