Court Opinion

ID: 2678698
Source: CourtListenerOpinion
Date Created: 2014-06-17 17:00:16.314841+00
Date Added: 2024-06-11T13:10:41.260561
License: Public Domain

NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT
                              ________________

                                      No. 13-3371
                                   ________________

                               In re: SCH CORP., et al.,
                                                    Debtors

                         CFI CLASS ACTION CLAIMANTS,
                                              Appellants

                                   ________________

                     Appeal from the United States District Court
                             for the District of Delaware
                       (D.C. Civil Action No. 1-12-cv-01577)
                     District Judge: Honorable Sue L. Robinson
                                 ________________

                                   Argued April 8, 2014

                Before: AMBRO, JORDAN, and ROTH, Circuit Judges

                            (Opinion filed: June 17, 2014 )

Irv Ackelsberg, Esquire (Argued)
Howard I. Langer, Esquire
John J. Grogan, Esquire
Langer, Grogan & Diver
1717 Arch Street
The Bell Atlantic Tower, Suite 4130
Philadelphia, PA 19103

Christopher D. Loizides, Esquire
Loizides & Associates
1225 King Street, Suite 800
Wilmington, DE 19801

      Counsel for Appellants
Thomas H. Kovach, Esquire
Anthony M. Saccullo, Esquire
A.M. Saccullo Legal
27 Crimson King Drive
Bear, DE 19701

Daniel K. Astin, Esquire
John D. McLaughlin, Jr., Esquire (Argued)
Joseph J. McMahon, Jr., Esquire
Ciardi Ciardi & Astin
1204 North King Street
Wilmington, DE 19801

       Counsel for Appellee

                                    ________________

                                        OPINION
                                    ________________

AMBRO, Circuit Judge

       The CFI Class Action Claimants (“CFI Claimants”) challenge the District Court’s

dismissal of their bankruptcy appeal as equitably moot. Because the District Court

dismissed the appeal despite a finding that reversing the plan of liquidation would not

result in any inequity, and because our opinion in In re Semcrude, L.P., 728 F.3d 314 (3d

Cir. 2013), came after the District Court’s decision in this case, we vacate the dismissal

order and remand the case for further consideration.

       SCH Corp., American Corrective Counseling Services, Inc., and ACCS Corp.

(jointly and severally, the “Debtors”) were in the debt collection business in January 2009

when they filed for Chapter 11 bankruptcy in the District of Delaware. The cases were

consolidated, and Carl Singley was appointed as the disbursing agent, litigation designee,

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and responsible officer for each Debtor. The CFI Claimants were the largest group of

unsecured creditors in the bankruptcy based on their role as plaintiffs in pending class

action lawsuits against the Debtors in California, Florida, and Indiana. The lawsuits

generally alleged violations of the Fair Debt Collection Practices Act (“FDCPA”), 15

U.S.C. § 1692 et seq., and similar statutes. A group of plaintiffs with claims pending in

Pennsylvania (the “Pennsylvania Claimants”) comprised a separate class because an

insurance policy held by the Debtors applied to their claims.

       The plan of liquidation provided for the sale of the Debtors’ business to National

Corrective Group, Inc. (“NCG”), a subsidiary of their largest secured creditor. The CFI

Claimants rejected a first proposed plan because it included third-party releases that

would prohibit them and others from pursuing claims against NCG post-bankruptcy. An

amended plan, which removed the releases but decreased the required plan funding, was

confirmed in November 2009 with active support from the CFI Claimants. The

confirmed plan required NCG to pay the Debtors $200,000 per year for five years but

allowed it to offset these payments by certain litigation costs. For their part, the

Pennsylvania Claimants received a judgment against the Debtors for $2.55 million,

enforceable solely against the Debtors’ insurer. Soon after confirmation, about $200,000

was distributed under the plan to cover the fees of bankruptcy counsel and other

preferential claims. However, NCG asserted its set-off rights with respect to the annual

payments, and thus very little, if any, funds have been distributed to unsecured creditors

(including the CFI Claimants) under the plan.

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       NCG’s set-off rights came quickly into play as a result of litigation that was filed

by counsel for the CFI Claimants (“CFI Counsel”) shortly after the plan was confirmed.

By January 2010 CFI Counsel, representing a new set of plaintiffs, filed suit against NCG

in California. Like the pre-bankruptcy suits against the Debtors, this class action lawsuit

against NCG alleged violations of the FDCPA, the Racketeer Influenced and Corrupt

Organizations Act (“RICO”), 18 U.S.C. § 1962, and state law. To their dismay, based on

their dual representation of the CFI Claimants and the plaintiffs in the new California

litigation, NCG moved to disqualify CFI Counsel in both the pre- and post-bankruptcy

litigation in that State. The motions in both cases were granted.

       Following the disqualification orders in California, the CFI Claimants (through

their counsel) moved to dismiss the Debtors’ bankruptcy cases for lack of good faith or,

in the alternative, to enforce the terms of the amended plan. The CFI Claimants argued

that Singley and NCG acted in bad faith by transferring the Debtors’ business to NCG

while effectively insulating the new company from liability. Although formally styled as

a motion to dismiss, the CFI Claimants sought a range of relief, including the removal of

Singley as the responsible officer and sanctions against NCG.

       The Bankruptcy Court held three days of hearings before denying the motion to

dismiss. It found, inter alia, that the bankruptcy was several years post-confirmation and,

although no significant distributions had been made, that was not unexpected given the

terms of the amended plan. App. at 127-30. It concluded that there was no persuasive

evidence of gross negligence by Singley nor did he act in bad faith by cooperating with

NCG’s defense in the post-bankruptcy litigation in California. Id. at 129, 132. Finally,

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the Bankruptcy Court noted that, to the extent CFI Counsel sought review of the

disqualification rulings in California, a federal court in Delaware could not grant such

relief. Id. at 133-34.

       The CFI Claimants appealed that order to the District Court pursuant to 28 U.S.C.

§ 158(a). Instead of deciding the appeal on the merits, the District Court granted

Singley’s motion to dismiss the appeal as equitably moot. Applying our five-factor test

from In re Continental Airlines, 91 F.3d 553, 560 (3d Cir. 1996) (en banc), the Court

determined as follows:

       The amended plan at bar has been substantially consummated. Debtors’ assets
       have been transferred to NCG and some professionals have been paid under the
       amended plan. However, there have been no distributions to any unsecured
       claimants. Arguably, the only aspects of plan implementation that require reversal
       are the limited number of distributions that have occurred. Therefore, the record
       does not indicate that reversing the amended plan would result in “great difficulty
       or inequity.” The first factor, therefore, weighs against dismissal.

       All other prudential factors weigh in favor of dismissal. No stay has been sought
       either during confirmation of the amended plan or in the three years since the
       liquidation plan was confirmed. The relief requested would affect third parties not
       presently before the court, including both Pennsylvania class claimants who have
       received a final and non-appealable judgment allowing a $2.55 million proof of
       claim under the amended plan, and the professionals who have had funds
       distributed to them under the amended plan. The relief requested would rescind
       the amended plan in its entirety, reducing the debtors’ ability to liquidate. Further,
       public policy affords finality to bankruptcy judgments.

In re SCH Corp., Civ. No. 12-1577, 2013 WL 3380440, at *3 (D. Del. July 8, 2013)

(footnotes and citations omitted).

       In this context, we address only the narrow question of whether the District Court

properly dismissed the bankruptcy appeal as equitably moot. It had jurisdiction under 28

U.S.C. §§ 158(a) and 1334. We have jurisdiction under 28 U.S.C. §§ 158(d) and 1291.

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We review the Court’s equitable mootness determination for abuse of discretion.

Continental, 91 F.3d at 560.

       Federal courts have a “‘virtually unflagging obligation’ . . . to exercise the

jurisdiction conferred on them.” Semcrude, 728 F.3d at 320 (quoting Colo. River Water

Conservation Dist. v. United States, 424 U.S. 800, 817 (1976)). To dismiss in the face of

this strong presumption should occur only where granting relief is “almost certain to

produce a perverse outcome[.]” Id. (internal quotation marks and citation omitted).

       As noted, in Continental we listed five factors that an appellate court should

consider when equitable mootness is alleged. Semcrude, synthesizing further the analysis

in In re Phila. Newspapers, LLC, 690 F.3d 161, 168 (3d Cir. 2012), explained how

appellate courts should apply these five factors (which often overlap) in practice:

       [I]t is useful to think of equitable mootness as proceeding in two analytical steps:
       (1) whether a confirmed plan has been substantially consummated; and (2) if so,
       whether granting the relief requested in the appeal will (a) fatally scramble the
       plan and/or (b) significantly harm third parties who have justifiably relied on plan
       confirmation.
728 F.3d at 321. However, Semcrude was filed after the District Court dismissed the CFI

Claimants’ appeal and thus was not available for consideration.

       What gives us pause in reviewing the District Court’s order is the conclusion that

dismissal was appropriate even though “the record does not indicate that reversing the

amended plan would result in ‘great difficulty or inequity.’” SCH, 2013 WL 3380440, at

*3. To invoke equity when there is no inequity is counterintuitive. Moreover, it is in

tension with the guiding principle that matters should generally be decided on their merits

when that is possible.

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       We also question whether the District Court considered the full range of relief the

CFI Claimants sought and the specific effect that relief would have on third parties.

While the Court noted the potential effect of the appeal on the Pennsylvania Claimants

and the professionals paid under the amended plan, it seems only to have considered the

possibility of rescinding the confirmation plan in its entirety. As noted above, the CFI

Claimants sought not only dismissal of the bankruptcy cases but, in the alternative, other

relief that included enforcement of the terms of the plan, removal of Singley as

responsible officer, and sanctions against NCG. (As NCG was not a party to the appeal,

it may not be within the power of the District Court to award a sanction against it.)

Should the District Court wish to revive a dismissal for reasons of equity, it should

consider all forms of relief sought, as “the feared consequences of a successful appeal are

often more appropriately dealt with by fashioning limited relief at the remedial stage than

by refusing to hear the merits of an appeal at its outset.” Semcrude, 728 F.3d at 324

(citing Continental, 91 F.3d at 571-72 (Alito, J., dissenting)). Moreover, a merits decision

may be necessary because “[d]ismissing an appeal as equitably moot should be rare,

occurring only where there is sufficient justification to override the statutory appellate

rights of the party seeking review.” Id. at 326-27.

       We thus vacate the District Court’s order and remand for it to reconsider the

appeal of the CFI Class Action Claimants.

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