Rich Dad Operating Co. v. Rich Global

FILED
United States Court of Appeals
UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT June 14, 2016
_________________________________
Elisabeth A. Shumaker
Clerk of Court
In re: RICH GLOBAL, LLC,
Debtor.
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RICH DAD OPERATING COMPANY,
LLC,
Appellant,
v. No. 15-8103
(D.C. No. 1:13-CV-00167-ABJ)
TRACY L. ZUBROD, Chapter 7 Trustee; (D. Wyo.)
LEARNING ANNEX HOLDINGS, LLC;
LEARNING ANNEX, LLC; LEARNING
ANNEX, L.P.,
Appellees.
_________________________________
ORDER AND JUDGMENT*
_________________________________
Before BRISCOE, LUCERO, and PHILLIPS, Circuit Judges.
_________________________________
Creditor Rich Dad Operating Company, LLC (RDOC) appeals from the district
court’s affirmance of the bankruptcy court’s order approving a settlement agreement
*
After examining the briefs and appellate record, this panel has determined
unanimously to honor the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
submitted without oral argument. This order and judgment is not binding precedent,
except under the doctrines of law of the case, res judicata, and collateral estoppel. It
may be cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1
and 10th Cir. R. 32.1.
between the trustee for the debtor’s estate and another creditor. RDOC obtained a
stay of the bankruptcy court’s order pending its appeal to the district court, but it did
not seek a stay of the district court’s order pending this appeal. After the automatic
stay of the district court’s order expired, the trustee and the creditor performed their
obligations under the settlement agreement. Accordingly, they now move this court
to dismiss this appeal as moot. Because we are not persuaded that the appeal is moot,
we proceed to the merits and review the bankruptcy court’s approval of the
settlement agreement. But because we also are not persuaded by RDOC’s challenges
to the decision, we affirm.
I. BACKGROUND
RDOC is the sole member and manager of the debtor, Rich Global, LLC
(Rich Global). Rich Global lost a lawsuit brought by appellees Learning Annex
Holdings, LLC, Learning Annex, LLC, and Learning Annex L.P. (collectively,
Learning Annex) in the Southern District of New York. In July 2012, that court
entered judgment against Rich Global and in favor of Learning Annex for nearly
$23.7 million. Rich Global appealed to the Second Circuit Court of Appeals.
Learning Annex cross-appealed the district court’s dismissal of one of its claims, as
well as its grant of judgment as a matter of law to another defendant in the action.
The Southern District of New York ordered Rich Global to post a reduced
appeal bond, but instead Rich Global filed a Chapter 7 bankruptcy petition in the
District of Wyoming. The filing of that petition automatically stayed the Second
Circuit appeal and cross-appeal. The bankruptcy court appointed appellee
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Tracy L. Zubrod as trustee (the Trustee). Two creditors filed proofs of claim:
(1) RDOC for approximately $2.2 million, and (2) Learning Annex for the amount of
the judgment with interest, almost $23.7 million.
Initially the Trustee intended to abandon Rich Global’s interest in the Second
Circuit appeal. She rejected RDOC’s offer to indemnify the estate for the costs of
pursuing the appeal. Ultimately, however, the Trustee and Learning Annex entered
into the settlement agreement (the Agreement). The principal terms of the
Agreement are: (1) Learning Annex would pay the bankruptcy estate $100,000;
(2) the Trustee would dismiss the Second Circuit appeal, with prejudice; (3) Learning
Annex would dismiss Rich Global as an appellee in its cross-appeal; and (4) “[a]
single claim shall be allowed as a general unsecured claim in favor of . . . Learning
Annex . . . in the amount of $23,690,999.41,” Aplt. App., Vol. 2 at 467. Over
RDOC’s objection, the bankruptcy court approved the Agreement. RDOC moved for
and was granted a stay pending its appeal to the U.S. District Court for the District of
Wyoming.
On August 18, 2015, the district court affirmed the bankruptcy court’s order.
By operation of Fed. R. Bankr. P. 8025(a), the district court’s judgment was
automatically stayed for fourteen days. RDOC did not move for a further stay of the
district court’s order. After the end of the automatic stay period, the Trustee and
Learning Annex performed their obligations under the Agreement. Learning Annex
had already paid the Trustee $100,000, so on September 4, the Trustee and Learning
Annex filed their agreed-upon stipulation to dismiss Rich Global’s Second Circuit
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appeal and Learning Annex’s cross-appeal against Rich Global. On September 8, the
Second Circuit dismissed the appeal and the cross-appeal against Rich Global, and it
issued its mandate. The next week, it lifted the stay of the cross-appeal and set a
briefing schedule.
On September 16, RDOC appealed to this court from the district court’s order.
In light of their performance of the Agreement, the Trustee and Learning Annex
moved to dismiss the appeal as moot.
II. DISCUSSION
A. Mootness
1. Constitutional Mootness
Under Article III of the Constitution, the judiciary has authority to adjudicate
“Cases” and “Controversies.” U.S. Const. art. III, § 2, cl. 1. “A case becomes
moot—and therefore no longer a ‘Case’ or ‘Controversy’ for purposes of Article
III—when the issues presented are no longer live or the parties lack a legally
cognizable interest in the outcome.” Already, LLC v. Nike, Inc., 133 S. Ct. 721, 726
(2013) (internal quotation marks omitted). “An appeal is constitutionally moot if the
court can fashion no meaningful relief. . . . [I]f a court can fashion some form of
meaningful relief, even if it only partially redresses the grievances of the prevailing
party, the appeal is not moot.” Search Market Direct, Inc. v. Jubber (In re Paige),
584 F.3d 1327, 1336 (10th Cir. 2009) (brackets and internal quotation marks
omitted). The burden of establishing there is no longer a live case or controversy is
on the party claiming mootness, see id., here the Trustee and Learning Annex.
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The Trustee and Learning Annex argue that given the performance of their
obligations under the Agreement, particularly the dismissal of the Second Circuit
matters, this court cannot afford RDOC any meaningful relief. RDOC asserts, to the
contrary, that “the Settlement Agreement and its effects upon the bankruptcy estate
can be unwound and modified without substantial difficulty.” Resp. to Mot. to
Dismiss at 3. It suggests that the $100,000 payment can be returned to Learning
Annex; that “nothing would prevent the parties from requesting that the Second
Circuit vacate its recent orders dismissing the Second Circuit Appeal or the
cross-appeal against Rich Global and an affiliate,” id. at 8-9; and that “Learning
Annex’s allowed general unsecured claim against the bankruptcy estate of
Rich Global can be adjusted, discounted, subordinated or disallowed should this
Court decide to reverse the decisions made by the district court and the bankruptcy
court,” id. at 9.
It appears that the Trustee could return the $100,000. But of course this court
has no ability to compel the Second Circuit to recall its mandate. Moreover, a court
of appeals may exercise its power to recall the mandate “only in extraordinary
circumstances”; “it is [a power] of last resort, to be held in reserve against grave,
unforeseen contingencies.” Calderon v. Thompson, 523 U.S. 538, 550 (1998). And
the cross-appeal has moved forward with briefing. In these circumstances, there is
virtually no chance that the appeal and cross-appeal can be resurrected. RDOC’s
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suggestion that the settlement can be unwound because nothing prohibits the parties
from seeking such resurrection borders on the frivolous.1
This appeal is not moot, however, if we may offer even partial relief. And the
burden of showing the absence of any meaningful relief rests on the Trustee and
Learning Annex. Those parties have failed to overcome RDOC’s assertion that, if we
were to reverse the decision to approve the Agreement, RDOC would be able to
challenge Learning Annex’s claim in ways that it could not do if the Agreement
stands. In light of this possibility of relief, the appeal is not constitutionally moot.
2. Equitable Mootness
In the bankruptcy context, equitable mootness may also be a consideration.
Under this doctrine, “equitable, prudential, or pragmatic considerations can render an
appeal of a bankruptcy court decision moot even when the appeal is not
constitutionally moot.” Paige, 584 F.3d at 1337 (internal quotation marks omitted).
“As with constitutional mootness, we hold that the party seeking to prevent this court
from reaching the merits of the appeal bears the burden of proving that, for pragmatic
1
In addition, these arguments contradict RDOC’s prior statements to the
bankruptcy court in its motion for stay. RDOC asserted that it would suffer
irreparable harm in the absence of a stay because “[t]he Judgment allows Trustee to
dismiss the Second Circuit Appeal with prejudice. Once the Second Circuit Appeal
is so dismissed, it is gone forever and Debtor’s estate will have no opportunity to
reduce a $23 million claim against it.” Aplt. App., Vol. 4 at 870. It later stated that
“[d]ismissing the Second Circuit Appeal could also render the . . . [a]ppeal moot
because, even if it reverses the Judgment, it is highly unlikely the [district court] can
revive the Second Circuit Appeal once the Second Circuit dismisses it.” Id. at 876
(citing cases). Because we consider untenable RDOC’s current position regarding
the Second Circuit appeal, we need not decide whether judicial estoppel applies. We
note, however, that the courts generally disfavor parties’ changing positions as it may
suit them. See, e.g., New Hampshire v. Maine, 532 U.S. 742, 749-51 (2001).
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reasons, the court should abstain from reaching the merits of the case.” Id. at
1339-40.
We apply equitable mootness at our discretion. See C.O.P. Coal Dev. Co. v.
C.W. Mining Co. (In re C.W. Mining Co.), 641 F.3d 1235, 1240 (10th Cir. 2011).
Upon careful consideration, we decline to decide whether this appeal is equitably
moot. The parties have not explicitly argued for equitable mootness, and this court
has not yet decided whether equitable mootness should apply in a Chapter 7 case,
see id. Accordingly, we will not “decide whether the doctrine can be applied, and if
so, weigh the doctrine’s six factors in this case in the face of an underdeveloped
record on this issue.” Id.
3. Statutory Mootness
RDOC’s first merits argument also triggers a mootness inquiry—this time
statutory mootness. RDOC asserts that the bankruptcy court erred in declining to
apply the sale-of-property provisions in 11 U.S.C. § 363(b), instead approving the
Agreement solely under Fed. R. Bankr. P. 9019. The Trustee and Learning Annex
counter that, if § 363 applies, this appeal is moot under § 363(m), which provides:
The reversal or modification on appeal of an authorization under subsection
(b) or (c) of this section of a sale or lease of property does not affect the
validity of a sale or lease under such authorization to an entity that
purchased or leased such property in good faith, whether or not such entity
knew of the pendency of the appeal, unless such authorization and such sale
or lease were stayed pending appeal.
“[Section] 363(m) forecloses any remedy . . . that would affect the validity of the
trustee’s sale.” C.W. Mining Co., 641 F.3d at 1239. As with the other mootness
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doctrines, it is the Trustee’s and Learning Annex’s burden to prove that the appeal is
moot under § 363(m). See id.
RDOC asserts that § 363(m) does not apply because the bankruptcy court did
not apply § 363. It further asserts that § 363(m) only applies to a “good faith”
purchaser, and in this case there has been no determination that Learning Annex
acted in good faith.
It seems disingenuous for RDOC to complain about the bankruptcy court’s
failure to apply § 363(b) while simultaneously disclaiming the applicability of
§ 363(m). Nevertheless, we do not consider RDOC’s § 363 argument statutorily
moot. By the statute’s plain terms, there must be a determination of “good faith,”
and the Trustee and Learning Annex have not shown any such determination.
For these reasons, we do not consider any portion of this appeal to be moot,
and we move to the parties’ merits arguments.
B. Merits Arguments
“Even though this appeal comes to us from the district court, we review a
bankruptcy court’s decisions independently, examining legal determinations de novo
and factual findings for clear error.” FB Acquisition Prop. I, LLC v. Gentry (In re
Gentry), 807 F.3d 1222, 1225 (10th Cir. 2015). “A bankruptcy court’s approval of a
compromise may be disturbed only when it achieves an unjust result amounting to a
clear abuse of discretion.” Reiss v. Hagmann, 881 F.2d 890, 891-92 (10th Cir. 1989)
(citation omitted). “A bankruptcy court is inherently a court of equity,” and “[t]here
is an overriding consideration that equitable principles govern the exercise of
8
bankruptcy jurisdiction.” Sec. Nat’l Bank v. Turner (In re Ocobock), 608 F.2d 1358,
1360 (10th Cir. 1979) (internal quotation marks omitted).
1. 11 U.S.C. § 363
Section 363(b) allows the trustee to sell estate property outside the ordinary
course of business. As stated, RDOC argues that the bankruptcy court erred in not
applying § 363(b) standards, instead approving the Agreement solely under
Fed. R. Bankr. P. 9019. It asserts that a remand is necessary for the bankruptcy court
to consider the Agreement under § 363(b) standards, including whether the
Agreement is within the Trustee’s sound business judgment.
Although the federal courts are split, the majority have held that a settlement
of claims can also qualify as a sale of property under § 363. See 3 Collier on
Bankruptcy ¶ 363.02 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). For
purposes of this appeal, we assume without deciding that this court would adopt the
majority position. But courts have also held that “[w]hether to impose formal sale
procedures is ultimately a matter of discretion that depends upon the dynamics of the
particular situation.” Goodwin v. Mickey Thompson Enter. Grp., Inc. (In re Mickey
Thompson Enter. Grp., Inc.), 292 B.R. 415, 422 (B.A.P. 9th Cir. 2003); see also
Cadle Co. v. Mims (In re Moore), 608 F.3d 253, 265 (5th Cir. 2010) (same). “In
most compromises, the procedures of [Fed. R. Bankr. P.] 6004 [implementing § 363]
and the substance of Code section 363 will not be implicated.” 10 Collier on
Bankruptcy ¶ 6004.01[6] (emphasis added).
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In both Moore and Mickey Thompson, the courts were persuaded that § 363
auctions were required because the tendering of higher offers indicated that an
auction could yield a better result for the estate. See Moore, 608 F.3d at 265;
Mickey Thompson, 292 B.R. at 421, 422; see also 10 Collier on Bankruptcy
¶ 6004.01[6] (indicating that § 363 procedures are necessary “if other parties indicate
that they are willing to pay more for the claim, or if it is otherwise shown that a
bidding procedure would be appropriate”). Those decisions, however, were
context-dependent. See Mickey Thompson, 292 B.R. at 422 n.7 (“We are not
suggesting that every compromise of a bona fide controversy presented to a
bankruptcy court under Rule 9019 must pass muster as a sale under section 363. We
are sensitive to the different considerations that come into play.”). As the district
court recognized, in this case the circumstances are significantly different. The
“claims” at issue are defensive appellate arguments. No other person or entity
offered more to settle the appeal; RDOC itself went only so far as to offer to
indemnify the estate for the costs of pursuing the appeal. Moreover, the parties
already had demonstrated the futility of trying to resort to an auction, given that an
earlier proposed auction never went forward because they failed to agree on
procedures. In these circumstances, we reject RDOC’s assertion that the bankruptcy
court’s failure to employ § 363(b) protections requires reversal of the order
approving the Agreement.
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2. Fed. R. Bankr. P. 7052
RDOC argues that the bankruptcy court’s order fails to satisfy Fed. Bankr. R.
7052, which incorporates Fed. R. Civ. P. 52 into certain bankruptcy proceedings.
Under Rule 52(a)(1), “the court must find the facts specially and state its conclusions
of law separately.”
“The Rule is designed to provide the appellate court with a clear understanding
of the basis of the trial court’s decision and to aid the trial court in considering and
adjudicating the facts.” Colo. Flying Acad., Inc. v. United States, 724 F.2d 871, 877
(10th Cir. 1984). “Findings of fact satisfy Rule 52(a) . . . if they afford the reviewing
court a clear understanding of the factual basis for the trial court’s decision.” Bell v.
AT & T, 946 F.2d 1507, 1510 (10th Cir. 1991) (internal quotation marks omitted).
Findings need not be in a specific form and need not be detailed. See Colo. Flying
Acad., Inc., 724 F.2d at 878; Featherstone v. Barash, 345 F.2d 246, 250 (10th Cir.
1965).
RDOC complains that the bankruptcy court’s order is insufficient for appellate
review. We disagree. The order is adequate to show this court the basis for the
decision. To the extent that RDOC believes the bankruptcy court should have been
more specific regarding certain points, “[g]eneral findings which realistically meet
and resolve the issues in dispute may be sufficient in the absence of occasion or
request for more specific ones.” Featherstone, 345 F.2d at 250. The bankruptcy
court adequately gave “the reviewing court some basis for distinguishing between
well-reasoned conclusions arrived at after comprehensive consideration of relevant
11
factors and mere boilerplate approval.” Official Comm. of Unsecured Creditors of
W. Pac. Airlines, Inc. v. W. Pac. Airlines, Inc. (In re W. Pac. Airlines, Inc.), 219 B.R.
575, 580 (D. Colo. 1998) (internal quotation marks omitted).
3. Fed. R. Bankr. P. 9019
Fed. R. Bankr. P. 9019(a) allows the bankruptcy court to approve a
compromise or settlement upon notice and a hearing. RDOC asserts that the
bankruptcy court abused its discretion in approving the Agreement under Rule 9019.
In undertaking its analysis, the bankruptcy court applied the following four
factors: (1) the chance of success of the litigation on the merits; (2) possible
problems in collecting a judgment; (3) the expense and complexity of the litigation;
and (4) the interest of creditors. See W. Pac. Airlines, 219 B.R. at 579; Kopp v. All
Am. Life Ins. Co. (In re Kopexa Realty Venture Co.), 213 B.R. 1020, 1022
(B.A.P. 10th Cir. 1997); William L. Norton, Jr. and William L. Norton III, 8 Norton
Bankruptcy Law & Practice § 167:2 (3d ed. 2011). The parties do not argue that the
bankruptcy court erred in identifying these as the appropriate factors, and so we
assume without deciding that they are.
“[A] court’s general charge is to determine whether the settlement is fair and
equitable and in the best interests of the estate.” W. Pac. Airlines, 219 B.R. at 579
(internal quotation marks omitted). “[T]he court should, without conducting a trial or
deciding the numerous questions of law and fact, review the issues and determine
whether the settlement falls below the lowest point in the range of reasonableness.”
12
8 Norton Bankruptcy Law & Practice § 167.2 (brackets and internal quotation marks
omitted).
Contrary to RDOC’s assertions, we are not convinced that the bankruptcy
court failed to adequately apprise itself of the facts and the law pertaining to the
Second Circuit appeal. The court reviewed “the history of the litigation, the counts
alleged, . . . the District Court opinions and the supporting documents found on the
record.” Aplt. App., Vol. 4 at 860. It was not required to “decid[e] the numerous
question of law and fact.” 8 Norton Bankruptcy Law & Practice § 167.2. Nor was it
required to conduct a detailed analysis of the underlying law or a risk-adjusted value
of continuing litigation, as RDOC urges. And the bankruptcy court did not ignore
either the Southern District of New York’s assessment or RDOC’s indemnity offer,
as RDOC also asserts. It is apparent that the court was aware of these issues, as it
addressed them in the order. We see no abuse of discretion with regard to any of
these points.
RDOC states that the bankruptcy court’s failure to reject the Agreement, in
light of its indemnity offer, is per se reversible error. We disagree. In Reiss, this
court reversed the rejection of a settlement where the only creditor had offered to pay
the costs of a lawsuit upon which rested the only hope of any recovery for
disbursement to that creditor. 881 F.2d at 893. We did not create a per se rule,
however, and in fact we qualified our holding by stating “[a]t least in a case like that
at bar.” Id. The circumstances here are unlike those in Reiss.
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RDOC also asserts that the bankruptcy court erred in concluding that if the
Second Circuit appeal were reversed, a third trial would be required. Even if error,
however, we do not consider it reversible error. The bankruptcy court’s concern
about the potential of an appeal or further litigation dragging on for an extended time
was not an invalid one.
Regarding the interests of the creditors, RDOC argues that the bankruptcy
court erred in weighing the relative effects of the Agreement on Learning Annex and
RDOC—if the Second Circuit were to reverse the judgment, RDOC would be the
sole remaining creditor and would be paid a significant portion of its claim. The
bankruptcy court, however, was well aware of RDOC’s creditor status (as well as its
status as Rich Global’s only member). RDOC also asserts that the bankruptcy court,
while expressing concern about RDOC’s proposed indemnity arrangement aligning
RDOC and the Trustee against Learning Annex, instead impermissibly allowed the
Trustee and Learning Annex to align together against RDOC when it approved the
Agreement. But the bankruptcy court was concerned that the indemnity agreement
would “put[] the Trustee in the position of working for a creditor and equity
shareholder of the estate, against the only other creditor.” Aplt. App., Vol. 4 at 861.
The Agreement, in contrast, did not put the Trustee in the position of “working for”
Learning Annex.
Having thoroughly reviewed the arguments, the record, and the applicable law,
we cannot conclude that the bankruptcy court abused its discretion. The approval of
14
the Agreement does not “achieve[] an unjust result amounting to a clear abuse of
discretion.” Reiss, 881 F.2d at 891-92.
III. CONCLUSION
The motion to dismiss the appeal as moot is denied. The judgment is affirmed.
Entered for the Court
Gregory A. Phillips
Circuit Judge
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