IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 08-40517

In The Matter Of: SAN PATRICIO COUNTY COMMUNITY ACTION

AGENCY

Debtor

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

TECHNOLOGY LENDING PARTNERS LLC; NUECES FINANCIAL

CORPORATION

Appellants

v.

SAN PATRICIO COUNTY COMMUNITY ACTION AGENCY; TRUSTEE

MICHAEL B SCHMIDT; TEXAS ATTORNEY GENERAL, as Protector for

Public Interests in Charity; IRVING RONDON; MAYRA RONDON; LUPITA

PAIZ; GUSTAVO GALLARDO PINO; CESAR R NAVARRETTE; P&N AUTO

SALES; TERRY SIMPSON; NINA TREVINO; SARA CRUZ; CHRIS

VARGAS; WALTER HILL; ET AL

Appellees

Appeal from the United States District Court 

for the Southern District of Texas

Before JOLLY, PRADO, and SOUTHWICK, Circuit Judges.

Leslie H. Southwick, Circuit Judge:

Technology Lending Partners LLC and Nueces Financial Corporation (“the

Lenders”) appeal the district court’s dismissal of their appeal of the bankruptcy

United States Court of Appeals

Fifth Circuit

F I L E D

July 14, 2009

Charles R. Fulbruge III

Clerk
No. 08-40517

2

court’s approval of a settlement order. The Lenders argue that the district court

improperly applied the doctrine of equitable mootness to dismiss. Because the

case was resolved on this threshold mootness issue, the district court was never

called upon to decide whether the Lenders’ state-law tort claims were part of the

bankruptcy estate. We agree that equitable mootness should not have been

applied to the appeal to district dourt. Consequently, we REVERSE and

REMAND to the district court for further proceedings. 

I. BACKGROUND

San Patricio County Community Action Agency (“the Debtor”) was a

nonprofit organization, which received money from the state of Texas and the

federal government to facilitate its charitable activities. A portion of this money

was used to purchase passenger vans.

Lupita Paiz operated as an officer or director of the Debtor. Paiz, on behalf

of the Debtor, entered into a transaction with the Lenders. The Lenders agreed

to purchase the vans from the Debtor and then lease the vans back for the

Debtor’s continued use. This transaction permitted a loan of operating funds

and the receipt of title to the vehicles as security. Paiz represented to the

Lenders that the Debtor had the legal right to enter into this transaction. She

signed a bill of sale on behalf of the Debtor. 

This litigation exists because the loan of money by the state and federal

governments to purchase the vans prohibited the Debtor from entering into a

contract affecting the government’s interest in the property. The Lenders

contend that Paiz later admitted that she was unaware that she did not have the

authority to sell the vans and declared that she would not have sold the vans

had she known of the restrictions. 

When the Debtor was unable to make lease payments on the vans, the

Lenders were unable to claim the vans as security. Government restrictions on

the transfer of title left the Lenders unsecured. Therefore, in 2005, the Lenders
No. 08-40517

3

each filed separate state-law tort suits in Texas state court against Paiz in her

individual capacity. Each suit alleged negligent misrepresentation on the part

of Paiz. However, the Lenders limited the recovery they sought from Paiz to the

proceeds from the Debtor’s directors and officers insurance policy. 

It is undisputed that the policy, which was issued by St. Paul Fire and

Marine Insurance Company and provided $1 million in benefits, would cover

relevant claims against Paiz in addition to claims against the Debtor. There is

no issue in this appeal as to what kinds of claims the policy covered. The policy

language stated that it covered a “wrongful act” by the Debtor and by other

insureds. “Wrongful Act” is broadly defined in the policy, but we assume that

the policy was not one simply to pay debts. We make these observations, despite

that the policy is not directly in issue, because part of the background

explanation by the district court for its holding was that the Lenders had no

greater claim to insurance proceeds than would any of the other creditors. That

would be so only if the policy covered all debts of the insured. If that were the

nature of the coverage, and with claims in bankruptcy of about $2.6 million, it

does not seem quite plausible that a settlement would be reached of only

$650,000 on a $1 million policy. That concern, though, does not affect the result.

Paiz declared personal bankruptcy. The Lenders sought and received an

order lifting the stay in Paiz’s bankruptcy, which allowed the Lenders to proceed

with their state court negligent misrepresentation actions.

The Debtor then filed its own Chapter 7 bankruptcy petition in March

2005. Michael Schmidt was appointed as the bankruptcy trustee. An audit by

the U.S. Department of Health and Human Services in 2004 determined that the

Debtor had overspent its grant funding by more than $550,000. In January

2007, just before the Lenders’ state court trials were to begin, Schmidt

intervened in both actions. Over the Lenders’ opposition, he removed them to

bankruptcy court. Schmidt had previously brought actions on behalf of the
No. 08-40517

4

Debtor against the Debtor’s officers and directors for alleged mismanagement.

Schmidt and the Texas Attorney General also both brought actions against the

Debtor itself. Eventually, over the Lenders’ objection, six adversary proceedings,

including Schmidt’s suits, the Texas Attorney General’s suit, and both of the

Lenders’ suits, were consolidated in bankruptcy court in June 2007.

Schmidt, as trustee, moved in the bankruptcy court to appoint himself as

special counsel to represent the bankruptcy estate in proceedings involving the

Debtor and its officers, directors, and employees. The bankruptcy court granted

the motion, which included a contingency fee schedule for Schmidt of a third of

all money collected from settlement prior to trial, 45% of all money collected

after trial, and half of all money collected after appeal. 

Schmidt negotiated a settlement agreement with St. Paul, which was

reached after mediation but before trial. In May 2007, the bankruptcy court

approved the settlement agreement, holding that St. Paul would pay $650,000

of the $1 million available under the policy in exchange for the dismissal with

prejudice of all claims against the policy. That dismissal included both of the

Lenders’ claims, which they had initially filed in state court. The bankruptcy

court found that all of the proceeds of the Debtor’s relevant insurance policy

were part of the bankruptcy estate. The Lenders unsuccessfully opposed the

settlement agreement. Their motion to stay the order approving the settlement

agreement was denied.

With the settlement agreement approved, Schmidt next filed a motion for

approval of an interim distribution agreement for the settlement proceeds. The

bankruptcy court granted the motion. It approved a distribution agreement that

gave $325,000, or half of the settlement, plus out-of-pocket expenses to Schmidt;

more than $150,000 to the Texas Attorney General; and eventually left

$118,961.06 to be distributed pro rata among approximately 50 unsecured

creditors, including the Lenders. The Lenders filed a motion to stay the interim
No. 08-40517

5

distribution agreement, but they did not post a bond. The motion was denied in

August 2007, and the funds were distributed. 

The Lenders appealed the following orders to the district court: (1) the

Order Consolidating all the Adversary Proceedings, (2) the Order Approving the

Settlement Agreement, (3) the Order Denying Lenders’ Motion for Stay of Order

Approving Settlement Agreement, (4) the Order Granting Motion for Approval

of Interim Distribution Agreement for Settlement Proceeds, and (5) the Order

Denying Motion for Stay of Order Approving Interim Distribution and Denying

Stay of Dismissal of Consolidated Adversaries. The parties fully briefed the

merits issues before the district court, and then one month later Schmidt filed

a separate motion to dismiss the appeal as equitably moot. In March 2008, the

district court granted Schmidt’s motion. Though the district court mentioned

the merits issues, its analysis concentrated solely on the issue of equitable

mootness. In granting the motion to dismiss, the court explained, “it would be

inequitable and futile to consider the merits of Appellants’ appeals.”

This appeal followed.

II. DISCUSSION

On this appeal, we act as the second appellate court to review the acts of

the bankruptcy court. Consequently, we apply the same standard of review to

the bankruptcy court’s ruling as did the district court. We provide no deference

to legal conclusions and analyze them anew. On the other hand, clear error

must be shown before we would reverse a finding of fact. Mixed questions of law

and fact that may be in the case receive de novo review. In re Seven Seas

Petroleum, Inc., 522 F.3d 575, 583 (5th Cir. 2008). 

The controlling holding by the district court was that the appeal was

equitably moot by the time it arrived. That is a legal determination subject to

de novo review. In re GWI PCS 1 Inc., 230 F.3d 788, 799-800 (5th Cir. 2000). 
No. 08-40517

6

The doctrine of equitable mootness is designed “to address equitable

concerns unique to bankruptcy proceedings.” In re Manges, 29 F.3d 1034, 1038

(5th Cir. 1994). It is not an Article III inquiry into whether a case or controversy

exists, but rather “a recognition by the appellate courts that there is a point

beyond which they cannot order fundamental changes in reorganization actions.”

Id. at 1039. “An appeal is equitably moot when a plan of reorganization has

been so substantially consummated that a court cannot order effective relief

even though a live dispute remains among some parties to the bankruptcy case.”

In re Hilal, 534 F.3d 498, 500 (5th Cir. 2008). Both of the latter two statements

of principle refer to plans of reorganizations. Such plans maintain a debtor in

operation and may result in substantial changes in ownership, management,

and business relations. New contracts may be entered, such as new

arrangements with suppliers and others. All of that and more result in

expectation interests that courts are loath to upset.

Whether the doctrine has much if any relevance to a bankruptcy under a

Chapter 7 liquidation, as this one, is a threshold issue. “Equitable mootness

normally arises where a Chapter 11 reorganization plan is at issue.” In re

Grimland, Inc., 243 F.3d 228, 231 n.4 (5th Cir. 2001). The doctrine responds “to

the particular problems presented by the consummation of plans of

reorganization under Chapter 11.” Id. at 231. Indeed, equitable mootness is

often defined in relation to reorganization plans. See, e.g., In re Hilal, 534 F.3d

at 500; In re Berryman Prods., Inc., 159 F.3d 941, 944 (5th Cir. 1998); In re

Manges, 29 F.3d at 1039; 13B CHARLES ALAN WRIGHT, ARTHUR R. MILLER &

EDWARD H. COOPER,FEDERAL PRACTICE AND PROCEDURE § 3533.2.3 (3d ed. 2008).

But see In re Pequeno, 246 F. App’x 274 (5th Cir. 2007) (finding equitable

mootness in a Chapter 7 proceeding in an unpublished and therefore nonprecedential opinion). 
No. 08-40517

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It is certainly arguable that equitable mootness has no application to an

appeal in a Chapter 7 liquidation. Yet, there is no reason to make such a

comprehensive statement here. Instead, we find that under traditional equitable

mootness analysis, this case is not moot.

We start with some standard qualifiers to equitable mootness.

“Substantial consummation of a reorganization plan is a momentous event, but

it does not necessarily make it impossible or inequitable for an appellate court

to grant effective relief.” In re Manges, 29 F.3d at 1042-43 (internal quotation

marks and citation omitted). Further, “equitable mootness need not foreclose an

appeal from aspects of Chapter 11 plan confirmation that solely concern

professional compensation and releases.” In re Hilal, 534 F.3d at 501; see In re

SI Restructuring, Inc., 542 F.3d 131, 136-37 (5th Cir. 2008) (holding that a

challenge to the disbursement of attorney’s fees was not equitably moot).

Whatever else may be equitably moot, the Lenders’ claim to have a portion of

Schmidt’s attorney’s fees disgorged seems beyond the reach of the doctrine.

We examine three factors in the usual equitable mootness assessment: “(1)

whether a stay has been obtained, (2) whether the plan has been ‘substantially

consummated,’ and (3) whether the relief requested would affect either the

rights of parties not before the court or the success of the plan.” In re Manges,

29 F.3d at 1039. “The ultimate question to be decided is whether the Court can

grant relief without undermining the plan and, thereby, affecting third parties.”

In re SI Restructuring, Inc., 542 F.3d at 136. In this case, the first two factors

are not at issue, at least factually. The Lenders did not obtain a stay. The

settlement has mostly and perhaps entirely been paid, but whether that is the

equivalent of “substantially consummated” can be deferred.

The remaining factor is whether the relief requested would affect the

success of the plan or the rights of parties not before the court. The relief that

the Lenders would receive from a finding that their state-law claims should not
No. 08-40517

8

have been removed to bankruptcy court would be a restarting of their

proceedings against Paiz in state court. Were the Lenders to be successful in

those claims, then Paiz could make a claim on benefits payable under the

insurance policy. Everyone affected has been involved in these bankruptcy

proceedings as creditors, trustee, or as a non-party insurance company entering

a settlement with the specific purpose of having it approved by the court.

This case involves the payment of money to parties who were before the

bankruptcy court, with three-quarters of the settlement being paid to either

Schmidt or the state of Texas. We realize that the money paid to the state was

then to be given to a comparable charity or charities. Still, we do not find that

fact to create a hardship in this case sufficient to outweigh the general right of

dissatisfied litigants to have a review of their appellate issues.

Indeed, we find little difference in the equities in this case from those in

general civil appeals in which a money judgment was entered, but no stay was

obtained. There is a provision for seeking a stay of a judgment in appeals in

such cases. Fed. R. App. P. 8(a). If there is no stay, a money judgment involving

multiple parties may be paid prior to a ruling on the appeal. If informed of those

payments, we do not consider dismissing the appeal with a statement that

equity now prevents us from reviewing the merits. That is true even though in

some cases, the money would not be recoverable if the judgment were reversed.

The principal entity who loses pro tanto is the appellant who did not get the stay

and cannot recover all of the payments already made. It has never been the law

that failure to get the stay moots the appeal. 

We are aware that settlement agreements can play an important role in

improving the odds for the overall success of a bankruptcy plan. See, e.g., In re

Hilal, 226 F. App’x 381 (5th Cir. 2007); In re Morningside Mobile Home RV Park,

32 F. App’x 130 (5th Cir. 2002); In re U.S. Brass Corp., 169 F.3d 957 (5th Cir.

1999). In those cases, the settlement agreements and releases were part of a
No. 08-40517

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larger plan of reorganization. In one case, we found that a dispute in a Chapter

7 bankruptcy between two parties over a surcharge order was not equitably moot

because reversing the order would simply require one party to repay the other.

In re Grimland, 243 F.3d at 232. There are more parties involved in this case,

but not a different principle. There is no reorganization plan here that has been

put into effect and would need to be unraveled. If the settlement agreement in

this case eventually were set aside, money received under the interim

disbursement order would need to be repaid. Some of the creditors may be

financially unable to repay. That difficulty is not of the same nature or

magnitude as the undoing of a complicated plan of reorganization.

Equitable mootness is, to be redundant, an equitable doctrine. On these

facts, even if the doctrine has some legal relevance to Chapter 7 liquidations, we

do not apply it. Equity much more strongly lies with the parties who raise a

legitimate argument that their claims were not properly part of the bankruptcy

estate in the first place. That claim should be reviewed absent stronger

equitable mootness arguments than we have seen here.

The district court never reached the summary judgment issues on whether

the Lenders’ claims were part of the estate. Instead, the appeal was simply

dismissed on motion. The only order being reviewed today concerns equitable

mootness. We go no further than to conclude that the doctrine does not apply.

We REVERSE and REMAND for further proceedings.