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Summarizing by Shane Ramsey

Kreit v. Quinn

Case Type:
Case Status:
21-20067 (5th Circuit, Feb 11,2022) Published
The U.S Court of Appeals for the Fifth Circuit: (1) affirmed financial sanctions ordered by the bankruptcy court and ratified by the district court on doctors who asserted causes of action placed in a since-ended trust by the former for paying creditors of Cleveland Imaging & Surgical Hospital LLC, a debtor in which they invested and on whose board they served, in an adversary proceeding (AP); and found jurisdiction (2) lacking over the AP's dismissal by an order omitted from the uninjured trio's appeal notice but (3) present over the sanctions issue due to the trustee's extant outcome stake.
Procedural context:
In 2019, despite an order by the U.S. Bankruptcy Court for the Southern District of Texas (BC) placing all the possible causes of action of Cleveland Imaging & Surgical Hospital LLC (CISH), a debtor as of 2014, in a trust presided over by a Christopher Quinn (Quinn) as trustee, a trio of doctors named Camil and Samir Kreit and Fadi Ghanem (Appellants), the drivers of the appeals here and below, opted to assert such causes of action in an AP. After two hearings, the BC opted to impose sanctions on all three (Sanctions Order), reasoning that by attempting to seize control of trust property, they had knowingly violated its order confirming the liquidation plan, which had continued the automatic stay for the benefit of the trust. These sanctions took two forms: payment of the costs that the trust had incurred as a result of their AP and enjoinment from violating the automatic stay in the future, the latter injunction to be enforced with future sanctions of $100,000 per individual per violation. By separate order, the BC dismissed the Appellants' AP with prejudice. Notably, the BC entered the Sanctions Order on the docket for the underlying CISH bankruptcy case, but the dismissal order on the AP's docket. The Appellants paid the monetary sanctions to Quinn, as, under Texas law, the trust created by the BC was not (and could not be) a "separate legal entity" and could thus not possess any kind of property interest. Afterward, on August 14, 2019, to be precise, they filed a notice of appeal of the Sanctions Order with the U.S. District Court for for the Southern District of Texas (DC). Affirming and vacating in part, the DC affirmed the monetary sanctions but vacated the $100,000 sanction for future violations as "punitive and beyond the bankruptcy court's authority." The Appellants timely filed a notice of appeal with the U.S Court of Appeals for the Fifth Circuit (Circuit) that designated solely the Sanctions Order as its subject but later challenged not just this edict but also the order dismissing the AP; Quinn did not cross-appeal the vacatur of the punitive sanctions.
Starting in 2002, CISH owned and operated a four-bed hospital in Cleveland, Texas. Credentialed physicians, the Appellants had invested in CISH and served on its board. In 2012, the Appellants sued CISH for breach of contract in state court. When one of CISH’s creditors learned that the hospital had ceased operations on account of the suit, the creditor successfully petitioned a state court to appoint a receiver, who then put CISH into bankruptcy in September 2014. In the course of CISH's bankruptcy case, many of its assets were sold. Indeed, the Appellants themselves competed with one of their rivals on the CISH board to purchase the hospital from CISH's estate. Ultimately, the BC approved a sale of the hospital to their rival in August 2015. While the Appellants objected, they did not appeal, but two months later, one--Camil Kreit--accused the receiver and rival of rigging the sale. Meanwhile, in June 2016, the BC confirmed a liquidation plan for CISH to which the Appellants again objected, but whose approval they did not appeal. Per the plan, CISH's causes of action were placed in trust so they could be liquidated on behalf of its creditors, with Quinn being appointed for this single purpose. Among other provisions, the plan kept the automatic stay in place for the benefit of the trust and provided that the trust would terminate automatically on December 31, 2018.
Jerry E. Smith; Patrick E. Higginbotham; and James C. Ho

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