Court Opinion

ID: 16153
Source: CourtListenerOpinion
Date Created: 2010-04-25 06:51:41+00
Date Added: 2024-06-11T16:46:24.946274
License: Public Domain

IN THE UNITED STATES COURT OF APPEALS
                        FOR THE FIFTH CIRCUIT

                      __________________________

                             No. 98-10046
                           Summary Calendar
                      __________________________

              In The Matter Of:  BERRYMAN PRODUCTS, INC.
                                Debtor
                      __________________________

NATIONWIDE MUTUAL INSURANCE COMPANY;
MATT VAN HART
                                                           Appellants,

                                  versus

BERRYMAN PRODUCTS, INC.;
BERRYMAN PRODUCTS OF DELAWARE, INC.
                                                            Appellees.

         ___________________________________________________

             Appeal from the United States District Court
                  for the Northern District of Texas
         ___________________________________________________

Before WIENER, BARKSDALE, and EMILIO M. GARZA, Circuit Judges.

WIENER, Circuit Judge:

     This appeal arises from the Chapter 11 bankruptcy proceeding

of Berryman Products, Inc. and Berryman Products of Delaware, Inc.

(“Berryman”    or   “the   Debtor”).1   Appellants   Nationwide   Mutual

     1
      The briefs filed in this appeal reference a single Debtor,
“Berryman Products, Inc.,” but the appellees are listed as
“Berryman Products, Inc. and Berryman Products of Delaware, Inc.”
We refer to a single Debtor throughout the opinion, but to the
extent that both Berryman Products, Inc. and Berryman Products of
Delaware, Inc. are affected, the term Debtor in the singular
Insurance Company and Matt Van Hart (collectively “Nationwide”)

appeal the district court’s grant of the Debtor’s motion to dismiss

Nationwide’s appeal of plan confirmation on the ground of mootness.

Based on the facts before us, we conclude that the merits of the

appeal are moot and therefore, dismiss the appeal.

                                I.

                      FACTS AND PROCEEDINGS

     In March of 1993, the Debtor voluntarily filed for relief

under Chapter 11 of the Bankruptcy Code (the “Code”) as a result of

being cast in judgment for $7.5 million in a products liability

suit. That case arose from an accident that occurred in California

on which Matt Van Hart (“Hart”) sued Berryman and others alleging

that he sustained injuries in a car that had been serviced with

brake cleaner manufactured by Berryman (the “Hart Lawsuit”). Among

others, Hart also sued the distributor of the brake cleaner, C.P.

Hunt Company (“Hunt”).   After a jury trial, the California court

found Berryman and Hunt jointly and severally liable for $7.5

million, being 80% of the damages sustained by Hart.

     At the time of the accident, Berryman was insured by Corporate

Underwriters, Ltd., which failed to indemnify Berryman for losses

it suffered by virtue of the Hart judgment.    The specter of this

judgment motivated Berryman to file voluntarily for reorganization

under Chapter   11 of the Code.      Hunt, the party jointly and

references both entities.

                                2
severally liable with Berryman for the Hart judgment, was insured

by Nationwide, which then settled with Hart.          Nationwide agreed to

pay Hart $6 million in exchange for a release from liability and

the authority to pursue claims in Hart’s name.

     One month after Nationwide settled with Hart, Berryman filed

suit against its own risk manager and Nationwide (the “Berryman

Lawsuit”), alleging negligence, breach of express and implied

contracts and warranties, breach of fiduciary duties, and negligent

misrepresentation in connection with their conduct during the Hart

Lawsuit.    Additionally, Berryman appealed the verdict in the Hart

Lawsuit,    which   was   eventually    reversed    for   trial   errors   and

remanded in early 1995 for a new trial.2                  Both the Hart and

Berryman Lawsuits are still pending.

     At    the   onset    of   the     Berryman    bankruptcy     proceeding,

Nationwide, on behalf of Hunt, filed a proof of claim for $6

million, the amount paid on the personal injury/products liability

claim.     On the recommendation of Berryman, the court estimated

Nationwide’s claim to be $6 million for purposes of voting and

evaluating the feasibility of a plan; resolution of the Hart and

Berryman Lawsuits was not predicted to occur until three to five

years after plan confirmation.             Hart too filed a claim for the

remaining $1.5 million of the net $7.5 million personal injury

     2
      Unlike Berryman, Nationwide did not appeal the verdict in the
Hart Lawsuit.

                                       3
judgment.3

     The Debtor’s Reorganization Plan (the “Plan”) was structured

to assure repayment of 100% of the present value of the claims

through issuance of interest-bearing, fifteen year notes for the $6

million and $1.5 million, respectively.             As state court litigation

was ongoing, the term of the notes was set to commence on entry of

final orders resolving all contested matters in the Hart and

Berryman Lawsuits.        In other words, in an effort to avoid undue

delay in the administration of the Plan, Nationwide’s claims were

characterized as contingent and unliquidated.4 Nationwide objected

to the Plan on various grounds and was the only class of creditors

to vote against it.       The bankruptcy court held a two-day hearing to

evaluate     the   Plan    and   contemplate        Nationwide’s    objections,

ultimately confirming the Plan in July, 1994.

     The next month, Nationwide sought a stay from the bankruptcy

court to prevent the Plan’s execution and appealed the bankruptcy

court’s    order   of     confirmation       to   the   district   court.   The

bankruptcy court denied the stay on the merits, and Nationwide

appealed its request for a stay to the district court.               Citing the

     3
      During the pendency of the bankruptcy proceeding and the Hart
Lawsuit appeal, Matt Van Hart died and all claims in his name have
subsequently inured to his estate.
     4
      See 11 U.S.C. § 502(c) (1994); BANKR. R. 3018(a) (providing
for the estimation of claims for purposes of voting to accept or
reject a plan).

                                         4
failure   to   follow   Bankruptcy   Rule   8005,5   the   district   court

likewise denied the stay.       Nationwide neither filed an amended

request to correct the deficiencies noted by the district court nor

appealed the denial of the stay to this court.         In the absence of

a stay to prevent execution of the Plan, the Debtor commenced

implementation by paying its creditors (with the exception of the

Nationwide claims, which were contingent).

     As noted, Nationwide had also appealed the bankruptcy court’s

order confirming the Plan to the district court.       Arguing that this

appeal was moot, the Debtor filed a motion to dismiss, which was

followed by an exchange of response and reply memos.          More than a

year after the appeal of plan confirmation was filed —— in January,

1996 —— Nationwide requested a hearing on the matter, which the

district court denied.      Although it eventually set a hearing in

December, 1997, the district court ultimately canceled the hearing

and granted the Debtor’s motion, finding the appeal moot and

inequitable.     The district court focused on (1) Nationwide’s

failure to obtain or diligently seek a stay of the Plan, (2) the

Plan’s resulting implementation, and (3) the inevitable prejudice

that the Debtor would incur from a reversal.           Nationwide timely

     5
      Bankruptcy Rule 8005 provides that a motion for stay pending
appeal made to the district court must show why the relief was not
obtained from the bankruptcy judge. BANKR. R. 8005.    The district
court found that “appellant in no way indicates the reasons for the
bankruptcy judge’s denial of its request for a stay.” The district
court further noted that notwithstanding the procedural deficiency,
appellants failed to make the necessary showing that they were
entitled to a stay pending appeal.

                                     5
filed this appeal.

                                   II.

                                 ANALYSIS

A.   Standard of Review

     In the bankruptcy appellate process, we perform the same

function   as   did   the   district       court:   Fact   findings    of   the

bankruptcy court are reviewed under a clearly erroneous standard

and issues of law are reviewed         de novo.6

B.   Applicable Law

     Nationwide contests the district court’s dismissal of its

appeal challenging confirmation of the Plan.           Nationwide urges us

to reverse the order of dismissal and reach the merits of the

appeal, contending that the mootness analysis applied by the

district court was flawed.        Nationwide focuses on the district

court’s finding that reversal of the Plan would disrupt trade

relationships and jeopardize the Plan’s economic core.                Instead,

Nationwide asserts, the Debtor, in its exclusive discretion, could

     6
      Matter of Crowell, 138 F.3d 1031, 1033 (5th Cir. 1998);
Matter of U.S. Abatement Corp., 79 F.3d 393, 397 (5th Cir. 1996);
In re Block Shim Dev. Co.-Irving, 939 F.2d 289, 291 (5th Cir.
1991). Nationwide urges this court to adopt a plenary standard of
review because the district court on appeal did not have access to
the entire bankruptcy court record.     In our review, we are not
limited to the record examined by the district court, but refuse to
adopt a plenary standard of review as it applies to issues of fact.
As we have repeatedly held, findings of fact are reviewed under the
clearly erroneous standard. See Block Shim, 939 F.2d at 291 (in
evaluating dismissal of a case as moot, the court “reviews factual
findings of the district court using a clearly erroneous standard
in light of the entire record.”).

                                       6
choose to forego repayment from its creditors, thereby maintaining

the status of the Plan and precluding a finding of mootness.

     The standard for mootness in the bankruptcy context differs

from a constitutional mootness analysis. Article III of the United

States Constitution requires an inquiry into whether a live case or

controversy     exists;   in   contrast,    reviewing   courts   considering

bankruptcy appeals such as the one now before us seek to determine

whether implementation of the reorganization plan has progressed to

a point at which fundamental changes in the plan would jeopardize

its success.7     Stated differently, we may decline to consider the

merits of confirmation when a plan has been so substantially

consummated that effective judicial relief is no longer available

—— even though the parties may have a viable dispute on appeal.8

Historically,     when    evaluating       dismissal    of   challenges   to

reorganization plans in a bankruptcy case as moot, we have looked

to see whether (1) a stay has been obtained, (2) the plan has been

substantially consummated, and (3) the relief requested would

affect either the rights of parties not before the court or the

success of the plan.9      Nationwide argues that in this case each of

     7
      In re Manges, 29 F.3d 1034, 1038-39 (5th Cir. 1994), cert.
denied, 513 U.S. 1152 (1995).
     8
      Id. at 1039; see also In re Andreuccetti, 975 F.2d 413, 418
(7th Cir. 1992); In re Crystal Oil Co., 854 F.2d 79, 82 (5th Cir.
1988); In re Roberts Farms, Inc., 652 F.2d 793, 798 (9th Cir.
1981).
     9
      Manges, 29 F.3d at 1039; Block Shim, 939 F.2d at 291.

                                       7
the elements is lacking in some respect; accordingly, we now

evaluate each in turn.

     1.      Failure to obtain a stay

     The first question in a mootness inquiry is whether the

appellants secured a stay to prevent execution of the Plan.              As

correctly     noted   by   the   Debtor,   the   requirement   of   a   stay

encapsulates the fundamental bankruptcy policy of reliance on the

finality     of   confirmation    orders   by    the   bankruptcy   court.10

Nationwide asserts that because it diligently pursued a stay, its

failure to obtain the stay does not require dismissal of the

proceeding as moot.11      We rejected this argument in In re Manges.12

In response to a similar argument, we cited with approval a Seventh

Circuit opinion that stated, “[a] stay not sought, and a stay

     10
      See In re Public Serv. Co., 963 F.2d 469, 471-72 (1st Cir.)
(“the equitable component [to the mootness doctrine] centers on the
important public policy favoring orderly reorganization and
settlement of debtor estates”), cert. denied, 506 U.S. 908 (1992);
In re Information Dialogues, Inc., 662 F.2d 475, 476-77 (8th Cir.
1981) (“[T]he mootness doctrine promotes an important policy of
bankruptcy law —— that court-appointed reorganizations be able to
go forward in reliance on such approval unless a stay has been
obtained.”).
     11
      Nationwide cites In re Federated Dept. Stores, Inc., 44 F.3d
1310 (6th Cir. 1995) and Matter of 203 LaSalle St. Partnership, 126
F.3d 955 (7th Cir. 1997), cert. granted, 118 S.Ct. 1674 (1998), to
support its proposition. In our view, however, neither of these
cases provide guidance. Federated involved the appointment of a
financial advisor, which the court termed a “collateral
consequence” to reorganization, 44 F.3d at 1315-16, and 203 LaSalle
St. involved the reversal of a bankruptcy plan because innocent
third parties were unharmed. 126 F.3d at 961.
     12
          29 F.3d at 1039-40.

                                      8
sought and denied, lead equally to the implementation of the plan

of reorganization.”13   In Manges we recognized that a reviewing

court’s decision not to grant a stay is often dispositive of a

mootness challenge on appeal, but that provisions of the Bankruptcy

Code “preordain” such a consequence.14

     In this case, Nationwide unsuccessfully petitioned both the

bankruptcy and district courts to obtain a stay, yet failed to

appeal the stay to this court or to amend its motion in the

district court to comply with procedural inadequacies.      In the

absence of a stay, the Plan became effective and was implemented

over the course of four years. Consistent with our Manges opinion,

we conclude that even though Nationwide sought a stay —— pursued

with a marked lack of diligence, we might add —— the stay was

denied and the Plan was largely implemented. Consideration of this

factor thus militates in favor of dismissal for mootness.

     2.   Substantial consummation of the Plan

     The second question in the mootness inquiry is whether the

Plan has been substantially consummated, which the Code defines as:

(a) transfer of substantially all property the plan proposes to

transfer; (b) the debtor’s assumption of the business or management

of substantially all property dealt with by the plan; and (c)

     13
      Manges, 29 F.3d at 1040, quoting In re UNR Indus., Inc., 20
F.3d 766, 769-70 (7th Cir.), cert. denied, 513 U.S. 999 (1994).
     14
      Manges, 29 F.3d at 1040 (citing to sections of the Bankruptcy
Code and Bankruptcy Rules that prohibit reversal or modification
of unstayed bankruptcy orders).

                                9
commencement of distribution under the plan.15 At this time —— more

than four years after the effective date of the Plan —— the Debtor

has repaid $1.37 million in trade debt and has retired $2.15

million in secured debt owed to an insider of the company; the

allowed claims has been effectively repaid in full.16

     Nationwide         argues   that    because       distributions    have    never

commenced on its $6 million claim, the plan cannot have been

substantially consummated. Nationwide attempts to characterize its

claim as non-contingent and liquidated because the bankruptcy

court,     in   an    estimation    proceeding,        recognized    the   indemnity

obligation owed to Nationwide by the Debtor.                 Nationwide supports

its argument by attempting to distinguish its right to indemnity

from the personal injury judgment in the Hart Lawsuit, insisting

that its indemnity claim is not contingent on the outcome of the

Hart Lawsuit appeal.             We disagree.          The judgment in the Hart

Lawsuit     was      partially   satisfied       by    Nationwide,   which     sought

indemnity for its payment.          This payment, however, is the basis of

the Debtor’s claim against Nationwide on grounds of breach of

warranty        and     fiduciary       duties        (the   Berryman      Lawsuit).

     15
          11 U.S.C. § 1101(2) (1994).
     16
      The district concluded that substantial consummation had
occurred based on 150 distributions to trade creditors totaling
$337,000. Subsequent to the briefings in the district court, the
Debtor made additional payments under the Plan. We evaluate all
payments made by the Debtor at the time this appeal, which includes
these additional payments. See Manges, 29 F.3d at 1041 (“[T]his
court may review evidence as to subsequent events not before the
courts below which bears upon the issue of mootness.”)

                                          10
Consequently, the indemnity obligation owed by the Debtor to

Nationwide is directly contingent on the outcome of both the Hart

and Berryman Lawsuits.

     Furthermore, the bankruptcy court estimated the value of

Nationwide’s claim at $6 million solely for voting and feasibility

purposes —— not for allowance.       Nationwide’s claim will not become

an “allowed” claim until the conclusion of all the state court

litigation.    At the present time, the Debtor has fulfilled all

obligations allowed under the Plan, thereby resulting in its

substantial    consummation.17       We    find   Nationwide’s   arguments

unavailing and conclude that the second factor in this analysis

weighs in favor of dismissal as moot.

     3.   Effect on parties not before the court

     The final question in the mootness inquiry is whether the

requested relief would affect the rights of parties not before the

court or the success of the Plan.          Nationwide assures us that it

does not seek piecemeal revision or amendment of the Plan, but

requests reversal of Plan confirmation in its entirety. In seeking

reversal of confirmation, Nationwide contends that the Debtor need

not restore distributions made under the Plan, citing section 549

of the Code to support this proposition.          Nationwide’s argument,

however, has    no   applicability    in   this   context.   Section   549

     17
      See Block Shim, 939 F.2d at 291 (finding substantial
consummation under the Code because “Block Shim and its creditors
have completed every transfer contemplated by the plan.”).

                                     11
provides, in pertinent part: “[T]he trustee may avoid a transfer of

property of the estate . . . that is not authorized by this title

or by the court.”18      Under this section, a two year statute of

limitations is placed on recovery of such post-petition transfers

unauthorized by the Code.19    In contrast to the situation addressed

in section 549, the Plan expressly authorized the payments made by

the Debtor in accordance with the Bankruptcy Code.        Section 549

does not address Nationwide’s argument, and Nationwide does not

cite any authority for the proposition that, in reversing the Plan,

the Debtor can forgo repayment from creditors. To the contrary, we

remain satisfied that reversal of the Plan means exactly that ——

placing the parties in the status quo pre-confirmation.20

     Unraveling the Plan at this time clearly would affect the

position of trade creditors who granted concessions to the Debtor

under the reorganization.       In fact, trade creditors reinstated

favorable pre-bankruptcy terms to the Debtor in exchange for full

satisfaction of their claims.           The restored terms fueled the

success of the reorganization and allowed the Debtor to pass

     18
          11 U.S.C. § 549(a) (1994).
     19
      Id. (emphasis added).    The Debtor in this case would be
outside of the two year limit.
     20
      See e.g. Manges, 29 F.3d at 1043 (doubting that the status
quo as it existed before the confirmation order could be attained
if the court unraveled the Plan); Miami Ctr. Ltd. Partnership v.
Bank of New York, 838 F.2d 1547, 1557 (11th Cir. 1988) (holding
that it would be legally and practically impossible to restore the
status quo before confirmation), cert. denied, 488 U.S. 823 (1989).

                                   12
savings on to its customers.            Reversal of these payments would

frustrate creditor relations and the emergence of the Debtor as a

viable going concern in the economy.21        We are satisfied that, like

the first two factors, this third one weighs against interfering

with the Plan after the passage of some four years.

                                    III.

                                CONCLUSION

     The district court properly granted the Debtor’s motion to

dismiss because Nationwide’s appeal met the test for mootness.

Nationwide did not secure or diligently pursue a stay to prevent

execution   of   the   Plan,   as   a    result   of   which   the   Plan   was

substantially consummated. The Debtor has extinguished 100% of the

obligations provided for in the Plan, with the exception of the

Nationwide claims, which presumably will be allowed when all state

court litigation is finally resolved.         Returning the Debtor to the

pre-confirmation status quo now would undermine the success of the

Plan and jeopardize critical trade relations of the Debtor.                 For

the forgoing reasons, we decline to reach the merits of the Plan,

and we dismiss the appeal of confirmation order as moot.

APPEAL DISMISSED.

     21
      See Crystal Oil, 854 F.2d at 81 (“loss of this plan would
disrupt a very successful organization”).

                                        13