Nationwide Mutual Insurance v. Berryman Products, Inc. (In Re Berryman Products, Inc.) , 159 F.3d 941 ( 1998 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
__________________________
No. 98-10046
Summary Calendar
__________________________
In The Matter Of: BERRYMAN PRODUCTS, INC.
Debtor
__________________________
NATIONWIDE MUTUAL INSURANCE COMPANY;
MATT VAN HART
Appellants,
versus
BERRYMAN PRODUCTS, INC.;
BERRYMAN PRODUCTS OF DELAWARE, INC.
Appellees.
___________________________________________________
Appeal from the United States District Court
for the Northern District of Texas
___________________________________________________
Before WIENER, BARKSDALE, and EMILIO M. GARZA, Circuit Judges.
WIENER, Circuit Judge:
This appeal arises from the Chapter 11 bankruptcy proceeding
of Berryman Products, Inc. and Berryman Products of Delaware, Inc.
(“Berryman” or “the Debtor”).1 Appellants Nationwide Mutual
1
The briefs filed in this appeal reference a single Debtor,
“Berryman Products, Inc.,” but the appellees are listed as
“Berryman Products, Inc. and Berryman Products of Delaware, Inc.”
We refer to a single Debtor throughout the opinion, but to the
extent that both Berryman Products, Inc. and Berryman Products of
Delaware, Inc. are affected, the term Debtor in the singular
Insurance Company and Matt Van Hart (collectively “Nationwide”)
appeal the district court’s grant of the Debtor’s motion to dismiss
Nationwide’s appeal of plan confirmation on the ground of mootness.
Based on the facts before us, we conclude that the merits of the
appeal are moot and therefore, dismiss the appeal.
I.
FACTS AND PROCEEDINGS
In March of 1993, the Debtor voluntarily filed for relief
under Chapter 11 of the Bankruptcy Code (the “Code”) as a result of
being cast in judgment for $7.5 million in a products liability
suit. That case arose from an accident that occurred in California
on which Matt Van Hart (“Hart”) sued Berryman and others alleging
that he sustained injuries in a car that had been serviced with
brake cleaner manufactured by Berryman (the “Hart Lawsuit”). Among
others, Hart also sued the distributor of the brake cleaner, C.P.
Hunt Company (“Hunt”). After a jury trial, the California court
found Berryman and Hunt jointly and severally liable for $7.5
million, being 80% of the damages sustained by Hart.
At the time of the accident, Berryman was insured by Corporate
Underwriters, Ltd., which failed to indemnify Berryman for losses
it suffered by virtue of the Hart judgment. The specter of this
judgment motivated Berryman to file voluntarily for reorganization
under Chapter 11 of the Code. Hunt, the party jointly and
references both entities.
2
severally liable with Berryman for the Hart judgment, was insured
by Nationwide, which then settled with Hart. Nationwide agreed to
pay Hart $6 million in exchange for a release from liability and
the authority to pursue claims in Hart’s name.
One month after Nationwide settled with Hart, Berryman filed
suit against its own risk manager and Nationwide (the “Berryman
Lawsuit”), alleging negligence, breach of express and implied
contracts and warranties, breach of fiduciary duties, and negligent
misrepresentation in connection with their conduct during the Hart
Lawsuit. Additionally, Berryman appealed the verdict in the Hart
Lawsuit, which was eventually reversed for trial errors and
remanded in early 1995 for a new trial.2 Both the Hart and
Berryman Lawsuits are still pending.
At the onset of the Berryman bankruptcy proceeding,
Nationwide, on behalf of Hunt, filed a proof of claim for $6
million, the amount paid on the personal injury/products liability
claim. On the recommendation of Berryman, the court estimated
Nationwide’s claim to be $6 million for purposes of voting and
evaluating the feasibility of a plan; resolution of the Hart and
Berryman Lawsuits was not predicted to occur until three to five
years after plan confirmation. Hart too filed a claim for the
remaining $1.5 million of the net $7.5 million personal injury
2
Unlike Berryman, Nationwide did not appeal the verdict in the
Hart Lawsuit.
3
judgment.3
The Debtor’s Reorganization Plan (the “Plan”) was structured
to assure repayment of 100% of the present value of the claims
through issuance of interest-bearing, fifteen year notes for the $6
million and $1.5 million, respectively. As state court litigation
was ongoing, the term of the notes was set to commence on entry of
final orders resolving all contested matters in the Hart and
Berryman Lawsuits. In other words, in an effort to avoid undue
delay in the administration of the Plan, Nationwide’s claims were
characterized as contingent and unliquidated.4 Nationwide objected
to the Plan on various grounds and was the only class of creditors
to vote against it. The bankruptcy court held a two-day hearing to
evaluate the Plan and contemplate Nationwide’s objections,
ultimately confirming the Plan in July, 1994.
The next month, Nationwide sought a stay from the bankruptcy
court to prevent the Plan’s execution and appealed the bankruptcy
court’s order of confirmation to the district court. The
bankruptcy court denied the stay on the merits, and Nationwide
appealed its request for a stay to the district court. Citing the
3
During the pendency of the bankruptcy proceeding and the Hart
Lawsuit appeal, Matt Van Hart died and all claims in his name have
subsequently inured to his estate.
4
See 11 U.S.C. § 502(c) (1994); BANKR. R. 3018(a) (providing
for the estimation of claims for purposes of voting to accept or
reject a plan).
4
failure to follow Bankruptcy Rule 8005,5 the district court
likewise denied the stay. Nationwide neither filed an amended
request to correct the deficiencies noted by the district court nor
appealed the denial of the stay to this court. In the absence of
a stay to prevent execution of the Plan, the Debtor commenced
implementation by paying its creditors (with the exception of the
Nationwide claims, which were contingent).
As noted, Nationwide had also appealed the bankruptcy court’s
order confirming the Plan to the district court. Arguing that this
appeal was moot, the Debtor filed a motion to dismiss, which was
followed by an exchange of response and reply memos. More than a
year after the appeal of plan confirmation was filed —— in January,
1996 —— Nationwide requested a hearing on the matter, which the
district court denied. Although it eventually set a hearing in
December, 1997, the district court ultimately canceled the hearing
and granted the Debtor’s motion, finding the appeal moot and
inequitable. The district court focused on (1) Nationwide’s
failure to obtain or diligently seek a stay of the Plan, (2) the
Plan’s resulting implementation, and (3) the inevitable prejudice
that the Debtor would incur from a reversal. Nationwide timely
5
Bankruptcy Rule 8005 provides that a motion for stay pending
appeal made to the district court must show why the relief was not
obtained from the bankruptcy judge. BANKR. R. 8005. The district
court found that “appellant in no way indicates the reasons for the
bankruptcy judge’s denial of its request for a stay.” The district
court further noted that notwithstanding the procedural deficiency,
appellants failed to make the necessary showing that they were
entitled to a stay pending appeal.
5
filed this appeal.
II.
ANALYSIS
A. Standard of Review
In the bankruptcy appellate process, we perform the same
function as did the district court: Fact findings of the
bankruptcy court are reviewed under a clearly erroneous standard
and issues of law are reviewed de novo.6
B. Applicable Law
Nationwide contests the district court’s dismissal of its
appeal challenging confirmation of the Plan. Nationwide urges us
to reverse the order of dismissal and reach the merits of the
appeal, contending that the mootness analysis applied by the
district court was flawed. Nationwide focuses on the district
court’s finding that reversal of the Plan would disrupt trade
relationships and jeopardize the Plan’s economic core. Instead,
Nationwide asserts, the Debtor, in its exclusive discretion, could
6
Matter of Crowell, 138 F.3d 1031, 1033 (5th Cir. 1998);
Matter of U.S. Abatement Corp., 79 F.3d 393, 397 (5th Cir. 1996);
In re Block Shim Dev. Co.-Irving, 939 F.2d 289, 291 (5th Cir.
1991). Nationwide urges this court to adopt a plenary standard of
review because the district court on appeal did not have access to
the entire bankruptcy court record. In our review, we are not
limited to the record examined by the district court, but refuse to
adopt a plenary standard of review as it applies to issues of fact.
As we have repeatedly held, findings of fact are reviewed under the
clearly erroneous standard. See Block Shim, 939 F.2d at 291 (in
evaluating dismissal of a case as moot, the court “reviews factual
findings of the district court using a clearly erroneous standard
in light of the entire record.”).
6
choose to forego repayment from its creditors, thereby maintaining
the status of the Plan and precluding a finding of mootness.
The standard for mootness in the bankruptcy context differs
from a constitutional mootness analysis. Article III of the United
States Constitution requires an inquiry into whether a live case or
controversy exists; in contrast, reviewing courts considering
bankruptcy appeals such as the one now before us seek to determine
whether implementation of the reorganization plan has progressed to
a point at which fundamental changes in the plan would jeopardize
its success.7 Stated differently, we may decline to consider the
merits of confirmation when a plan has been so substantially
consummated that effective judicial relief is no longer available
—— even though the parties may have a viable dispute on appeal.8
Historically, when evaluating dismissal of challenges to
reorganization plans in a bankruptcy case as moot, we have looked
to see whether (1) a stay has been obtained, (2) the plan has been
substantially consummated, and (3) the relief requested would
affect either the rights of parties not before the court or the
success of the plan.9 Nationwide argues that in this case each of
7
In re Manges, 29 F.3d 1034, 1038-39 (5th Cir. 1994), cert.
denied, 513 U.S. 1152 (1995).
8
Id. at 1039; see also In re Andreuccetti, 975 F.2d 413, 418
(7th Cir. 1992); In re Crystal Oil Co., 854 F.2d 79, 82 (5th Cir.
1988); In re Roberts Farms, Inc., 652 F.2d 793, 798 (9th Cir.
1981).
9
Manges, 29 F.3d at 1039; Block Shim, 939 F.2d at 291.
7
the elements is lacking in some respect; accordingly, we now
evaluate each in turn.
1. Failure to obtain a stay
The first question in a mootness inquiry is whether the
appellants secured a stay to prevent execution of the Plan. As
correctly noted by the Debtor, the requirement of a stay
encapsulates the fundamental bankruptcy policy of reliance on the
finality of confirmation orders by the bankruptcy court.10
Nationwide asserts that because it diligently pursued a stay, its
failure to obtain the stay does not require dismissal of the
proceeding as moot.11 We rejected this argument in In re Manges.12
In response to a similar argument, we cited with approval a Seventh
Circuit opinion that stated, “[a] stay not sought, and a stay
10
See In re Public Serv. Co., 963 F.2d 469, 471-72 (1st Cir.)
(“the equitable component [to the mootness doctrine] centers on the
important public policy favoring orderly reorganization and
settlement of debtor estates”), cert. denied, 506 U.S. 908 (1992);
In re Information Dialogues, Inc., 662 F.2d 475, 476-77 (8th Cir.
1981) (“[T]he mootness doctrine promotes an important policy of
bankruptcy law —— that court-appointed reorganizations be able to
go forward in reliance on such approval unless a stay has been
obtained.”).
11
Nationwide cites In re Federated Dept. Stores, Inc., 44 F.3d
1310 (6th Cir. 1995) and Matter of 203 LaSalle St. Partnership, 126
F.3d 955 (7th Cir. 1997), cert. granted, 118 S.Ct. 1674 (1998), to
support its proposition. In our view, however, neither of these
cases provide guidance. Federated involved the appointment of a
financial advisor, which the court termed a “collateral
consequence” to reorganization, 44 F.3d at 1315-16, and 203 LaSalle
St. involved the reversal of a bankruptcy plan because innocent
third parties were unharmed. 126 F.3d at 961.
12
29 F.3d at 1039-40.
8
sought and denied, lead equally to the implementation of the plan
of reorganization.”13 In Manges we recognized that a reviewing
court’s decision not to grant a stay is often dispositive of a
mootness challenge on appeal, but that provisions of the Bankruptcy
Code “preordain” such a consequence.14
In this case, Nationwide unsuccessfully petitioned both the
bankruptcy and district courts to obtain a stay, yet failed to
appeal the stay to this court or to amend its motion in the
district court to comply with procedural inadequacies. In the
absence of a stay, the Plan became effective and was implemented
over the course of four years. Consistent with our Manges opinion,
we conclude that even though Nationwide sought a stay —— pursued
with a marked lack of diligence, we might add —— the stay was
denied and the Plan was largely implemented. Consideration of this
factor thus militates in favor of dismissal for mootness.
2. Substantial consummation of the Plan
The second question in the mootness inquiry is whether the
Plan has been substantially consummated, which the Code defines as:
(a) transfer of substantially all property the plan proposes to
transfer; (b) the debtor’s assumption of the business or management
of substantially all property dealt with by the plan; and (c)
13
Manges, 29 F.3d at 1040, quoting In re UNR Indus., Inc., 20
F.3d 766, 769-70 (7th Cir.), cert. denied, 513 U.S. 999 (1994).
14
Manges, 29 F.3d at 1040 (citing to sections of the Bankruptcy
Code and Bankruptcy Rules that prohibit reversal or modification
of unstayed bankruptcy orders).
9
commencement of distribution under the plan.15 At this time —— more
than four years after the effective date of the Plan —— the Debtor
has repaid $1.37 million in trade debt and has retired $2.15
million in secured debt owed to an insider of the company; the
allowed claims has been effectively repaid in full.16
Nationwide argues that because distributions have never
commenced on its $6 million claim, the plan cannot have been
substantially consummated. Nationwide attempts to characterize its
claim as non-contingent and liquidated because the bankruptcy
court, in an estimation proceeding, recognized the indemnity
obligation owed to Nationwide by the Debtor. Nationwide supports
its argument by attempting to distinguish its right to indemnity
from the personal injury judgment in the Hart Lawsuit, insisting
that its indemnity claim is not contingent on the outcome of the
Hart Lawsuit appeal. We disagree. The judgment in the Hart
Lawsuit was partially satisfied by Nationwide, which sought
indemnity for its payment. This payment, however, is the basis of
the Debtor’s claim against Nationwide on grounds of breach of
warranty and fiduciary duties (the Berryman Lawsuit).
15
11 U.S.C. § 1101(2) (1994).
16
The district concluded that substantial consummation had
occurred based on 150 distributions to trade creditors totaling
$337,000. Subsequent to the briefings in the district court, the
Debtor made additional payments under the Plan. We evaluate all
payments made by the Debtor at the time this appeal, which includes
these additional payments. See Manges, 29 F.3d at 1041 (“[T]his
court may review evidence as to subsequent events not before the
courts below which bears upon the issue of mootness.”)
10
Consequently, the indemnity obligation owed by the Debtor to
Nationwide is directly contingent on the outcome of both the Hart
and Berryman Lawsuits.
Furthermore, the bankruptcy court estimated the value of
Nationwide’s claim at $6 million solely for voting and feasibility
purposes —— not for allowance. Nationwide’s claim will not become
an “allowed” claim until the conclusion of all the state court
litigation. At the present time, the Debtor has fulfilled all
obligations allowed under the Plan, thereby resulting in its
substantial consummation.17 We find Nationwide’s arguments
unavailing and conclude that the second factor in this analysis
weighs in favor of dismissal as moot.
3. Effect on parties not before the court
The final question in the mootness inquiry is whether the
requested relief would affect the rights of parties not before the
court or the success of the Plan. Nationwide assures us that it
does not seek piecemeal revision or amendment of the Plan, but
requests reversal of Plan confirmation in its entirety. In seeking
reversal of confirmation, Nationwide contends that the Debtor need
not restore distributions made under the Plan, citing section 549
of the Code to support this proposition. Nationwide’s argument,
however, has no applicability in this context. Section 549
17
See Block Shim, 939 F.2d at 291 (finding substantial
consummation under the Code because “Block Shim and its creditors
have completed every transfer contemplated by the plan.”).
11
provides, in pertinent part: “[T]he trustee may avoid a transfer of
property of the estate . . . that is not authorized by this title
or by the court.”18 Under this section, a two year statute of
limitations is placed on recovery of such post-petition transfers
unauthorized by the Code.19 In contrast to the situation addressed
in section 549, the Plan expressly authorized the payments made by
the Debtor in accordance with the Bankruptcy Code. Section 549
does not address Nationwide’s argument, and Nationwide does not
cite any authority for the proposition that, in reversing the Plan,
the Debtor can forgo repayment from creditors. To the contrary, we
remain satisfied that reversal of the Plan means exactly that ——
placing the parties in the status quo pre-confirmation.20
Unraveling the Plan at this time clearly would affect the
position of trade creditors who granted concessions to the Debtor
under the reorganization. In fact, trade creditors reinstated
favorable pre-bankruptcy terms to the Debtor in exchange for full
satisfaction of their claims. The restored terms fueled the
success of the reorganization and allowed the Debtor to pass
18
11 U.S.C. § 549(a) (1994).
19
Id. (emphasis added). The Debtor in this case would be
outside of the two year limit.
20
See e.g. Manges, 29 F.3d at 1043 (doubting that the status
quo as it existed before the confirmation order could be attained
if the court unraveled the Plan); Miami Ctr. Ltd. Partnership v.
Bank of New York, 838 F.2d 1547, 1557 (11th Cir. 1988) (holding
that it would be legally and practically impossible to restore the
status quo before confirmation), cert. denied, 488 U.S. 823 (1989).
12
savings on to its customers. Reversal of these payments would
frustrate creditor relations and the emergence of the Debtor as a
viable going concern in the economy.21 We are satisfied that, like
the first two factors, this third one weighs against interfering
with the Plan after the passage of some four years.
III.
CONCLUSION
The district court properly granted the Debtor’s motion to
dismiss because Nationwide’s appeal met the test for mootness.
Nationwide did not secure or diligently pursue a stay to prevent
execution of the Plan, as a result of which the Plan was
substantially consummated. The Debtor has extinguished 100% of the
obligations provided for in the Plan, with the exception of the
Nationwide claims, which presumably will be allowed when all state
court litigation is finally resolved. Returning the Debtor to the
pre-confirmation status quo now would undermine the success of the
Plan and jeopardize critical trade relations of the Debtor. For
the forgoing reasons, we decline to reach the merits of the Plan,
and we dismiss the appeal of confirmation order as moot.
APPEAL DISMISSED.
21
See Crystal Oil, 854 F.2d at 81 (“loss of this plan would
disrupt a very successful organization”).
13