Opinion
Case No.: SA CV 21-cv-01961 AB Bkcy Case No. 8:20-bk-13335-MW/SC
12-05-2022
IN RE: HEARTWISE, INC.
Proceedings: [In Chambers] ORDER RE 1) APPELLEE HEARTWISE, INC.’S MOTION TO DISMISS BANKRUPTCY APPEAL [27]; AND 2) APPELLANT DAVIDPAUL DOYLE'S APPEAL FROM UNITED STATES BANKRUPTCY COURT [1, 23]
ANDRÉ BIROTTE JR., United States District Judge
I.
INTRODUCTION
This matter is before the Court on Appellee Heartwise, Inc.’s ("Appellee" or "Defendant" or "Heartwise" or "Debtor") Motion to Dismiss ("Motion" or "MTD") the bankruptcy appeal ("Appeal") of Appellant DavidPaul Doyle ("Appellant" or "Plaintiff" or "Doyle") for lack of jurisdiction. [Doc. Nos. 27, 1, 23.] The Court has considered the papers filed in support of and in opposition to the Motion, and deems this matter suitable for decision without oral argument. See Fed. R. Civ. P. 78(b) ; C.D. Cal. L.R. 7-15. For the reasons set forth below, the Appellee's Motion is GRANTED .
II.
JUDICIAL NOTICE
As an initial matter, before the Court is the Appellant's Motion to Modify the Record on Appeal. [Doc. No. 37.] The Appellant moves to modify the record on appeal or, in the alternative, requests that the Court take judicial notice of certain documents identified in the motion. Id. citing Fed. Rule Evid. 201(d) ; 201(b). The Appellant states that none of the documents requested "are outside the scope of the record before the Bankruptcy Court ... each of these documents were filed in the bankruptcy court's main action and/or related adversary proceeding." Id. at 6.
The Appellee does not oppose the Appellant's request to include Appellant's Amended Proof of Claim No. 6. Id. at 1; see also Declaration of Mark Foley at 4, [Doc. No. 38].
Under Federal Rule of Evidence 201, a "judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot be reasonably questioned." Fed. Rule Evid. 201(b). The Court GRANTS IN PART AND DENIES IN PART the Appellant's Motion to Modify the Record on Appeal. [Doc. No 37.] The Court DENIES the Motion to Modify the Record on Appeal but GRANTS the Appellant's request, in the alternative, to take judicial notice of the identified documents because court filings are proper subjects of judicial notice. Reyn's Pasta Bella, LLC v. Visa USA, Inc. , 442 F.3d 741, 746 n.6 (9th Cir. 2006) (courts may take judicial notice of "court filings" as they are "readily verifiable, and therefore, the proper subject of judicial notice").
III.
FACTUAL AND PROCEDURAL BACKGROUND
On May 10, 2012, Doyle founded Heartwise, Inc., an Oregon corporation. Appellant's Opening Brief ("AOB") at 9, [Doc. No. 23] citing Appellant's Excerpts of Record ("Appellant's ER") at AA0439, [Doc. Nos. 24; 25]. On December 4, 2020, Heartwise filed a voluntary petition for bankruptcy relief pursuant to Chapter 11 of the United States Bankruptcy Code. Id. at 10 citing Appellant's ER at AA043-84; see also Appellee's Excerpts of Record ("Appellee's ER") at 71-72, [Doc. No. 29]. The Debtor also filed Schedules and a Statement of Financial Affairs ("Schedules"). Appellee's Answering Brief ("AAB"), at 8, [Doc. No. 28] citing Appellant's ER at AA043-84. As of the date the petition was filed, and pursuant to the Schedules, the Debtor had two shareholders: 1) Earnesty LLC ("Earnesty") which held 51% of the shares in Debtor, and Appellant, who held 49% of the shares in Debtor. AOB at 10 citing Appellant's ER at AA0128-131. On March 20, 2021, Heartwise put forth a Chapter 11 plan of reorganization ("Plan"). AOB at 10 citing Appellant's ER at AA0261-275. The Plan proposed to pay in full creditors holding allowed claims as of the Plan's effective date. MTD at 4 citing Grimshaw Decl., Exh. 1 at 36-37. Doyle and VOL objected to the Plan. AAB at 9 citing Appellant's ER at AA028, AA0913-981. On May 10, 2021, Doyle commenced an Adversary Proceeding (Case No. 8:21-ap-01019). AOB at 10 citing Appellant's ER at AA0465-502.
Heartwise is a retailer and wholesaler of supplements, including multivitamins, probiotics, herbal blends, etc., and operates under the brand name "Naturewise®." Appellant's ER at AA0439; AA0495.
According to Appellee, the Debtor's liabilities exceeded its assets, thus rendering the Debtor insolvent. MTD at 4; AAB at 8 citing AA45, AA53. The cause of Debtor's insolvency was due, in part, to the entry of a judgment against Debtor and in favor of Vitamins Online, Inc. ("VOL") just prior to the filing of the bankruptcy petition. MTD at 4 citing Declaration of Matthew W. Grimshaw ("Grimshaw Decl."), Exhibit ("Exh.") 3 at 183-192; Exh. 1 at 36-37, [Doc. No. 27].
The Adversary Proceeding asserted, inter alia , that the Plan "was proposed to accomplish an unlawful squeeze-out of Doyle as a minority shareholder." AOB at 10 citing AA0465-502.
On September 9, 2021, Doyle filed a Notice of Intention to Withdraw Debtor's Proposed Plan of Reorganization and Initiate a Sale of the Debtor and Request to Revise Schedule ("Doyle Notice"). Id. citing Appellant's ER at AA0645-753. On September 15, 2021, the Bankruptcy Court held a hearing on a Motion to Dismiss or Stay the Adversary Proceeding and stayed the Adversary Proceeding until after the Plan Confirmation Hearing. AOB at 11, Appellant's ER at AA1755-56; AA1759-1760.
The Bankruptcy Court scheduled a trial on confirmation of the Plan to begin on November 10, 2021 ("Confirmation Trial"). AAB at 9 citing Appellant's ER at AA30-31; AA1195-1285; AA1335-1345. On November 10, 2021, prior to the start of the Confirmation Hearing and on the first day of the Confirmation Trial, Osman Khan ("Khan"), the Chief Financial Officer of creditor VOL, informed the Bankruptcy Court that he had purchased all of Doyle's claims against, rights and interest in the Debtor. AOB at 12; AAB at 9 citing Appellant's ER at AA1157-1186. The Bankruptcy Court therefore determined that Doyle was no longer a party in interest and prohibited him from presenting evidence and calling or cross-examining any witnesses during the Confirmation Trial ("Evidentiary Rulings"). AOB at 12; AAB at 9 citing Appellant's ER at AA1203-1212. The Bankruptcy Court, however, did allow Khan to present arguments that had been previously made by Doyle. AOB at 12-13; AAB at 9 citing Appellant's ER at AA1203-1212.
According to Khan, VOL's claims make up more than 90% of the claims in the Debtor's Chapter 11 bankruptcy case. Appellant's ER at AA1158.
On November 11, 2021, the second day of the Confirmation Trial, Doyle filed an Emergency Motion for Reconsideration ("Reconsideration Motion"). AOB at 13; AAB at 10 citing Appellant's ER at AA1187-1191; AA92-94. The Reconsideration Motion argued that, pursuant to Bankruptcy Rule 7025, Doyle or Kahn, his successor in interest, had a right to pursue the claims and objections previously asserted by Doyle. AOB at 13; AA1187-1191. On November 12, 2021, the Bankruptcy Court conducted a hearing and orally denied the Reconsideration Motion. AOB at 13; AAB at 10 citing Appellant's ER at AA1335-1345; Appellee's ER at 79-80. On November 16, 2021, the Confirmation Trial was completed, and on November 17, 2021, the Bankruptcy Court entered a written Order denying the Reconsideration Motion ("Reconsideration Order"). AAB at 10 citing Appellant's ER at AA1286-1289.
The motion was entitled Emergency Motion of DavidPaul Doyle Pursuant to LBR 9075 for Reconsideration of the Court's Order Denying DavidPaul Doyle's Participation in the Confirmation Hearing. AOB at 13; AAB at 10 citing Appellant's ER at AA1187-1191.
On December 17, 2021, the Bankruptcy Court entered the judgment resulting from the Confirmation Trial in its Order Confirming Heartwise, Inc.’s First Amended Chapter 11 Plan of Reorganization ("Confirmation Order"). Id. citing Appellee's ER at 44-68. The Bankruptcy Court submitted its Findings of Fact and Conclusions of Law on the same date. Id. citing Appellee's ER at 70-97.
On November 24, 2021, prior to the entry of the Confirmation Order, Appellant filed a Notice of Appeal and Statement of Election ("Notice of Appeal"). Id. citing Appellant's ER at AA1346-1392. The subjects of the Notice of Appeal were the Bankruptcy Court's Evidentiary Rulings and the Reconsideration Order. Id. at 10-11 citing Appellant's ER AA1347. In the Notice of Appeal, the Appellant specifically identifies the subject of the appeal as follows:
Mr. Doyle appeals from the November 10 and November 12, 2021 oral rulings and November 17, 2021 written order that denied Mr. Doyle's continued participation in the chapter 11 plan confirmation hearing, denied his objections to confirmation for lack of standing, precluded him from calling witnesses, introducing any evidence, arguing in support of his objections, or otherwise participating, prevented his successor-in-interest from pursuing Doyle's objections to confirmation or presenting Doyle's witnesses in opposition to confirmation, and denied his motion for reconsideration of these issues." Id. citing Appellant's ER at AA1347; see also Doc. No. 1.
Further, in the Appellant's Statement of Issues on Appeal filed on December 8, 2021, the issues specifically identified by the Appellant pertained to whether the Bankruptcy Court erred in its Evidentiary Rulings and Reconsideration Order. Id. at 11 citing Appellant's ER AA1776-1781. The Confirmation Order itself was not appealed and became final on January 3, 2022. Id. citing Appellant's ER at AA37-38; see discussion infra . On December 6, 2021, the Appellant filed a Motion for Stay Pending Appeal of the Evidentiary Rulings ("Stay Motion"). Id. at 12 citing Appellant's ER at AA1401-1490. The Stay Motion, which was opposed by the Debtor and several creditors, was denied by the Bankruptcy Court in the Confirmation Order. Id. at 12 citing Appellant's ER AA35-36; Appellee's ER at 57-63. The Appellant did not seek an additional stay pending the instant appeal. Id.
The Appellant filed a Notice of Appeal with this Court on November 30, 2021. [Doc. No. 1.] The Appellee filed the instant Motion to Dismiss ("MTD") on March 12, 2022. [Doc. No. 27.]
IV.
JURISDICTION
Appellate jurisdiction is proper here under Federal Rules of Bankruptcy Procedure, Rule 8005(a) and under 28 U.S.C. § 158(c)(1). Pursuant to the Federal Rules of Bankruptcy Procedure, Rule 8005(a), election may be made to have an appeal heard by the district court instead of the bankruptcy appellate panel. See Fed. R. Bankr. P. 8005(a). Similarly, pursuant to 28 U.S.C. § 158(c)(1), an appellant may elect to have an appeal from a bankruptcy court order heard by the district court. See 28 U.S.C. § 158(c)(1).
V.
DISCUSSION
A. Jurisdiction.
Before considering the merits of the Appellant's appeal, the Court must first determine whether it has jurisdiction over the appeal in this matter. Eden Place, LLC v. Perl ("In re Perl") , 811 F.3d 1120, 1125 (9th Cir. 2016) (citations omitted). The Appellee's Motion contends that the Court lacks jurisdiction to hear the appeal because there is no justiciable controversy. MTD at 1-3, passim. The Appellee argues that the appeal is impermissible because the Evidentiary Rulings and Reconsideration Order at issue are interlocutory in nature, and therefore the Appellant does not have standing to contest them. Id. at 2. In addition, the Appellee asserts that the appeal is constitutionally and equitably moot. Id. at 2-3. The Appellant argues that the rulings and order at issue "are final and appealable because they fully resolved the individual disputes between Doyle and Debtor." Opp'n at 1. The Appellant further argues that "[t]he order denying Doyle standing and overruling his objections on the merits was final because it resolved Doyle's substantive rights and finally determined a discrete issue." Id. at 6.
i) Finality.
The court has jurisdiction over final orders of the bankruptcy court but does not have discretion to hear appeals of interlocutory bankruptcy court orders. Lievsay v. Western Financial Savings Bank (In re Lievsay) , 118 F.3d 661, 662 (9th Cir. 1997). In making this determination, the court "must first look to the nature of the underlying bankruptcy court order" and "[i]f the underlying bankruptcy court decision is interlocutory, the ... order affirming or reversing it is also interlocutory." In re Lievsay , 118 F.3d at 662 citing Security Pac. Bank Wash. v. Steinberg (In re Westwood Shake & Shingle, Inc.) , 971 F.2d 387, 389 (9th Cir. 1992).
Only " ‘final’ orders of a bankruptcy court" are subject to immediate appeal. Bullard v. Blue Hills Bank , 575 U.S. 496, 500, 135 S.Ct. 1686, 191 L.Ed.2d 621 (2015) citing 28 U.S.C. § 158(a)(1). Pursuant to 28 U.S.C. § 158(a), "[t]he district courts of the United States shall have jurisdiction to hear appeals (1) from final judgments, orders, and decrees; ... and (3) with leave of the court, from other interlocutory orders and decrees." Accordingly, "only ‘final’ rulings of the bankruptcy court may be appealed as of right." In re Frontier Properties, Inc. , 979 F.2d 1358, 1362 (9th Cir. 1992). "A final decision is one that ‘ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.’ " Id. quoting Catlin v. United States , 324 U.S. 229, 233, 65 S.Ct. 631, 633, 89 L.Ed. 911 (1945) ; see 9 James W. Moore et al., Moore's Federal Practice ¶ 110.08[1] (2nd ed. 1990) (final judgment "disposes of the entire litigation ... or ... disposes of a complete claim for relief or all the claims of a party").
The Ninth Circuit has adopted a "pragmatic approach to finality in bankruptcy [which] focuses on whether the decision appealed from effectively determined the outcome of the case." In re Frontier Properties, Inc. , 979 F.2d 1358, 1363 (9th Cir. 1992) (internal quotations and citations omitted). "A final order has been defined as follows: ‘A decision which finally determines the rights of parties to secure in that suit the relief they seek is a ‘final decision.’ " In re Merle's Inc. , 481 F.2d 1016, 1018 (9th Cir. 1973) (citation omitted); see also Young Properties Corp. v. United Equity Corp. , 534 F.2d 847, 851 (9th Cir. 1976). An order "is final because it finally determines the rights of the parties." Id. According to the Ninth Circuit, "a bankruptcy order is appealable where it 1) resolves and seriously affects substantive rights and 2) finally determines the discrete issue to which it is addressed." In re Frontier Properties, Inc. , 979 F.2d at 1363 citing In re Allen , 896 F.2d 416, 418-19 (9th Cir. 1990). Lastly, "[t]raditional finality concerns still dictate, however, that ‘[w]e avoid having a case make two complete trips through the appellate process.’ " Id. quoting In re Vylene Enters. , 968 F.2d 887, 895 (9th Cir.1992).
An interlocutory order "is one which does not finally determine a cause of action but only decides some intervening matter pertaining to the cause, and which requires further steps to be taken in order to enable the court to adjudicate the cause on the merits." In re Merle's Inc. , 481 F.2d at 1018 (citations omitted); see also Young Properties Corp. , 534 F.2d at 851. Pursuant to the Ninth Circuit, the court "does not have discretion to hear interlocutory appeals under section 158(d)." In re Lievsay , 118 F.3d at 662 citing In re Westwood Shake & Shingle, Inc. , 971 F.2d at 389. In addition, "[t]he final judgment rule was designed to prevent piecemeal litigation, conserve judicial energy, and eliminate delays caused by interlocutory appeals ... [t]he case is not to be sent up in fragments." In re Frontier Properties, Inc. , 979 F.2d at 1362 (internal quotations and citations omitted). In Bullard v. Blue Hills Bank , the Supreme Court explained the rationale behind the rule of finality:
Avoiding ... delays and inefficiencies is precisely the reason for a rule of finality. It does not make much sense to define the pertinent proceeding so narrowly that the requirement of finality would do little work as a meaningful constraint on the availability of appellate review. 575 U.S. at 504, 135 S.Ct. 1686.
ii) The Confirmation Order.
Pursuant to 28 U.S.C. § 158(c)(2), the time frame allowed for appeals to be taken under this section is governed by Rule 8002 of the Bankruptcy Rules. Federal Rules of Bankruptcy Procedure, Rule 8002(a)(1) states that, "a notice of appeal must be filed with the bankruptcy clerk within 14 days after entry of the judgment, order, or decree being appealed." Here, the Confirmation Order was entered on December 17, 2021, and was not appealed by the Appellant or any other party. AAB at 10 citing Appellee's ER at 44-68; MTD at 6. Accordingly, the Confirmation Order became final on January 3, 2022. MTD at 6-7. Further, the additional mechanism of obtaining leave of court to pursue an interlocutory appeal was not sought by the Appellant. AAB at 3; see 28 U.S.C. § 158(a)(3).
Although the Court has attempted to discern a rationale behind the Appellant's decision not to appeal the Confirmation Order itself, the only insight provided directly by the Appellant is as follows:
The bankruptcy court denied Doyle's Motion to Stay the Effective Date pending appeal on December 17, 2021. The Plan Effective Date was January 3, 2022. Grimshaw Appendix Ex. 5. Because of the intervening holidays, it was not feasible for Doyle to brief, much less for the District Court to decide a second motion for stay before the Effective Date. Regardless, the Debtor was on notice of the appeal. Opp'n at 11.
The Appellee, however, offers its own hypothesis which is as follows:
Doyle (as controlled by Khan) made a tactical decision not to appeal the Confirmation Order. The reason for that decision was explained at a hearing in the Bankruptcy Court on January 24, 2022. In short, VOL (and Khan) believed that the $14.5 million in the Bankruptcy Court's registry could be obtained without waiting for the conclusion of the Tenth Circuit appeal. It cannot. Now, Doyle (as controlled by Khan) is unhappy with the consequences of that decision. Appellee's Reply at 20 citing Grimshaw Decl., Exh, 11 at 511-517, Exh. 1 at 36-37.
On January 24, 2022, counsel for VOL stated the following in a hearing before the Bankruptcy Court:
[I]t's Vitamins Online's understanding that the confirmation order does not require a reservation of those funds in the Court's registry until the appeals are concluded before the Tenth Circuit. Otherwise, Vitamins Online would have had every reason to appeal the confirmation order because it stood no chance to be paid that 14.5 million dollars in short order while pursuing its cross appeals as the Court's confirmation order stated. Grimshaw Decl., Exh, 11 at 511-517.
The Court does not offer an opinion as to the internal legal strategy of the parties.
The Appellee claims that the "Appellant is impermissibly attempting to use this appeal to collaterally attack the Confirmation Order" and that the "Confirmation Order finally adjudicated the issues underlying the evidentiary rulings that are the subject of this appeal." Id. at 2. The Appellee argues that the Evidentiary Rulings at issue are not final orders and are therefore not appealable because "they did not fully adjudicate any matter." MTD at 2. The Appellee further argues that, "[h]ere, the Evidentiary Rulings and Reconsideration Order did not dispose of litigation or constitute a complete claim for relief." Id. at 13.
The Appellant argues that "[t]he orders denying Doyle's standing and, consequently, overruling his Plan objections on the merits, is a final decision as to his rights and interests." Opp'n at 6. In support of this argument the Appellant states that these rulings "deprived Doyle of the ability to prevent confirmation of a Plan that extinguished equity value of $10-to-$20 million without compensation" and, therefore, "[t]hat is sufficient finality to appeal a bankruptcy Order." Opp'n at 1. In addition, the Appellant states that, "[h]e lost the right to stop the Debtor's illegal and fraudulent Plan and retain control of the Company or cash out millions of dollars of equity value." Id.
a) Finality in Civil Litigation Versus Bankruptcy.
The Appellant articulates that the "standard for finality of a bankruptcy order differs from the standard for orders in civil litigation." Opposition at 5. The Appellant cites to Eden Place, LLC v. Perl ("In re Perl") and Bullard v. Blue Hills Bank ("Bullard") where the difference between finality in civil litigation versus in the bankruptcy context is discussed. The Ninth Circuit states in In re Perl that, for purposes of jurisdiction, "[i]n an ordinary civil case, a party may appeal the district court's judgment only under 28 U.S.C. § 1291 and only if the decision ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." In re Perl , 811 F.3d 1120 at 1125-26 (citations and internal quotation marks omitted).
The Appellee does not dispute this assertion as a general principle.
Conversely, for purposes of appeal in bankruptcy litigation, the Supreme Court defines finality as follows:
The rules are different in bankruptcy. A bankruptcy case involves "an aggregation of individual controversies," many of which would exist as stand-alone lawsuits but for the bankrupt status of the debtor. Accordingly, "Congress has long provided that orders in bankruptcy cases may be immediately appealed if they finally dispose of discrete disputes within the larger case." ... The current bankruptcy appeals statute reflects this approach: It authorizes appeals as of right not only from final judgments in cases but from "final judgments, orders, and decrees ... in cases and proceedings." Bullard , 575 U.S. at 501-502, 135 S.Ct. 1686 citing § 158(a) (internal citations omitted).
The Appellee acknowledges the "flexibility of the finality test for certain types of bankruptcy court orders," but argues that, in the instant case, this added flexibility "does not alter the interlocutory nature of a bankruptcy court's evidentiary rulings." MTD at 12; AAB at 17. The Appellee posits that "the Bankruptcy Court issued the equivalent of an in limine order regarding Appellant's lack of standing, and therefore, his inability to present evidence at the Confirmation Trial." MTD at 1. Furthermore, the Appellee explains, in most instances, the type of evidentiary rulings at issue here "are reviewed by an appellate court in connection with its review of the order resolving the proceeding to which the evidence relates." Id. at 12-13 citing see e.g., Lee-Benner by & through Mills v. Gergely (In re Gergely) , 110 F.3d 1448 (9th Cir. 1997) (evidentiary rulings of the bankruptcy court were reviewed for abuse of discretion concurrently with an appeal of a judgment pursuant to § 523(a)(4)). Accordingly, the Appellee states, "[t]he finality test's flexibility does not allow for a separate appeal of each evidentiary ruling." Id. at 13.
The Appellant contends that the Appellee "wrongly characterizes the appealed orders as in limine ‘evidentiary rulings.’ " Opp'n at 7. In support of this contention the Appellant states that, "[t]o the contrary, [sic] Court recognized that Doyle had done everything necessary to proffer testimony at the confirmation hearing." Id. The Appellant further contends that "[r]elevant cases hold that a dismissal for lack of standing is a final order" and then relies on several non-binding cases out of the Sixth and First Circuits. Opp'n at 6-7.
See e.g., Schwab v. Oscar (In re SII Liquidation Co.) , 517 B.R. 72, 76 (6th Cir. BAP 2014) ; In re Blasingame , 585 B.R. 850, 853 (B.A.P. 6th Cir. 2018), aff'd , 920 F.3d 384 (6th Cir. 2019) ; Hamilton v. Appolon (In re Hamilton) , 399 B.R. 717, 720 (1st Cir. BAP 2009).
The Court agrees with the Appellee's characterization of the rulings by the Bankruptcy Court as equivalent to orders pertaining to motions in limine , and therefore not considered final for purposes of appeal. The Ninth Circuit in Coursen v. A.H. Robins discusses the rationale behind denying the right to appeal in limine orders by stating, "[t]he rationale underlying the denial of a right to appeal in limine rulings is obvious. In limine rulings are by their very nature preliminary." 764 F.2d 1329, 1342 (9th Cir. 1985). Here, the denial of Appellant's standing, exclusion of his evidence, and overruling of his objections were all "by their very nature preliminary" and a precursor to the heart of the proceedings which was the Confirmation Trial. Id. It necessarily follows that the reason why, as the Appellee articulates, in most cases these kinds of evidentiary rulings "are reviewed by an appellate court in connection with its review of the order resolving the proceeding to which the evidence relates" is precisely because of the inherently preliminary nature of such rulings.
The Court finds the analysis in In re Frontier Properties, Inc. , instructive on this point as well. 979 F.2d 1358, 1362 (9th Cir. 1992). The Ninth Circuit explained:
[W]here an issue is determined in an interlocutory order and later incorporated into a final order, the determination of the original issue is appealable upon an appeal of the final order, thereby providing the district court with an " ‘ultimate review on all the combined issues.’ " In re Stanton , 766 F.2d 1283, 1287–88 (9th Cir.1985) (citations omitted); see Baldwin v. Redwood City , 540 F.2d 1360, 1364 ([9th Cir.] 1976) ("[A]n interlocutory appeal is permissive, not mandatory. When an appeal is not taken, the interlocutory order merges in the final judgment and may be challenged in an appeal from that judgment."), cert. denied ,
431 U.S. 913, 97 S.Ct. 2173, 53 L.Ed.2d 223 (1977). Id. at 1364.
iii) Eden Place, LLC v. Perl ("In re Perl").
The Appellant cites to In re Perl in support of his contention that the Bankruptcy Court's rulings were final orders and are therefore properly appealable. Opp'n at 6. The Appellant argues that, "[a]fter two oral rulings and a written decision denying reconsideration, ‘Resolution of [Doyle's] issue is as final as it will ever be in this case.’ " Id. quoting In re Perl , 811 F.3d at 1127. The Court in In re Perl explains that the Ninth Circuit has "adopted a pragmatic approach" for determining what constitutes an appealable order in bankruptcy proceedings. In re Perl at 1125.
The Ninth Circuit acknowledges, however, that "[o]ur precedent has not been entirely pellucid regarding the flexible concept of finality in the bankruptcy context." Id. at 1126.
In re Perl involved an appeal from the Bankruptcy Appellate Panel ("BAP") affirming the bankruptcy court's determination that by evicting the debtor from a residential property, Eden Place was in violation of the automatic stay provisions of the Bankruptcy Code. In re Perl , 811 F.3d at 1123-24. The Court held that the order of the bankruptcy court finding that the purchaser had violated the automatic stay was a final and appealable order, even though a financial penalty or sanction had yet to be assessed. Id. The Court reasoned:
The bankruptcy court's order determined the discrete issue of whether there was a stay violation, which was the only issue litigated in the bankruptcy proceedings and before the BAP. As a practical matter, resolution of this issue resolved the entire case and thereby qualifies as a final decision under our pragmatic approach to finality in the bankruptcy context.... [T]he ruling by the bankruptcy court that Eden Place violated the automatic stay resolved the only issue in the case , and seriously affected substantive rights related to damages. There is no question that the discrete issue addressed by the bankruptcy court—violation of the automatic stay—has been definitively and finally resolved. Resolution of that issue is as final as it will ever be in this case. Id. at 1127 (citations omitted) (emphasis added).
The Court finds In re Perl distinguishable from the case at hand. Here, unlike In re Perl , the rulings in question were not the only issues litigated in the bankruptcy proceeding nor did they serve to resolve the entire case. The Bankruptcy Court orders pertained to the Appellant's participation in the proceedings involving the confirmation process, but did not address plan reorganization itself, which was ultimately adjudicated via the Confirmation Order. Accordingly, the orders in question were tangential to the central issues of the case which consisted of reorganization and plan confirmation. Further, the Confirmation Order, and not the Evidentiary Rulings by the Bankruptcy Court, served to resolve the case in its entirety. Id. The pertinent "discrete issue" before the Court, namely the confirmation, or lack thereof, of the reorganization Plan, was not "definitively and finally resolved" until the Confirmation Trial and subsequent Confirmation Order. Id. Accordingly, even under the more flexible "pragmatic approach" articulated in In re Perl , the Court does not find that the rulings qualify as final decisions. Id. at 1125.
iv) Bullard v. Blue Hills Bank ("Bullard").
The Supreme Court has provided instruction on evaluating the nature of a judgment in the bankruptcy context in determining whether it is interlocutory or final. See Bullard , 575 U.S. 496, 135 S.Ct. 1686. In Bullard , the debtor Bullard filed for Chapter 13 bankruptcy, proposed a repayment plan that was objected to by the creditor bank, and the bankruptcy court denied confirmation of the plan. Id. The BAP affirmed the bankruptcy court and the Court of Appeals for the First Circuit dismissed the appeal for lack of jurisdiction. Id. The Supreme Court affirmed on the basis that the denial of plan confirmation was not a final order within the meaning of § 158(a). Id. The Court focused on what constitutes an "immediately appealable proceeding" for purposes of ascertaining finality within the bankruptcy context. Id. at 502, 135 S.Ct. 1686.
The Court stated that, "Congress has long provided that orders in bankruptcy cases may be immediately appealed if they finally dispose of discrete disputes within the larger case.... The current bankruptcy appeals statute reflects this approach: It authorizes appeals as of right not only from final judgments in cases but from ‘final judgments, orders, and decrees ... in cases and proceedings.’ " Id. at 501-502, 135 S.Ct. 1686 quoting § 158(a).
The Supreme Court reasoned that, "confirmation is appealable because it resolves the entire plan consideration process, and that therefore the entire process is the ‘proceeding.’ " Id. at 506, 135 S.Ct. 1686. The Supreme Court further reasoned that, conversely, "[a] decision that does not resolve the entire plan consideration process—denial—is therefore not appealable." Id. While acknowledging the existence of an inherent imbalance in this analysis, the Supreme Court articulated that, "any asymmetry in this regard simply reflects the fact that confirmation allows the bankruptcy to go forward and alters the legal relationships among the parties, while denial does not have such significant consequences." Id. The Supreme Court held:
In recognizing that the consequences of their ruling would likely create some "unappealing" scenarios, the Supreme Court explained that, "our litigation system has long accepted that certain burdensome rulings will be ‘only imperfectly reparable’ by the appellate process." Id. at 507, 135 S.Ct. 1686 (citations omitted).
The relevant proceeding is the process of attempting to arrive at an approved plan that would allow the bankruptcy to move forward. This is so, first and foremost, because only plan confirmation—or case dismissal—alters the status quo and fixes the rights and obligations of the parties. When the bankruptcy court confirms a plan, its terms become binding on debtor and creditor alike. Confirmation has preclusive effect, foreclosing relitigation of any issue actually litigated by the parties and any issue necessarily determined by the confirmation order. Id. at 502, 135 S.Ct. 1686 (internal quotations and citations omitted).
In providing a rationale for its decision to place parameters on the notion of finality within the bankruptcy context, the Bullard Court cited to concerns about inefficiency and piecemeal litigation. The Court stated:
[E]ach climb up the appellate ladder and slide down the chute can take more than a year. Avoiding such delays and inefficiencies is precisely the reason for a rule of finality. It does not make much sense to define the pertinent proceeding so narrowly that the requirement of finality would do little work as a meaningful constraint on the availability of appellate review. Id. at 504, 135 S.Ct. 1686.
The Ninth Circuit analyzed the impact of the Bullard decision on interpreting "the scope of jurisdiction granted by § 158." See Gugliuzza v. Federal Trade Commission (In re Gugliuzza ), 852 F.3d 884 (9th Cir. 2017). The Court explained:
Efficiency is best served by our review of the district court's resolution of the dispute between the parties as a whole ... not our review of the individual elements of a dispute. Any efficiency gained by the potential for clarification of the scope of the bankruptcy court's fact-finding mission on remand is outweighed by the near certainty of piecemeal appeals that result, especially given that this argument could be made with respect to interim review of an "endless" list of matters. Id. at 899 citing In re Landmark Fence Co., Inc. , 801 F.3d 1099, 1103 (9th Cir. 2015).
The circumstances of the instant case are analogous to Bullard in several ways. Here, the Evidentiary Rulings and Reconsideration Order of the Bankruptcy Court, like the denial of the confirmation plan, do not constitute a "proceeding" within the definition of finality in Bullard. These rulings did not "resolve[ ] the entire plan consideration process," nor did they facilitate or otherwise "allow the bankruptcy to move forward." Id. at 502, 506, 135 S.Ct. 1686. And, like the denial of the confirmation plan in Bullard , allowing a review of the rulings at issue would only serve to broaden the scope of finality that the Supreme Court was clearly attempting to constrain via the Bullard decision. Defining the "pertinent proceeding" to include a piecemeal analysis of one individual, non-party in interest's inability to participate in a Confirmation Trial, would fail to serve as any type of "meaningful constraint on the availability of appellate review" as intended by Bullard.
v) Ritzen Group, Inc. v. Jackson Masonry, LLC ("Ritzen").
Ritzen Group, Inc. v. Jackson Masonry, LLC ("Ritzen") is the most recent decision in the line of cases that examines the issue of finality in the bankruptcy context and further develops the holdings of the Supreme Court in Bullard. Ritzen involved a contract in which Ritzen Group, Inc. ("Ritzen") made an agreement to buy land from Jackson Masonry, LLC ("Jackson") but the sale was not consummated. ––– U.S. ––––, 140 S.Ct. 582, 587, 205 L.Ed.2d 419 (2020). As a result, Ritzen sued Jackson in Tennessee state court for breach of contract. Id. When Jackson filed for bankruptcy protection under Chapter 11, the petition triggered an automatic stay of the state court litigation under 11 U.S.C. § 362(a). Id. Pursuant to § 362(d), Ritzen filed a motion for relief from the automatic stay which was denied by the bankruptcy court after a hearing. Id. The order was not appealed by Ritzen. Id. Subsequently, the bankruptcy court confirmed Jackson's reorganization plan. Id. at 588. Next, Ritzen filed an appeal of the denial of relief from the automatic stay in the district court, which was denied by the bankruptcy court as untimely. Id. The district court dismissed the appeal of the relief from stay order as untimely, and the Sixth Circuit Court of Appeals affirmed. Id. The Supreme Court held that an order by the Bankruptcy Court dispositively denying relief from an automatic stay constitutes a final, immediately appealable order pursuant to § 158(a)(1). Id. at 586. The Court stated, "[w]e hold that the adjudication of a motion for relief from the automatic stay forms a discrete procedural unit within the embracive bankruptcy case. That unit yields a final, appealable order when the bankruptcy court unreservedly grants or denies relief." Id.
In analyzing the applicability of the finality requirement of § 158(a), the Supreme Court looked to their opinion in Bullard for guidance. Id. at 588. In Bullard , as previously discussed, the Court found that bankruptcy court orders are considered final and immediately appealable if they "dispose of discrete disputes within the larger [bankruptcy] case." Id. at 587 quoting Bullard at 501, 135 S.Ct. 1686. The Court stated that "a bankruptcy court's order rejecting a proposed plan was not ‘final’ under § 158(a) because it did not conclusively resolve the relevant "proceeding." Id. citing Bullard at 499, 135 S.Ct. 1686. Justice Ginsburg identified the relevant inquiry in Ritzen , derived from Bullard , as "how to define the immediately appealable ‘proceeding’ in the context of [stay-relief motions]." Id. at 589. In identifying the stay-relief motion as the applicable ‘proceeding’ in the analysis, the Court stated that "[a] bankruptcy court's order ruling on a stay-relief motion disposes of a procedural unit anterior to, and separate from, claim-resolution proceedings." Id. The Court reasoned:
Adjudication of a stay-relief motion ... occurs before and apart from proceedings on the merits of creditors’ claims: The motion initiates a discrete procedural sequence, including notice and a hearing, and the creditor's qualification for relief turns on the statutory standard, i.e. , "cause" or the presence of specified conditions.... Resolution of stay-relief motions does not occur as part of the adversary claims-adjudication process, proceedings typically governed by state substantive law. Under Bullard , a discrete dispute of this kind constitutes an independent "proceeding" within the meaning of 28 U.S.C. § 158(a). Id. at 589 citing Bullard at 502-505, 135 S.Ct. 1686 (internal citations omitted).
In the context of the analysis in Ritzen as guided by Bullard , this Court must determine whether the rulings by the Bankruptcy Court at issue are "a discrete dispute" thus constituting "an independent ‘proceeding’ within the meaning of 28 U.S.C. 158(a)." Id. The Appellant argues:
[T]he discrete issue is Doyle's standing to participate in the confirmation hearing after transfer of his claims and interest to Khan. This discrete dispute began with the notice that Khan had acquired Doyle's interests, followed by the court's decision that Doyle no longer had standing to appear and be heard. Appellant's Reply at 2.
This Court disagrees and finds the rulings by the Bankruptcy Court to be an integral part of and not "anterior to, and separate from" the confirmation process. Ritzen at 589. Accordingly, the rulings, unlike in Ritzen , do not form "a discrete procedural unit within the embracive bankruptcy case." Id. at 586. An important distinction the Ritzen Court makes is as to the "discrete procedural sequence" of the process of adjudicating a stay relief motion. Id. at 589. The Court found that these types of motions are distinct and "cannot be considered part of any subsequent claim adjudication." Id. at 591. This distinction is illustrative and distinguishable from the instant case. Not only were the rulings by the Bankruptcy Court germane to the process of Plan confirmation, they constituted an intrinsic prelude to and component of the Confirmation Trial and subsequent Confirmation Order. As such, their dispute does not constitute a discrete, independent proceeding within the meaning of 28 U.S.C. § 158(a). Id. at 589. Furthermore, and for the same reasons, the rulings clearly can be "considered part of [a] subsequent claim adjudication," namely, the Confirmation Trial. Id. at 591. Thus, because the applicable "proceeding" here is the Confirmation Trial, the Bankruptcy Court's orders denying Doyle's participation in the Trial are not "final." Id. at 592. The orders at issue did not end the Confirmation Trial or process, nor did they "leave nothing more for the Bankruptcy Court to do in that proceeding." Id. The rulings of the Bankruptcy Court were prefatory to the relevant proceeding which was the Confirmation Trial itself.
vi) Bankruptcy Court Findings.
In the Bankruptcy Court's analysis of Appellant's entitlement to standing to contest the Evidentiary Rulings and Reconsideration Order, the Honorable Mark S. Wallace found that Doyle did not have standing to appeal the orders because "the Participation Denial Order is an interlocutory order, not a final order, and therefore is not subject to appeal." Confirmation Order, Appellee's ER at 58. In discussing the rationale for denying the Appellant's motion for stay pending the instant appeal the Bankruptcy Court stated:
The Bankruptcy Court refers to these as the "Participation Denial Order." Appellee's ER at 57.
Lacking any cognizable interest in Heartwise that would qualify him as a "party in interest" within the meaning of Bankruptcy Code section 1109 (entitled, appropriately enough, "Who May Be Heard") or Bankruptcy Code section 1128(b), Mr. Doyle seeks to bring to a screeching halt the entire Plan confirmation process which importantly affects parties who do have an interest in this case. Such bona fide parties in interest – unlike Mr. Doyle – have claims against Heartwise that are to be paid 100 cents on the dollar (plus postpetition interest) when the Plan goes effective. Intuitively, it would seem that a person who has absolutely no interest of any kind in a chapter 11 debtor should not be permitted to derail a plan of reorganization proposing to pay all creditors holding allowed claims 100 cents on the dollar plus postpetition interest on the plan's effective date. Intuition does not always translate into a correct legal conclusion, but in this instance it does .... Appellee's ER at 57.
The Bankruptcy Court further stated:
One of the purposes of the final order rule is to prevent piecemeal appeals that burden appellate courts where there is a possibility that the entire matter may become moot because of subsequent developments in the case. Bullard v. Blue Hills Bank , 575 U.S. [496], 135 S. Ct. 1686 (2015) (" ... [p]ermitting piecemeal, prejudgment appeals ... undermines ‘efficient judicial administration ..."). For example, appellate litigation concerning a defendant's objection to a protective order precluding a deposition becomes useless and pointless if the trial court subsequently awards judgment in favor of the defendant ... Similar circumstances are present here. Mr. Doyle objected to confirmation of the Plan. The Court then entered the Participation Denial Order. The Court followed this up with a hearing on Plan confirmation. Had the Court decided that the Plan should not be confirmed, Mr. Doyle would not be prosecuting this particular appeal. This shows that the "final order" in question here is this Confirmation Order, not the Participation Denial Order ... Mr. Doyle's ultimate rights are not altered until the Court confirms the Plan – and thus the "final order" is this Confirmation Order, not the earlier Participation Denial Order. Id. at 58-59.
This Court agrees with the Bankruptcy Court's conclusions and finds that, because the Evidentiary Rulings and Reconsideration Order were interlocutory in nature, the relevant order to be appealed should have been the Confirmation Order. Accordingly, and in light of the foregoing analysis, the Court finds that the Appellant lacks standing to contest the appeal. Consequently, because there is no justiciable controversy, the Court lacks jurisdiction to hear the appeal.
B. Mootness.
There are two circumstances in which a bankruptcy appeal is rendered moot. Rev Op Group v. ML Manager LLC ("In re Mortgages Ltd.") , 771 F.3d 1211, 1214 (9th Cir. 2014) citing Motor Vehicle Casualty Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.) , 677 F.3d 869 (9th Cir. 2012) (" Thorpe "). The first circumstance is constitutional mootness and is derived from Article III of the Constitution, and the second is equitable mootness derived from equity. Id.
The Appellee contends that the Court lacks jurisdiction to hear the Appeal due to both constitutional and equitable mootness. MTD at 16-17; AAB at 1. The Appellee argues that, "[b]ecause the Confirmation Order is final and not subject to appeal, the issues in this appeal are moot." AAB at 2. The Appellant, however, argues that the appeal is not moot because there are still possible remedies that can be afforded from the appellate process. Appellant's Reply at 4.
i) Constitutional Mootness.
It is well settled that "[t]he jurisdiction of federal courts is limited to actual cases and controversies." Thorpe , 677 F.3d at 880 citing U.S. Const. art. III, § 2, cl. 1. "The inability of the federal judiciary ‘to review moot cases derives from the requirement of Art. III of the Constitution under which the exercise of judicial power depends upon the existence of a case or controversy.’ " DeFunis v. Odegaard , 416 U.S. 312, 316, 94 S.Ct. 1704, 40 L.Ed.2d 164 (1974) (citations omitted). Federal courts do not have jurisdiction to review "moot questions ... or to declare principles or rules of law which cannot affect the matter in issue in the case before it." Forest Guardians v. Johanns , 450 F.3d 455, 461 (9th Cir. 2006) (citations omitted). A claim is considered moot "if it has lost its character as a present, live controversy." Id. quoting Am. Rivers v. Nat'l Marine Fisheries Serv. , 126 F.3d 1118, 1123 (9th Cir. 1997). The burden of establishing that the court cannot fashion any effective relief lies with the party claiming mootness. Id. citing S. Or. Barter Fair v. Jackson County , 372 F.3d 1128, 1134 (9th Cir. 2004). This is a heavy burden; "a case is not moot where any effective relief may be granted." Id. citing Northwest Envtl. Defense Ctr. v. Gordon , 849 F.2d 1241, 1244 (9th Cir. 1988) (internal quotations omitted). If it is impossible for a Court to "grant ‘any effectual relief whatever,’ " a case or controversy no longer exists, and an appeal is rendered constitutionally moot. Church of Scientology of Cal. v. United States , 506 U.S. 9, 12, 113 S.Ct. 447, 121 L.Ed.2d 313 (1992) quoting Mills v. Green , 159 U.S. 651, 653, 16 S.Ct. 132, 40 L.Ed. 293 (1895).
The Appellee argues that it is impossible for the Court to grant the Appellant relief because "the remedy requested by Doyle is not available to him." MTD at 17. The Appellee states that the relief requested is unavailable because "[t]he Confirmation Order is now final and not subject to challenge," therefore, any "order from this Court directing the Bankruptcy Court to consider Doyle's objections to the Plan cannot, and will not, alter the terms of the Confirmation Order." Id. The Appellant argues that "[t]his appeal is not constitutionally moot because it is not impossible for the Court to grant Appellant relief." Opp'n at 8; see also Appellant's Reply at 4 citing Church of Scientology of Cal. v. United States , 506 U.S. 9, 12, 113 S.Ct. 447, 121 L.Ed.2d 313 (1992). The Appellant cites to In re Mortgages Ltd. in support of his contention that "[w]hen the question is constitutional mootness, the Court has the power to provide a remedy even if this required reversal of plan confirmation or modifications of the plan." MTD at 9 citing In re Mortgages Ltd. , 771 F.3d at 1214-15.
On the question of mootness, the Thorpe case is conclusive. 677 F.3d 869. In Thorpe , the debtors, companies that installed asbestos installation products, sought bankruptcy protection under Chapter 11. Id. at 876. The bankruptcy court, applying § 524(g) of the Bankruptcy Code, a provision specifically involving companies facing liability arising out of asbestos installation, confirmed the plan of reorganization. Id. The district court affirmed on the basis that the non-settling insurers did not have standing to challenge the plan. Id. The Ninth Circuit reversed and remanded on appeal holding that the insurers did have standing and that the appeal was not constitutionally or equitably moot. Id. In reaching its conclusion the Thorpe Court reasoned:
The test for mootness of an appeal is whether the appellate court can give the appellant any effective relief in the event that it decides the matter on the merits in his favor. If it can grant such relief, the matter is not moot. We conclude that the appeal is not constitutionally moot because we could reverse plan confirmation or require modification of the plan, thereby giving relief to Appellants. Thorpe at 880 (internal quotations and citations omitted) (emphasis added).
The determination of constitutional mootness turns on the issue of impossibility. Specifically, if it is "still possible to fashion some relief," an appeal is not constitutionally moot, even if "[s]uch relief might be difficult or inequitable." Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC) , 391 B.R. 25, 33 (9th Cir. BAP 2008). Here, the Court has concluded that the Appellant lacks standing and therefore the Court does not have jurisdiction to consider the appeal. See discussion supra. Accordingly, although it would be difficult to grant the Appellant the requested relief, it would, however, be conceivably possible, as in Thorpe , to "reverse plan confirmation or require modification of the plan." Thorpe at 880. Moreover, because it is not impossible to fashion relief, although it would be burdensome, and because the Court could theoretically "give the appellant any effective relief in the event that [we] decide[ ] the matter on the merits in [its] favor," the Court finds that the appeal is not constitutionally moot. In re Mortgages, Ltd. at 1214 quoting Thorpe , 677 F.3d at 880.
The Appellant raises the issue of Claim No. 6 in his Opposition and states that, "[t]he Court could provide the remedy of deciding the claims or abstaining to permit the claim to be pursued in state court." Opp'n at 9-10. The Court notes that the Appellant is not precluded from pursuing the allegations of Claim No. 6 in Oregon state court. Grimshaw Decl. Exh. 1 at 43.
ii) Equitable Mootness.
Next, the Court examines the doctrine of equitable mootness as it relates to the notion of finality. Equitable mootness occurs when the circumstances of a case have been altered so substantially as to render the consideration of the merits of an appeal inequitable. See Rev Op Group v. ML Manager LLC (In re Mortgages Ltd.) , 771 F.3d 1211, 1214 (9th Cir. 2014). A critical aspect of this doctrine also involves the issue of reliance on the bankruptcy order by "debtors, creditors, and third parties." Id. at 1215 citing Thorpe at 880. The Court finds the Ninth Circuit's discussion of the difference between ‘real’ versus ‘equitable mootness’ in In re Mortgages Ltd. instructive. The Ninth Circuit explained:
Even when we could entirely reverse plan confirmation or wholly modify the plan, and thus the appeals are not constitutionally moot, we can dismiss appeals of bankruptcy matters when there has been a comprehensive change of circumstances ... so as to render it inequitable for this court to consider the merits of the appeal. We call this equitable mootness, a judge-made abstention doctrine unrelated to the constitutional prohibition against hearing moot appeals....
[T]here is a big difference between inability to alter the outcome (real mootness) and unwillingness to alter the outcome (equitable mootness). An appeal is equitably moot if the case presents transactions that are so complex or difficult to unwind that debtors, creditors, and third parties are entitled to rely on [the] final bankruptcy court order. In re Mortgages Ltd. , 771 F.3d at 1214-15 (9th Cir. 2014) (internal quotations and citations omitted).
a) Thorpe Factors.
Both parties cite to the Thorpe case for its analysis of the doctrine of equitable mootness. In Thorpe , the Ninth Circuit discussed equitable mootness as follows:
Equitable mootness occurs when a comprehensive change of circumstances has occurred so as to render it inequitable for this court to consider the merits of the appeal. The question is whether the case present[s] transactions that are so complex or difficult to unwind that the doctrine of equitable mootness would apply. Thorpe at 880 (internal quotations and citations omitted).
The Appellee argues that "the doctrine of equitable mootness applies because Reorganized Debtor's chapter 11 plan has been substantially consummated and it cannot be unwound without harming numerous parties that are not before the Court." AAB at 2. The Appellee states that the Confirmation Plan has been "substantially consummated" because, for instance, in accordance with the Plan terms following entry of the Confirmation Order, "Debtor made approximately 98% of the payments required by the Plan, effecting substantial consummation." Id. at 4 citing Appellant's ER at AA38, AA42; Appellee's ER at 99-100, 102-105; 172-174, 176-177. The Appellee further states that, "[u]nwinding the confirmation of the Plan, as requested by Appellant, would require unwinding those payments (as well as other relief against numerous third parties who are not parties to this appeal), which would be manifestly unjust." Id.
The Appellant argues that "[t]his Appeal is not equitably moot because the requirements for finding equitable mootness are not satisfied." Opp'n at 11. And while the Appellant does not dispute the applicability of the Thorpe factors, he argues that "Appellee misapplies each factor, and wrongly assumes that the four Thorpe factors are weighted equally." Id. The Court evaluates each of the Thorpe factors in turn in the context of the contentions of the parties.
The Appellant also claims that "[t]he doctrine of equitable mootness has fallen out of favor with appellate courts." Id. at 13-14. The Court disagrees and finds that the doctrine remains applicable in the Ninth Circuit. See, e.g., Michs. Bank v. Gewalt (In re Gewalt) , 2022 WL 305271 *2–3, 2022 Bankr.LEXIS 284 *4-7 (9th Cir. BAP 2022).
The Thorpe case provides a test for determining whether a bankruptcy court ruling is equitably moot and outlines the following factors:
"We will look first at whether a stay was sought, for absent that a party has not fully pursued its rights. If a stay was sought and not gained, we then will look to whether substantial consummation of the plan has occurred. Next, we will look to the effect a remedy may have on third parties not before the court. Finally, we will look at whether the bankruptcy court can fashion effective and equitable relief without completely knocking the props out from under the plan and thereby creating an uncontrollable situation for the bankruptcy court." In re Thorpe at 881.
i. Seek of Stay Pending Appeal.
Pursuant to the Thorpe test, the first factor for the Court to consider is whether a stay was sought pending appeal and if that stay was granted. In re Thorpe at 881. "A party that disagrees with an order of a bankruptcy judge can move to stay the order before that bankruptcy judge, who has the power to suspend the order or offer other appropriate relief during the pendency of an appeal of the order, to protect the rights of all parties in interest." In re Mortgages Ltd. , 771 F.3d at 1215 citing Fed. R. Bankr. P. 8005. If the bankruptcy court denies the stay, the objecting party can move the district court or the bankruptcy appellate panel for a stay. Id. The purpose of a stay is to ensure "that the estate and the status quo may be preserved pending resolution of the appeal." Id. quoting In re Chateaugay Corp. , 988 F.2d 322, 326 (2d Cir. 1993).
In analyzing this initial factor, courts consider a party's due diligence and "failure to seek a stay can render an appeal equitably moot." Id. citing In re Roberts Farms , 652 F.2d 793, 797-98 (9th Cir. 1981). Here, on December 6, 2021, Appellant sought a stay pending appeal which was denied by the Bankruptcy Court on December 17, 2021. MTD at 20 citing Grimshaw Decl., Exh. 9 at 399-405. The Appellant, however, did not pursue a stay from the District Court. MTD at 20; see also Appellant's Reply at 7. On balance, because Appellant did seek a stay from the Bankruptcy Court, this factor weighs against a finding of equitable mootness. However, as the Ninth Circuit points out in Thorpe , "[t]he failure to gain a stay is one factor to be considered in assessing equitable mootness, but is not necessarily controlling." Thorpe at 881-82.
The Appellant states the following reason for not pursuing a second motion for stay: "The effective date was January 3, 2022. Because of the intervening holidays, it was not feasible for the parties to brief a second motion for stay before the Effective Date. Nonetheless, the Debtor was on notice of the appeal before proceeding with the Effective Date, which the Debtor could waive." Appellant's Reply at 7.
ii. Substantial Consummation.
The second factor involves whether the plan at issue has been "substantially consummated." Id. at 882. "If a stay was sought and not gained, we then will look to whether substantial consummation of the plan has occurred." Id. at 881.
Substantial consummation is defined by the Bankruptcy Code as follows:
(A) transfer of all or substantially all of the property proposed by the plan to be transferred;
(B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and
(C) commencement of distribution under the plan. 11 U.S.C. § 1101(2).
The decision of "[w]hether a plan has been ‘substantially consummated’ is a question of fact to be determined upon the circumstances of each case." Antiquities of Nevada, Inc. v. Bala Cynwyd Corp. (In re Antiquities of Nevada, Inc.) , 173 B.R. 926, 928 (9th Cir. BAP 1994) citing In re Jorgensen , 66 B.R. 104, 106 (9th Cir. BAP 1986). Courts within the Ninth Circuit have held that substantial consummation has taken place once a debtor begins to make payment pursuant to a confirmed plan. MTD at 19 citing In re Antiquities of Nevada, Inc. , 173 B.R. at 930 ("Since Antiquities has assumed management and control of the property administered under the confirmed plan, and commenced distribution of payments on both short and long term debt on the effective date, we hold that the plan has been ‘substantially consummated’ "); see also Little v. Amber Hotel Corp. , 2014 WL 12703710, *5, 2014 U.S. Dist. LEXIS 105716, *18-20 (C.D. Cal. 2014) (" Little ") (The court, estimating that approximately 17% of claims had been paid, found that substantial consummation of the Plan had occurred).
The Appellee argues that substantial consummation has occurred here for multiple reasons. MTD at 20. After the Bankruptcy Court entered an order confirming the Plan on December 17, 2021, Heartwise initiated Plan implementation. Id. citing Tuong Nguyen Declaration, Chief Executive Officer of Heartwise, ("Nguyen Decl."), ¶6-7. First, in exchange for all of the new shares provided under the Plan, Earnestly LLC paid approximately $9.4 million to Heartwise. Id. citing Nguyen Decl. at ¶7. Also, in accordance with the Plan, Heartwise's two primary trade creditors returned millions of dollars to Debtor that they held in security deposits. Id. citing Nguyen Decl. at ¶8. Heartwise used these funds to pay approximately 98% of the outstanding debt pertaining to the Plan. Id. citing Nguyen Decl. at ¶12. On December 31, 2021, Tuong Nguyen, on behalf of Heartwise, sent checks to most, if not all, of Heartwise's unsecured creditors holding allowed claims pursuant to the Plan using, in part, the funds provided by trade creditors and Earnesty LLC. Id. citing Nguyen Decl. at ¶9. Next, on January 3, 2022, Tuong Nguyen, on behalf of Heartwise, deposited approximately $14.5 million into the Bankruptcy Court's registry for payment of claims arising out of the Judgment. Nguyen Decl. at ¶10. Lastly, in February 2022, upon approval of the payments by the Bankruptcy Court, Tuong Nguyen, on Heartwise's behalf, paid for all of the services of Heartwise's Chapter 11 professionals. Nguyen Decl. at ¶11. The Appellant argues, without any supporting authority, that substantial consummation has not occurred because the $14.5 million owed based upon the Judgment has been deposited in the Bankruptcy Court's registry but has not yet been dispersed to creditors. Opp'n at 12. The Court does not find this argument persuasive and agrees with the Appellee that, although "the Plan prohibits the release of the $14.5 million until the Tenth Circuit appeal is complete, ... that does not alter the fact that the payment required by the terms of the Plan (i.e., the deposit of the funds in the Court's registry) has been made." Reply at 14.
The return of deposits were from creditors Robinson Pharma, Inc. ("Robinson") and Alpha Health Research ("Alpha"). See Grimshaw Decl., Exh. 1 at 38.
The only claims remaining to be paid are either disputed and not currently owed, or were asserted within 30 days of the filing of the MTD. Nguyen Decl. at ¶12. Further, Heartwise used these funds to pay approximately 98% of the debt pertaining to the Plan. Id.
In accordance with the Plan, the $14.5 million is to be held in the court's registry pending resolution of the Tenth Circuit appeal. Appellee's Reply at 14. Pursuant to Heartwise's First Amended Chapter 11 Plan of Reorganization confirmed by the Bankruptcy Court:
The amount asserted in Claim No. 5 of Magleby, Cataxinos & Greenwood, P.C. ("Magleby"), $14.5 million, which amount is related to the Final Judgment (the "Judgment") entered by the U.S. District Court for the District of Utah, Case No. 2:13-cv-00982-DAK, on November 10, 2020, shall be deposited with the Court's registry as interpleaded funds on the Effective Date, and will be released to Magleby only upon further order of [the Bankruptcy] Court. Grimshaw Decl., Exh. 1 at 37.
In considering the above actions, it is apparent that the Debtor has, at a minimum, initiated "commencement of distribution under the plan." 11 U.S.C. § 1101(2)(C) ; see Nguyen Decl. at ¶9; see also In re Antiquities of Nevada, Inc. , 173 B.R. at 930. Accordingly, the Court concludes that the Plan has been substantially consummated, a factor that weighs in favor of a finding of equitable mootness.
iii. Effect on Third Parties.
The third factor examines what effect, if any, a remedy may have on third parties who are not before the court. Thorpe , 667 at 881. Specifically, the court considers whether it is feasible to alter the Plan "in a way that does not affect third party interests to such an extent that the change is inequitable." Id. at 882 ; Little , 2014 WL 12703710, *6, 2014 U.S. Dist. LEXIS 105716, *21. The Court must evaluate "whether modification of the plan of reorganization would bear unduly on the innocent." Thorpe at 882. Pursuant to Thorpe , "[a]n important consideration is whether all the parties affected by the appeal are before the Court." Id. (citations omitted); Little , 2014 WL 12703710, *6, 2014 U.S. Dist. LEXIS 105716, *21.
The Appellee argues that "[n]either Earnesty nor any of the creditors that received payment under the Plan are before this Court in connection with this appeal and would be harmed by the requested relief." MTD at 22. In addition, as the Appellee states:
Earnesty transferred over $9.4 million to Debtor in reliance on the Confirmation Order so that the payments to creditors could be made and that transaction cannot be undone, nor can the cancellation of the old shares in the Debtor or the issuance of the new shares in the Reorganized Debtor.... Unwinding the Confirmation Order and conducting a new Confirmation Trial deprives Earnesty of its bargained-for exchange. MTD at 22 citing Nguyen Decl. at ¶7.
The Appellant argues that "[t]here will be no material adverse effects on innocent third-parties not before the Court." Opp'n at 12. In his Opposition, the Appellant organizes several parties involved in the case into four main groups. These parties include: 1) "a handful of independent general unsecured creditors;" 2) "Vitamins Online and Magleby [sic] Cataxinos & Greenwood ("MCG");" 3) "Doyle or Khan;" 4) "the Nguyen Group, consisting of Mr. Nguyen and the entities he owns and controls." Opp'n at 12. The Court counts at least five parties including Doyle and "a handful of ... creditors," of which only Doyle is before the Court. Id. The Appellant claims that "the only ‘innocent third parties’ are those in Groups 1 and 2," namely, "a handful of independent general unsecured creditor[sic] whose approximately $1.5 million in claims was paid in full under the Plan" and "Vitamins Online and Magleby [sic] Cataxinos & Greenwood ("MCG")." Opp'n at 12. The Appellant further claims that he "does not seek to recover those payment [sic] to Group 1, and no one in group 2 has been paid," thus concluding that "[n]one of these parties will be hurt." Id. at 13. First, although the Appellant has determined that the parties in Groups 3 and 4, namely, himself, Khan, and the Nguyen Group, are not "innocent third parties" because "they each have a direct interest in the appeal," he provides no authority for this characterization. Second, as to the Appellant's contention regarding Group 2 "not being paid," the Court has already addressed this argument in the context of the substantial consummation analysis. See discussion supra. Further, although the Appellant states that he does not seek to recover the $1.5 million that was dispersed to Group 1, this does not alter the fact that these payments would in all likelihood still need to be re-evaluated in the context of unwinding the Confirmation Order. See discussion infra.
The Court observes that there are several third parties not before the Court who would be harmed if the relief requested were to be granted. Notably, Earnesty would be deprived of its position as the sole shareholder of Heartwise based upon its reliance on the bargained-for exchange of over $9.4 million, not to mention the numerous creditors and Chapter 11 professionals who have already received payments from this transaction as well as from the return of millions of dollars held in security deposits from Heartwise's two primary trade creditors. See Nguyen Decl. at ¶¶7-9, 11-12. Accordingly, and because reversal would be inequitable to other parties who have relied on confirmation of the Plan, this factor weighs in favor of equitable mootness.
iv. Effective and Equitable Relief.
The last Thorpe factor is "whether the bankruptcy court can fashion effective and equitable relief without completely knocking the props out from under the plan and thereby creating an uncontrollable situation for the bankruptcy court." Thorpe at 881. "Finally, ‘and most importantly, we look to whether the bankruptcy court on remand may be able to devise an equitable remedy.’ " In re Mortgages Ltd. , 771 F.3d at 1218 quoting Thorpe at 883.
The Court finds the Little case cited by the Appellee illustrative of this final Thorpe factor. In Little , in compliance with the confirmation plan, Amber Hotel had "undertaken all required property transfers and obtained a secured loan from a third party" and "also made $63,322 in payments to its Class B and C creditors, ... paid in full all unclassified claims with the exception of an administrative claim totaling $60,000, and ... cancelled and re-issued its stock certificates." 2014 WL 12703710 *6, 2014 U.S. Dist. LEXIS 105716 *23 (internal citations omitted). In light of these circumstances, the court found that "[i]t would be difficult for the bankruptcy court to unwind these transactions, and attempting to do so would risk creating an unmanageable mess for that court — in no small part because the money Amber Hotel has paid out to its creditors might already have been spent." Id. at *7, 2014 U.S. Dist. LEXIS 105716 *23-24. Consequently, the Little court found the appeal equitably moot, concluding, "[t]his court declines to consider an appeal which seeks to make the bankruptcy court unwind the transactions that have taken place thus far, where doing so would unfairly harm third parties and risk miring the bankruptcy court in an unmanageable mess." Id. at *7, 2014 U.S. Dist. LEXIS 105716 *26.
As previously indicated, Earnestly LLC paid approximately $9.4 million to Heartwise for all of its new shares under the Plan. MTD at 20 citing Nguyen Decl. at ¶7. Additionally, pursuant to the Plan, Heartwise's two primary trade creditors returned millions of dollars to Debtor that they held in security deposits. Id. citing Nguyen Decl. at ¶8. Further, Heartwise used these funds to pay approximately 98% of the outstanding debt pertaining to the Plan. Id. citing Nguyen Decl. at ¶12. Like the court observed in Little , it is possible if not likely, that the monies Heartwise has paid to its creditors has already been spent. Little at *7, 2014 U.S. Dist. LEXIS 105716 *23-24. Moreover, as the Appellee argues, and the Court agrees, "granting the requested relief would result in a difficult, if not uncontrollable, situation for the Bankruptcy Court" and "would be tantamount to setting aside the Confirmation Order." MTD at 24.
The Appellant argues that the doctrine of "equitable mootness does not apply because Doyle does not seek to revoke the confirmation order, only to adjudicate collateral issues and modify the Plan in ways that affect parties only related to this appeal." Opp'n at 2. However, a ruling in Appellant's favor would involve much more than simply "modify[ing] the Plan" and "adjudicat[ing] collateral issues." Furthermore, the Appellant does not present a proposal for how relief could be granted without the unwinding of the Confirmation Plan, nor does he provide specific details as to how this modification of the Plan would occur. Therefore, a finding for Appellant would, as Appellee states, likely necessitate "[u]nwinding the Confirmation Order and conducting a new Confirmation Trial" which would precipitate the unwinding of the Confirmation Plan. This is not an undertaking the Court entertains lightly, especially considering that "approximately 98% of the outstanding debt pertaining to the Plan" has been paid by the Debtor. See Nguyen Decl. at ¶12. Moreover, the Court does not believe this is a situation where "the bankruptcy court on remand may be able to devise an equitable remedy." See In re Mortgages Ltd. , 771 F.3d at 1218 quoting Thorpe at 883. Thus, the Court concludes that a "comprehensive change of circumstances" has occurred so "as to render it inequitable for this court to consider the merits of the appeal." Thorpe at 880 quoting In re Roberts Farms , 652 F.2d 793, 798 (9th Cir. 1981).
In response, the Appellee states that "seeking to ‘modify’ the Plan is a collateral attack on the Confirmation Order." Appellee's Reply at 12.
b. Exception: Collateral Legal Consequences.
The Appellant attempts to invoke the "collateral legal consequences" doctrine as an exception to mootness. Appellant's Reply at 10 citing In re Burrell , 415 F.3d 994, 998 (9th Cir. 2005). The collateral legal consequences doctrine may be invoked as an exception to mootness if a party can prove that they would continue "to suffer collateral legal consequences of the action being appealed" after a claim has been rendered moot. In re Burrell at 998. A party may not invoke this exception, however, if the "harm is merely hypothetical and speculative." Id. at 999. The Court does not find the Appellant's argument persuasive because, as the Appellee points out, the Appellant "made a tactical decision not to appeal the Confirmation Order." Appellee's Reply at 20; see discussion supra.
Upon consideration of the Thorpe factors, the Court finds that, on balance, the majority of factors weigh in favor of a finding of equitable mootness. Therefore, the Court concludes that the appeal is equitably moot.
VI.
CONCLUSION
In light of the foregoing, the Court finds that the Appellant does not have standing to challenge the Appeal, and that the Appeal is equitably moot. Accordingly, the Court concludes that it does not have jurisdiction to hear the Appellant's Appeal in this matter. The Appellee's Motion is therefore GRANTED , and the Appellant's Appeal is DISMISSED for lack of jurisdiction.