Court Opinion

ID: 858428
Source: CourtListenerOpinion
Date Created: 2013-04-18 17:26:15.337635+00
Date Added: 2024-06-11T12:38:04.837507
License: Public Domain

Case: 12-50297       Document: 00512212507        Page: 1   Date Filed: 04/18/2013

           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                                        FILED
                                                                       April 18, 2013

                                      No. 12-50297                     Lyle W. Cayce
                                                                            Clerk

In the Matter of: ESCARENT ENTITIES, L.P.,

                                                 Debtor

___________________

LEWIS MILLER SMYTH; L.M. SMYTH ENTERPRISES, LIMITED,

                                                 Appellants,

v.

SIMEON LAND DEVELOPMENT, L.L.C.; EDMUND A. WEINHEIMER, JR.;
JOHN J. SCHMERMUND,

                                                 Appellees

                    Appeal from the United States District Court
                         for the Western District of Texas
                              USDC No. 5:11-CV-524

Before DeMOSS, OWEN, and HAYNES, Circuit Judges.1

      1
          Haynes, Circuit Judge, concurring in judgment only.
     Case: 12-50297       Document: 00512212507         Page: 2     Date Filed: 04/18/2013

                                       No. 12-50297

PER CURIAM:**
       Appellant Lewis Miller Smyth challenges the bankruptcy court’s and
district court’s findings that certain state law claims alleged against Appellees
Edmund Weinheimer and John Scmermund were part of the bankruptcy estate.
Smyth further alleges error in the sale of those claims to a third party. For the
following reasons, we affirm the district court’s dismissal of the bankruptcy
appeal.
                                              I.
       Appellant Lewis Miller Smyth is a limited partner in Escarent Entities,
L.P. (Escarent), the Debtor in the bankruptcy action. Appellees Edmund
Weinheimer and John Schmermund (collectively “Appellees”) are also limited
partners in Escarent. Appellee Simeon Land Development, L.L.C. (Simeon) is
the general partner in Escarent. Simeon is managed by the limited partners of
Escarent. Escarent was created solely to buy and sell a 495-acre property in
Hays County, Texas. Escarent entered into a contract with Quantum Diversified
Holdings (Quantum), wherein Quantum agreed to purchase the property for $7.5
million. Closing was set for January 12, 2009. Seven days before closing,
Escarent filed for Chapter 11 bankruptcy. Smyth opposed Escarent’s bankruptcy
filing, alleging that Appellees were attempting to avoid the contract with
Quantum because they had received a better offer for the property. Appellees
asserted that Escarent had to file for bankruptcy to prevent foreclosure by a
third party who had a lien on the property.
       On March 12, 2009, Smyth filed suit in Texas state court, alleging that
Appellees breached their fiduciary duty by filing bankruptcy to prevent
execution of the sale contract with Quantum. Smyth asserted claims of
negligence, tortious interference with contract, breach of contract, conspiracy,

       **
         Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.

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and breach of fiduciary duty, causing injury “to the Partnership and [Smyth’s
interest therein].” On July 1, 2010, Appellees removed Smyth’s state court action
to the bankruptcy court (Smyth Adversary). Smyth sought a remand to the state
court, asserting that the claims raised in the state court action were his
individual claims. Appellees argued that the harm alleged in Smyth’s claims was
derivative of the harm suffered by the partnership and the claims belonged to
the bankruptcy estate. The bankruptcy court denied Smyth’s motion to remand,
finding that the claims “appear[ed] to be property of the estate.”
      Escarent moved to intervene in the Smyth Adversary and asserted that
any causes of action relating to a breach of fiduciary duty by a general or limited
partner belonged to Escarent as debtor. The bankruptcy granted Escarent’s
motion to intervene. In the same order, the bankruptcy court granted Smyth’s
motion to be appointed representative of the estate in order to prosecute
Escarent’s claims against Appellees on behalf of the estate. Smyth did not take
any action in pursuing the claims. Smyth then filed a motion to convert
Escarent’s bankruptcy to a Chapter 7 proceeding and to appoint a Trustee. The
motion was granted. The Trustee subsequently filed a motion to sell the estate’s
interest in all potential causes of action. Smyth did not object to the Trustee’s
motion, and did not seek a stay of the sale. The bankruptcy court granted the
Trustee’s motion, authorizing sale of the estate’s claims:
            [The Purchasers] shall have the authority to
            immediately take whatever action is necessary to
            prosecute and/or defend the Smyth assets in the Smyth
            [A]dversary, including but not limited to the right to
            prosecute, act, and dismiss with prejudice any and all
            claims pending against Defendants Weinheimer,
            Schmermund, or Simeon Land Development LLC.

      On November 15, 2010, affiliates of the Appellees (Purchasers) purchased
the estate’s interest in the relevant causes of action for $70,000. Smyth did not

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participate in the sale. The Purchasers subsequently filed a motion to dismiss
all claims asserted against Weinheimer, Schmermund, or Simeon. In response,
Smyth filed an amended motion to remand to the state court the state law claims
originally asserted against Appellees. The bankruptcy court dismissed the
motion as moot in light of the sale of those claims. The bankruptcy court then
granted Purchaser’s motion to dismiss the claims:
            Plaintiffs, Miller Smyth and L.M. Smyth Enterprises
            Ltd., asserted claims against Defendants that derive
            from damages allegedly suffered by Escarent. Any right
            to recover for those damages was purchased by the
            Purchasers and may be dismissed with prejudice
            pursuant to the sale order.

      Smyth appealed to the district court. The district court found that the
claims originating from Smyth’s state court action were derivative of the estate’s
claims against Appellees. The district court further found that the Bankruptcy
Code prevented the court from modifying the sale of those claims and dismissed
the appeal as moot. Smyth timely appealed to this court.
                                        II.
      When cases originate in bankruptcy, this court “perform[s] 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.” Nationwide Mut. Ins. Co. v. Berryman Prods., Inc., (In re Berryman
Prods., Inc.), 159 F.3d 941, 943 (5th Cir. 1998).
      Bankruptcy Code §363(m) prevents this court from reversing or modifying
a sale order unless the party challenging the sale order sought a stay of that
order pending appeal.
            The reversal or modification on appeal of an
            authorization . . . of a sale or lease of property does not
            affect the validity of a sale or lease under such
            authorization to an entity that purchased or leased

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                such property in good faith, whether or not such entity
                knew of the pendency of the appeal, unless such
                authorization and such sale or lease were stayed
                pending appeal.

11 U.S.C. § 363(m). “Section 363 (m) patently protects, from later modification
on appeal, an authorized sale where the purchaser acted in good faith and the
sale was not stayed pending appeal.” Gilchrist v. Westcott (In re Gilchrist), 891
F.2d 559, 560 (5th Cir. 1990). Failure to obtain a stay renders moot a subsequent
appeal of that order.1 Id. at 560-61; see also Hytken v. Williams (In re Beach
Development LP), 2008 WL 2325647, at *1-2 (5th Cir. June 6, 2008); Schum v.
Zwirn Special Opportunities Fund LP (In re The Watch Ltd.), 257 F. App’x 748,
750 (5th Cir. 2007); Bleaufontaine, Inc. v. Roland Int’l (In re Bleaufontaine, Inc.),
634 F.2d 1383, 1389-90 (5th Cir. Unit B 1981).
       Although framed as a challenge to the dismissal order, the remedy Smyth
seeks from this court a reversal of the sale order.2 Smyth asserts that his state
law claims are individual and not part of the bankruptcy estate, thus the
bankruptcy court did not have jurisdiction over his state law claims, and he was
not obligated to take any action to protect those claims from being sold. This
argument ignores the bankruptcy court’s finding that Smyth’s state law claims
belonged to the estate. When the state law claims were originally removed to the
bankruptcy court, Smyth sought a remand, which the bankruptcy court denied
because the claims “appeared to be derivative of the estate.” As such, Smyth
should have been aware that the bankruptcy court intended to sell Smyth’s state

       1
           Smyth does not challenge whether Purchasers purchased the claims in good faith.
       2
         Smyth arguably does not have standing to challenge the dismissal order. The
bankruptcy court denied Smyth’s motion to remand the state law claims on the grounds that
they were derivative of the estate. Those claims were included in the sale of claims to the
Purchasers, a sale unchallenged by Smyth. Once the Purchasers sought to enforce the sale
order, the Purchasers and the estate were the only parties with a legal interest in the claims.

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                                   No. 12-50297

law claims as part of the bankruptcy estate and Smyth was obligated to seek a
stay of the sale pending appeal.
      Smyth further argues that a challenge to the bankruptcy court’s
jurisdiction may be raised at any time. This argument fails. When an appeal is
moot because an appellant has failed to obtain a stay, this court cannot reach the
question of whether the bankruptcy court had jurisdiction to sell the claims. In
re Gilchrist, 891 F.2d at 561 (citing In re Sax, 796 F.2d 994, 998 (7th Cir. 1986)
(finding that a challenge to the bankruptcy court’s jurisdiction was forfeited
when plaintiff failed to obtain a stay)); see also Ginther v. Ginther Trusts (In re
Ginther Trusts), 238 F.3d 686, 689 (5th Cir. 2001) (“[A] failure to obtain a stay
is fatal to a challenge of a bankruptcy court’s authorization of the sale of the
property, notwithstanding any questions as to that court’s jurisdiction.”).
“Despite the maxim that subject matter jurisdiction can be raised at any time,
valid procedural rules cannot be ignored just because the jurisdictional decision
is being challenged rather than the decision on the merits.” In re Gilchrist, 891
F.2d at 561 (quoting In re Sax, 796 F.2d at 998 (quotation marks omitted)).
      This court cannot modify or reverse the sale order because Smyth did not
seek a stay of the sale order pending appeal. The district court properly
dismissed Smyth’s bankruptcy appeal as moot. In re Gilchrist, 891 F.2d at 560.
The district court’s order is AFFIRMED.

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