Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_09-cv-01099/USCOURTS-azd-2_09-cv-01099-1/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Dexter Distributing Corporation, et al.,, 

Debtors, _________________________________

Taylor R. Coleman,

Appellant,

vs.

ANMP, et al., 

Appellees. 

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No. CV 09-1099-PHX-JAT

BK NO. 2:03-bk-03546-RJH

Jointly Administered as Case With:

2-03-BK-03548-RJH

2-03-bk-04238-RJH

2-03-BK-04695-RJH through

2-03-BK-04710-RJH

2-03-BK-05427-RJH

2-03-BK-11513-RJH

2-03-BK-11515-RJH

2-03-BK-04238-RJH

2-07-BK-01017-RJH

2-07-BK-01018-RJH

2-07-BK-01019-RJH; and

2-08-BK-05785-RJH

ADV. NO. 00-0000

BAP NO. AZ-00-0000

ORDER

Taylor R. Coleman filed this action under 28 U.S.C. § 158, seeking judicial review

of the Bankruptcy Court’s Modified and Restated Plan of Reorganization of Debtors, Official

Committee of Unsecured Creditors, ANMP, and Mark A. Franks Filed February 20, 2009

Case 2:09-cv-01099-JAT Document 69 Filed 03/18/10 Page 1 of 9
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1

 For a recitation of the pertinent facts and the procedural background, see the Court’s

July 13, 2009, Order (Doc. # 25).

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(“2009 Plan”). For the reasons that follow, the Court dismisses Coleman’s appeal on

mootness grounds.1

ANALYSIS

“Mootness is a jurisdictional question because the Court is not empowered to decide

moot questions or abstract propositions; our impotence to review moot cases derives from

the requirement of Article III of the Constitution under which the exercise of judicial power

depends upon the existence of a case or controversy. ” North Carolina v. Rice, 404 U.S. 244,

246 (1971) (internal quotations and citations omitted). “If a case becomes moot while

pending on appeal, it must be dismissed.” In re Pattullo, 271 F.3d 898, 900 (9th Cir. 2001).

Appellees argue that the “myriad of transfers and transactions that have occurred in

reliance on the Order Confirming Plan have rendered it impossible, impracticable, and

inequitable for this Court to provide Coleman with any relief whatsoever.” (Doc. # 54 at p.

14.) The Court agrees and finds that Coleman’s appeals is both statutorily and

constitutionally moot.

Section 363(m) Mootness

Congress has expressly limited appellate remedies in the event of reversal by

precluding reviewing courts from altering or otherwise affecting the validity of any sales

conducted pursuant to 11 U.S.C. § 363:

The reversal or modification on appeal of an authorization under

subsection (b) or (c) of this section of a sale or lease of property does not affect

the validity of a sale or lease under such authorization to an entity that

purchased or leased such property in good faith, whether or not such entity

knew of the pendency of the appeal, unless such authorization and such sale

or lease were stayed pending appeal.

11 U.S.C. § 363(m). Courts have interpreted this statute to mean that when a sale of assets

is made to a good faith purchaser, the reviewing court may not modify or set aside the sale

unless the sale was stayed pending appeal. See, e.g., In re Onouli-Kona Land Co. v. Estate

Case 2:09-cv-01099-JAT Document 69 Filed 03/18/10 Page 2 of 9
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of Richards, 846 F.2d 1170, 1172 (9th Cir. 1988); In re Vista Del Mar Associates, Inc., 181

B.R. 422, 423-24 (B.A.P. 9th Cir. 1995). “There are two recognized exceptions to this

mootness rule: (1) where the debtor has a statutory right of redemption, and (2) where other

state law would permit the sale to be set aside.” In re Vista, 181 B.R. at 425. Coleman does

not argue that either of these two exceptions apply in this case. Moreover, Coleman failed

to obtain a stay pending appeal. (Doc. # 25.) However, Coleman argues that the mandate

of Section 363(m) does not apply because Mark Franks was not a good faith purchaser. In

re Onouli-Kona Land Co., 846 F.2d at 1173 (“Bankruptcy’s mootness rule operates only

when a purchaser bought an asset in good faith.”). While the Court agrees that Section

363(m) does not apply if the sale is not to a good faith purchaser, the Court disagrees that

Franks does not constitute such a purchaser.

A lack of good faith in this context has been defined as “the misconduct that . . .

involves fraud, collusion between the purchaser and other bidders or the trustee, or an

attempt to take grossly unfair advantage of other bidders.” In re Suchy, 786 F.2d 900, 902

(9th Cir. 1985) (quotation omitted). “The bankruptcy judge is in the best position to assess

the good faith of the parties. The finding of good faith will not be overturned unless the

opponent of the plan can show that the finding was clearly erroneous.” In re Stolrow’s Inc.,

84 B.R. 167, 172 (B.A.P. 9th Cir. 1988) (citation omitted). After having reviewed the record,

the Court finds that the record amply supports the Bankruptcy Court’s determination that the

sale to Franks was in good faith.

The plan was overwhelmingly supported by the undisputed creditors of the estate,

which included both investors in American National Mortgage Partners and other trade

creditors, and who also understood the relationship between Frank and the Debtor. The

board considered other alternatives besides the sale to Franks but none of these alternatives

ever materialized. The record supports a finding that Franks is the only possible buyer and,

indeed, his offer was above the fair market value of the business. Moreover, the record

before the Bankruptcy Court is devoid of any expert testimony suggesting that the sale was

materially unfair or substantially less than the fair market value. Finally, even assuming

Case 2:09-cv-01099-JAT Document 69 Filed 03/18/10 Page 3 of 9
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2

 Coleman relies upon Donovan & Schuenke v. Sampsell, 226 F.2d 804 (9th Cir.

1955) for the proposition that a CEO of a debtor can never purchase the debtor’s assets.

(Doc. # 62 at p. 4.) In Donovan, and unlike here, the purchaser was the appointed agent of

the trustee and referee at the time of the sale. In any event, in this case, the sale to Franks

was approved by a committee of independent directors, and only after it was determined that

Franks’ offer was the only feasible alternative. To suggest that the CEO of a debtor could

never purchase the debtor’s assets would work a severe limitation on the bankruptcy

proceedings, as is evident in this case where the only viable option was selling to Franks.

The Court has already found that Franks was a good faith purchaser. Coleman’s reliance

upon Donovan is unavailing.

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Franks “was an estate fiduciary subject to significantly more stringent standards,” (Doc. #

62 at p. 4) the testimony before the Bankruptcy Court established that the 2008 Plan was

approved by a committee of independent directors who stood to gain nothing by selling to

Franks. Franks’ involvement in the sale did not involve fraud, collusion, or an attempt to

take grossly unfair advantage of other bidders. The Court finds that Franks was a good faith

purchaser.2

Bankruptcy’s mootness rule under Section 363(m) applies in this case. Coleman

failed to obtain a stay, the purchase was made in good faith, and neither of the two exceptions

articulated earlier apply. Thus, Section 363(m) precludes this Court from affecting or

otherwise altering the sale approved by the Bankruptcy Court. It is not entirely clear whether

Coleman is seeking relief other than to have the sale reversed or otherwise altered. In any

event, even if Coleman is seeking relief other than that which would affect the sale,

Coleman’s appeals also fails under a constitutional mootness analysis.

Constitutional Mootness

An appeal from the Bankruptcy Court is constitutionally moot if it is impossible for

this Court to fashion effective relief. In re Focus Media, Inc., 378 F.3d 916, 922 (9th Cir.

2004); In re Gotcha Intern. L.P., 311 B.R. 250, 253 (B.A.P. 9th Cir. 2004). “The party

asserting mootness has a heavy burden to establish that there is no effective relief remaining

for a court to provide.” In re Pintlar Corp., 124 F.3d 1310, 1312 (9th Cir. 1997).

Case 2:09-cv-01099-JAT Document 69 Filed 03/18/10 Page 4 of 9
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Appellees state that in reliance upon the unstayed Confirmation Order, the following

transfers and transactions have taken place:

1. The transfer of all of the Acquired Assets to Castle Megastore Group

(“CMG”);

2. The payment by CMG of the $800,000 purchase price to the

Liquidating Trust;

3. The transfer of all of the Acquired Litigation Claims to CMG;

4. The termination of all of the New Castle’s employees, including the

termination and cancellation of the New Castle’s employee health care Plan

and the termination and cancellation of the New Castle’s 401(k) Plan; 

5. The modification and restructure of matured loans secured by the

Castle Real Properties;

6. The payment of over $500,000.00 to several administrative

claimants; 

7. The payment of over $180,000.00 to the Arizona Department of

Revenue;

8. The filing of articles of dissolution for New Castle and Castle Realty

with the Arizona Corporation Commission;

9. The creation of the Liquidating Trust;

10. The transfer of the Castle Real Properties, as that term is defined in

the Confirmation Order, to the Liquidating Trust; 

11. The assumption of responsibility by the Liquidating Trust to collect, administer and distribute (a) the $800,000 Purchase Price paid by CMG, (b)

the proceeds from the Retained Causes of Actions, and (c) the proceeds related

to the sale or transfer of the Excluded Assets;

12. The disbursement of funds to creditors, including persons holding

administrative claims pursuant to terms of the Restated Plan and the

Liquidating Trust Agreement;

13. The closing of store No. 18; 

14. CMG has entered into an agreement with a landlord for the

operation of a CMG store; 

15. CMG has hired all, or substantially all, of New Castle’s former

employees and has acquired health care and 401(k) Plans for its new

employees.

(Doc. # 54 at p. 15.)

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Coleman responds to the above transactions in an attempt to demonstrate existent

forms of relief that can be fashioned to preclude the rendering of his appeal moot. First,

Coleman suggests that if the Court finds grounds for reversal, it can simply reverse the sale.

However, as discussed above, this option is precluded by Section 363(m). Indeed, many of

Coleman’s proffered forms of relief rely either explicitly or implicitly on reversing the sale

in violation of Section 363(m). To the extent any form of relief is premised upon reversing

the sale, it must be rejected. 

Next, Coleman asserts that in the event of a reversal, the employees are going to work

at the same stores and perform the same duties and, hence will not experience any change if

the 2008 Plan is abandoned. While practically speaking this may be true, Coleman’s

statements concerning the health insurance and 401(k) plans are assumptive at best.

Presumably, CMG has entered into agreements with third parties for the purposes of

providing health insurance and 401(k) plans. Reversing would have an effect on third parties

not involved in this appeal, an end the Court must seek to avoid at this stage of the

proceedings. 

Coleman next contends that the distributions by the Liquidating Trust should not

render his appeal moot. However, to the extent reversing the distributions made by the

Liquidating Trust requires this Court to reverse the sale, Coleman’s contention is unavailing.

Coleman next argues that the commencement of dissolution proceedings for New

Castle and Castle Realty should have no bearing on whether or not this Court can fashion

effective relief. The Court agrees with Coleman that to the extent the dissolution proceedings

are not final, they have no such bearing.

Coleman asserts that the notion of closing a store as somehow precluding the Court’s

ability to effectively fashion relief is “nonsensical, since New Castle could have simply

elected to close the store for business reasons while it was operating the business.” (Doc. #

62 at p. 10.) What “could have” happened does not alter the fact that a store was closed in

reliance upon the 2008 Plan and subsequent sale. Reversal of the Bankruptcy Court would

make it impossible to reestablish a store that was closed in reliance upon the 2008 Plan.

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Coleman next addresses Appellee’s modification and restructuring of loans secured

by Castle Real Properties. Coleman simply asserts that “[t]o the extent the plan in question

effected a modification of any such obligations, a reversal of the order confirming the plan

would merely reinstate the prior terms of the loans.” (Id.) The Court disagrees. Even if this

Court reversed the order confirming the 2008 Plan, the prior terms of the loans would not

automatically be reinstated. Negotiations are necessary for the modification and

restructuring of loans, and once such loans are modified, they cannot simply be reinstated

without further negotiations. Further, Coleman provides no support for his assertion that the

previous terms would automatically be reinstated. In any event, because the loans were

modified and restructured, reversing the order confirming the 2008 Plan would affect third

parties who are not participants in this appeal. See In re Southwest Products, Inc., 144 B.R.

100, 105 (B.A.P. 9th Cir. 1992) (“Effective relief could not involve overturning these aspects

of the sale because to do so could affect rights of third parties.”).

Lastly, Coleman states that reversing the order confirming the 2008 Plan would have

the effect of extinguishing the Liquidation Trust, including any of its duties and any real

estate transferred to it. The Court agrees with Coleman, that to the extent extinguishing the

Liquidation Trust would not affect the rights of third parties or otherwise make fashioning

relief ineffective, reversal of the 2008 Plan would not be mooted on this point.

After reviewing the record, the Court finds that Appellees have carried their heavy

burden of demonstrating that there is no effective relief remaining for this Court to provide.

Much of Coleman’s arguments center around the reversal of the sale, but as discussed earlier,

the Court is precluded from taking such a course of action. In any event, even if the Court

were permitted to reverse the sale, the Court cannot fashion effective relief that would not

either affect the rights of third parties to this appeal or create an unmanageable, piecemeal

situation for the Bankruptcy Court. See In re Roberts Farms, Inc., 652 F.2d 793, 797 (9th

Cir. 1981) (“Certainly, reversal of the order confirming the plan of arrangement, which

would knock the props out from under the authorization for every transaction that has taken

place, would do nothing other than create an unmanageable, uncontrollable situation for the

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3

 The Bankruptcy Code defines “substantial consummation”as:

(A) transfer of all or substantially all of the property proposed by the

plan to be transferred;

(B) assumption by the debtor or by the successor to the debtor under the

plan of the business or of the management of all or substantially all of the

property dealt with by the plan; and

(C) commencement or distribution under the plan.

11 U.S.C. § 1101(2).

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Bankruptcy Court.”). The transfer of all the acquired assets and litigation claims have

already been transferred. Various administrative claimants have been paid over $500,000

in addition to a payment of $180,000 to the Arizona Department of Revenue, as well as the

disbursement of funds to creditors. Moreover, it is impossible for the Court to unwind the

store closing, the modifying and restructuring of the loans, and the agreement with a landlord

for the operation of a store. Because Coleman failed to obtain a stay, the 2008 Plan has been

substantially consummated3

, and the Court cannot fashion effective relief, Coleman’s appeal

is moot. In re Clarke, 98 B.R. 979, 980 (B.A.P. 9th Cir. 1989) (“It is now well recognized

that when a stay of an order confirming a reorganization plan has not been obtained and the

plan has been consummated, appeals seeking to attack the confirmed plan may be

precluded.”).

CONCLUSION

The Court finds that Coleman’s appeal is moot under constitutional principles, as well

as under 11 U.S.C. § 363(m). For these reasons, the Court is precluded from addressing the

merits of Coleman’s appeal.

Accordingly,

IT IS ORDERED that decision of the Bankruptcy Court be affirmed and that Taylor

R. Coleman’s Appeal from the Bankruptcy Court be denied as moot.

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IT IS FURTHER ORDERED that Appellees’ Motion for Leave to Supplement

Record on Appeal (Doc. # 40) is granted. The Clerk of the Court shall cause the documents

contained at Doc. # 40 to be filed.

IT IS FURTHER ORDERED that Taylor R. Coleman’s Motion for Leave to

Supplement Designations of Record (Doc. # 60) is granted. The additional docket entries set

forth in Coleman’s Motion are considered designated by Coleman and part of the record on

appeal.

IT IS FINALLY ORDERED that the Clerk of the Court shall enter judgment

accordingly. The judgment will serve as the mandate of this Court.

DATED this 17th day of March, 2010.

Case 2:09-cv-01099-JAT Document 69 Filed 03/18/10 Page 9 of 9