Opinion ID: 172833
Heading Depth: 1
Heading Rank: 3

Heading: Applying the Principles of Equitable Mootness to this Case, we Reverse the District Court's Decision To Dismiss SMDI's Appeal

Text: a. Failure to Obtain Stay The first question in [an equitable] mootness inquiry is whether the [appellant] secured a stay to prevent execution of the reorganization plan. In re GWI, 230 F.3d at 800. This inquiry really involves two questions: (1) Did the party seeking reversal try to obtain a stay? (2) Assuming the party seeking reversal sought a stay, was that party successful in obtaining a stay pending appeal? Different courts have placed a greater emphasis on one or the other of these questions. Compare Chateaugay II, 10 F.3d at 953 (inquiring into whether the appellant pursued with diligence all available remedies to obtain a stay of execution of the objectionable order) (quotation and alteration omitted; emphasis added), and Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 144 (2d Cir. 2005) (A chief consideration ... is whether the appellant sought a stay of confirmation.) (emphasis added), and Nordhoff Invs., 258 F.3d at 191 (Alito, J., concurring) (stating that he was reluctantly concurring primarily because of the appellants' failure to seek a stay) (emphasis added), with In re Long Shot, 224 B.R. at 480-81 (stating that a party's failure to obtain a stay is only tangential to the factors related to the substantial consummation of a plan and the affect on third parties, because `[a] stay not sought, and a stay sought and denied, lead equally to the implementation of the plan of reorganization.') (quoting In re UNR Indus., 20 F.3d at 770), and In re Milk Palace, 327 B.R. at 468 (inquiring into whether appellant obtained a stay pending appeal). We think both of these questions are significant. We will obviously be less inclined to apply the doctrine of equitable mootness when the appellant has successfully obtained a stay, at least in part because that will also generally be dispositive of other relevant factors, such as whether the plan has been substantially consummated and whether reversal of the plan would negatively affect third parties. However, we will also examine an appellant's efforts to obtain a stay, even if those efforts were unsuccessful. On the one hand, an appellant's complete and unjustified failure to seek a stay will often make it unfair for the court to grant relief especially if that relief may affect third parties. See In re Roberts Farms, 652 F.2d at 798 (An entirely separate and independent ground for dismissal has also been established because Appellants have failed and neglected diligently to pursue their available remedies to obtain a stay of the objectionable orders of the Bankruptcy Court and have permitted such a comprehensive change of circumstances to occur as to render it inequitable for this court to consider the merits of the appeal.). On the other hand, we will be more inclined to accommodate an appellant who has diligently but unsuccessfully pursued a stay pending appeal, even if awarding him relief may adversely affect third parties. See In re Metromedia, 416 F.3d at 144 (If a stay was sought, we will provide relief if it is at all feasible, that is, unless relief would `knock the props out from under the authorization for every transaction that has taken place and create an unmanageable, uncontrollable situation for the Bankruptcy Court.') (quoting Chateaugay II, 10 F.3d at 953). Thus, we will not only look to whether a stay has been obtained; we will also inquire into whether the appellant has sought a stay pending appeal. This case presents a sort of middle ground. SMDI sought a stay from the bankruptcy court and the district court, but did not appeal the denial of those requests to this court. Nor did SMDI seek mandamus relief directly from this court. Thus, while SMDI made some effort to obtain a stay, it did not pursue with diligence all available remedies to obtain a stay of execution. Chateaugay II, 10 F.3d at 953 (quotation omitted; emphasis added); see also In re Pub. Serv. Co., 963 F.2d at 472 (holding that appeal was equitably moot where appellant had sought a stay from the bankruptcy and district courts, but did not seek either appellate or mandamus relief from the circuit court). Where a party has sought a stay from both the bankruptcy and district courts, the party's failure to appeal that decision to this court, which so rarely overturns the district courts' decisions, will not, without more, render an appeal of the merits moot. But cf. In re Metromedia, 416 F.3d at 144 (stating that [w]e insist that a party seek a stay even if it may seem highly unlikely that the bankruptcy court will issue one). Thus, this factor weighs somewhat against proceeding to the merits of SMDI's appeal, but is not dispositive. b. Substantial Consummation The second consideration in the mootness inquiry is whether the reorganization plan has been substantially consummated. We have adopted the `substantial consummation' yardstick because it informs our judgment as to when finality concerns and the reliance interests of third parties upon the plan as effectuated have become paramount to a resolution of the dispute between the parties on appeal. In re GWI, 230 F.3d at 801 (quoting In re Manges, 29 F.3d at 1041). The Bankruptcy Code defines substantial consummation of a reorganization plan 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 of distribution under the plan. 11 U.S.C. § 1101(2). That standard has been adopted in the equitable mootness analysis to determine the extent to which the plan has progressed. In re United Producers, 526 F.3d at 948. The district court found here that the Joint Plan affirmed by the bankruptcy court had been substantially consummated because post-confirmation all estate property intended to be transferred has been transferred, the Liquidating Trustee and/or Plan Trustee as successor to the trustee has assumed management of the property dealt with under the confirmed plan, and Plan Trustee has made substantial distributions under the plan. (Dist. Ct. Order at 12.) Since the district court made that finding, the trustee has paid out even more claims, incurred more administrative costs, and continued to prosecute the AP. Perhaps in light of those additional efforts, on appeal, SMDI concedes that the Plan has been substantially consummated, and argues instead that the other factors support a finding in their favor. (See Aplt. Br. at 25.) We see no reason to reject SMDI's concession of substantial consummation, but note that this concession is not dispositive of our analysis of whether the doctrine of equitable mootness should prevent the court from reaching the merits of SMDI's appeal. See Ins. Subrogation Claimants v. U.S. Brass Corp. (In re U.S. Brass Corp.), 169 F.3d 957, 961 (5th Cir.1999) (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. Rather, we must also consider whether the remedy the [appellants] seek will affect the success of the plan or alter the rights of third parties that have been achieved by its substantial consummation.) (citations and quotations omitted); Chateaugay II, 10 F.3d at 952 (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 AOV, 792 F.2d at 1148 (In exercising its discretionary power to dismiss an appeal on [equitable] mootness grounds, a court cannot avoid its obligation to scrutinize each individual claim, testing the feasibility of granting the relief against its potential impact on the reorganization scheme as a whole. `Substantial consummation' is not a blanket discharge of this judicial duty to examine carefully each request for relief.). The substantial consummation of a bankruptcy plan may make providing relief difficult, and may raise concerns about fairness to third parties, but [c]ourts can and do order divestiture or damages in situations where business deals or bankruptcy plans have been wrongly consummated. In re Res. Tech. Corp., 430 F.3d 884, 886-87 (7th Cir.2005). In this case, although this plan has been substantially consummated, many of the concerns that motivate courts not to decide the merits of an appeal of a substantially consummated bankruptcy plan do not apply. For example, courts are often concerned that it will be difficult to unscramble the transactions that occurred when consummating the plan. In this case, however, reversal of the Joint Plan will not undo any complex transactions. SMDI primarily seeks to undo the sale of the domain name to ConsumerInfo, which is not likely to be particularly complex or troublesome. See Nordhoff Invs., 258 F.3d at 185-86 (discussing the complexity of the post-confirmation transactions and whether unscrambling those transactions would be difficult enough to counsel against reaching the merits of the appellants' appeal). SMDI also proposes transferring control of the estate from the liquidating trust back to the Chapter 11 trustee. This also does not appear to pose a very serious problem, because the bankruptcy trustee and liquidating trustee is the same person. This case is not, therefore, like the Tenth Circuit BAP decision in In re Milk Palace Dairy, 327 B.R. at 467, where the court question[ed] whether it could order the bankruptcy court to retrieve the assets from the Trust when the Trust has not presented its position to either the trial court or this Court. In this case, there appears to be no equitable or technical barrier to this court's ability to order the dissolution of the Liquidating Trust. Further, even if the court cannot transfer the Liquidating Trust's assets back to the estate, it could presumably find a way to use the Liquidating Trust's assets to SMDI's benefit. Thus, at least some of the reasons courts are reluctant to undo substantially consummated bankruptcy plans do not pose serious problems in this case. In addition, the party most likely to be injured by an undoing of the Joint Plan is ConsumerInfo, which is hardly an innocent third party unaware of SMDI's continuing objection to the consummation of the Joint Plan. ConsumerInfo has been, and is, SMDI's main antagonist and it is intimately involved in the entire convoluted history of this bankruptcy proceeding. Finally, where, as here, the parties attempting to convince the court not to reach the merits have accelerated the consummation of the plan despite their knowledge of a pending appealin this case, by waiving the requirement that the consummation await the resolution of all pending appealswe are less inclined to grant their wish that the court abstain from reaching the merits on appeal. We must, therefore, carefully examine the remaining factors. c. Effects on Third Parties The effects that reversal will have on non-party creditors is probably the foremost concern in our analysis of equitable mootness. See, e.g., In re SI Restructuring, 542 F.3d at 136 (The ultimate question to be decided is whether the Court can grant relief without undermining the plan and, thereby, affecting third parties.). This factor may even implicate the court's jurisdiction, since a court may lack jurisdiction over an appeal where the impact of reversal would fall most heavily on parties not before the court. See In re Pub. Serv. Co., 963 F.2d at 475-76 & 476 n. 19 (collecting cases and noting that this jurisdictional idea is closely analogous to appeals determined moot due to loss of jurisdiction over the res, or the parties, occasioned by their removal or transfer from the jurisdiction in the absence of a stay or injunctive relief pending appeal). The district court found that reversing the bankruptcy court's decision would unduly harm third parties because there is no evidence at this point that there is sufficient money in place to immediately and fully cover all amounts paid under the confirmed plan. (Dist. Ct. Order at 14.) The district court wrongly placed the burden of proof on this issue on SMDI. The district court did not conclude that Appellees had shown that SMDI had insufficient funds to finance their plan and, therefore, that third parties would be adversely affected. Rather, the district court concluded that SMDI had failed to prove that it had sufficient funds. The proper focus should have been on the former question. Focusing our attention on that former question, we find that Appellees have failed to carry their burden to prove that the relief SMDI seeks would unduly affect third parties. In the first place, as noted above, because of ConsumerInfo's pivotal role in the bankruptcy proceedings, it is hard to consider it a third party or at least an innocent third party. In any event, we do not have sufficient evidence of SMDI's finances, the value of the domain name SMDI would obtain if they prevailed, or the cost of implementing SMDI's plan. However, the little evidence we do have strongly suggests that SMDI would be more than able to finance their plan. Therefore, this factor weighs substantially against applying the doctrine of equitable mootness in this appeal. i. The Cost of Confirming SMDI's Plan Appellees argue that SMDI lacks adequate funds to cover the estate's expenses and, therefore, that reversal of the Joint Plan and confirmation of SMDI's plan would require disgorgement of payments already made to third-party creditors. Specifically, Appellees argue that SMDI lacks the funds necessary to cover the following expenses that they would incur if their plan was confirmed: [9] (1) more than $2.84 million to repay funds that have been paid or loaned to the estate by ConsumerInfo; (2) $2.2 million to pay out the CCB Data claims purchased by ConsumerInfo that were voluntarily subordinated under the Joint Plan; (3) $2.68 million that has been paid out to creditors, $1.45 million of which has been paid to innocent third party creditors and taxing authorities (Aple. Br. at 29); and (4) the cost of objecting to the CCB Data claims and of defending the estate against a breach-of-contract claim that would be filed if SMDI's plan were confirmed. We briefly consider each of those expenses. Appellees have failed to show that SMDI would be liable to refund the $2.84 million that ConsumerInfo has paid or loaned the estate. Appellees have not explained, for example, which, if any, of those funds were paid to the estate in order to prosecute the AP, the costs of which may not have to be repaid by SMDI. Further, some of this money likely represents payments made to the trustee and, if SMDI prevails on its argument that the trustee has not been disinterested, the bankruptcy court may order disgorgement of payments made to compensate the trustee. See Gray v. English, 30 F.3d 1319, 1324 (10th Cir.1994) (affirming bankruptcy court's decision to deny compensation to bankruptcy trustee who was not disinterested and noting that [i]n exercising the discretion granted by the statute we think the court should lean strongly toward denial of fees, and if the past benefit to the wrongdoer fiduciary can be quantified, to require disgorgement of compensation previously paid that fiduciary even before the conflict arose); see also Salomon v. Logan (In re. Int'l Envtl. Dynamics, Inc.), 718 F.2d 322, 326 (9th Cir.1983) (holding that appeal of bankruptcy court decision was not moot in part because the estate's counsel was a party to [the] appeal and this court could fashion effective relief by remanding with instructions to the bankruptcy court to order the estate's counsel to return erroneously disbursed funds). Thus, it is far from clear that SMDI would be liable for this full amount. [10] Appellees further argue that SMDI's plan fails to account for the CCB Data claims against the estate that have been purchased by ConsumerInfo. However, while these claims seek $2.1 million, the bankruptcy court estimated those claims at $225,000. That estimation was only for the purpose of considering confirmation of the Competing Plans, but still provides at least some indication that those claims are actually worth far less than their face value. Thus, even if SMDI will need to pay those claims, they may not present a very substantial burden. Appellees argue that SMDI would be liable for $2.68 million that has been paid out to creditors. However, Appellees concede that only $1.45 million has been paid to innocent third party creditors and taxing authorities (Aple. Br. at 29), and for purposes of our analysis of likely third-party effects, we are primarily concerned with those payments. Finally, Appellees argue that SMDI's plan failed to account for the cost of objecting to the CCB Data claims purchased by ConsumerInfo or of defending the estate against the lawsuit ConsumerInfo is likely to file for breach of the APA if SMDI's plan is confirmed. We agree that the $20,000 that SMDI proposed to supply for the trustee's expenses would not likely be sufficient to cover these expenses. However, Appellees have not shown that these expenses are likely to pose a very heavy financial burden. Initially, we note that, as mentioned above, the CCB Data claims appear to be worth far less than their facial amount, and it seems likely that settling those claims would not pose a debilitating financial burden. Further, unlike the bankruptcy court, which denied confirmation of SMDI's plan in part because it found that by compelling the trustee to settle the AP, SMDI's plan could easily be construed as a breach of Trustee's duties to ConsumerInfo under the APA, In re Paige, 2007 WL 4143212, at  16, and would open the estate to a potentially serious breach-of-contract claim, we are not convinced that Appellees would necessarily have a viable breach-of-contract claim if SMDI's plan was ultimately confirmed. The APA empowered ConsumerInfo to object [to] or to overbid any settlement agreements ( see Appx. at 317-18); there does not appear to be anything in the APA that gives ConsumerInfo the power to veto a settlement. Further, where the court orders a settlement, as is proposed by SMDI's plan, it appears that ConsumerInfo's ability to overbid may be meaningless. We are unsure, therefore, that SMDI's plan would necessarily run afoul of the APA. Further, at a hearing seeking the bankruptcy court's approval for the APA, the trustee's counsel asserted that the trustee would retain control over the AP. If it is true that, under the APA, the trustee is in control of the AP, it is perplexing that he could also be in breach of the APA by agreeing to settle the AP. On the other hand, if settling the AP would constitute a breach of the APA, then the trustee's counsel may have misled the bankruptcy court when he stated the trustee would retain control over the AP, and it might be inequitable to allow the trustee to use his now-asserted lack of control over the AP as a reason to prevent the courts from reaching the merits of SMDI's appeal. Therefore, even if SMDI's claims on appeal present a financial burden on the estate, the hypothetical costs do not weigh very heavily in favor of equitable mootness. ii. SMDI's Resources When this case was before the bankruptcy court, SMDI had placed $2.6 million in a special account in order to demonstrate their ability to fund their plan. See In re Paige, 2007 WL 4143212 at . When this case came before the district court on appeal, however, it appears that money was no longer in the account. Nonetheless, the fact that this money was no longer set aside in an account for these purposes does not mean that SMDI would be unable to replace that money. On the contrary, without any evidence to the contrary, the fact that just a few years ago SMDI was able to put $2.6 million in an account suggests that they have substantial funds at their disposal. More importantly, if SMDI's plan is confirmed, SMDI will obtain full ownership of a very valuable domain name: FreeCreditScore.com. Mr. Balducci, a ConsumerInfo executive, testified that ConsumerInfo would be willing to pay $5 million for the FreeCreditScore.com domain name. Mr. May, the CEO of Search Market, testified before the bankruptcy court that the domain name is worth $25 million. Mr. May's estimate may be high, but the evidence before the court supports Mr. Balducci's $5 million estimate, if for no other reason than, if SMDI prevails, they would likely be able to sell the domain name to ConsumerInfo for that amount. [11] Thus, SMDI should have approximately $7 million at their disposal if their plan were confirmed. [12] iii. The Bottom Line Appellees have failed to show that SMDI would be unable to finance their plan. On the contrary, the evidence suggests that SMDI's resources may exceed a reasonable estimation of the costs of implementing their plan. Further, even if SMDI's plan cannot be confirmed without additional funding, the court could still reverse the Joint Plan without adversely affecting third parties, and [c]ertainly, [SMDI] would readily accept some fractional recovery that does not impair feasibility or affect parties not before this Court, rather than suffer the mootness of [their] appeal as a whole. Chateaugay II, 10 F.3d at 954. Thus, this factor weighs in favor of reaching the merits of SMDI's appeal. d. Public Policy and Finality This factor reflects a court's concern for striking the proper balance between the equitable considerations of finality and good faith reliance on a judgment and the competing interests that underlie the right of a party to seek review of a bankruptcy court order adversely affecting him. First Union Real Estate Equity & Mortgage Inv. v. Club Assocs. (In re Club Assocs.), 956 F.2d 1065, 1069 (11th Cir. 1992); see also In re Long Shot, 224 B.R. at 479 (In bankruptcy cases, [equitable mootness] `centers on the important public policy favoring orderly reorganization and settlement of debtor estates by affording finality to the judgments of the bankruptcy court.') (quoting In re Pub. Serv. Co., 963 F.2d at 471-72) (further quotation omitted). As the Second Circuit explained, [a]s a practical matter, completed acts in accordance with an unstayed order of the bankruptcy court must not thereafter be routinely vulnerable to nullification if a plan of reorganization is to succeed. In re Chateaugay, 988 F.2d at 326. Further, it is equally important that a court not reverse a bankruptcy plan if an appellate reversal of the substantially consummated reorganization plan ... would `creat[e] a nightmarish situation for the bankruptcy court on remand' and make reconstructive relief extremely improbable. In re Pub. Serv. Co., 963 F.2d at 474 (quoting Trans World Airlines, Inc. v. Texaco, Inc. (In re Texaco, Inc.), 92 B.R. 38, 50 (S.D.N.Y.1988)) (citations, alteration omitted). The district court found that [t]his factor weighs heavily in favor of mootness. (Dist. Ct. Order at 15.) The district court was concerned that SMDI's appeal was really designed to undo the APA between the estate and ConsumerInfo, and that allowing SMDI to conduct this roundabout attack on the APA would entirely undermine the finality of Bankruptcy Court orders approving the sale of property. ( Id. at 16.) Although the district court was correct to note that reversal would impact the finality of the bankruptcy court's orders, there are countervailing concerns that outweigh the public policy interest in finality of bankruptcy court decisions in this case. SMDI's appeal raises troubling allegations of bad-faith dealings between the debtor, ConsumerInfo, and the trustee, and of a lack of disinterestedness on the part of the trustee. While this court expresses no opinion on the substantive merits of those allegations, these are serious allegations that should, if possible, receive their due attention. Further, Appellees have failed to present any reason for this court to suspect that reversal of the Joint Plan would create an unmanageable situation for the bankruptcy court. On the contrary, it is clear that both SMDI and ConsumerInfo are willing to pay far more than the aggregate amount of all the estate's debts and expenses in order to acquire the domain name. There is, therefore, very little risk that the court would need to unwind any of the payments that have been made to innocent third-party creditors. Similarly, Appellees have failed to point to any other aspects of the Joint Plan that would be difficult to undo if SMDI prevails on the merits of their appeal. This factor therefore weighs in favor of reaching the merits of SMDI's appeal. e. Impact upon the Likelihood of a New Reorganization Here, the analysis already undertaken in our opinion suggests there is a substantial likelihood of a new successful reorganization of the debtor even if SMDI were partially or wholly to succeed in their appeal in this case. See In re United Producers, 526 F.3d at 950 (considering, among other factors, what the consequences of reversal of the confirmed plan would be for the success of the reorganization); see also In re Manges, 29 F.3d at 1039 (considering, in applying equitable mootness, `whether it is prudent to upset the plan of reorganization at this late date') (quoting In re UNR Indus., 20 F.3d at 769). Thus, in this case, this factor cuts against applying equitable mootness. f. A Quick Look at the Merits Although at this stage of the proceedings neither we nor the district court has thoroughly or even adequately evaluated the merits of SMDI's claims, a quick look at this appeal suggests the claims may have some merit. See In re Metromedia, 416 F.3d at 144 (Because equitable mootness bears only upon the proper remedy, and does not raise a threshold question of our power to rule, a court is not inhibited from considering the merits before considering equitable mootness. Often, an appraisal of the merits is essential to the framing of an equitable remedy.) (citation omitted). SMDI's claims certainly allege serious conflicts of interest involving the trustee, and questions about whether SMDI's competing proposal has received an adequate and balanced appraisal. These are serious matters that will not lightly be swept under the rug in the name of equitable mootness unless other factors discussed above strongly counsel against allowing SMDI's claims to be heard on the merits. In many ways, the claims raised go to the very integrity of the bankruptcy process in this case. Given the lack of clear direction from the other factors discussed above, this final factor counsels against equitable mootness.