Opinion ID: 3062086
Heading Depth: 3
Heading Rank: 4

Heading: Denial of Confirmation of the SMDI Plan

Text: The bankruptcy court determined that the SMDI Plan was not confirmable because it was not feasible as required by § 1129(a)(11); it was not proposed in good faith under § 1129(a)(3); and it improperly classified ConsumerInfo’s interests. The district court, after deciding to affirm the bankruptcy court’s confirmation of the Joint Plan, declined to inquire into whether the SMDI Plan was also confirmable. Paige, 439 B.R. at 800. SMDI argues that both courts erred, and that we must determine whether its plan could 48 have been confirmed even if we agree that the Joint Plan was confirmable.13 Under § 1129(c), SMDI correctly notes, if more than one plan is confirmable, the bankruptcy court must “consider the preferences of creditors and equity security holders in determining which plan to confirm.” Conf. App., Aplt. Reply Br. at 21 n.57. SMDI makes no effort to explain why, if both plans were confirmable, a proper analysis under § 1129(c) would have resulted in the SMDI Plan’s confirmation. But we need not speculate about whether the bankruptcy court could have reached a different result if SMDI’s plan was capable of confirmation. The bankruptcy court correctly concluded that it was not confirmable for lack of feasibility. A Chapter 11 plan cannot be confirmed unless it is feasible. See § 1129(a)(11); Pikes Peak, 779 F.2d at 1459 (noting that a plan must be feasible and practical to be proposed in good faith). “[T]he bankruptcy court has an obligation to scrutinize [a] plan carefully to determine whether it offers a reasonable prospect of success and is workable.” Pikes Peak, 779 F.2d at 1460. “The test is whether the things which are to be done after confirmation can be done as a practical matter under the facts” of the case. 13 ConsumerInfo contends that the confirmability of SMDI’s plan is moot because ConsumerInfo has acquired the Domain Name as a good faith purchaser pursuant to a sale order. Under § 363(m), ConsumerInfo argues, we could not now deprive it of the Domain Name, which is what implementation of the SMDI Plan would require. According to ConsumerInfo, “even if this Court concludes that SMDI’s plan trustee could have conveyed the estate’s interest in the Domain Name back in 2007, that is impossible today, and thus there is no way the SMDI Plan could presently be confirmed.” Conf. App., Aplee. Br. at 49. For the reasons we explain below, § 363(m) does not render this issue moot. See infra Part III.B.2. 49 Clarkson v. Cooke Sales & Serv. Co. (In re Clarkson), 767 F.2d 417, 420 (8th Cir. 1985) (quotation omitted). The bankruptcy court determined that the SMDI Plan was not feasible, and we review this finding of fact for clear error. Sherman v. Harbin (In re Harbin), 486 F.3d 510, 517 (9th Cir. 2007). We conclude that the bankruptcy court did not clearly err. The SMDI Plan would have required the estate to settle the AP with SMDI and allow SMDI to keep the Domain Name. But in the bankruptcy court’s view, the APA bound the Trustee to litigate the AP in good faith and, if possible, recover the Domain Name.14 Paige, 2007 WL 4143212, at . Thus, the bankruptcy court concluded the SMDI Plan would cause the estate to breach its obligations to ConsumerInfo under the APA. The bankruptcy court determined that the SMDI Plan did not provide sufficient funds to resolve the claim ConsumerInfo threatened to bring for breach of contract. Moreover, if ConsumerInfo were to succeed in its claim against the estate, the bankruptcy court feared that the plan trustee would need to seek disgorgement from creditors who had already been paid. For all of these reasons, the court concluded that the SMDI Plan was not feasible. Id. Not surprisingly, SMDI and ConsumerInfo have disagreed throughout this litigation about what the APA allowed. The APA, SMDI emphasizes, contemplated the 14 The bankruptcy court’s view that the SMDI Plan would have caused the Trustee to breach the APA was also the basis for the court’s conclusion that the SMDI Plan was not proposed in good faith. See Paige, 2007 WL 4143212, at –17. 50 possibility of a settlement—it provided that the Trustee would reimburse ConsumerInfo with $1,825,000 of the $1.9 million purchase price in the event that the Trustee settled with SMDI. Conf. App., Aplt. Reply Br. at 24 (citing APA § 1.5). SMDI also notes that in approving the APA, the bankruptcy court itself said that the Trustee enjoyed the right “to determine strategy throughout the litigation,” as well as “sole discretion to settle the adversary proceeding.” Conf. App., Aplt. Br. at 9, 52 (quoting Paige, No. 05-34474, slip op. at 15). Therefore, SMDI reasons, the Trustee had the right at any time to drop the litigation and return the bulk of ConsumerInfo’s money. The SMDI Plan proposed to do exactly that. But the matter is not so simple. Numerous provisions of the APA limited the Trustee’s power to settle, and the bankruptcy court read these provisions as requiring cause before he could do so. Specifically, the court cited: (1) paragraph 4.2 requiring the Trustee to take all steps necessary to proceed diligently and in good faith to satisfy each condition of the APA, (2) the portion in paragraph 1.5 requiring the Trustee to prosecute the AP in good faith, (3) paragraph 11.10 requiring each party to use reasonable, good faith efforts to do all things necessary to see that the conditions of the APA are satisfied, (4) paragraph 8.2(b) requiring the Trustee to transfer the Domain Name to ConsumerInfo at a subsequent closing without additional consideration, and (5) paragraph 8.4 requiring specific performance . . . . Paige, 2007 WL 4143212, at . Moreover, the APA did not give the Trustee unfettered discretion to settle the AP, but rather conveyed the right to do so “in his reasonable business discretion.” APA § 1.5. The bankruptcy court reasoned, in light of these provisions, that “a dismissal by 51 the Trustee without showing any cause or excuse is not what was bargained for or allowed by the APA.” Paige, 2007 WL 4143212, at . The Trustee had not determined that cause existed to settle—that “further pursuit of the claims in the AP [was] meritless or [that] the costs of proceeding [were] so excessive that the recovery would not justify the costs.” Id. Thus, the court considered “dismissal under the SMDI Plan [to be] inconsistent with the APA.” Id. If the SMDI Plan were confirmed, then, the bankruptcy court believed ConsumerInfo would have a substantial claim for breach of contract against the estate. Id. at . Regardless of how this claim was resolved, the court thought that the cost of litigating it alone would be “very substantial.” Id. The SMDI Plan allocated only $20,000 for the trustee’s post-confirmation administration of the estate, an amount the bankruptcy court thought “would most likely be insufficient to contest [ConsumerInfo’s] administrative claim.” Id. SMDI insists that the confirmability of its plan turns exclusively on “whether the settlement of the Adversary Proceeding, as proposed in the SMDI Plan, violated the APA.” Conf. App., Aplt. Reply Br. at 22. If it did not, SMDI contends, “then there is no basis for any of the adverse findings on good faith, feasibility, or misclassification.” Id. But this argument misses the point. The issue here is much like the “fair and equitable” analysis above. There, the question was not simply whether the estate had a right to elect remedies; even if a court might have eventually agreed that it did, the cause was sufficiently doubtful to justify the Trustee’s course of action. Just so, the feasibility issue 52 is not—as SMDI contends—solely about whether the APA permitted a plan-imposed settlement of the AP. Rather, the question is whether the matter was murky enough that ConsumerInfo would have sued for breach of contract and quite possibly won.15 “To be feasible for purposes of section 1129(a)(11), a plan must take into account the possibility that a potential creditor may, following confirmation, recover a large judgment against the debtor.” In re Harbin, 486 F.3d 510, 517 (9th Cir. 2007). The bankruptcy court recognized that a suit for breach was more or less inevitable, and it expected that ConsumerInfo would win. The court found that SMDI’s plan did not “provide[] sufficient funding . . . for defense costs or to satisfy the monetary judgment that could result from the allowance of an administrative claim by ConsumerInfo.” Paige, 2007 WL 4143212, at . We hold that these findings were not clearly erroneous. See Kane v. Johns-Manville Corp., 843 F.2d 636, 650 (2d Cir. 1988) (applying a clear error standard of review to the bankruptcy court’s feasibility determination); Prudential Ins. Co. of Am. v. Monnier (In re Monnier Bros.), 755 F.2d 1336, 1341 (8th Cir. 1985) (same). Accordingly, we need not address the bankruptcy court’s conclusions regarding 15 In Paige, 584 F.3d at 1345–46, we said we were “unsure . . . that SMDI’s plan would necessarily run afoul of the APA” and were therefore “not convinced that [ConsumerInfo] would necessarily have a viable breach-of-contract claim if SMDI’s plan was ultimately confirmed.” Of course, we also acknowledged that we had not fully evaluated the merits of the case at that juncture. Id. at 1348. But in any event, we need not be convinced even now that ConsumerInfo would win a suit for breach to recognize that SMDI provided insufficient funds to defend against it. Moreover, we note that while ConsumerInfo and the Trustee had the burden of proving SMDI’s appeal was moot, id. at 1331, SMDI had the burden of proving compliance with the applicable provisions of § 1129. 53 good faith or proper classification of claims in the SMDI Plan.