Court Opinion

ID: 1015584
Source: CourtListenerOpinion
Date Created: 2013-07-04 21:35:25.676589+00
Date Added: 2024-06-11T15:12:39.026070
License: Public Domain

UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                             No. 02-2386

In re:   SHAWNEE HILLS, INCORPORATED,

                                                             Debtor.
--------------------------------------------

DRAWBRIDGE SPECIAL OPPORTUNITIES FUND, L.P.,

                                             Plaintiff - Appellant,

           versus

SHAWNEE HILLS, INCORPORATED,

                                                           Defendant,

WEST VIRGINIA DEPARTMENT OF HEALTH AND HUMAN
RESOURCES; PRESTERA CENTER FOR MENTAL HEALTH
SERVICES, INCORPORATED; U. S. DEPARTMENT OF
HEALTH & HUMAN SERVICES; WEST VIRGINIA HOUSING
DEVELOPMENT FUND; WEST VIRGINIA DIVISION OF
REHABILITATION,

                                                 Parties in Interest,

DEBRA A. WERTMAN, United States Trustee,

                                                             Trustee,

           and

H. LYNDEN GRAHAM, JR., Chapter 7 Trustee,

                                                  Trustee - Appellee.
Appeal from the United States District Court for the Southern
District of West Virginia, at Charleston. Joseph Robert Goodwin,
District Judge. (CA-02-872-2; BK-02-20983)

Argued:   September 24, 2003              Decided:   March 3, 2005

Before WIDENER, TRAXLER, and KING, Circuit Judges.

Affirmed by unpublished per curiam opinion.

ARGUED: Amy Marie Smith, STEPTOE & JOHNSON, P.L.L.C., Clarksburg,
West Virginia, for Appellant.     Stephen L. Thompson, BARTH &
THOMPSON, Charleston, West Virginia, for Appellee.     ON BRIEF:
Michael L. Bray, STEPTOE & JOHNSON, P.L.L.C., Clarksburg, West
Virginia, for Appellant.

Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).

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PER CURIAM:

     Huntington    National   Bank    (“Huntington”)   appeals    from    the

district   court’s   order    dismissing     its   bankruptcy    appeal    as

equitably moot.      For the reasons stated below, we affirm the

district court.1

                                     I.

     Debtor Shawnee Hills, Inc., (“Shawnee Hills”) is a non-profit

corporation that operates mental health, mental retardation, and

alcohol counseling and rehabilitation facilities throughout West

Virginia. On May 1, 2002, Shawnee Hills filed a voluntary petition

for protection under Chapter 7 of the Bankruptcy Code.                At the

time,    Shawnee   Hills   had   roughly    775    employees    and   served

approximately ten thousand patients.

     On May 2, 2002, Shawnee Hills learned that employee payroll

checks for its employees, written before Shawnee Hills filed its

bankruptcy petition, were not being honored by two separate banks

at which Shawnee Hills had deposit accounts: Huntington and City

National Bank (“City National”).           Shawnee Hills estimated that

“when it filed [for bankruptcy,] there were outstanding checks for

employee payroll and withholding taxes in the approximate amount of

$15,000.00 written on its general operating account at Huntington

     1
      Huntington has sold its loans and claims to Drawbridge
Special Opportunities, L.P., who is now the appellant. For ease of
reference, we continue to refer to the appellant as Huntington.

                                      3
National Bank and in the approximate amount of $818,000.00 on its

account at City National Bank.”        J.A. 41.   Later the same day,

Shawnee Hills filed an emergency motion, seeking an order requiring

Huntington and City National to honor outstanding payroll checks

issued prior to the May 1st bankruptcy filing.      The Trustee joined

in the emergency motion, and the bankruptcy court scheduled an

emergency hearing for 4:00 p.m. on May 2, 2002.

     At the hearing, City National took no position and stated that

it would take whatever action the court directed.       Because of the

short notice, counsel for Huntington could not attend the hearing

in person, but did appear telephonically.         Huntington’s counsel

objected to the short notice and argued that an order requiring the

banks to honor the payroll checks written before the bankruptcy

petition was filed would be improper because Huntington held a

perfected security interest in the accounts receivable of Shawnee

Hills, and that this security interest extended to the accounts at

Huntington and City National.

     At the conclusion of the emergency hearing, the bankruptcy

court stated that the $15,000 in Huntington’s account had adequate

protection from insurance and other secured property, but stated

that it was providing no protection for the City National account

because it had “no idea how [Huntington] could have an interest in

those funds.”   J.A. 55.   The court granted the emergency motion and

                                   4
entered an order requiring Huntington and City National to honor

the pre-petition payroll checks written by Shawnee Hills.

     The    following      day,   Huntington    filed      a     motion    for

reconsideration, again arguing that it had a perfected security

interest in the funds and that it was not provided sufficient

notice to allow it to advance this argument at the emergency

hearing.     Huntington attached copies of security agreements and

filing statements to support its motion for reconsideration.

     On May 15, 2002, the bankruptcy court held a hearing on

Huntington’s motion for reconsideration.         After the hearing, the

court entered an order denying the motion for reconsideration,

finding that “Huntington Bank may be fully secured by sufficient

real estate and other assets in addition to proceeds from accounts

receivables and the deposit accounts now or formerly held by City

National    Bank   and   Huntington   Bank   which   are   the   subject    of

Huntington Bank’s Motion” and that insurance on Shawnee Hill’s

other properties provided “adequate protection” to Huntington.

J.A. 106.    Huntington appealed the bankruptcy court’s decision to

the district court.       However, because Huntington did not seek a

stay of the bankruptcy court’s order, by the time its challenge

reached the district court, the payroll checks had been cashed by

the employees and honored by the banks.2

     2
      According to the Trustee, as of July 5, 2002, approximately
$498,136.78 in payroll employee checks had cleared the City
National account, and approximately $15,000 in such checks had

                                      5
     On appeal to the district court, Huntington challenged the

bankruptcy court’s entry of the emergency order, arguing that the

court had erred in its application of the Uniform Commercial Code

and Bankruptcy Code, and that its order requiring the banks to

honor the payroll checks had deprived Huntington of its interest in

property without due process of law.       The Bankruptcy Trustee

responded by filing a motion to dismiss the appeal, arguing that

the appeal was constitutionally and equitably moot.

     Rather than addressing the merits of Huntington’s challenge,

the district court granted the Trustee’s motion to dismiss the

appeal as equitably moot.   Noting Huntington’s failure to seek a

stay at any time during the pendency of the emergency order, the

district court cited to the impracticality of recovering the wages

paid to Shawnee Hill’s employees.

     Huntington acknowledges that putting into effect a
     reversal of the Bankruptcy Court’s order would involve
     disgorging funds from the employees who have cashed their
     payroll checks. . . . [A]s to the issue of equitable
     mootness, the question is . . . whether disgorgement is
     practicable. In this case, the cash collateral at issue
     has been distributed to many, probably hundreds, of
     Shawnee Hills employees.      Tracking down these many
     employees, determining whether they are entitled to keep
     the funds as innocent transferees, and, if not,
     determining whether they are able to repay the funds,
     would be an impracticable, if not literally impossible,
     venture.

J.A. 132 (citation omitted).   This appeal followed.

cleared the Huntington account.

                                  6
                                      II.

     “[T]he     doctrine   of    equitable    mootness    is   a   pragmatic

principle, grounded in the notion that, with the passage of time

after a judgment in equity and implementation of that judgment,

effective relief on appeal becomes impractical, imprudent, and

therefore inequitable.” Mac Panel Co. v. Virginia Panel Corp., 283

F.3d 622, 625 (4th Cir. 2002); see also In re US Airways Group,

Inc., 369 F.3d 806, 809 (4th Cir. 2004).           To determine whether a

bankruptcy appeal has become equitably moot, we consider the

following factors:

     (1) whether the appellant sought and obtained a stay; (2)
     whether the reorganization plan or other equitable relief
     ordered has been substantially consummated; (3) the
     extent to which the relief requested on appeal would
     affect the success of the reorganization plan or other
     equitable relief granted; and (4) the extent to which the
     relief requested on appeal would affect the interests of
     third parties.

Mac Panel, 283 F.3d at 625.

     Like the district court, we find that these factors weigh

heavily in favor of a finding of equitable mootness. Most striking

is that Huntington failed to seek a stay of the bankruptcy court’s

order.     It is well-settled that the failure of a party to seek a

stay of a bankruptcy order can alone render further appeal moot.

See Taylor v. Austrian, 154 F.2d 107, 108 (4th Cir. 1946) (per

curiam).    Huntington did not seek a stay of the bankruptcy court’s

order after the initial emergency hearing or after the subsequent

hearing    on   its   motion    to   reconsider.    The   consequences   of

                                       7
Huntington’s failure to seek a stay are evident.                    The bankruptcy

court’s order has been carried out and hundreds of Shawnee Hill

employees have cashed (and likely spent) their payroll checks.

And, it is highly unlikely that any other pre-petition checks

remain outstanding and unpaid at this time.                 Thus, the bankruptcy

court’s order has been fully consummated.                   A reversal at this

juncture would substantially affect the equitable relief granted

and could significantly impact the third-party employees, who were

not   parties   to   the   appeal    and      have   received     no    notice    that

Huntington might seek to compel them to disgorge their wages.                      The

district court held that any attempt to grant Huntington relief

“would be impractical and would impose significant hardship on

hundreds of employees who cashed their regular paychecks months ago

and who are not parties to this appeal.”               J.A. 134.        The district

court’s reasoning is sound and remains applicable -- the months

that had passed since the payroll checks were cashed have now

become    years.     Accordingly,     we      hold   that   the     district     court

correctly    determined    that     the    equities    in    this      case   favor   a

determination that Huntington’s appeal from the bankruptcy court is

equitably moot.3

      3
      The parties disagree as to whether we should review the
district court’s order de novo or for an abuse of discretion.
Because we would affirm the district court under either standard,
we need not resolve that question. We likewise express no opinion
as to the merits of the bankruptcy order and note that, in view of
the district court’s dismissal of the appeal, we need not address
Huntington’s claim that the bankruptcy court deprived it of due

                                          8
                                III.

     For the reasons stated, we affirm the district court’s             order

dismissing   Huntington’s   appeal       from   the    bankruptcy   court   as

equitably moot.

                                                                     AFFIRMED

process of law by failing       to       provide      sufficient   notice   and
opportunity to be heard.

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