Hugh Wilson Haden v. Joel Pelofsky , 212 F.3d 466 ( 2000 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 98-3035
No. 98-3036
___________
Hugh Wilson Haden; Karen Sue Haden; *
Richard D. Hughes; Edith May Hughes; *
Jerry D. Clay, *
*
Debtors-Appellees, *
* Appeal from the United States
v. * District Court for the
* Eastern District of Missouri
Joel Pelofsky, U.S. Trustee; Fredrich J. *
Cruse, Standing Trustee, *
*
Appellants. *
___________
Submitted: April 23, 1999
Filed: April 12, 2000
___________
Before McMILLIAN, MURPHY, and MONTGOMERY,1 Circuit Judges.
___________
McMILLIAN, Circuit Judge.
Joel Pelofsky, United States Trustee ("UST"), and Fredrich J. Cruse, Standing
Trustee ("standing trustee") (collectively "trustees"), appeal from a final order entered
1
The Honorable Ann D. Montgomery, United States District Judge for the
District of Minnesota, sitting by designation.
in the United States District Court2 for the Eastern District of Missouri affirming the
bankruptcy court's3 confirmation of three Chapter 12 bankruptcy plans over the trustees'
objections. See Cruse v. Haden (In re Haden), No. 2:96CV00092 ERW (E.D. Mo.
June 2, 1998) (hereinafter "Dist. Ct. Order"), aff'g Nos. 94-20111-293/94-20178-
293/93-20183-293 (Bankr. E.D. Mo. Oct. 3, 1996) (hereinafter "Bankr. Ct. Order").
For reversal, the trustees argue that the district court below erred in reading In re
Wagner, 36 F.3d 723 (8th Cir. 1994) (Wagner), to mandate confirmation of Chapter
12 plans in which the debtors propose to pay certain creditors directly, without the
oversight of the Chapter 12 trustee and without payment of trustee's fees. For the
reasons discussed below, we affirm the district court order.
Jurisdiction
Jurisdiction in the district court was proper based upon 28 U.S.C. § 158(a).
Jurisdiction in this court is proper under 28 U.S.C. § 158(d). The notice of appeal was
timely filed pursuant to Fed. R. App. P. 4(a).
Background
The three sets of debtors in the instant case -- Hugh Wilson and Karen Sue
Haden (together "the Hadens"), Richard D. and Edith May Hughes (together "the
Hugheses"), and Jerry D. Clay (collectively "debtors") -- are family farmers in
Missouri. Separately and at different times during 1994 and 1995, the debtors
2
The Honorable E. Richard Webber, United States District Judge for the Eastern
District of Missouri.
3
The Honorable David P. McDonald, United States Bankruptcy Judge for the
Eastern District of Missouri.
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petitioned for Chapter 12 reorganization and protection.4 See Bankr. Ct. Order at 1-3.
Each family's Chapter 12 plan contained proposed language permitting the debtors to
pay some of their creditors directly, rather than through the intermediary standing
trustee.5 No creditors objected to these direct payments by the debtors. See id. at 12
n.4. With respect to such direct payments, the plans also purported to exclude trustee's
fees. See id. at 2-3.
The bankruptcy court confirmed each of the plans, subject only to its subsequent
ruling on the trustees' objections as to the direct payments. See id. After the parties
consolidated their arguments and submitted briefs on the direct payment issue, the court
entered an order overruling all but one of the trustees' objections. Based on Wagner6,
4
Under Chapter 12, a debtor typically proposes a financial reorganization plan
to reschedule debt payments over a three-year post-petition period. See 11 U.S.C.
§ 1222(c) (permitting repayment plans of up to five years upon court approval and
showing for cause). The chapter's principal benefit is that families may retain their
farms while reorganizing. See id. §§ 1203, 1204.
5
The UST acts as a "bankruptcy watch-dog" and is authorized to raise "any issue
in any case or proceeding under [the Bankruptcy Code]." 11 U.S.C. § 307.
Specifically, the UST monitors and files comments upon plans submitted for
confirmation by Chapter 12 debtors. See id. § 1224; 28 U.S.C. § 586(a)(3)(C). "If the
number of cases under chapter 12 . . . commenced in a particular region so warrants,"
the regional UST may appoint a "standing trustee." 28 U.S.C. § 586(b). The UST then
supervises the standing trustee in the performance of his or her duties. See id.6
In re Wagner, 36 F.3d 723 (8th Cir. 1994) (Wagner), involved four Chapter 12
plans calling for direct payments of impaired secured creditors by the debtors and for
no payment of trustee's fees with respect to these transactions. (An "impaired" secured
creditor is one whose legal, equitable, or contractual rights have been diluted by the
bankruptcy plan. See id. at 725 n.3.) Soon after the bankruptcy court had confirmed
the plans and the debtors had initiated payments, the trustee moved to dismiss the
bankruptcy actions based on the failure to pay trustee's fees for the debtors' direct
payments. The bankruptcy court then consolidated the cases and granted the trustee's
motions to dismiss. Upon appeal, the district court reversed. The Eighth Circuit
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the bankruptcy court reasoned that Chapter 12 plans containing provisions for direct
payments to a debtor's impaired secured creditors were confirmable over the trustees'
objections. See id. at 10. Moreover, because "the financial impact of allowing direct
payments on the stability of the Chapter 12 program does not appear to be a deciding
factor in allowing the Debtors to pay their creditors directly," the court determined that
it could not "deny[] confirmation of a Chapter 12 plan that provides for direct payments
to impaired secured creditors." Id. at 11. Similarly, the bankruptcy court rejected the
trustees' objections to the direct surrender of secured collateral as well as the direct
payment of unimpaired secured claims and administrative expenses. See id. at 12-15.
However, the court did order Clay to direct child support arrearage payments through
the trustee. See id. at 15.
The district court affirmed, holding that such direct payment plans were
permitted under Wagner. See Dist. Ct. Order at 3. The debtors have since made
payments in accordance with the confirmed plans. In fact, discharges were entered
with respect to the Hadens and the Hugheses in August 1997 and June 1998,
respectively; no discharge has been entered for Clay, although he has apparently
finished making all payments under the plan. See Brief for Appellant UST at 12 n.4;
Supp. Brief for Appellant UST at 5; Supp. Brief for Appellees at 5. Pending appeal,
the debtors have held in escrow trustee's fees on all disputed payments, equal to the
amount required if the trustees' objections were sustained. See Brief for Appellant
Standing Trustee at vi. These appeals followed.
affirmed the decision of the district court, holding that "the debtors' plans permit them
to make direct payments to their impaired secured creditors, and that these provisions
of the plans are not in conflict with the bankruptcy code." Id. at 727. Based on the
language of Chapter 12, the court concluded that the debtors owed no fees to the
trustee for the debtors' direct payments to impaired secured creditors. See id. at 728.
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Discussion
Mootness
Before considering the merits of the trustees' separate appeals, we must decide
whether we have jurisdiction. See Steel Co. v. Citizens for a Better Environment, 523
U.S. 83, 94-95 (1998). Article III of the United States Constitution limits the
jurisdiction of the federal courts to actual, ongoing cases and controversies. See
Missouri ex rel. Nixon v. Craig, 163 F.3d 482, 484 (8th Cir. 1998) (Craig). "It is of
no consequence that the controversy was live at earlier stages in this case; it must be
live when we decide the issues." South Dakota v. Hazen, 914 F.2d 147, 150 (8th Cir.
1990). When, during the course of litigation, the issues presented in a case "lose their
life because of the passage of time or a change in circumstances . . . . and a federal
court can no longer grant effective relief," the case is considered moot. Beck v.
Missouri State High Sch. Activities Ass'n, 18 F.3d 604, 605 (8th Cir. 1994). "[I]f this
case is indeed moot, we must refrain from reaching the merits because any opinion
issued would be merely 'advisory' and rest on hypothetical underpinnings." Craig, 163
F.3d at 484. With these principles in mind, we examine whether the trustees' separate
appeals remain alive, given that all three sets of debtors have completed payments
under their respective plans and that the Hadens and the Hugheses have been
discharged from bankruptcy proceedings.
Debtors claim that the appeals of both the UST and the standing trustee are
moot, in light of the execution of all plan payments and the discharge of two sets of
debtors. Debtors contend that, because all plan payments have been made and
therefore no administrative work remains, the standing trustee cannot be entitled to any
fees for the debtors' direct payments to creditors. See Supp. Brief of Appellees at 6-7.
Accordingly, debtors argue that the trustee's fees issue is moot.
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The UST now asserts effective relief may still be available with respect to each
of the three plans and thus his appeal is not moot.7 See Supp. Brief of Appellant UST
at 9, 13 n.2. Such effective relief could include the bankruptcy court either
(1) disgorging certain payments from creditors and rerouting payments through the
standing trustee or (2) ordering that the standing trustee collect some portion of the fees
being held in escrow. See id. at 9, 11. Although the UST concedes that the former
outcome may conflict with Eighth Circuit precedent, see id. at 10, the UST asserts that
the latter falls within the bankruptcy court's "considerable equitable discretion in
fashioning an appropriate bankruptcy remedy" pursuant to 11 U.S.C. § 105. Id. at 11(quoting In re Reeves, 65 F.3d 670, 674 (8th Cir. 1995)).
The standing trustee similarly argues that his appeal is not moot. In addition to
contending that the cases below are "capable of repetition, but evading review," and
thus not moot, Southern Pac. Terminal Co. v. ICC, 219 U.S. 498, 515 (1911), the
standing trustee asserts that a discharge order cannot moot an issue collateral to the
bankruptcy, such as the propriety of trustee's fees for certain payments to creditors.
See Supp. Brief of Appellant Standing Trustee at 4 (citing Wagner, 36 F.3d at 726).
We hold that, under Wagner, neither the UST's nor the standing trustee's appeal
is moot. In Wagner, the debtors had been discharged from bankruptcy proceedings.
The trustee sought neither a stay nor an appeal of the discharge. This court rejected the
debtors' assertion that the trustee's appeal was moot. This court reasoned:
7
At oral argument, the UST contended that his own appeal had been rendered
moot by the discharges and completions of all plan payments. At the same time,
neither the UST nor the standing trustee believed that the standing trustee's separate
appeal was moot. Debtors did not comment on this issue. Upon this court's own
motion, the parties were directed to file supplemental briefs addressing the mootness
question. See Haden v. Pelofsky, Nos. 98-3035/98-3036 (8th Cir. Apr. 23, 1999)
(order directing parties to file supplemental briefs on mootness issue).
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A discharge under the bankruptcy code discharges "debts provided for by
the plan." Trustee's fees are not "debts provided for by the plan," but are
fees levied for services provided in administering the plan. A claim
against the debtors for trustee's fees is collateral to the bankruptcy action
and the obligation to pay such fees is not relieved by a discharge from the
bankruptcy proceedings. If we find that [the trustee's] arguments have
merit we may grant effective relief, and [his] appeal thus is not moot.
Wagner, 36 F.3d at 726 (citation omitted). Similarly, the discharges and completion
of payments in the bankruptcy plans at issue here cannot render moot the trustees'
claims with respect to fees. Because effective relief would be available if we find merit
to the trustees' claims for fees, the trustees' separate appeals are not moot.
Direct Payments and Trustee's Fees
As the second reviewing court, our standards are the same as those of the district
court; we review the bankruptcy court's findings of fact for clear error and its
conclusions of law de novo. See In re Mathiason, 16 F.3d 234, 235 (8th Cir. 1994).
For reversal, the UST contends that the courts below misread Wagner to bar
bankruptcy courts "from ever considering the impact that removing trustee oversight
from a Chapter 12 debtor's payment of impaired secured creditors may have on the
feasibility of the debtor's plan." Brief for Appellant UST at 13. According to the UST,
the bankruptcy court incorrectly concluded that Wagner created an "absolute right" for
debtors to make such direct payments, reasoning that "[t]he language used by the Court
in Wagner prevents this Court from denying confirmation of a Chapter 12 plan that
provides for direct payments to impaired secured creditors." Brief for Appellant UST
at 10-11 (quoting Bankr. Ct. Order at 11). Similarly, the district court viewed the
question presented as "whether [Wagner] requires confirmation of a Chapter 12 plan
that provides for direct payments on impaired secured claims by a debtor to the
creditors, thereby avoiding payment of the standing trustee's statutory fee." Dist. Ct.
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Order at 1. The UST argues that Wagner did not address this issue of whether the code
creates a "blanket entitlement" to make direct payments, irrespective of the effect that
lack of trustee oversight might have on plan feasibility; instead, the court in Wagner
merely concluded that the bankruptcy code does not necessarily prohibit direct
payments by Chapter 12 debtors. The UST claims that the debtors in the instant case
admitted as much in their memorandum of law to the bankruptcy court by observing
that "Wagner does not address the issue of when a debtor may provide for direct
payments or what circumstances warrant their approval by a court." Joint Appendix,
vol. II, at 488 (Debtors' Memorandum Regarding Direct Payments in Chapter 12 and
Trustee's Fees).
The UST argues that the lower courts' misconstruction of Wagner places an
"unprecedented constraint" on the bankruptcy courts and runs counter to both precedent
and policy considerations underlying the Chapter 12 framework. The UST claims that
the rule announced by the courts below "unjustifiably handicaps bankruptcy courts'
ability to satisfy their statutory mandate to confirm only feasible Chapter 12 plans."
Brief for Appellant UST at 28. Pursuant to this obligation, the courts must assure
themselves that "the debtor will be able to make all payments under the plan and to
comply with the plan." 11 U.S.C. § 1225(a)(6). The UST argues that any rule
requiring confirmation of direct payment plans would essentially trump judicial
evaluation under § 1225 of potential threats to plan feasibility.8 Moreover, the UST
8
The UST also foresees a range of potential negative consequences if trustee
oversight is removed with respect to certain direct payments. For one, a debtor who
lacks the business acumen necessary to ensure all payments are made correctly may be
unable to coordinate direct payments to creditors. Moreover, unsophisticated creditors
with few resources and little understanding of the bankruptcy process may be in poor
position to ensure that debtors are paying in line with their Chapter 12 plans. See In
re Pianowski, 92 B.R. 225, 233-34 (Bankr. W.D. Mich. 1988) (Pianowski).
Additionally, the debtor's default on payments to one creditor may impair the interests
of all other creditors (as well as the debtor), if the unpaid creditor lays claim to the
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contends that the lower courts' interpretation of Wagner conflicts with the well-
accepted line of cases establishing a discretionary test for courts' review of plans
including direct payments. See, e.g., In re Pianowski, 92 B.R. 225, 233-34 (Bankr.
W.D. Mich. 1988) (Pianowski) (setting forth a non-exclusive thirteen factor test for
evaluating plan feasibility under 11 U.S.C. § 1225). Accordingly, the UST urges this
court to reject the lower courts' overly broad reading of Wagner and to instruct lower
courts to evaluate proposed direct payments in light of their impact on plan feasibility.
The standing trustee contends that, because the procedural background of
Wagner was materially different from that of the instant case, the courts below erred
by applying the Wagner standard to the adjudication of the trustees' objections.
Specifically, the standing trustee notes that he objected to the debtors' plans prior to
judicial confirmation, whereas the Wagner standing trustee failed to make such a timely
objection. As a result, the standing trustee argues, in Wagner, this court only evaluated
the potential conflict between the bankruptcy code and the already confirmed plan, and
not the bankruptcy court's decision to confirm a plan with direct payments despite the
objections of trustees or creditors. See Brief for Standing Trustee at 2-3 (citing
Michaela M. White, Direct Payment Plans, 29 Creighton L. Rev. 583, 609-10 (1996)
("[T]he Eighth Circuit's statement [in Wagner] that the Code does not prohibit direct
payment plans cannot be properly understood as depriving the bankruptcy court of
discretion in the confirmation of such plans for the rather basic reason that this was not
even the question on appeal.")). Alternatively, the standing trustee requests en banc
reconsideration of Wagner.
debtor's property without regard for others' financial interests. See In re Logemann, 88
B.R. 938, 941-42 (Bankr. S.D. Iowa 1988). Finally, direct payments may undermine
the trustee's ability to receive adequate compensation for his or her work. See
Pianowski, 92 B.R. at 234 & n.16.
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Upon careful review, we hold that the courts below did not err in their
interpretation and application of Wagner. First, we do not read Wagner's textual
analysis of the Chapter 12 statutes as limited to its own particular procedural context.
In examining the bankruptcy code (prior to any consideration of the plans themselves
or any attendant trustee objections), this court recognized in Wagner that the code
"does not forbid plan provisions allowing direct payments by the debtor to impaired
secured creditors." 36 F.3d at 726. In fact, as this court noted, the language of the
code expressly anticipates that such payments may be made. See id. (noting that 11
U.S.C. § 1226(c) requires the trustee to make payments to creditors under the plan
"[e]xcept as otherwise provided in the plan or in the order confirming the plan"
(emphasis added), while id. § 1225(a)(5)(B)(ii) addresses the treatment of secured
claims by referring to "property to be distributed by the trustee or the debtor under the
plan." (emphasis added)). Accord. In re Beard, 45 F.3d 113, 119 (6th Cir. 1995)
(Beard) (comparing Chapter 12 code provisions and concluding that "Congress had
constructed a scheme that envisioned that debtors would at times be able to pay their
debts directly to their creditors, allowing them to bypass the trustee."). We find nothing
in Wagner to indicate that its statutory analysis only applied to Chapter 12 plans
matching Wagner's procedural posture, where the trustee apparently had not objected
to the direct payment provisions prior to confirmation. Accordingly, we are not
convinced by the standing trustee's arguments that Wagner is procedurally
distinguishable from the instant case.
Next, we do not believe that the courts below misinterpreted Wagner. Although
both the bankruptcy court and the district court used somewhat imprecise language in
defining Wagner's scope, at no point did either of the lower courts state that Wagner
established an "absolute right" for Chapter 12 debtors to make direct payments to
impaired secured creditors. See Bankr. Ct. Order at 11 ("The language used by the
Court in Wagner prevents this Court from denying confirmation of a Chapter 12 plan
that provides for direct payments to impaired secured creditors."); Dist. Ct. Order at
1 ("The main issue on appeal is whether [Wagner] requires confirmation of a Chapter
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12 plan that provides for direct payments on impaired secured claims by a debtor to the
creditors, thereby avoiding payment of the standing trustee's statutory fees."). We read
the lower courts' decisions to hold that such direct payment plans may be confirmed
under Wagner, provided all the requirements of 11 U.S.C. § 1225 are met, including
a plan feasibility assessment. See id. § 1225(a)(6).
The UST incorrectly claims that the bankruptcy court failed to make an adequate
feasibility determination in this case. The bankruptcy court clearly indicated that the
plans were feasible and that the direct payments at issue were permissible so long as
they did not interfere with feasibility. Regarding the trustees' objections to the direct
payments given the debtors' avoidance of trustee's fees, the court admitted the possible
negative impact on the Chapter 12 administrative apparatus if "debtors are given free
reign to circumvent the trustee's fees." Id. at 11. However, based on Wagner 's
rejection of similar reasoning, see 36 F.3d at 726 (finding no support in the bankruptcy
code for the reasoning that "Congress could not have intended debtors to make direct
payments to creditors" just because "the trustee will receive nothing" if such payments
are made), the bankruptcy court concluded that "the financial impact of allowing direct
payments on the stability of the Chapter 12 program does not appear to be a deciding
factor in allowing the Debtors to pay their creditors directly." Bankr. Ct. Order at 11;
see also Beard, 45 F.3d at 118-120 (permitting Chapter 12 debtor to pay directly the
secured portion of undersecured claims and rejecting trustee's argument that lack of
trustee remuneration would undermine Chapter 12 administrative scheme and
Congressional intent). The bankruptcy court indirectly addressed feasibility by noting
that, if the secured creditors in the instant case had objected to the direct payments,
"the results in the present cases may have been different." Bankr. Ct. Order at 12 n.4.
Later in its opinion, the bankruptcy court expanded upon the impact of removing trustee
oversight on direct payments:
[S]ecured creditors, both impaired and unimpaired, are nearly always
sophisticated and often represented by experienced counsel. The need for
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the trustee to monitor payments made directly to the secured creditors is
less significant in assuring the success of a Chapter 12 plan. Thus, if the
court is reasonably certain that direct payments to the creditors will not
interfere with the statutory duties of the Trustee, nor contribute to the
likelihood of the failure of the farmers' efforts to organize or their
noncompliance with the confirmed plan, then there is no reason why the
court should not approve the Debtors' request to directly pay their
administrative and [secured] creditors. However, it is unlikely that the
court would ever approve direct payments to unsecured creditors, without
the debtor clearly demonstrating the existence of good cause and the
creditors' affirmative consent.
Id. at 13-14. While the bankruptcy court did order that child arrearage payments to a
particular unsecured creditor be made through the trustee, see id. at 14-15, the court
apparently considered the lack of trustee oversight and remuneration for the other direct
payments to be of little importance with respect to the feasibility of the Chapter 12
plans. Accordingly, we hold that the lower courts correctly applied Wagner not to
mandate confirmation of all direct payment plans, but rather to permit direct payments
which comport with feasibility requirements under the bankruptcy code.9
Conclusion
For the reasons stated, we affirm the order of the district court.
9
Neither Wagner nor any other Eighth Circuit case has outlined the possible
factors involved in such a Chapter 12 plan feasibility determination. As the UST
concedes, we need not resolve that issue here. See Brief for Appellant UST at 28.
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A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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