Opinion
CIVIL ACTION NO: 01-2331 SECTION: "R"
December 19, 2001.
ORDER AND REASONS
This matter is before the Court on appellee's motion to dismiss the appeals of the bankruptcy court's June 26, 2001 final order confirming the Chapter 11 Plan of Reorganization of Efficient Solutions, Inc. For reasons set forth below, the appeals are dismissed.
I. Background
Efficient Solutions, Inc., the debtor, was in the business of installing and maintaining lighting systems. It had contracts with customers that required the customers to make monthly payments over periods of five to ten years. Appellants, Fleming Companies, Inc. ("Fleming") and Bill Heard Chevrolet Company and Bill Heard Oldsmobile Cadillac, Inc. (collectively "Heard"), were customers of the debtor. The debtor had persistent difficulties in performing its obligations under the contracts. Ultimately, the contracts went unserviced, and appellants ceased making the contracted for payments.
The debtor filed for Chapter 13. bankruptcy relief on June 24, 1999. In its schedules, the debtor listed the contracts of Fleming and Heard as executory contracts that it owned subject to the security interest of Fleet Business Credit, LLC. It listed Fleet as its largest secured creditor. During the first week of the Chapter 11 case, the debtor filed a motion for authority to use cash collateral and requested an emergency preliminary hearing under 11 U.S.C. § 363(c)(3) and Federal Rule of Bankruptcy 4001(b)(2). In support of its motion, the debtor contended that its transactions with Fleet were not true sales, but rather were security interests. Fleet opposed the motion. Fleet contended that the transfers were true sales, and therefore, that the transferred rights were not property of the estate.
The bankruptcy court held an emergency hearing. The court preliminarily ruled that the transfers were security devices, and therefore, that the assets were cash collateral. The court permitted the debtor to use these assets upon furnishing adequate protection to Fleet. The court set a final hearing on the cash collateral issue for July 29, 1999. Fleet filed a motion for reconsideration of and/or a new trial on the preliminary ruling. The hearing on the motion for reconsideration and the final hearing on the motion for the use of cash collateral were continued several times. The court finally took up the cash collateral issue at a hearing on September 16 and 17, 1999. The court denied the debtor the continued use of the cash collateral based on the debtor's failure to provide adequate protection. The court did not address Fleet's contention that it owned the contract rights, nor did it rule on Fleet's pending motion for reconsideration.
After the court ruled on the cash collateral issue, the debtor, Fleet, and the Chapter 11 Official Unsecured Creditors' Committee reached an agreement on the terms of a consensual plan of reorganization, the "Plan Agreement." Under the Plan Agreement, (1) Fleet was granted the right, but not the obligation to provide service under the debtor's customer contracts; (2) Fleet paid $2,375,000 in cash to the debtor, of which a minimum of $350,000 was reserved for distribution to unsecured creditors; (3) Fleet agreed to waive all of its then existing claims against the debtor; and (4) the debtor and the Committee agreed to support a plan under which the bankruptcy court would-grant Fleet's motion. for reconsideration and find that Fleet was the owner of the customer contract rights.
Elements 1-4 of the Plan Agreement are referred to as the "FBCC Settlement."
The debtor filed a proposed plan and disclosure statement in accordance with the Plan Agreement. Fleming objected to the disclosure statement. Fleming asserted that the disclosure statement was inadequate because Fleming could not determine from it whether the debtor intended to assume or reject its contracts with Fleming. In response to this objection, the debtor agreed to amend the disclosure statement to clarify its position that it was neither assuming nor rejecting the customer contracts because it did not consider them executory within the meaning of 11 U.S.C. § 365, but that if the contracts were executory, they would be rejected under the plan. The bankruptcy court then approved the disclosure statement subject to the right of Fleming to provide additional language for inclusion in the disclosure statement if it believed further clarification was needed. Fleming provided additional language, and it was included in the final disclosure statement that was submitted and approved by the court.
The court held a confirmation hearing on September 6, 2000. Fleming objected to confirmation and argued that it still could not tell whether its contracts with the debtor were being assumed or rejected. At the close of the hearing, the court announced that it would confirm the plan and directed counsel to submit a form of order.
In April 2001, Fleet moved for and obtained a status conference with the court. By the time of the status conference, the debtor and Fleet had resolved all objections to confirmation except those asserted by Fleming and Racquet Club of Columbus, Ltd. ("RCC"), another of the debtor's former customers. During the status conference, Fleet offered to add protective language to the "Finding" portion of the confirmation order so that the finding could not be used to the prejudice of Fleming or ROC in any litigation or arbitration involving Fleet. Fleming and RCC declined the offer.
After receiving an amended Plan from the debtor, the Bankruptcy Court entered the proposed confirmation order submitted by the debtor and Fleet on June 28, 2001. Under the confirmed Plan, the debtor will continue to operate as a corporation for the sole purpose of effectuating the Plan. Ultimately, the Plan calls for the liquidation of the company. Fleming and Heard filed their notices of appeal on July 30, 2001.
On October 25, 2001, the estate transferred all of its assets ($919,842.22) to the Liquidation Agent, and the agent assumed management of all of the, property covered by the Plan. Fleet gave the debtor $2,375,000 in cash and a waiver and release of virtually all of Fleet's claims against the estate. Additionally, the debtor transferred title to Fleet of certain assets of the debtor under the Asset Purchase Agreement, the Bankruptcy Court entered a finding stating that Fleet owns rights under a number of the debtor's customer contracts, and the debtor gave Fleet a complete release and the protection of a permanent injunction pursuant to 11 U.S.C. § 105. On November 13, 2001, Fleet filed this motion to dismiss Fleming's and Heard's appeals as equitably moot.
II. Discussion
A. Statement of Jurisdiction
The Court properly has jurisdiction over this case under 28 U.S.C. § 158(a) and Federal Rule of Bankruptcy Procedure 8001. See 28 U.S.C. § 158(a); FED.R.BANKR.P. 8001.
B. Equitable Mootness
In bankruptcy appeal proceedings, "mootness" is a "recognition by the appellate courts that there is a point beyond which they cannot order fundamental changes in reorganization actions. In re CWI PCS I, Inc., 230 F.2d 788, 800 (5th Cir. 2000) (citing In re Manges, 29 F.3d 1034, 1039 (5th Cir. 1994), cert. denied, 513 U.S. 1152, 115 S.Ct. "1105 (1995) "Consequently, a reviewing court may decline to consider the merits of a confirmation order when there has been substantial consummation of the plan such that effective judicial relief is no longer available — even though there may still be a viable dispute between the parties on appeal." Id. (quoting In re Manges, 29 F.3d at 1039). To determine whether this appeal is moot, the Court must examine the following three factors: (1) whether a stay has been obtained, (2) whether the plan has been "substantially consummated," and (3) whether the relief requested would affect either the rights of parties not before the court or the success of the plan. Id.
1. Failure to Obtain a Stay
"The requirement of a stay encapsulates the fundamental bankruptcy policy of reliance on the finality of confirmation orders by the bankruptcy court." In re Berryrnan, 159 F.3d 941, 944 (5th Cir. 1998). Here, no stay was obtained. Although Fleming argues that it attempted to obtain a stay, this Court and the Fifth Circuit denied its request. The Fifth Circuit has rejected the argument that attempts to obtain stays should protect appeals from dismissal. See In re CWI, 230 F.3d at 800, n. 25 ("[a] stay not sought, and a stay sought and denied, lead equally to the implementation of the plan of reorganization.") (quoting In re UNR Indus., 20 F.3d 766; 769-70 (7th Cir. 1994)); In re Berryman, 159 F.3d at 944 (same); In re Manges, 29 F.3d at 1040 (same). Therefore, this factor favors dismissal for mootness.
2. Substantial Consummation
Under the Bankruptcy Code, a plan has been substantially consummated when: (1) substantially all property the plan proposes to transfer is transferred; (2) the debtor assumes the business or management of substantially all of the property dealt with by the plan; and (3) distribution under the plan commences. 11 U.S.C. § 1101 (2); In re GWI, 230 F.3d at 801; In re Berryrnan, 159 F.3d at 945. The "substantial consummation" test informs a court's "judgment as to when finality concerns and the reliance interests of third parties upon the plan as effectuated have become paramount to a resolution of the dispute between the parties on appeal." Id. (quoting In re Manges, 29 F.3d at 104).
Here, substantially all of the property the plan proposes to transfer has been transferred. The debtor has transferred title to certain assets as provided in the Asset Purchase Agreement. Fleming and Heard argue that this is irrelevant because the transfers occurred prior to confirmation. See Fleming's Opp. Mot. to Dismiss at 7-8. The transfers to Fleet, however, were contingent on confirmation of the Plan. See Second Amended Plan at art. XIV. Further, Fleming and Heatd fail to provide the Court with any evidence that the, transfers were completed prior to confirmation. Regardless, the debtor has transferred all of the remaining assets of the estate, consisting of $919,842.22 in cash and the right to prosecute the debtor's claims against third-parties, to the Liquidation Agent.
Fleming and Heard argue that because the Plan contemplates liquidation there can be no successor to assume management of the property dealt with in the Plan for the purposes of satisfying the substantial consummation test. See Fleming's Opp. Mot. to Dismiss at 8-9. The Fifth Circuit's decision in In re Manges defeats appellants' argument. In In re Manges, the debtor's Chapter 11 plan created a liquidation trust to hold the debtor's assets for sale and distribution of the proceeds to the various creditors. See 29 F.3d at 1037. The Manges court found that "the liquidating trustees have assumed the business and management of all the property dealt with by the Plan," and the. court held that the plan was substantially consummated. Therefore, because the debtor's Liquidation Agent has assumed the business and management of all the property dealt with in the Plan, this aspect of the "substantially consummated" test is satisfied.
Regarding the last element of the "substantial consummation" test, Fleming and Heard argue that the evidence submitted by Fleet to demonstrate that the liquidation agent has commenced distributions under the plan is inadmissable under Federal Rules of Evidence 901 and 801. See Fleming's Opp. Mot. to Dismiss at 2-5; Heard's Opp. Mot. to Dismiss at 2. As the Manges court noted, "problems can arise . . . where the party opposing a motion to dismiss on mootness grounds contests the newly submitted evidence." 29 F.3d at 1041-42. In this case, however, just as in Manges, the Court need not address an evidentiary dispute over matters of little consequence. Here, the "centerpiece" of the plan has been completed; the terms of settlement between the debtor, Fleet, and the Official Unsecured Creditors Committee have been carried out. See id. In Manges, the court refused to address the disputed evidentiary issues because there was "no real controversy" about the sale of the ranch, the "centerpiece" of the litigation, and the key fact in the mootness determination. Id. Similarly, in this case, there is no real controversy regarding Fleet's payment of $2,375,000 to the debtor in exchange for the title transfers, the setting aside of $350,000 for the unsecured creditors, and the issuance of the "Finding" by the bankruptcy court. Rather, the evidentiary dispute involves proof that the Liquidation Agent made initial distributions under the Plan. The amount of these asserted distributions is de minimis and should not control the outcome of this appeal; See Fleming's Opp. Mot. to Dismiss at 9; Heard's Opp. Mot. to Dismiss at 2. Additionally, although distributions may or may not have begun, the debtor has fulfilled all of its obligations under the Plan. See In re Berryman, 159 F.3d at 945 (plan substantially consummated when debtor fulfilled all obligations allowed under plan). Therefore, the Court finds that the transactions that have taken place, the exchange of mutual releases, and the general implementation of the Plan by all involved parties evidence the substantial consummation of the Plan.
3. Effect on Third-Parties and Success of the Plan
"Substantial consummation of a reorganization plan is a momentous event, but it does not necessarily make it impossible or inequitable for an appellate court to grant effective relief." In re U.S. Brass, 169 F.3d 957, 961 (5th Cir. 1999) (quoting In re Manges, 29 F.3d at 1042-43). Rather, the Court must determine whether the plan has been implemented to the point that the removal of the settlement agreement between Fleet, debtor and the Official Unsecured Creditors' Committee would jeopardize the Plan's success. See id. Fleet maintains that the settlement is an essential element of the Plan, and its removal would be fatal to confirmation. Appellants contend, on the other hand, that reversing the Finding and the transfer of certain assets to Fleet would not unravel the Plan.
Section 14.1 of the plan expressly provides that certain events, including the approval of the FBCC Settlement, the entering of the "Finding" and the confirmation of an order implementing the Plan Agreement, are conditions precedent to confirmation of the plan. See Sec. Amend. Plan at art. XIV. "These settlements reflect the negotiations of the parties interested in the Chapter 11 case and the bargains they secured by voting in favor of the plan." In re U.S. Brass, 169 F.3d at 961. The provisions of the Plan support Fleet's argument that the challenged provisions are essential to the Plan's confirmation.
The Fifth Circuit's decision in In re U.S. Brass is instructive here. In In re U.S. Brass, plaintiffs settled a class action against a Chapter 11 debtor and other parties in interest. 169 F.3d at 958. The settlement was incorporated into the reorganization plan, and the plaintiffs were designated as Class 5 claimants under the plan. Id. Under the terms of the settlement, a bankruptcy trust was to pay the plaintiffs a greater percentage of their claims than other Class 5 claimants like ISC, the appellant. Id. After ISC appealed, Brass and Shell filed a motion to dismiss the appeal as moot. Id. One of ISC's arguments in defense of dismissal was that the relief it sought would affect only the settlement component of the plan. The court disagreed. It held that to remove the settlement from the plan would dismantle a substantially consummated plan. Id. at 962. Accordingly, the court dismissed the appeal as moot. Id.
Here, the Court finds that granting the appellants the relief they desire would remove a key ingredient of the Plan that cantot be removed without impacting on other vital ingredients. See id. Eliminating the "Finding" would destroy the settlement that led to the acceptance of the Plan, because it would allow Fleet to reclaim all the cash held by the Liquidation Agent and the money set aside for the unsecured creditors. In all, the "centerpiece" of the Plan, the settlement, would be eliminated. Therefore, the Court finds that the relief requested by Fleming and Heard would jeopardize the success of the Plan.
III. Conclusion
In sum, the Court finds that the appeals of Fleming and Heard are equitably moot. In the absence of evidence of wrongdoing by Fleet, the Court rejects appellants' arguments that equity favors denying dismissal. Accordingly, the appeals of Fleming and Heard are DISMISSED.