FILED JUL 12 2022 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
In re: BAP No. CC-21-1123-LGT CPESAZ LIQUIDATING, INC., fka Community Provider of Enrichment Bk. No. 9:20-bk-10554-DS Services, Inc.; NDS LIQUIDATING, INC., fka Novelles Developmental Services, Inc.; CPESCA LIQUIDATING, INC., fka CPES California, Inc., Debtors.
ROBERT BENNETTI; LINDA MARIANO; LINKI PEDDY; CHARLES FOUST, JR.; INDIVDUAL CPES ESOP PARTICIPANTS, Appellants, v. MEMORANDUM∗ CPESAZ LIQUIDATING, INC., fka Community Provider of Enrichment Services, Inc.; NDS LIQUIDATING, INC., fka Novelles Developmental Services, Inc.; CPESCA LIQUIDATING, INC., fka CPES California, Inc.; OXFORD RESTRUCTURING ADVISORS, LLC, Appellees.
∗ This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. 1 Appeal from the United States Bankruptcy Court for the Central District of California Deborah J. Saltzman, Bankruptcy Judge, Presiding
Before: LAFFERTY, GAN, and TAYLOR, Bankruptcy Judges.
INTRODUCTION
This is an appeal from the bankruptcy court’s order confirming
Debtors’ chapter 111 plan of liquidation (the “Plan”). Appellants are
participants in Debtors’ Employee Stock Ownership Plan and Trust
(“ESOP”). Their primary argument on appeal is that the bankruptcy court
erred in confirming the Plan without permitting them either to direct the
ESOP trustee’s vote via a “direction pass-through” vote (a vote directed by
plan participants and beneficiaries, i.e., shareholders) or to vote as
unsecured creditors; they claim this failure violated ERISA, 2 the ESOP
Document, and Arizona law. They also argue that the Plan is tainted by
conflict and contains impermissible provisions, including third-party
releases.
Appellants, however, have not shown that the bankruptcy court
abused its discretion in confirming the Plan or that it erred in its
underlying rulings. We AFFIRM.
1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532. “Rule” references are the Federal Rules of Bankruptcy Procedure. 2 “ERISA” stands for the Employee Retirement Income Security Act of 1974.
2 FACTS3
This case involves three debtors: CPESAZ Liquidating, Inc. fka
Community Provider of Enrichment Services, Inc. (“CPESAZ”); NDS
Liquidating, Inc., fka Novelles Developmental Services, Inc. (“Novelles”);
and CPESCA Liquidating, Inc., fka CPES California, Inc. (“CPESCA”)
(collectively, “Debtors”). CPESAZ and Novelles filed their chapter 11
petitions in April 2020, and CPESCA in August 2020. The cases were
ordered jointly administered, with CPESAZ as lead.4 No creditors’
committee was appointed.
Debtors were previously in the business of offering behavioral health
services. They operated day treatment centers and programs in California
and Arizona. As of the petition date, all shares of CPESAZ capital stock
were held by the Community Provider of Enrichment Services, Inc.
(“CPES”) ESOP. Appellants are former employees and individual
participants in the CPES ESOP (the “ESOP Participants”). Appellees are
Oxford Restructuring Advisors, LLC, the liquidating trustee of the CPES
Liquidating Trust (“Liquidating Trustee”), which was created pursuant to
the chapter 11 plan, and the Debtors.
3 Where necessary, we have exercised our discretion to take judicial notice of the dockets and imaged papers filed in debtors’ bankruptcy cases. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 4 The other two entities are wholly owned subsidiaries of CPESAZ.
3 In November 2020, the bankruptcy court entered an order approving
the sale of substantially all Debtors’ assets. The sale order was not
appealed, and the sale has been consummated.
Thereafter, Debtors filed a liquidating plan and disclosure statement,
which were subsequently amended. The Plan, as amended, proposed a
100% payout to general unsecured creditors, with interest, to be overseen
by a liquidating trustee appointed by the bankruptcy court under
§ 1123(b)(3)(B). The three debtor entities were to be dissolved. The
liquidation analysis in the amended disclosure statement estimated that
$8.4 million would be available for distribution to the ESOP Trust after
payment of allowed claims, compared to $8 million in a chapter 7
liquidation.
The Plan provides that any ESOP Participant wishing to vote on the
plan must hold a claim in Class 3 (general unsecured creditors) that is
“separate and apart from” a direct ESOP claim and that any direct ESOP
claims would be asserted by the ESOP Trustee, Miguel Parades, on behalf
of all holders of beneficial interests in the ESOP. The ESOP Participants are
classified as Class 6 equity interests, to be treated as follows:
Each Equity Interest shall be canceled on the Effective Date of the Plan. Allowed Class 6 Equity Interests will be paid a Pro Rata dividend, if any, and only to the extent Allowed Class 3 General Unsecured Claims are paid in full, from the remaining net proceeds of the Liquidating Trust Assets. Notwithstanding anything to the contrary in this Plan, the ESOP Trustee shall retain responsibility, standing, and
4 authority to commence, prosecute and settle lawsuits or actions on behalf of the holders of beneficial interests to the Equity Interest in the ESOP. The Plan further provides, “The ESOP Trustee, on behalf of the ESOP
Trust, the sole Holder of Class 6 Equity Interests, is entitled to vote to
accept or reject the Plan.”
The motion to approve the disclosure statement included a request to
establish procedures for solicitation and tabulation of votes. Appellants
objected to the provision entitling the ESOP Trustee to exercise his
discretion to accept or reject the plan rather than permitting them to direct
the vote. The bankruptcy court overruled their objection and approved the
disclosure statement and voting procedures.
Appellants thereafter moved to appoint a chapter 11 trustee or
convert the case to chapter 7, alleging that the ESOP Trustee had conflicts
of interest and complaining that the proposed plan denied a vote to the
individual ESOP Participants. The bankruptcy court denied the motion.
Appellants also moved for temporary allowance of individual ESOP
Participants’ claims or an order estimating those claims for purposes of
voting on the plan (“Temporary Allowance Motion”), again arguing that
the ESOP Trustee could not vote the interests of the participants without a
“direction pass-through vote” by the participants. The bankruptcy court
denied the motion, finding that the ESOP Trustee was the proper party to
submit a vote on behalf of the ESOP participants. In the end, two of the
5 three impaired classes of creditors, Class 3, general unsecured creditors,
and Class 6, equity interests, voted to accept the Plan. The other impaired
class, Class 4 (intercompany claims), was deemed to have rejected the Plan,
as no votes were received.
Appellants filed an objection to confirmation of the Plan, asserting
that the Plan violated their voting rights and their right to bring claims for
breaches of ERISA fiduciary duties. They also objected to the release and
exculpation provisions of the Plan and argued that the Plan was
unconfirmable because it provided for a discharge of the Debtors and
because it violated the best interests of creditors test. Appellants also filed a
response to the Debtors’ confirmation memorandum and an objection to
the proposed findings of fact and conclusions of law regarding plan
confirmation. The bankruptcy court overruled the objections and
confirmed the Plan. Appellants timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(L). Subject to the discussion below, we have jurisdiction under 28
U.S.C. § 158.
ISSUES
Should this appeal be dismissed?
Did the bankruptcy court err in denying the motion to appoint a
chapter 11 trustee or convert the case to chapter 7?
6 Did the bankruptcy court err in denying the Temporary Allowance
Motion?
Did the bankruptcy court abuse its discretion in confirming Debtors’
chapter 11 plan of liquidation?
STANDARDS OF REVIEW
We review the bankruptcy court’s order confirming a chapter 11 plan
for abuse of discretion. Beal Bank USA v. Windmill Durango Off., LLC (In re
Windmill Durango Off., LLC), 481 B.R. 51, 63 (9th Cir. BAP 2012). We also
review for abuse of discretion the bankruptcy court’s denial of a motion to
convert. Richter v. Klein/Ray Broad. (In re Klein/Ray Broad.), 100 B.R. 509, 511
9th Cir. BAP 1987).
A bankruptcy court abuses its discretion if it applies the wrong legal
standard, or misapplies the correct legal standard, or if it makes factual
findings that are illogical, implausible, or without support in inferences
that may be drawn from the facts in the record. United States v. Hinkson, 585
F.3d 1247, 1262 (9th Cir. 2009) (en banc).
Whether cause exists to appoint a chapter 11 trustee requires factual
findings that we review for clear error. In re Klein/Ray Broad., 100 B.R. at
511. A factual finding is clearly erroneous if it is illogical, implausible, or
without support from inferences that may be drawn from the facts in the
record. Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).
7 DISCUSSION
A. Appellees’ Motion to Dismiss Appeal and/or Strike
Appellees moved to dismiss this appeal on two jurisdictional
grounds, arguing that: (1) the Panel lacks jurisdiction over the issues raised
in the appeal because those issues were adjudicated in previous orders
entered by the bankruptcy court that were not appealed; and (2) the appeal
is equitably moot. Alternatively, Appellees ask the Panel to: (1) dismiss the
appeal because Appellants’ initial opening brief exceeds the page and word
limits set by Rule 8015; or (2) strike improper arguments and allegations
from Appellants’ opening brief and strike references to new evidence.
1. Jurisdiction
a. The Panel has jurisdiction over the issues raised in this appeal because the bankruptcy court’s prior rulings on those issues were not final. A bankruptcy court’s order may be immediately appealed if it
“finally dispose of discrete disputes within the larger case.” Bullard v. Blue
Hills Bank, 575 U.S. 496, 501 (2015). “The test for finality in bankruptcy
typically asks two questions: (1) whether the bankruptcy court’s order fully
and finally determined the discrete issue or issues it addressed; and
(2) whether it resolves and seriously affects substantive rights.” Jue v. Liu
(In re Liu), 611 B.R. 864, 870 (9th Cir. BAP 2020) (citing Eden Place, LLC v.
Perl (In re Perl), 811 F.3d 1120, 1126 (9th Cir. 2016) (additional citation and
internal quotations omitted).
8 Appellees contend that we lack jurisdiction to review the four issues
listed in Appellants’ opening brief because they were previously
addressed, either in the bankruptcy court’s order denying the Temporary
Allowance Motion or its order denying the motion to appoint a trustee.
Those issues are:
• Whether the bankruptcy court erred when it confirmed the Plan
without permitting ESOP Participants to vote either as equity (through a
direction pass-through vote under ERISA, the IRC, and applicable state
law) or as unsecured creditors.
• Whether the bankruptcy court erred when it confirmed the Plan
without requiring evidence regarding whether any of the Appellees were
unsecured creditors.
• Whether the bankruptcy court erred when it confirmed the Plan by
failing to appoint a chapter 11 trustee or convert the case to chapter 7 and
by failing to require and consider any evidence from Debtors, their counsel,
and/or the ESOP Trustee of his relationship to the Debtors.
• Whether the bankruptcy court erred by allowing the ESOP Trustee to
vote the interests of ESOP Participants when the evidence showed that
such individual was nothing more than a directed trustee and an
independent contractor at will of Debtors and had no authority or
resources to take positions contrary to the Debtors, its management and
board of directors, and its attorneys.
9 Although not included in their list of issues on appeal, Appellants
also argue in their opening brief—as they did in the bankruptcy court—
that the release and exculpation provisions of the Plan violate their rights
to bring claims for ERISA violations and that the Plan was unconfirmable
because it provided for a discharge of the Debtors’ debts and violated the
best interests of creditors test. These are confirmation issues over which we
have jurisdiction in this appeal. Appellees do not argue otherwise.
The issues regarding the bankruptcy court’s refusal to appoint a
chapter 11 trustee and whether the ESOP Trustee acted at the behest of
Debtors rather than the ESOP Participants were raised in the context of the
motion to appoint a trustee. But an order denying a motion to convert or
appoint a chapter 11 trustee is interlocutory. United States Bakery v.
Svenhard’s Swedish Bakery, 632 B.R 312, 320 (E.D. Cal. 2021), appeal filed, (9th
Cir. Nov. 29, 2021); In re Klein/Ray Broad., 100 B.R. at 510-11. The
bankruptcy court’s ruling on that motion did not become final until it
confirmed the Plan. We thus have jurisdiction to consider those issues.
The other two issues—whether the bankruptcy court erred in
refusing to permit the ESOP Participants a direction pass-through vote on
the Plan or to require evidence on whether any of the ESOP Participants
held general unsecured claims—were raised in the context of the
Temporary Allowance Motion. But the bankruptcy court’s ruling on that
motion was narrow and not the final word on anything other than whether
the ESOP Participants were entitled to have any claims estimated or
10 allowed for voting purposes. The bankruptcy court denied it because:
(1) Appellants had not met their burden to show that they had any claims
that could be allowed on a temporary basis; and (2) the assertion that
Appellants had pass-through voting rights under the ESOP documents and
applicable law was not supported by the evidence or the law. The court
qualified its ruling when it stated, “whether there is evidence out there that
would cause the Court to make a different ruling at a different point in
time, I’m not making that determination . . . .” Accordingly, the order
denying the Temporary Allowance Motion did not finally resolve the
identified issues.
b. This appeal is not equitably moot.
An appeal is equitably moot “if the case ‘presents transactions that
are so complex or difficult to unwind that debtors, creditors, and third
parties are entitled to rely on the final bankruptcy court order.’” JPMCC
2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props., Inc. (In re
Transwest Resort Props., Inc.), 801 F.3d 1161, 1167 (9th Cir. 2015) (quoting
Rev. Op. Grp. v. ML Manager LLC (In re Mortgs. Ltd.), 771 F.3d 1211, 1215
(9th Cir. 2014)). Unlike constitutional mootness, equitable mootness is a
judge-created doctrine that reflects not an inability to provide relief, but an
unwillingness to do so. Id.
We are to assess four factors in considering a dismissal of an appeal
on equitable mootness grounds: (1) whether a stay was sought; (2) whether
substantial consummation of the plan has occurred; (3) the effect that a
11 remedy may have on third parties not before the court; and (4) whether the
bankruptcy court can provide “effective and equitable relief without
completely knocking the props out from under the plan and thereby
creating an uncontrollable situation for the bankruptcy court.” Id. at 1167-
68 (9th Cir. 2015) (quoting Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In
re Thorpe Insulation Co.), 677 F.3d 869, 881 (9th Cir. 2012)). In the Ninth
Circuit, this last consideration is the most important. Id. at 1171. “Even if
the relief would be only partial, ‘[w]here equitable relief, though
incomplete, is available, the appeal is not moot.’” Id. (quoting In re Thorpe
Insulation Co., 677 F.3d at 883).
Appellees point out that Appellants did not seek a stay pending
appeal. This factor weighs heavily in favor of a finding of equitable
mootness. In re Mortgages Ltd., 771 F.3d at 1217-18. See also Cobb v. City of
Stockton (In re City of Stockton, Cal.), 909 F.3d 1256, 1264 (9th Cir. 2018). 5 But
5 In City of Stockton, the Ninth Circuit stated that it is “’obligatory’ that one seeking relief from plan confirmation ‘pursue with diligence all available remedies to obtain a stay of execution of the objectionable order.’ Failure to do so without adequate explanation should result in dismissal.” 909 F.3d at 1264 (quoting Trone v. Roberts Farms, Inc. (In re Roberts Farms, Inc.), 652 F.2d 793, 798 (9th Cir. 1981). Although this language suggests a per se rule requiring dismissal whenever an appellant has failed to seek a stay pending appeal, we note that the City of Stockton court went on to analyze the remaining equitable mootness factors before ultimately deciding to dismiss the appeal. 909 F.3d at 1264-65. And we have found no Ninth Circuit authority for such a per se rule. Rather, courts look at whether the failure to seek a stay caused other parties to change position in reliance on the finality of the subject order such that it would be inequitable to reverse the order. See In re Roberts Farms, Inc., 652 F.2d at 798 (“[I]t is obligatory upon appellant in a situation like the one with which we are faced to pursue with diligence all available remedies to obtain a stay of execution of the objectionable 12 the other factors weigh against such a finding. First, even if it can be
argued that substantial consummation has occurred, it is unlikely that third
parties would be prejudiced or that the bankruptcy court could not fashion
appropriate equitable relief without “knocking the props out from under
the plan.” The asset sale occurred long before the Plan was proposed, and
the Plan is a mechanism for determining claims and potential causes of
action to marshal and properly distribute the proceeds. According to
Appellants, those proceeds are approximately $15.5 million. Appellees
assert that $32,000 in administrative expenses has been paid and an
additional $148,000 has been approved to be disbursed to another
administrative claimant. They also state that $359,414 has been distributed
to general unsecured creditors. Appellants point out that these sums are a
mere fraction of the total proceeds and that numerous claims remain
unpaid.
As for prejudice to third parties, “for this factor to weigh in favor of
holding a party’s appeal to be equitably moot, the specific relief sought
must bear unduly on innocent third parties.” In re Transwest Resort Props.,
Inc., 801 F.3d at 1169. Appellees have not made such a showing. In any
event, the payment of money can be undone and thus weighs against an
equitable mootness finding. See Elder v. Uecker (In re Elder), 325 B.R. 292,
296-97 (N.D. Cal. 2005). Appellees further argue that the replacement of the
order . . . if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from.” (emphasis added)). 13 Liquidating Trustee by a chapter 11 trustee would result in a costly
duplication of efforts, but to the extent this is a valid consideration in the
equitable mootness analysis, it does not mean the bankruptcy court could
not fashion any relief.
2. Failure to comply with Rule 8015
Appellees ask the Panel to dismiss the appeal on the ground that
Appellants’ initial opening brief exceeded the page and word number
limits of Rule 8015. After the motion was filed, Appellants filed an
amended brief that complied with the rule. Even if they had not, we would
not dismiss the appeal on this basis. See Ehrenberg v. Cal. State Univ.,
Fullerton Found. (In re Beachport Ent.), 396 F.3d 1083, 1088 (9th Cir. 2005)
(reversing BAP's summary dismissal of appeal for failure to provide certain
documents in the excerpts of record, as required under Rule 8009, on the
ground that "the sanction of summary dismissal was inappropriately harsh
in relation to the harm that was actually caused.”).
3. Motion to Strike
Finally, Appellees ask the Panel to strike portions of Appellants’ brief
that contain factual allegations and legal arguments that were not properly
raised in the bankruptcy court. We generally do not consider arguments
not properly raised before the bankruptcy court. See O'Rourke v. Seaboard
Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957 (9th Cir. 1989). And to the
extent a factual assertion is not supported by the record, we need not
accept it.
14 Appellees also ask the Panel to strike new documents and
information that was not before the bankruptcy court. We generally do not
consider evidence that was not presented to the bankruptcy court unless it
bears on a jurisdictional issue such as mootness. Thus we see no need to
order the documents stricken. All relief requested in the motion to dismiss
and/or strike is DENIED.
B. The bankruptcy court did not err by declining to appoint a trustee or convert the case. Section 1104 provides that the bankruptcy court shall appoint a
trustee “for cause, including fraud, dishonesty, incompetence, or gross
mismanagement of the affairs of the debtor by current management, either
before or after the commencement of the case, or similar cause . . . .” Section
1112(b) provides that the bankruptcy court may convert a chapter 11 case
to chapter 7 “for cause.”
Appellants moved for appointment of a chapter 11 trustee based on
their lack of confidence in Debtors’ management and their belief that Mr.
Paredes was not an independent fiduciary who would vote in their
interests. They also believed that the actions of the Debtors’ directors,
officers, former ESOP fiduciaries, and the current and former ESOP Trustee
should be investigated to determine whether claims could be asserted
against those individuals. They alleged that Debtors had “extensive
conflicts of interest” based on an admitted overvaluation of the ESOP as of
the end of 2018 and Debtors’ expenditure of $2 million for the purchase of
15 fiduciary liability insurance and proposal of a plan that granted releases to
the persons subject to the insurance coverage. They also complained about
the amount of attorneys’ fees incurred by Debtors’ counsel.
Debtors pointed out in their opposition that the cost for the D&O
portion of insurance expenses was around $120,000 (not $2 million), claims
against the current and former ESOP Trustees were not released under the
Plan, and the Plan preserves claims against former officers and directors.
They also noted that Mr. Paredes was not installed on behalf of Debtors but
to oversee the ESOP assets. They pointed out that attorneys’ fees and costs
would be subject to bankruptcy court approval and that appointing a
trustee at that juncture would increase, not decrease, administrative costs.
The bankruptcy court denied the motion, finding that the evidence
did not establish cause to appoint a chapter 11 trustee or to convert the
case. The court noted that the concerns raised by Appellants regarding Plan
provisions could be addressed in the context of confirmation.
Appellants argue that the bankruptcy court erred in denying the
motion for the same reasons presented to the bankruptcy court. They also
contend that the court erred “by failing to require and consider any
evidence from the Debtors, their counsel, and/or the ESOP Trustee of his
relationship to the Debtors.” But Appellants, not Debtors, had the burden
to show cause for the appointment of a trustee. United Sur. & Indem. Co. v.
López-Muñoz (In re López-Muñoz), 866 F.3d 487, 497 (1st Cir. 2017).
16 Appellants also contend that the ESOP Participants’ lack of
confidence in, and acrimony toward, Debtors’ management and their
counsel constituted “cause” to appoint a trustee, citing In re Sundale, Ltd.,
400 B.R. 890, 909-10 (Bankr. S.D. Fla. 2009), and In re Eurospark Industries,
Inc., 424 B.R. 621, 630-31 (Bankr. E.D.N.Y. 2010). But Appellants fail to
mention that the Sundale court did not appoint a trustee based on a lack of
confidence or acrimony and noted that those circumstances, while possibly
a ground for the appointment of a trustee, do not always support that
result. “There is no per se rule by which mere conflicts or acrimony
between debtor and creditor mandate the appointment of a trustee.” In re
Sundale, Ltd., 400 B.R. at 909 (quoting In re Marvel Ent. Grp., Inc., 140 F.3d
463, 473 (3d Cir. 1998) (internal quotations and alteration omitted)). And
the bankruptcy court in Eurospark appointed a trustee based on its finding
that the debtor’s sole shareholder had a conflict of interest; its decision was
bolstered by, but not wholly based upon, the fact that the U.S. Trustee and
creditors had lost confidence in the shareholder’s ability to fulfill his
fiduciary duties. In re Eurospark Indus., 424 B.R. at 630-31. Appellants have
cited no authority that a loss of confidence by creditors constitutes “cause”
to appoint a trustee as a matter of law. Rather, this determination is made
on a case-by-case basis. See In re Marvel Ent. Grp., 140 F.3d at 472-73.
Here, the only evidence offered by Appellants were declarations of
the ESOP Participants expressing their opinion that they had lost
confidence in Debtors’ management and in Mr. Paredes. But, as the
17 bankruptcy court observed, “feelings and perceptions do not rise to the
level of evidence establishing cause for what the [courts have] recognized
as an extreme remedy.”
Based on the record before us, the bankruptcy court did not err in
finding that Appellants did not establish cause for appointment of a trustee
or conversion to chapter 7. They did not produce evidence sufficient to
support a finding of mismanagement, conflict, or any other ground for
relief.
C. The bankruptcy court did not err in denying the Temporary Allowance Motion. Appellants moved for an order under Rule 3018(a) to allow
temporarily the unsecured claims of ESOP Participants, which were the
subject of unresolved objections by the Debtors. That rule provides, in
relevant part, “Notwithstanding objection to a claim or interest, the court
after notice and hearing may temporarily allow the claim or interest in an
amount which the court deems proper for the purpose of accepting or
rejecting a plan.” Rule 3018(a). The motion stated that the rights of the
ESOP Participants and beneficiaries were either equity or unsecured debt,
depending on the individual circumstances, but reaching a conclusion on
that issue would require an extensive audit of the Debtors’ records.
Debtors opposed the motion, pointing out that Appellants’ claims
were against the ESOP, not the Debtors, and that Mr. Paredes was the
proper party to assert claims on behalf of the ESOP Participants in his role
18 as ESOP Trustee. They also pointed out that the ESOP Document grants the
ESOP Trustee the power to vote, in his discretion, any stock held in the
ESOP Trust.
The bankruptcy court denied the motion on the ground that
Appellants had not established that there were any claims that were
capable of being allowed or estimated on a temporary basis.
Appellants argue that the bankruptcy court erred by failing to require
evidence regarding whether some or all ESOP Participants were unsecured
creditors. They argue that they had claims against the Debtors because the
plan called for termination of the ESOP, after which CPESAZ would be
obligated to fund their retirement. But they ignore that, to be allowed as
claims against the Debtors, any unsecured claims would have had to exist
as of the petition date. Although Appellants argue that the bankruptcy
court “should have” granted the motion, they have not identified any legal
or factual basis for concluding that the court erred in denying it. In any
event, as discussed below, we agree with the bankruptcy court that the
ESOP Trustee was the proper party to vote on the Plan on behalf of the
ESOP Participants.
D. The bankruptcy court did not abuse its discretion in confirming Debtors’ Plan. Appellants contend that the bankruptcy court abused its discretion in
several ways when it confirmed the Plan. Specifically, they argue that
(1) the bankruptcy court erred in confirming the Plan without requiring a
19 direction pass-through vote by the individual ESOP Participants; (2) the
Plan contained impermissible third-party releases; (3) the Plan is tainted by
conflict; (4) the Plan discharged the Debtors; and (5) the Plan violated the
“best interests test.”
1. The bankruptcy court did not err in confirming the Plan without requiring a direction pass-through vote. Appellants argue that confirmation of the plan without a direction
pass-through vote violated ERISA, the ESOP Document, and Arizona law.
We disagree. Nothing in the statutes or the ESOP Document required such
a vote.
ERISA provides that a tax credit employee stock ownership plan
qualifies under ERISA
only if each participant or beneficiary in the plan is entitled to direct the plan as to the manner in which voting rights under securities of the employer which are allocated to the account of such participant or beneficiary are to be exercised with respect to any corporate matter which involves the voting of such shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transaction as the Secretary may prescribe in regulations. 26 U.S.C.A. § 409(e)(3).
The ESOP Document provides in part at Section 8 (entitled “Voting of
CPES Stock”):
Shares of CPES Stock in the Trust shall be voted in the manner determined by the Trustee. With respect to any corporate 20 matter which involves the voting of such shares at a shareholder meeting and which constitutes a merger, consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business or a similar transaction specified in regulations under Section 409(e)(3) of the Code, however, each Participant (or Beneficiary) will be entitled to give confidential instructions as to the voting of shares of CPES Stock then allocated to his Stock Account in accordance with procedures established by the Trustee. Finally, Arizona law provides:
A. On the terms and conditions and for the consideration determined by the corporation’s board of directors, a corporation may sell, lease, exchange or otherwise dispose of all or substantially all of its property, with or without the goodwill, other than in the usual and regular course of business, if the board of directors proposes and its shareholders approve the proposed transaction. B. For a transaction to be authorized: 1. The board of directors shall recommend the proposed transaction to the shareholders unless the board of directors determines that because of conflict of interest or other special circumstances it should make no recommendation and communicates the basis for its determination to the shareholders with the submission of the proposed transaction. 2. The shareholders entitled to vote shall approve the transaction. Ariz. Rev. Stat. § 10-1202.
Appellants complain at the outset that the asset sale that occurred
early in the case should not have been approved without giving the
individual ESOP Participants the opportunity to direct a vote. Based on the
21 plain language of the relevant statutes and Plan document, they may be
correct as to the sale. But Appellants did not move for reconsideration on
that ground nor do they assert on appeal that they were denied due
process. In any event, the order approving the sale was not appealed and is
now final.
Nothing in the quoted statutes or Plan Document requires that the
individual participants be allowed to direct a pass-through vote with
respect to confirmation of a chapter 11 plan. Mr. Paredes voted on behalf of
the ESOP Participants pursuant to his duties as ESOP Trustee. To the extent
Appellants object to the fact that Mr. Paredes voted to accept the Plan, they
have not explained how this vote violated his fiduciary duties.
2. The release, exculpation, and indemnification provisions in the plan do not violate the Bankruptcy Code or ERISA. Appellants argue that the releases, exculpation, and indemnification
provisions of the Plan violate their rights in two ways. First, they argue that
nonconsensual third-party releases and exculpations violate § 524. Second,
they argue that those provisions violate their rights under ERISA.
Release and exculpation provisions are found at Articles 9.2 and 9.3
of the Plan. Article 1.1 of the Plan defines “Exculpated Party” as “(a) the
Debtors; (b) the Patient Care Ombudsman, and (c) with respect to each of
the foregoing, such Entity’s successors and assigns and current affiliates,
subsidiaries, officers, directors, trustees, principals, employees, agents,
financial advisors, attorneys, accountants, investment bankers, consultants,
22 representatives, and other Professionals.” And Article 1.1 defines
“Released Parties” as “(a) the Debtors; (b) Faegre Drinker Biddle & Reath
LLP [Debtors’ counsel]; and (c) CohnReznick Capital Markets Securities,
LLC [Debtors’ investment banker].”
Article 9.2 of the Plan provides that Released Parties are released and
discharged from any and all claims of the Debtors and the Estates related
to Debtors’ restructuring efforts, intercompany transactions, the
formulation, preparation, dissemination, negotiation, or filing of the plan
documents, plan documents, contracts and releases, the chapter 11 cases,
the plan, the purchase agreements, consummation and administration of
the plan, and the business or contractual arrangements between Debtors
and any released party “taking place on or before the Effective Date
relating to any of the foregoing.” Article 9.2 also states that the releases do
not apply to post-effective date obligations of any person or entity under
the plan, any cause of action related to an act or omission that constitutes
actual fraud, willful misconduct, or gross negligence, or any of the
Litigation Claims as defined in the Plan.
Next, Article 9.3 provides:
Except as otherwise specifically provided in the Plan, no Exculpated Party shall have or incur, and each Exculpated Party is hereby released and exculpated from any Cause of Action for any claim related to any act or omission in connection with, relating to, or arising out of, the Chapter 11 Cases, the Disclosure Statement, the Plan, the Sale Transactions, the Purchase Agreements, or any Plan Document, contract,
23 instrument, release or other agreement or document (including providing any legal opinion requested by any Person or Entity regarding any transaction, contract, instrument, document, or other agreement contemplated by the Plan or the reliance by any Exculpated Party on the Plan or the Confirmation Order in lieu of such legal opinion) created or entered into in connection with the Disclosure Statement or the Plan, the filing of the Chapter 11 Cases, the pursuit of Confirmation, the pursuit of Consummation, the administration and implementation of the Plan, including the distribution of property under the Plan or any other related agreement, except for claims related to any act or omission that is determined in a final order to have constituted actual fraud, willful misconduct, or gross negligence, but in all respects such Persons and Entities shall be entitled to reasonably rely upon the advice of counsel with respect to their duties and responsibilities pursuant to the Plan. The Exculpated Parties have, and upon closing of the Chapter 11 Cases or the Effective Date shall be deemed to have, participated in good faith and in compliance with the applicable laws with regard to the solicitation of, and distribution of, consideration pursuant to the Plan and, therefore, are not, and on account of such distributions shall not be, liable at any time for the violation of any applicable law, rule, or regulation governing the solicitation of acceptances or rejections of the Plan or such distributions made pursuant to the Plan. The Ninth Circuit has held that § 524(e) precludes bankruptcy courts
from discharging the liabilities of non-debtors. Resorts Int’l, Inc. v.
Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401 (9th Cir. 1995). That
subsection provides in relevant part that “discharge of a debt of the debtor
does not affect the liability of any other entity on, or the property of any
24 other entity for, such debt.” 11 U.S.C. § 524(e). More recently, however, the
Ninth Circuit has held that “tailored” exculpation clauses are permissible.
Blixseth v. Credit Suisse, 961 F.3d 1074, 1082 (9th Cir. 2020). In Blixseth, the
Ninth Circuit held that a plan provision exculpating a creditor from
potential claims against it did not run afoul of § 524(e) because it was
narrow in scope and time. 961 F.3d at 1081. Specifically, the provision was
limited to releasing the parties for acts or omissions in connection with,
relating to, or arising out of the chapter 11 cases or the bankruptcy filing,
i.e., acts occurring during the bankruptcy proceedings and not before. Id.
The provision also applied only to negligence claims; it excluded willful
misconduct and gross negligence. Id. at 1081-82. And it covered only
parties closely involved in drafting the plan. Id. at 1082. The court
concluded that Ҥ 524(e) does not bar a narrow exculpation clause of the
kind here at issue—that is, one focused on actions of various participants in
the Plan approval process and relating only to that process.” Id.
As can be seen, the release and exculpation provisions in the Plan
extend only to the estate’s professionals who worked to assist the Debtors
in effectuating a plan, and they exclude willful misconduct and gross
negligence. They do not include the ESOP Trustee as an exculpated party,
and Article 1.1(79) of the Plan (defining “Preserved D&O Claims”)
preserves claims and causes of action relating to the ESOP. As such, the
bankruptcy court did not err in concluding that the release and exculpation
25 provisions fell into the category of tailored, limited exculpation clauses that
are not prohibited under the Code or Ninth Circuit case law.
Appellants also contend that the indemnification provision of the
Plan violates ERISA. They quote Article 6.3 of the Plan, which provides:
All indemnification obligations in place as of the Effective Date (whether in the by-laws, certificates of incorporation or formation, limited liability company agreements, other organizational or formation documents, board resolutions, indemnification agreements, employment contracts, or otherwise) for the post-petition directors, officers, trustees, managers, employees, attorneys, accountants, investment bankers, and other professionals of the Debtors, as applicable, shall be assumed and remain in full force and effect after the Effective Date, and shall not be modified, reduced, discharged, impaired, or otherwise affected in any way, and shall survive Unimpaired and unaffected, irrespective of when such obligation arose. They then point out that the ESOP Trust Agreement contains a
provision under which CPES purports to indemnify “each individual
Trustee, to the extent permitted by law, against any personal liability or
expense resulting from his or her service as Trustee, except for liability or
expense incurred by reason of his or her own willful misconduct or gross
negligence.” Amendment 2015-2 to the CPES ESOP Document purports to
indemnify “each member of the [ESOP] Committee (to the extent permitted
by law) against any personal liability or expense resulting from his service
on the Committee, except such liability or expense as may result from his
own willful misconduct.”
26 They argue that these provisions, which they assume are
incorporated into the Plan by Article 6.3, violate 29 U.S.C. § 1110(a). That
statute provides, in relevant part, “any provision in an agreement or
instrument which purports to relieve a fiduciary from responsibility or
liability for any responsibility, obligation, or duty under this part shall be
void as against public policy.”
As Appellees point out, 29 U.S.C. § 1110 also contains a provision
permitting the purchase of liability insurance for fiduciaries. And
Amendment 2015-2 to the ESOP Document provides, “to the extent
required under Section 412 of ERISA, CPES shall secure fidelity bonding
for the fiduciaries of the Plan.” It also provides that CPES may obtain
liability insurance for fiduciaries. Such insurance was purchased in
connection with the CPES ESOP, which is consistent with ERISA
requirements. The bankruptcy court did not err in approving the release,
exculpation, and indemnity provisions of the Plan.
3. There is no evidence of any conflicts of interest. Appellants contend that “the plan of liquidation is conflicted” for two
reasons. First, they assert that Mr. Paredes has a conflict because he was
previously represented by Debtors’ counsel, Faegre Drinker Biddle &
Reath, LLP (“Faegre Drinker”), and that representation was not disclosed,
and because they believe he is acting at the behest of Debtors’
management. Second, as explained below, they complain that the Plan
27 provisions create a conflict between the Liquidating Trustee and members
of the Trust Oversight Committee (“TOC”).
To begin, Appellants assert that Mr. Paredes’ appointment as ESOP
Trustee was “clouded in controversy.” Faegre Drinker did not disclose in
its appointment application that it had a prior relationship with
Mr. Paredes or that Mr. Paredes had executed a conflict of interest waiver.
The ESOP Trust Agreement and the ESOP Trustee’s engagement letter
permit the ESOP Trustee to resign upon 60 days’ written notice to CPES.
The ESOP Trustee may resign if given instructions or directions from CPES
with which he is unable or unwilling to comply. He may be removed at
any time by the board of directors of CPES. Based on these provisions,
Appellants characterize Mr. Paredes as an at-will employee of the Debtors
who acts at the discretion of Debtors’ management. But they cite no
evidence in the record to support this assertion.6
Appellants next point out that the Plan permits the ESOP Trustee to
be a member of the TOC, which oversees the Liquidating Trustee. The TOC
6 Notably, corporate managers are not prohibited from serving as ESOP fiduciaries. See 29 U.S.C. § 1108(c)(3) (“Nothing in section 1106 of this title [enumerating prohibited transactions, such as self-dealing] shall be construed to prohibit any fiduciary from serving as a fiduciary in addition to being an officer, employee, agent, or other representative of a party in interest.”). See also Grindstaff v. Green, 133 F.3d 416, 421-22 (6th Cir. 1998). The Grindstaff court explained that ESOPs are exempted from ERISA’s strict prohibitions against self-dealing because of the “distinctive dual nature and purpose of ESOPs as both a retirement plan and a means of corporate finance.” 133 F.3d at 421 (citation and internal quotations omitted). As such, ESOPs are not intended to guarantee retirement benefits; they place employee retirement assets at much greater risk than does the typical diversified ERISA plan. Id. 28 is comprised of Mr. Paredes, CapGrow Holdings JV Sub IV LLC, Debtors’
largest unsecured creditor, and Sentry Insurance, CPES’s workers
compensation and employer liability insurer.
Under Articles 5.2 and 5.4 of the Plan, the Liquidating Trust is vested
with all Causes of Action. 7 The Liquidating Trustee has the authority to
enforce those causes of action, and the Liquidating Trust has the sole
responsibility and authority to pursue, settle, or abandon all Litigation
Claims 8 that are not expressly released or waived under the Plan.9 Under
7 “Causes of Action” is defined in Article 1.1(13) of the plan as “any and all claims, actions, causes of action, choses in action, suits, debts, damages, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, judgments, remedies, rights of set-off, third-party claims, subrogation claims, contribution claims, reimbursement claims, indemnity claims, counterclaims, and crossclaims (including all claims and any avoidance, recovery, subordination, or other actions against Insiders and/or any other Entities under the Bankruptcy Code, including Avoidance Actions) of any of the Debtors, the debtors in possession, and/or the Estates (including those actions set forth in the Plan Supplement), whether known or unknown, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, that are or may be pending on the Effective Date or commenced by the Liquidating Trustee after the Effective Date against any Entity, based in law or equity, including under the Bankruptcy Code, whether direct, indirect, derivative, or otherwise and whether asserted or unasserted as of the date of entry of the Confirmation Order.” 8 “Litigation Claims” are defined in Article 1.1(69) of the plan as “any and all
Causes of Action of any Debtor and/or any of the Estates against any Entity, including but not limited to, (a) all claims and Causes of Action related to or arising out of the ESOP that are not Direct ESOP Claims, (b) the Preserved D&O Claims, (c) all claims and Causes of Action arising under Chapter 5 of the Bankruptcy Code (other than Causes of Action that constitute Purchased Assets), and (d) all claims and Causes of Action against insiders of the Debtors.” 9 At oral argument, Appellants’ counsel stated that his clients want the ability to
assert derivative claims against Debtors. But it is not clear what evidence would support such claims; to the extent Appellants allege they were injured by the process 29 Paragraph 2.7 of the Liquidating Trust Agreement, the Liquidating Trustee
has the authority, with the TOC’s consent, to retain professionals to carry
out its duties under the agreement. Appellants assert that these
circumstances add up to a conflict of interest because the Liquidating
Trustee would be discouraged from bringing claims against any member of
the TOC.
Additionally, Appellants point out that the Liquidating Trustee could
replace the ESOP Trustee, but the ESOP Trustee is a member of the TOC
that maintains oversight over the Liquidating Trustee. They also note that
the fees for the Liquidating Trustee’s services are to be paid from the
Liquidating Trust and thus will reduce amounts to be distributed to the
ESOP Participants, but they are not subject to court approval. Appellants
acknowledge that the Liquidating Trustee is a fiduciary, but they argue
that the bankruptcy court should have required him to submit fee
applications that could be scrutinized by the ESOP Participants.
These arguments and circumstances do not establish any conflicts of
interest. To establish a conflict, it must be shown the party in question has
duties to different individuals or entities that have adverse interests. Under
ERISA, “[a] fiduciary with respect to a plan shall not . . . in his individual or
in any other capacity act in any transaction involving the plan on behalf of
a party (or represent a party) whose interests are adverse to the interests of
leading up to and including confirmation of the plan, any such injury has yet to be articulated. 30 the plan or the interests of its participants or beneficiaries.” 29 U.S.C.
§ 1106(b)(2). Appellants point to no evidence of any conflicts of interest
among Debtors, their counsel, and the ESOP Trustee. Although Debtors’
counsel has represented Mr. Paredes, that representation was limited to
Mr. Paredes’ professional capacity as a fiduciary for ESOP trusts. 10
Appellants cite no evidence of conduct by the ESOP Trustee that would
raise questions about his adherence to his fiduciary obligations.
With respect to the relationship between the Liquidating Trustee and
the TOC, the Liquidating Trustee is an independent fiduciary and, under
paragraph 2.4 of the Liquidating Trust Agreement, may be removed only
upon request of the TOC and approval by the bankruptcy court. Debtors’
directors and officers have no say in the Liquidating Trustee’s role or
continued employment. There is no evidence in the record that the
Liquidating Trust has claims against members of the TOC. And the
Liquidating Trustee does not control claims against the ESOP Trustee. All
claims against the ESOP Trustee are held by the ESOP Trust and governed
by ERISA, not the estates or the Liquidating Trust. See 29 U.S.C. § 1132(a)
(providing civil remedies for breach of fiduciary responsibilities).
10Appellants moved to disqualify Debtors’ counsel. The bankruptcy court recently ruled on that motion. It found that Faegre Drinker’s failure to disclose its prior relationship with Mr. Paredes did not amount to a disqualifying conflict, but it was a violation of Rule 2014. Accordingly, the bankruptcy court reduced the requested fees by $120,000 as a sanction. On May 11, 2022, Appellants appealed to this Panel the order denying their disqualification motion and the order approving the reduced fees (BAP No. CC-22-1090). 31 Appellants also complain that the Plan permitted Debtors and the
ESOP Trustee to choose the Liquidating Trustee. While this is true, the
appointment of the Liquidating Trustee was subject to bankruptcy court
approval. Moreover, Appellants point to no evidence in the record of any
impropriety in the selection of the Liquidating Trustee.
In short, Appellants’ assertion that conflicts exist is speculative and
not based on any evidence in the record.
4. The Plan does not discharge Debtors.
Appellants argue that the Plan improperly provides for a discharge
of the Debtors. It does not. In fact, Article 9.4 of the Plan provides,
“confirmation of this Plan does not operate to discharge the Debtors;
provided, however, that upon confirmation of the Plan, the occurrence of
the Effective Date, and the distributions provided for under the Plan, the
Holders of Claims and Equity Interests may not seek payment or recourse
against or otherwise be entitled to any distribution from the Estates or
Liquidating Trust except as expressly provided in the Plan.” Appellants
have not cited any authority suggesting that this provision is
impermissible.
5. The Plan does not violate the “best interests” test.
Section 1129(a)(7) requires that each holder of an impaired claim or
interest must either accept the plan or receive on account of its claim or
interest property of a value, as of the effective date of the plan, that is not
less than the amount the holder would receive if the debtor were liquidated
32 under chapter 7. Ordinarily, this determination is made using a liquidation
analysis showing a comparison of estimates of how much would be
available for distribution under the plan versus a chapter 7. As noted, the
liquidation analysis attached to the disclosure statement estimated that $8.4
million would be available for distribution to the ESOP Trust after
payment of allowed claims, compared to $8 million in a chapter 7
Appellants do not quibble with the liquidation analysis itself, but
they contend that the releases and exculpations granted to Debtors’
insiders, the ESOP Trustee, TOC members and other fiduciaries and
attorneys would not have been granted in a chapter 7 liquidation.
Appellants assert, with no citation to evidence in the record or any
analysis, that a chapter 7 trustee would have had an opportunity to pursue
“these claims” for the benefit of the estate. Appellants do not identify any
such claims, nor do they cite any legal authority suggesting that this is a
basis for finding that the Plan did not meet the best interests of creditors
test. This argument is frivolous.
CONCLUSION
For all these reasons, the bankruptcy court did not err in denying
Appellants’ motion to appoint a chapter 11 trustee and the Temporary
Allowance Motion. Nor did it abuse its discretion in confirming the Plan.
We AFFIRM.