Solomon v. Graham Barber ( 1997 )

UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT
________________
No. 96-11201
(Summary Calendar)
_________________
In The Matter Of: ALPHONSO SOLOMON,
Debtor.
ALPHONSO SOLOMON, JANET M SOLOMON
Appellants,
versus
ROBERT MILBANK, Trustee, ET AL.,
Appellees.
_____________________
No. 96-11528
(Summary Calendar)
_____________________
In the Matter of: ALPHONSO SOLOMON,
Debtor.
ALPHONSO SOLOMON, JANET M SOLOMON,
Appellants,
versus
ROBERT MILBANK, Trustee,
Appellee.
_____________________
No. 96-11529
(Summary Calendar)
_______________________
In the Matter of: ALPHONSO SOLOMON,
Debtor.
ALPHONSO SOLOMON,
Appellant,
versus
GRAHAM BARBER COLLEGE, INC.,
Appellee.
Appeals from the United States District Court
For the Northern District of Texas
September 25, 1997
Before DAVIS, EMILIO M. GARZA, and STEWART, Circuit Judges.
PER CURIAM:*
The debtor, Alphonso Solomon, appeals the district court’s
affirmance of three orders issued by the bankruptcy court (1)
entering a nondischargeable judgment against Solomon and his
estate, (2) confirming Solomon’s plan of reorganization as modified
by a settlement agreement negotiated by the trustee, Robert
Milbank, and (3) converting his case from chapter 11 to chapter 7.
We affirm.
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this
opinion should not be published and is not precedent except under the limited
circumstances set forth in 5TH CIR. R. 47.5.4.
2
I
In May 1994, Solomon filed a voluntary petition for bankruptcy
relief under chapter 11 of the Bankruptcy Code. The bankruptcy
court subsequently converted Solomon’s case to chapter 7 and
appointed Milbank as trustee of the estate. Solomon converted the
case back to chapter 11, and Milbank remained as chapter 11
trustee.
At the time he filed his bankruptcy petition, Solomon was
involved in litigation in Texas state court with LaFrance Graham,
as executrix of the Estate of Johnny Graham, Sr., and Graham Barber
College (collectively, “the College”) concerning Solomon’s alleged
breaches of fiduciary duty during his tenure as president of the
College. The state court action was removed to bankruptcy court
and, after trial, the bankruptcy court entered a judgment against
Solomon in the amount of $224,724 plus pre-judgment interest. The
court further ordered the judgment nondischargeable under sections
523(a)(2)(A), (a)(4), and (a)(6) of the Bankruptcy Code1 and
entered an order allowing the judgment against Solomon’s estate.
1
Section 523(a) of the Bankruptcy Code excludes certain debts from
discharge in bankruptcy. The relevant portions of the section provide that:
(a) discharge [under this title] does not discharge an individual
debtor from any debt))
(2) for money . . . to the extent obtained by . . .
actual fraud . . .;
(4) for fraud or defalcation while acting in a fiduciary
capacity, embezzlement, or larceny;
(6) for willful and malicious injury by the debtor to
another entity or to the property of another entity
. . . .
11 U.S.C. § 523(a).
3
Solomon appealed the damage award and nondischargeability judgment
to the district court, but did not appeal the court’s order
allowing the claim against the estate.
Solomon filed a proposed plan of reorganization (“the Plan”)
which the bankruptcy court confirmed on December 15, 1995. The
Plan provided for the creation of a trust for the liquidation of
all assets of the estate until such time as the creditors were paid
in full. The Plan further provided that Milbank would continue as
liquidating trustee after confirmation. As part of the Plan,
Solomon agreed to pay $50,000 in post-confirmation income to the
liquidating trust on or before January 31, 1996.
Prior to confirmation of the Plan, Milbank negotiated a
4
compromise and settlement of the College’s claim against the estate
(the “Compromise”) which provided that, in exchange for the
transfer of all right, title, and interest held by the bankruptcy
estate in the stock and assets of the College, the College would
release the nondischargeable judgment, waive all claims against
Solomon and his bankruptcy estate, including a $103,000 proof of
claim filed by LaFrance Graham, and dismiss all pending proceedings
with prejudice. In addition, Graham agreed to pay $80,000 cash to
the estate in settlement of a separate judgment held by the estate
against Graham (the “Payne judgment”) which had an approximate face
value of $110,000 including interest. The bankruptcy court
approved the Compromise, finding it “fair, equitable, and in the
best interests of the [estate] and its creditors” and “eliminates
the largest known or allowed claim . . . and locks in a discharge
for the Debtor.” The bankruptcy court then approved the Plan as
modified by the Compromise. Solomon appealed the bankruptcy
court’s order approving the Compromise and the order confirming the
Plan insofar as it conditioned confirmation on the Compromise. The
district court consolidated the two appeals.
While Solomon’s appeal of the confirmation order was pending
5
before the district court, Milbank and the College implemented the
Compromise. The College paid $80,000 to the trust and the trust
transferred the stock to the College. In addition, the bankruptcy
court entered orders releasing the nondischargeable judgment
against the estate and Solomon and authorizing withdrawal of all
claims against the estate.
After confirmation of the Plan, Solomon failed to contribute
the required $50,000 in post-confirmation income by January 31,
1996, as required by the Plan. In accordance with Article 11.2 of
the Plan, Milbank filed a motion to show cause why the case should
not be converted to chapter 7 under section 1112(b) of the
Bankruptcy Code.2 Following a hearing, the bankruptcy court found
that Solomon had not fulfilled his obligation to make the payment,
that failure to make the payment constituted a material default
under the Plan, and that conversion of the case for continued
liquidation under chapter 7, rather than dismissal, would be in the
best interests of the creditors. Accordingly, the bankruptcy court
converted the case to chapter 7. Solomon appealed the conversion
order.
2
Section 1112(b) provides:
(b) Except as provided in subsection (c) of this section, on request of a
party in interest or the United States trustee or bankruptcy
administrator, and after notice and a hearing, the court may convert a
case under this chapter to a case under chapter 7 of this title or may
dismiss a case under this chapter, whichever is in the best interest of
creditors and the estate, for cause, including))
. . .
(8) material default by the debtor with respect to a confirmed plan
. . .
11 U.S.C. § 1112.
6
Soon after the bankruptcy court converted the case, the
district court dismissed Solomon’s appeal of the bankruptcy court’s
order confirming the Plan, reasoning that since the case had been
converted to chapter 7, the appeal of confirmation of a chapter 11
plan of reorganization is moot. Several months later, the district
court affirmed the bankruptcy court’s order converting the case to
chapter 7 and dismissed Solomon’s appeal of the nondischargeability
judgment. Solomon appeals each of these three orders by the
district court.
II
We will first address Solomon’s appeal of the district court’s
affirmance of the bankruptcy court’s order converting his case from
chapter 11 to chapter 7. A determination of whether cause under
section 1112(b) exists rests in the sound discretion of the
bankruptcy court. Sullivan Central Plaza I, Ltd. v. Bancboston
Real Estate Capital Corp. (Matter of Sullivan Cent. Plaza I, Ltd.),
935 F.2d 723, 728 (5th Cir. 1991). We review a bankruptcy court’s
findings of fact for clear error and its determination of issues of
law de novo. Border v. McDaniel (Matter of McDaniel), 70 F.3d 841,
842-43 (5th Cir. 1995).
A
Solomon first argues that the district court erred in
affirming the bankruptcy court’s determination that his failure to
pay $50,000 in post-confirmation income to the Trust constituted a
7
material default under the Plan. Alphonso insists that Janet
Solomon made this payment on his behalf when she contributed her 50
percent interest in the proceeds from the sale of community
property to the Trust.
Janet held a 50 percent interest in all community property
assets immediately prior to commencement of the bankruptcy
proceeding. After Alphonso filed his petition, Janet, as non-
debtor spouse, became a creditor of the estate based on her
interest in that property. Several months prior to confirmation of
the Plan, Janet filed a motion to order Milbank to release her
share of the proceeds from the sale of community property assets
pursuant to 11 U.S.C. § 363(j).3 Before the bankruptcy court ruled
on the motion, however, Alphonso filed a proposed modification of
the Plan by which Janet would reserve the right to contribute to
the estate, as an additional source of funding, her share of those
assets up to the amount of $138,000. The Solomons argue that the
bankruptcy court granted this modification and accepted Janet’s
contribution of $138,000, including $50,000 in satisfaction of
Alphonso’s obligation under the Plan.
Solomon mischaracterizes the bankruptcy court’s bench ruling.
As the district court correctly noted, the bankruptcy judge did not
3
Section 363(j) states: “After a sale of property to which subsection
(g) or (h) of this section applies, the trustee shall distribute to the debtor’s
spouse or the co-owners of such property, as the case may be, and to the estate,
the proceeds of such sale . . . according to the interests of such spouse or co-
owner, and of the estate.”
8
rule on Janet’s motion for distribution of her community property
interest but rather carried the motion until such time as $276,000
in community property assets had been distributed.4 At any rate,
Janet Solomon is not entitled to collect any part of her one-half
interest in community property assets until the estate is
completely administered. See In re Melenyzer, 140 B.R. 143, 148
n.16 (Bankr. W.D. Tex. 1992) (finding that “the mere fact that
certain property belongs to the community estate does not make the
non-debtor spouse immediately entitled to receive and spend her
one-half interest”). Section 541(a)(2) of the Bankruptcy Code
includes as property of the estate “[a]ll interests of the debtor
and the debtor’s spouse in community property” that is “(A) under
the sole, equal, or joint management and control of the debtor; or
(B) liable for an allowable claim against the debtor . . . .” 11
U.S.C. § 541(a)(2). The bankruptcy court specifically found that
Alphonso Solomon had either sole or joint control and management of
all of the community property in question. In addition, under
Texas law, community property subject to sole or joint control of
a spouse is subject to the liabilities of that spouse. Tex. Fam.
Code Ann. § 3.202(c) (West 1997) (formerly Tex. Fam. Code Ann.
§ 5.61(c)). Therefore, under section 541(a)(2), Janet Solomon’s
4
The bankruptcy court reasoned that at that time, Janet’s motion may
be moot since the $276,000 distributed to creditors would include Janet’s
proposed contribution of $138,000 in additional funding for the estate. In doing
so, however, the court specifically declined to rule on the question of whether
Janet was actually entitled to distribution of $138,000 so as to enable her to
make the proposed contribution.
9
share of community property assets became property of the estate
upon commencement of the case, subject to administration by the
trustee and payment to creditors.
Janet, however, asserts that she has an immediate right to the
proceeds of the sale of her community property interest under 11
U.S.C. § 363(j). Section 363(j), however, provides for payment of
the non-debtor spouse’s interest in property sold by the trustee
only if the property is also subject to section 363(g) or (h). It
is clear that subsection (g), which governs “dower or curtesy,”
does not apply in this case. Moreover, by its terms, section
363(h) applies only to property owned jointly by the estate and a
third party, not to property wholly-owned by the estate.5 Through
the operation of section 541(a), the estate acquired both
Alphonso’s and Janet’s interests in the community property and is
therefore the sole owner. Section 363(h) is simply inapplicable.6
See In re Hendrick, 45 B.R. 976, 987-88 (Bankr. M.D. La. 1985)
(holding that § 363(h) does not apply to community property); In re
Verges, 1992 WL 77791 *6 (E.D.La. 1992) (finding that § 363(j) does
not apply to distribution of proceeds of sale of former community
5
Section 363(h) allows the trustee, under certain circumstances, to
“sell both the estate’s interest . . . and the interest of any co-owner in
property in which the debtor had, at the time of the commencement of the case,
an undivided interest as a tenant in common, joint tenant, or tenant by the
entirety.”
6
Our conclusion is further bolstered by the language of section 363(i)
which specifically distinguishes between jointly-owned property to which
subsection (h) applies and property of the estate that was community property
immediately prior to commencement of the case.
10
property held by estate). Therefore, Janet was not entitled to
distribution of the proceeds of the sale of community property
under section 363(j).
In sum, since Janet Solomon’s share of community property was
already property of the estate, her “contribution” of that interest
could not constitute satisfaction of Alphonso’s obligation to
contribute $50,000 in post-confirmation income to the estate. It
is undisputed that Solomon did not otherwise make the required
payment under the Plan. Therefore, the bankruptcy court did not
err in finding that Solomon had materially breached the Plan.
B
Solomon presents a litany of other arguments in support of his
appeal of the conversion order, only two of which merit discussion.
First, Solomon argues that the bankruptcy court failed to evaluate
whether converting the case to chapter 7, as opposed to maintaining
the case in chapter 11, best served the interests of the creditors.
However, the test under section 1112(b) is not whether continued
administration of the reorganization plan or conversion is better
for creditors, but whether conversion or dismissal of the case best
serves their interests. 11 U.S.C. § 1112(b) (“[T]he court may
convert a case under this chapter to a case under chapter 7 of this
title or may dismiss a case under this chapter, whichever is in the
best interests of creditors and the estate, for cause . . . .”).
Solomon does not argue how dismissal of the entire case as opposed
to continued liquidation of trust assets in chapter 7 would better
11
serve the creditors.7 The bankruptcy court has broad discretion to
convert a case to chapter 7 upon a showing of cause and need not
give exhaustive reasons for its determination. Koerner v. Colonial
Bank (Matter of Koerner), 800 F.2d 1358, 1367-68 (5th Cir. 1986).
We find no abuse of discretion.
Second, Solomon argues that only a creditor may request
conversion under 11 U.S.C. § 1112(b); therefore, Milbank did not
have standing to file a motion to show cause in the bankruptcy
court. Section 1112(b), however, provides that the court may
convert a case “on request of a party in interest.” 11 U.S.C.
§ 1112(b). Section 1109(b) explicitly includes the trustee as “a
party in interest” with the right to raise any issue in a case
under chapter 11. Milbank clearly was a proper party to move for
conversion of the case.
We find all other arguments raised by Solomon to be meritless.
The district court did not err in converting Solomon’s case from
chapter 11 to chapter 7.
7
Solomon simply cites In re T.S.P. Industries, Inc., 117 B.R. 375,
377-78 (Bankr. N.D. Ill. 1990), for the proposition that, because all property
of the estate vests in the debtor upon confirmation of the plan of reorganization
under section 1141(b) and does not subsequently revest in the estate upon
conversion under section 1112(b), conversion to chapter 7 after confirmation
would result in an estate with no assets. See also In re Winom Tool and Die,
Inc., 173 B.R. 613, 620-21 (Bankr. E.D. Mich. 1994). Therefore, he concludes
that conversion cannot possibly be in the best interests of the creditors because
the estate could not thereafter make distributions to creditors.
Solomon misses the mark. Section 1141(b) vests property of the estate in
the debtor upon confirmation “except as otherwise provided in the plan.” 11
U.S.C. 1141(b) (emphasis added). Here, Article VII of the Plan explicitly
provided that all property of the estate, except exempt property or property
subject to allowed secured claims, vested in the liquidating trust upon
confirmation, not Solomon. Therefore, In re T.S.P. Industries is clearly
distinguishable.
12
III
We next consider Solomon’s appeal of the district court’s
affirmance of the bankruptcy court’s judgment of
nondischargeability8 and its order confirming the Plan. The
district court dismissed both appeals as moot. We agree that
Solomon’s appeal of the confirmation of the Plan is moot since the
Plan is no longer in effect in this chapter 7 proceeding.
Solomon’s appeal of the nondischargeability action is moot because,
pursuant to the terms of the Compromise, the College has completely
released both the estate and Solomon individually from the
nondischargeable judgment. Thus, there is no judgment left to
appeal.
Solomon, however, urges that the bankruptcy court erred in
approving the Compromise because it grossly undervalued the stock
of the College and allowed the settlement of the Payne judgment for
less than its face value. Solomon also asserts that approval of
the Compromise unfairly extinguished his right to appeal the
judgment of liability. Solomon asks that we completely undo the
Compromise and reinstate the $224,000 nondischargeable judgment
against him.9
8
The district court consolidated the appeal of the bankruptcy court’s
judgment of liability in the underlying suit and the judgment of
nondischargeability of the claim under 11 U.S.C. § 523(a).
9
It is questionable that we may afford Solomon the relief he seeks
after consummation of the Compromise. The estate’s suit against LaFrance Graham
and the estate of Johnny Graham, Jr. for collection of the Payne judgment has
been dismissed with prejudice by the Probate Court of Dallas County, Texas, and
this court is powerless to resurrect that cause of action. See Thibaut v. Ourso,
13
We strongly question the wisdom of such a request. Solomon
admits that he filed his voluntary petition for bankruptcy in
anticipation of the judgment against him; the Compromise between
Milbank and the College afforded Solomon the very discharge he
desired. If we were to undo the Compromise to allow Solomon to
appeal the liability judgment against him and he is then
unsuccessful in that appeal, he cannot later obtain a discharge of
the debt. 11 U.S.C. § 523(a).
At any rate, we find that Solomon has failed to demonstrate
that the bankruptcy court erred in approving the Compromise. We
review a bankruptcy court’s approval of a compromise settlement
under Bankruptcy Rule 9019(a) for abuse of discretion. Connecticut
General Life Ins. Co. v. United Companies Financial Corp. (In re
Foster Mortg. Corp.), 68 F.3d 914, 917 (5th Cir. 1995). We review
705 F.2d 118, 120-121 (5th Cir. 1983) (finding that appeal of settlement was moot
where parties had dismissed state causes of action in reliance on court’s order
approving the settlement). Moreover, even if some form of relief could
conceivably be fashioned, Solomon’s challenge to the Compromise may still be
barred under the doctrine of “equitable mootness” if implementation of that
relief would be inequitable. See Manges v. Seattle First National Bank (Matter
of Manges), 29 F.3d 1034, 1038-39 (5th Cir. 1994), cert. denied, 513 U.S. 1152,
115 S. Ct. 1105, 130 L. Ed. 2d 1071 (1995); Official Comm. of Unsecured Creditors
of LTV Aerospace & Defense Co. v. Official Comm. of Unsecured Creditors of LTV
Steel Co. (In re Chateaugay Corp.), 988 F.2d 322, 325 (2d Cir. 1993). The
concept of mootness from a “prudential standpoint protects the interests of non-
adverse third parties who are not before the reviewing court but who have acted
in reliance upon the plan as implemented.” Manges, 29 F.3d at 1039. Although
it is clear from the record that both Milbank and the College acted in reliance
on the bankruptcy court’s approval of the Compromise and confirmation of the
Plan, both of whom are parties to the present appeal, neither Milbank nor the
College state precisely how third parties have relied upon approval of the
Compromise or how their rights would be affected by the relief requested.
Because we find that Solomon’s challenge to the Compromise fails on the merits,
we decline to rule whether that challenge is moot under Manges.
14
the court’s findings of fact de novo, but will not disturb findings
of fact absent clear error. Id.
A bankruptcy court may approve a compromise settlement only
when it is fair and equitable and in the best interests of the
estate. Id. In making this determination, the bankruptcy court
must consider: (1) the probability of success in the litigation,
with due consideration for the uncertainty in fact and law, (2) the
complexity and likely duration of the litigation and any attendant
expense, inconvenience and delay, and (3) all other factors bearing
on the wisdom of the compromise. Id. The interests of the
creditors, not the debtor, are paramount in determining the
fairness of the settlement. Id.
The bankruptcy court properly applied the Foster Mortgage test
in ruling on the motion to approve the Compromise. The Court found
that all parties in interest other than the Solomons supported the
Compromise. Moreover, the Court noted that the terms of the
agreement permitted the estate to extinguish its largest claim
while disposing of an asset of the estate))the stock of a closely-
held corporation))that is not easily valued or readily salable in
the marketplace. The court weighed Solomon’s likelihood of success
in his appeal with the expense and delay of continued litigation
and determined that the settlement was in the best interests of the
estate, as well as Solomon, since the Compromise would lock in a
guaranteed discharge for him. In addition, the court held that the
15
agreement would allow for the estate to collect on the Payne
judgment against the estate of Johnny Graham, Jr., immediately and
cheaply, rather than pursuing payment of the judgment in probate
court.
Solomon vehemently asserts that Milbank and the bankruptcy
court undervalued the estate’s interest in the stock of the
College, and that the swap of the stock for release of the judgment
was not a fair exchange. In addition, he asserts that Milbank and
the bankruptcy court gave inadequate consideration to his
probability of success on the merits of his appeal of the
nondischargeable judgment and his equitable subordination claim
against the College. Solomon contends, with little explanation,
that he is almost assured of success in the litigation.
However, a trustee “realistically cannot be required to
demonstrate to the satisfaction of every individual creditor and
the debtor, or to any compelling degree of certitude, that the
settlement benefit to the [estate] and the value of the settled
claim comprise a matched set.” Kowal v. Malkemus (In re Thompson),
965 F.2d 1136, 1145 (1st Cir. 1992). The trustee need only reach
an informed judgment that it would be “prudent to eliminate the
“inherent risks, delay and expense of prolonged litigation in an
uncertain cause.” Id. Solomon has not shown that Milbank failed
to make such an informed judgment.
Moreover, Solomon has the burden of proving that the fact
16
findings made by the bankruptcy court in ruling on the approval of
the Compromise are clearly erroneous. However, Solomon failed to
include a copy of the transcript of the hearing upon which the
bankruptcy court’s rulings are based. Thus, it is unclear from the
record what evidence the court considered in ruling on the motion.
In the absence of a transcript, we must presume the bankruptcy
court’s findings of fact are correct and supported by the evidence;
therefore, Solomon simply cannot meet his burden on appeal. See,
e.g., Trujillo v. Grand Junction Reg’l Ctr., 928 F.2d 973, 976
(10th Cir. 1991) (“When a trial transcript is not designated as
part of the record on appeal, an appellate court cannot review the
district court’s factual findings and must accept them as
correct.”). We find that the bankruptcy court did not abuse its
discretion in approving the Compromise.10
10
We note that a chapter 7 debtor does not ordinarily have standing to
appeal the settlement of a claim against the estate. In re Williams, 181 B.R.
532 (D.Kan. 1995); Martin v. O’Connor (In re Martin), 201 B.R. 338, 343 (Bankr.
N.D. NY 1996). Upon commencement of the case, all of the debtor’s property
becomes property of the estate, 11 U.S.C. § 541(a), and the appointment of a
trustee makes the trustee the representative of the estate. 11 U.S.C. § 323(a).
To have standing to appeal a bankruptcy order, a debtor must show that he was
directly or adversely affected pecuniarily by the order, or that the order
diminished his property, increased his burdens, or impaired his rights. Cajun
Elec. Power Coop., Inc. v. Central La. Elec. Co., Inc. (In re Cajun Elec. Power
Coop., Inc.), 69 F.3d 746, 748 (5th Cir. 1995), opinion withdrawn in other part
on reh’g, 74 F.3d 599 (5th Cir. 1996, cert. denied, ___ U.S. ___, 117 S. Ct. 51,
136 L. Ed. 2d 15 (1996).
As a general rule, the debtor in a liquidation proceeding is hopelessly
insolvent, and thus has no pecuniary interest in the administration of the
estate. In re Martin, 201 B.R. at 344. However, if the debtor can show that a
successful appeal will generate assets in excess of liabilities, thus entitling
him to a distribution of surplus under 11 U.S.C. § 726(a)(6), then the debtor is
a “person aggrieved” with standing to appeal. In re Thompson, 965 F.2d at 1144
n.12. Solomon asserts that return of the stock of the College to the estate and
his successful appeal of the nondischargeable judgment will generate a surplus
for the estate. Because we find that in any case, Solomon cannot show that the
17
As a result of the implementation of the Compromise, the
judgment of nondischargeability against Solomon has been fully
released. Therefore, there is no judgment against him from which
he may appeal.
IV
Solomon’s motion to file his reply brief in Case No. 96-11201
out of time is GRANTED. We AFFIRM the district court’s affirmance
of the bankruptcy court’s order converting Solomon’s case from
chapter 11 to chapter 7, and we AFFIRM the district court’s
dismissal of Solomon’s appeals of the confirmation order and the
dischargeability judgment as moot.
bankruptcy court erred in approving the Compromise, we will assume that Solomon’s
assertion is correct and that he has standing to prosecute this appeal.
18