New Indus., Inc. v. Byman (In Re Sneed Shipbuilding, Inc.) ( 2019 )

Case: 18-40350 Document: 00514823377 Page: 1 Date Filed: 02/05/2019
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 18-40350 February 5, 2019
Lyle W. Cayce
In The Matter of: SNEED SHIPBUILDING, INCORPORATED, Clerk
Debtor
NEW INDUSTRIES, INCORPORATED,
Appellant
v.
ALLISON D. BYMAN, Chapter 11 Trustee of Sneed Shipbuilding,
Incorporated; ESTATE OF MARTIN M. SNEED, SR.,
Appellees
Appeal from the United States District Court
for the Southern District of Texas
Before KING, HIGGINSON, and COSTA, Circuit Judges.
GREGG COSTA, Circuit Judge:
In bankruptcy, the right to appeal must sometimes give way to a
heightened interest in finality. Perhaps the most prominent example is
equitable mootness, a judicially created doctrine preventing appeals that
threaten to unravel a particularly interrelated confirmation plan. See In re
Manges, 29 F.3d 1034, 1038–39 (5th Cir. 1994). Bars on appeals can also be
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found in the Bankruptcy Code, such as the statute that prevents “reversal or
modification on appeal of an authorization . . . of a sale or lease of [estate]
property” unless that order was stayed pending appeal. 11 U.S.C. § 363(m);
see also In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir. 1994) (“Several
provisions of the Bankruptcy Code of 1978 provide that courts should keep
their hands off consummated transactions.”).
The bankruptcy trustee in this case invokes both equitable and statutory
mootness to try and block an appeal of a bankruptcy court’s approval of a sale
of key estate assets, including a settlement necessary to facilitate the
transaction. Equitable mootness is inappropriate here, but we conclude that
section 363(m) made the bankruptcy court’s approval the final word on the
subject when the objector did not obtain a stay of that ruling.
I.
Sneed Shipbuilding owned two shipyards in Texas, including one in
Channelview. It filed for bankruptcy in 2016 and, after reorganizing turned
tumultuous, the court appointed a trustee. The trustee then filed a complaint
against the probate estate of Sneed Shipbuilding’s longtime principal Martin
Sneed and several other Sneed family members. The complaint alleged that
Martin attempted to fraudulently transfer ownership of the Channelview
shipyard to himself, among other fraudulent activities. It sought to avoid
(bankruptcy-speak for “undo”) those transactions and have the court declare
that Sneed Shipbuilding was the true titleholder to the Channelview shipyard.
While the bankruptcy progressed slowly, operations at the Channelview
shipyard ground to a halt as a barebones staff serviced the one remaining
customer. Conversion to Chapter 7 and liquidation loomed as a real and
unpleasant possibility, so the trustee tried to sell the shipyard. San Jac Marine
was interested in purchasing it, but only if the bankruptcy estate and Martin’s
probate estate resolved their dispute over the title. To get clean title, the
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trustee had two undesirable options: years of litigation against the probate
estate, during which the shipyard would lose much of its value, or settlement
with the probate estate on unfavorable terms. She chose the latter.
The sale to San Jac Marine was made conditional on bankruptcy
approval of the settlement. The parties structured the settlement and sale
together along these lines: San Jac Marine paid Sneed Shipbuilding nearly $15
million and the trustee used those funds to ensure that the title it transferred
was clean; encumbrances from a secured creditor, the debtor-in-possession’s
lender, and property taxes were all paid off. In addition, Martin’s probate
estate gave up both its claim to the Channelview property and any other claims
in the bankruptcy for about $8 million and the trustee’s agreement to release
any other avoidance actions. All told the settlement and sale looked something
like this:
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The bankruptcy court approved the settlement and sale in a single
order, finding its provisions “non-severable and mutually dependent.” New
Industries, an unsecured creditor which claimed that Sneed Shipbuilding owed
it $550,000 from a construction contract, unsuccessfully objected to the
disbursement of funds to the probate estate. It did not seek a stay of the court’s
approval of the transaction.
New Industries appealed. The trustee asked the district court to dismiss
the appeal, citing both equitable mootness and 11 U.S.C. § 363(m). The district
court dismissed the appeal as moot without identifying whether it was
applying equitable or statutory mootness.
II.
The parties focus on whether equitable mootness applies. This doctrine
allows courts to abstain from appeals of plan confirmation orders, allowing the
interrelated web of parties to rely on a final decision. See In re Pacific Lumber
Co., 584 F.3d 229, 240 (5th Cir. 2009). As many courts have noted, equitable
mootness is not constitutional mootness. In a sense, the bankruptcy doctrine
presents the opposite concern of Article III mootness. A case is not equitably
moot because an appellate reversal would have no effect; it is equitably moot
when a reversal might have too much effect. See Pacific Lumber, 584 F.3d at
240; In re Continental Airlines, 91 F.3d 553, 569 (3rd Cir. 1996) (Alito, J.,
dissenting). Without an express basis in the Bankruptcy Code, equitable
mootness is controversial. Compare In re One2One Communications, LLC, 805
F.3d 428, 441 (3rd Cir. 2015) (Krause, J., concurring); In re Continental
Airlines, 91 F.3d at 569 (Alito, J., dissenting), with In re Tribune Media Co.,
799 F.3d 272, 287–88 (3rd Cir. 2015) (Ambro, J., concurring); see also UNR, 20
F.3d at 769 (rejecting the “equitable mootness” label as misleading, but
agreeing that “a plan of reorganization, once implemented, should be disturbed
only for compelling reasons”).
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We are more hesitant to invoke equitable mootness than many circuits,
treating it as a “scalpel rather than an axe.” Pacific Lumber, 584 F.3d at 240;
see also 7 COLLIER ON BANKRUPTCY ¶ 1129.09 (16th ed. 2018) (referring to this
circuit’s “willingness to tolerate the possibility that reversal will disrupt the
plan” as a “deep divide” between us and other circuits). Equitable mootness
typically requires a reorganization plan that is at least “substantially
consummated.” In re Hilal, 534 F.3d 498, 500 (5th Cir. 2008); see also In re
San Patricio Cnty. Cmty. Action Agency, 575 F.3d 553, 558 (5th Cir. 2009)
(declining to find dispute over settlement agreement equitably moot, without
deciding as a categorical matter whether the doctrine could apply in a Chapter
7 liquidation). That end stage of the Chapter 11 process must be reached
because the concern of equitable mootness is that appellate reversal might
undermine the plan and the parties’ reliance on it. In re SI Restructuring, Inc.,
542 F.3d 131, 135–36 (5th Cir. 2008). But Sneed Shipbuilding’s bankruptcy
case has never reached that stage because no plan has been proposed.
We recognize that some courts outside our circuit have employed
equitable mootness when reviewing settlement agreements, not just plan
confirmations, in particularly messy cases. See, e.g., In re Delta Airlines, Inc.,
374 B.R. 516, 522–525 (S.D.N.Y. 2007). But that just highlights the second
reason why equitable mootness should not apply to the order that New
Industries appeals: this settlement and sale were not sufficiently complex.
Equitable mootness is aimed at limiting review of complex plans whose
implementation has substantial secondary effects. See, e.g., Tribune, 799 F.3d
at 274, 281 (finding moot an appeal of $7.5 billion reorganization involving 243
different classes of creditors). Appellate intervention into reorganization plans
of such complexity may affect many innocent third parties. See Manges, 29
F.3d at 1042–43. Our ability to produce a single graphic to illustrate the
Channelview transaction demonstrates that this case does not rise to that level
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of complexity. Reversal on appeal would only affect a few third parties, all of
whom participated in the bankruptcy court. This does not appear to be the
case to expand equitable mootness into new frontiers.
III.
That is especially so because the trustee also raised the possibility of
mootness under section 363(m). The statute limits the ability of appellate
courts to review the sale of estate property when the order approving the
transaction is not stayed. 11 U.S.C. § 363(m); see also In re Ginther Trusts,
238 F.3d 686, 689 (5th Cir. 2001) (holding that section 363(m) even prevented
appeals to determine whether the bankruptcy court lacked jurisdiction). A
different motivation than complexity motivates section 363(m) mootness: the
need to encourage parties to bid for estate property. See In re Bleaufontaine,
Inc., 634 F.2d 1383, 1389 n.10 (5th Cir. 1981) (“If deference were not paid to
the policy of speedy and final bankruptcy sales, potential buyers would not
even consider purchasing any bankrupt’s property.”). The statute assures
purchasers that once the bankruptcy court approves the sale and it is
consummated (that is, the order is not stayed), then no appellate court can
later second-guess the deal. The cost, of course, is disposing of the full judicial
review for legal accuracy that typically follows a trial court’s ruling. But
Congress thought that trade was worth making to encourage buyers to come
to the table ready to revitalize useful assets, as those buyers might otherwise
stay away when a transaction remains shrouded in legal uncertainty. The
Bankruptcy Code thus entrusts review of a sale solely to the bankruptcy court’s
in-the-moment judgment unless a stay is obtained that prevents the sale from
closing prior to appellate review.
Recognizing this role of section 363(m), New Industries says it does not
challenge the sale of the property but only challenges the disbursement of cash
to the probate estate. But it does not cite any authority that would allow us to
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perform this isolated analysis. Paying off the probate estate was an essential
feature of the sale. And when creditors have tried to cut off part of a sale and
challenge it elsewhere, courts have found their appeals moot. See In re Trism,
Inc., 328 F.3d 1003 (8th Cir. 2003) (challenge to release of avoidance action
that was essential to sale of estate assets); In re Ala. Aircraft Indus., Inc., 464
B.R. 120 (D. Del. 2012) (dispute over creation of litigation trust with funds from
sale of estate assets). Without the more than $8 million payment, the probate
estate would not have released its claim that it owned the Channelview
shipyard. And without that release, San Jac Marine likely would have walked
away from the deal. As the bankruptcy court noted, there is no way to sever
the settlement from the sale; they are mutually dependent. Congress has
ordered us not to review such decisions by the bankruptcy court when they are
not stayed. This case is moot.
***
We AFFIRM the district court’s dismissal of the appeal.
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