Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: March 19, 2010
Appeal from the United States Bankruptcy Court for the District of Alaska. Bk. No. 08-00213-DMD. Hon. Donald MacDonald IV, Chief Bankruptcy Judge, Presiding.
Before JURY, PERRIS [ and DUNN, Bankruptcy Judges.
Hon. Elizabeth L. Perris, Chief Judge of the Bankruptcy Court for the District of Oregon, sitting by designation.
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
Debtor Glacier Valley Tours, LLC (" GVT") appeals the bankruptcy court's judgment (1) granting the Estate of Joseph M. Smith's (" Smith") Motion for Reconsideration; (2) granting the chapter 7 trustee's Motion to Sell Property Free and Clear of Liens; and (3) denying GVT's Motion to Convert Case to One Under Chapter 11.
Having reviewed the parties' briefs and the record, we DISMISS this appeal as moot.
I. FACTS
In 2001, GVT entered into a lease with Smith for 160 acres of remote wilderness property near Haines, Alaska. The lease included an option to purchase the property for $800,000.
The property is formally known as United States Mineral Survey 1564.
GVT's managing members, Albert Gilliam (" Gilliam") and his sister Pam Coulter (" Coulter"), planned to generate income from the property by offering " Fly In Fly Out" tours marketed to the cruise line industry and by mining it. Soon after its tour business began to develop, GVT shut down operations because the airstrip on the property became unuseable due to water erosion. GVT stopped making the lease payments.
Numerous disputes between GVT and Smith ensued, eventually ending in a 2004 settlement agreement whereby GVT purchased the property from Smith at a reduced price of $600,000 and took on the responsibility of repairing the airstrip. Along with initial payments, GVT executed a promissory note for $360,000 in favor of Smith which was secured by a first deed of trust on the property.
Subsequently, GVT defaulted, and Smith commenced a non-judicial foreclosure proceeding in January 2008 with the sale scheduled for April 23, 2008. GVT asked Smith to postpone the sale to give GVT time to obtain financing. Smith refused, and GVT filed a state court civil action against Smith alleging breach of contract and fraud. GVT's action was partially based on allegations that Smith, or his nephew Todd Smith, had buried hazardous waste material on the property and caused survey markers to be removed.
A. The Bankruptcy Filing
GVT filed for chapter 7 relief on April 22, 2008. The petition stayed the foreclosure sale scheduled for the next day.
GVT scheduled the property with a value of $600,000 and indicated it was encumbered by a deed of trust in favor of Smith with an outstanding balance of $318,594.18. GVT's scheduled personal property consisted of the state court action against Smith valued at $350,000 and $71,265 in other assets, including four vehicles, some excavating and office equipment, an airboat, and $3,000 in a checking account. Besides Smith's secured claim, GVT's scheduled liabilities included $9,358 in priority unsecured debt and $6,163 in general unsecured debt.
Larry D. Compton was appointed the chapter 7 trustee. No activity occurred in the case for almost a year. Smith, who was in poor health, passed away on September 29, 2008.
B. The Trustee's Motion to Sell the Property And GVT's Motion to Convert its Case to One Under Chapter 11
On July 2, 2009 the trustee filed an application to employ a real estate agent and moved to sell the property free and clear of liens under § 363. The proposed sale was to a third party buyer for $280,000 subject to overbid. Although the purchase price was less than the balance due on the Smith deed of trust, Smith's estate consented to the proposed sale.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
The Smith family agreed to let the trustee handle the sale of the property to avoid further fees and costs in litigating with Gilliam and Coulter and to bring a neutral into the equation.
Other terms included: (1) the sale was free and clear of any interest that Gilliam purported to own in three mining claims on the property, providing that such interests would attach only to the proceeds of the sale; (2) the trustee's realtor would receive an 8% commission on the sale, plus reimbursement of actual costs; (3) the bankruptcy estate would receive 8% of the gross sale proceeds; and (4) the balance would be paid to Smith's estate.
Four days after the trustee filed his motion to sell the property, GVT filed a motion to convert its case to chapter 11 to prevent the trustee's sale. GVT conceded that it did not have an absolute right to convert under the holding in Marrama v. Citizens Bank of Mass., 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007), but argued that it sought conversion in good faith and could propose a confirmable chapter 11 plan. Relying also on In re FMO Assocs. II, LLC, 402 B.R. 546, 551-52 (Bankr. E.D.N.Y. 2009), GVT argued that under the totality of circumstances test its motive for seeking conversion was made in good faith.
In Marrama, the United States Supreme Court held that a debtor's right to convert from chapter 7 to chapter 13 was limited by the bankruptcy court's power to take any action necessary to prevent bad-faith conduct or abuse of the bankruptcy process. Thus, a debtor had no absolute right to convert a case if there was evidence of atypical conduct which could be equated to bad faith. The Marrama court concluded that the debtor had made numerous statements about his house which were misleading and inaccurate and, therefore, forfeited his purportedly absolute right to proceed under Chapter 13.
Relevant factors under a totality of circumstances test include whether:
The trustee objected to GVT's motion to convert on the ground that GVT could not propose a confirmable plan and, therefore, selling the property was in the best interests of the creditors and the estate. The trustee argued that GVT had been in default under one agreement or another between it and Smith for the last ten years. Moreover, GVT had assured the trustee from the inception of its bankruptcy case that there was a financial savior around the corner, but no money or savior ever materialized. Finally, the trustee observed that GVT's members could bid on the property.
The bankruptcy court heard GVT's motion to convert and the trustee's motion to sell in tandem. At the July 29, 2009 hearing, GVT offered testimony from two witnesses interested in investing in the property. GVT had executed a working agreement with one of the witnesses under which GVT would receive a $25,000 nonrefundable down payment and a 15% royalty on gold mined from the property. The witness had not confirmed that gold existed on the property, but if it did, he estimated that GVT could receive up to $90,000 between the end of 2009 and the spring of 2010 from the royalty agreement.
The second witness testified that he had offered GVT $350,000 for a 40% share in GVT's tourism operations on the property. He had signed an intent to invest document three days before the hearing, but had not executed an investment agreement. The witness did not make his offer until GVT contacted him a week before the hearing, and he was not aware that he could have purchased the entire property from the trustee for $285,000. At the conclusion of the hearing, the court orally stated it intended to deny GVT's motion to convert and grant the trustee's motion to sell based on the best interests of creditors.
After the hearing, the court reviewed the holding in Marrama and concluded that it had applied the wrong standard to GVT's motion to convert because, unlike the debtor in Marrama, GVT had made no fraudulent statements during its bankruptcy proceeding. On July 31, 2009 the court held another hearing and found that GVT sought conversion in good faith. Accordingly, the court reversed its previous oral rulings, granted GVT's motion to convert, denied the trustee's motion to sell and entered the orders and judgment on the same day.
One hour later, Smith's estate filed a Motion for Reconsideration, arguing that the court should deny GVT's motion to convert based on factors indicative of bad faith set forth in FMO, 402 B.R. at 551-52. GVT received notice of the Motion for Reconsideration on the afternoon of July 31, 2009. The bankruptcy court sua sponte set a hearing on the motion for the afternoon of August 3, 2009, but did not request opposition from GVT under its Bankruptcy Local Rule 9023-1.
On August 4, 2009, the day after the hearing on the Motion for Reconsideration, the court vacated and reversed its July 31, 2009 orders and judgment in a written decision. The court granted the Smith estate's Motion for Reconsideration, granted the trustee's motion to sell the property for $280,000 to the third party buyer and denied GVT's motion to convert its case. GVT timely appealed the bankruptcy court's judgment.
C. Post-Judgment Proceedings
At the same time that GVT filed its appeal of the bankruptcy court's August 4, 2009 judgment, GVT moved for a stay pending appeal in the bankruptcy court. The bankruptcy court denied GVT's motion in a written decision.
GVT filed an emergency motion for a stay pending appeal with this panel. We granted a temporary stay of the trustee's sale. On August 18, 2009, we denied GVT's motion to stay the sale pending appeal, but extended the temporary stay to August 28, 2009.
GVT appealed this panel's Order Denying Motion for Stay Pending Appeal to the Ninth Circuit Court of Appeals, which ordered the appeal dismissed unless GVT could show cause why the appeal should not be dismissed on jurisdictional grounds.
On September 1, 2009 the trustee deeded the property to the third party buyer. Two days later, the trustee closed the sale and distributed $233,342.88 of the sale proceeds to Smith's estate and retained $22,400 for the bankruptcy estate.
On December 10, 2009 the Ninth Circuit Court of Appeals dismissed GVT's appeal of the Order Denying Motion for Stay Pending Appeal as moot.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § 1334 and § 157(b)(2)(A) and (N). We have jurisdiction to determine our jurisdiction. Hupp v. Educ. Credit Mgmt. Corp. (In re Hupp), 383 B.R. 476, 478 (9th Cir. BAP 2008).
III. ISSUE
Whether the appeal is moot.
IV. DISCUSSION
It is well established that we lack jurisdiction to hear moot cases. United States v. Pattullo (In re Pattullo), 271 F.3d 898, 900 (9th Cir. 2001).
The record shows that the trustee has sold the property in accordance with the bankruptcy court's August 4, 2009 order and distributed the proceeds to Smith's estate and the bankruptcy estate. The trustee argues the closing of the sale without more than a temporary stay pending appeal renders this appeal moot. We agree.
11 U.S.C. § 363(m) provides:
Section 363(m) protects the interests of good faith purchasers who buy property pursuant to a sale authorized under § 363(b) or (c) when a party in interest has failed to stay the sale pending appeal. See Onouli-Kona Land Co. v. Estate of Richards (In re Onouli-Kona Land Co.), 846 F.2d 1170, 1171 (9th Cir. 1988) (" Bankruptcy's mootness rule applies when an appellant has failed to obtain a stay from an order that permits a sale of a debtor's assets."). It is undisputed that GVT failed to obtain more than a temporary stay pending appeal and, therefore, the protection offered under § 363(m) applies to the sale -- a point that GVT concedes.
GVT has not raised any issue regarding the purchaser's lack of good faith in this appeal. Thus, the argument has been waived. Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999).
GVT challenges several of the bankruptcy court's rulings and argues that these additional assignments of error are not moot. Summarized, these errors include: (1) GVT complains that it was denied due process because it did not have adequate notice or a meaningful opportunity to respond to the Motion for Reconsideration; (2) the bankruptcy court erred in granting the Smith estate's Motion for Reconsideration because the trustee did not raise the issue of bad faith at the initial hearing and failed to identify the FMO factors; and (3) the bankruptcy court erred in denying GVT's motion to convert.
At oral argument, both parties urged the panel to consider their arguments regarding the proper standard for bad faith determinations in a conversion context. However, in light of our conclusion that this appeal is moot, we decline to reach the merits of the bankruptcy court's decision on the conversion issue.
GVT fails to explain why these claims have continuing viability given the change of circumstances, nor does it address the crucial question of whether it is too late for this panel to offer it some effective relief since its primary asset has been sold. GVT also does not argue that any of the exceptions to bankruptcy mootness apply, but simply contends that it " has presented serious legal questions that need to be resolved on appeal."
There are four recognized exceptions to the mootness doctrine: (1) collateral legal consequences; (2) wrongs capable of repetition yet evading review; (3) voluntary cessation; and (4) class actions where the named party ceases to represent the class. Pilate v. Burrell (In re Burrell), 415 F.3d 994, 999 (9th Cir. 2005). We cannot place GVT's due process challenge or its other assignments of court error within any of the mootness exceptions.
From the record before us, we conclude that GVT's appeal of the judgment denying its motion to convert is both constitutionally and equitably moot. We have previously explained the distinction between the two mootness doctrines:
Constitutional mootness derives from Article III of the United States Constitution, which provides that the exercise of judicial power depends on the existence of a case or controversy. The doctrine of constitutional mootness is essentially a recognition of Article III's prohibition against federal courts' issuing advisory opinions. While the Article III mootness doctrine has a 'flexible character, ' it applies when events occur during the pendency of the appeal that make it impossible for the appellate court to grant effective relief. If no effective relief is possible, we must dismiss for lack of jurisdiction.
A variation of the mootness rule, the equitable mootness doctrine, 'applies when appellants have failed and neglected diligently to pursue their available remedies to obtain a stay and circumstances have changed so as to render it inequitable to consider the merits of the appeal.'
United States v. Gould, 401 B.R. 415, 421 (9th Cir. BAP 2009).
Here, we cannot separate the remaining issues in this appeal from the sale of the real property. The record shows that GVT's conversion request and subsequent reorganization plan were entirely dependent on GVT keeping the property. GVT's reorganization plan was to obtain a cash infusion from an investor and mine for gold on the property in order to pay Smith and unsecured creditors. Obviously, this plan is no longer workable because it involved using the property.
GVT cannot propose another reorganization or liquidation plan that involves the sale of other assets or an equity infusion because it owns no other valuable assets. While this appeal was pending, the trustee noticed a sale of GVT's personal property -- a boat, trailer and van -- to GVT's managing members, Gilliam and Coulter, for $25,000 cash. The court approved the sale by order entered on March 15, 2010. This transaction leaves GVT's estate with few or no remaining assets to reorganize.
We take judicial notice of the motion and order docketed and imaged in debtor's bankruptcy case at Dkt. Nos. 78 and 81, respectively. O'Rourke v. Seaboard Surety Co. (In re Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989).
GVT does not contend that it is able to propose a reorganization plan in the absence of these assets. Therefore, by converting the case to chapter 11 on appeal, this panel could not grant effective relief to GVT, and thus the remaining issues in this appeal are constitutionally moot.
We conclude the equitable mootness doctrine also applies in this case. There is no feasible reorganization or liquidation plan that GVT could utilize now that its real property and few remaining assets belong to third parties who are not parties to this appeal. Thus, even if it were theoretically possible to provide some relief, circumstances have changed so as to render it inequitable to consider the merits of the conversion-related issues on appeal. Gould, 401 B.R. at 421; Varela v. Dynamic Brokers, Inc. (In re Dynamic Brokers, Inc.), 293 B.R. 489, 494 (9th Cir. BAP 2003) (comprehensive changes of circumstances during pendency of appeal may render appeal equitably moot when, as a practical matter, the court cannot grant effective relief).
V. CONCLUSION
Accordingly, we DISMISS this appeal as moot because the order approving the sale is statutorily moot under § 363(m) and the other aspects of the order are constitutionally and equitably moot.
(1) the debtor has only one asset; (2) the debtor has few unsecured creditors whose claims are small in relation to those of the secured creditors; (3) the debtor's one asset is the subject of a foreclosure action as a result of arrearages or default on the debt; (4) the debtor's financial condition is, in essence, a two party dispute between the debtor and secured creditors (sic) which can be resolved in the pending state foreclosure action; (5) the timing of the debtor's filing evidences an intent to delay or frustrate the legitimate efforts of the debtor's secured creditors to enforce their rights; (6) the debtor has little or no cash flow; (7) the debtor can't meet current expenses including the payment of personal property and real estate taxes; and (8) the debtor has no employees.
FMO, 402 B.R. at 551-52.
The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section 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 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.