IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 00-11103 _____________________
In The Matter Of: HAMMERSMITH DEVELOPMENT COMPANY; LOUIS G REESE, III
Debtors
---------------------------------
ADVANTAGE CAPITAL GROUP INC
Appellant
v.
HAMMERSMITH DEVELOPMENT COMPANY; LOUIS G REESE, III; SUSAN B REESE; MILO H SEGNER, Chapter 11 Trustee
Appellees
_________________________________________________________________
Appeal from the United States District Court for the Northern District of Texas No. 3:00-CV-1424-R _________________________________________________________________ January 30, 2001
Before KING, Chief Judge, and HIGGINBOTHAM and DUHÉ, Circuit Judges.
KING, Chief Judge:*
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4. Appellant Advantage Capital Group, Inc., a creditor in a
consolidated bankruptcy proceeding, appeals from the district
court’s dismissal of its appeal from the bankruptcy court’s order
of plan confirmation. The district court dismissed the appeal on
the ground of mootness. Based upon the facts before us, we
conclude that the merits of this appeal are moot and, therefore,
DISMISS the appeal.
I. FACTUAL AND PROCEDURAL HISTORY
There are two debtors involved in this case: Louis G.
Reese, III (“Debtor Reese”) and Hammersmith Development Company
(“Debtor Hammersmith”). Debtor Reese is a real estate developer
who filed for Chapter 11 bankruptcy on February 5, 1998, due to
several judgments against him arising from his participation in
the savings and loan crisis in the 1980s. Debtor Reese is the
sole owner of Debtor Hammersmith, a real estate development
company that filed Chapter 11 bankruptcy on January 22, 1998.
The Federal Deposit Insurance Corporation (“FDIC”) has
judgment claims against Reese, including a $3.45 million secured
claim (a criminal restitution judgment) and additional unsecured
claims. In 1993, the FDIC sold one of its unsecured claims to
Appellant Advantage Capital Group, Inc. (“Advantage”). From the
beginning, Advantage has alleged that Debtor Reese retains hidden
assets.
2 On March 13, 1998, the bankruptcy court appointed Milo H.
Segner, Jr. (“Trustee Segner”) as Chapter 11 trustee. Advantage,
Trustee Segner, and the FDIC have investigated Debtor Reese’s
finances in an effort to uncover these hidden assets. In fact,
the FDIC, through the Office of the Inspector General, opened its
own official investigation into Debtor Reese’s finances. To
date, however, no evidence has been produced showing that these
assets exist. Because the FDIC failed to uncover any hidden
assets, the FDIC, Trustee Segner, Debtor Reese, and his wife
Susan Reese engaged in negotiations in order to satisfy the
FDIC’s $3.45 million judgment against Debtor Reese. From these
negotiations, Trustee Segner formulated a Chapter 11 Joint Plan
for Reorganization (the “Plan”).1
On March 13, 1998, the bankruptcy court ordered the joint
administration of Debtor Reese’s and Debtor Hammersmith’s
bankruptcy cases. Debtor Reese, Debtor Hammersmith, Trustee
1 The Plan establishes the following six classes of claims: (1) Class 1 contains the FDIC’s $3.45 million nondischargeable secured claim; (2) Class 2 contains general unsecured claims, including the unsecured claims of the FDIC and Advantage; (3) Class 3 contains the claims of general unsecured creditors who have chosen to “opt-out” of Class 2 (there are no creditors in this class); (4) Class 4 contains the claims of the Louis and Theta Reese Grandchildren’s Trust; (5) Class 5 contains Debtor Reese’s interests in Hammersmith; and (6) Class 6 contains an unknown amount of claims from the ad valorem taxing authorities. The only other relevant claims against the Debtor estates are the administrative claims, totaling $400,000.
3 Segner, and Susan Reese are proponents of the Plan and Appellees
herein (collectively the “Plan Proponents”).
Pursuant to the Plan, the FDIC was to be paid $500,000 in
exchange for a release of its $3.45 million judgment against
Debtor Reese and a release of the accompanying priority lien
against the Reese homestead. To pay the required $500,000, the
Plan provided that Susan Reese was to infuse $901,000 into the
Debtor estates. From this $901,000, the Debtor estates were to
pay $500,000 to the FDIC to satisfy its nondischargeable secured
claim and $400,000 to the administrative professionals.2
The general unsecured creditors (Advantage and the FDIC)
received a secured promissory note (the “Note”) in the amount of
$2.5 million.3 The Note is secured by (1) a pledge of all of the
reorganized Hammersmith stock; (2) a $500,000 collection guaranty
executed by Susan Reese; and (3) the Lake Lewisville Property.4
2 The remaining $1000 was to be paid to the Class 4 claims, see supra note 1, then worth approximately $9,592,832. 3 The general unsecured creditors had the option of choosing their pro rata share of $100,000. Therefore, Advantage, being the 71.5% holder of the claims in this class, would have received $71,500, and the FDIC would have received $28,500. Neither party chose this option. 4 Pursuant to section 7.2(i) of the Plan, Lake Lewisville Resort, Inc. (currently called “Gerbaxal, Inc.”) was to execute a quitclaim deed transferring the Lake Lewisville Property to Debtor Reese, who in turn was to execute a quitclaim deed transferring the property to Debtor Hammersmith. In actuality, it appears that Gerbaxal, Inc. transferred the property to Greenville Holdings Company (owned by Susan Reese), which then transferred the property to Debtor Hammersmith.
4 The Note is to be funded by a portion of the profits from the
reorganized Hammersmith, and a certain portion of the profits
generated by Hammersmith from the sale of the property is to be
used to pay the general unsecured creditors pursuant to the Note.
Under the Plan, Advantage was a member of an impaired5
noninsider class of creditors. A vote of the impaired classes
was taken, and Advantage objected to the Plan. Because Advantage
held 71.5% of the claims in its class, the entire class was
deemed to have objected to the Plan. See 11 U.S.C. § 1126(c)
(1993). On May 12, 2000, the bankruptcy court confirmed the
Plan, as amended, over Advantage’s objections. Because an
impaired class was considered to have rejected the Plan, the Plan
was confirmed as a “cramdown” plan pursuant to 11 U.S.C.
§ 1129(b)(1) (1993).
On June 21, 2000, Advantage filed with the bankruptcy court
an Emergency Motion for Stay of Consummation of Plan Pending
Appeal. On June 23, Advantage filed a notice of appeal to the
district court. On June 28, the bankruptcy court denied
Advantage’s motion for a stay. Then, on June 30, Advantage filed
an Emergency Motion for Stay Pending Appeal in the district
court. The district court denied Advantage’s motion for a stay
on July 6, but granted its request for an expedited appeal on
5 A class of creditors is impaired unless the plan “leaves unaltered the legal, equitable, and contractual rights” of each class member. See 11 U.S.C. § 1124(1) (2000).
5 July 21. After oral argument on September 28, the district court
granted Appellees’ Motion to Dismiss Appeal for Mootness.6
Prior to oral argument in the district court, on September
11, Trustee Segner filed administrative fee applications with the
bankruptcy court. After a hearing on October 5, the bankruptcy
court approved the applications and entered orders that expressly
authorized the compensation to be paid immediately.7 At the
entering of these orders on October 6, Trustee Segner disbursed a
total of $400,000 to the administrative professionals.
Also on October 6, Advantage filed its Notice of Appeal to
this court. When Advantage filed its Notice of Appeal, it also
filed a Motion for Stay of Consummation of Plan Pending Appeal.
6 We note that the district court’s order was not entirely clear as to the basis of its judgment. In its succinct order, the district court first found the appeal to be moot and then went on to reach the merits of the appeal, affirming the bankruptcy court’s decision to confirm the Plan. In the end, the order did not state specifically that the appeal was “dismissed” as moot. We recognize that mootness in the bankruptcy context is prudential, rather than jurisdictional. See Kearns v. Vineyard Bay Dev. Co (In re Vineyard Bay Dev. Co.), 132 F.3d 269, 271 (5th Cir. 1998). However, because a finding of mootness in the bankruptcy setting is also premised in part on jurisdictional concerns, see Rochman v. Northeast Utils. Serv. Group (In re Pub. Serv. Co.), 963 F.2d 469, 471 (1st Cir. 1992); Deloitte & Touche LLP v. Aquila Biopharm., Inc. (In re Cambridge Biotech Corp.), 214 B.R. 429, 431 (Bankr. D. Mass. 1997), we conclude that the district court effectively dismissed the appeal by its finding of mootness. Accordingly, we do not address the holdings directed to the merits of the case. 7 Advantage did not file an objection to these applications for administrative fee payments, nor did any other party. Because no party objected to any fee applications filed in the case, the bankruptcy court’s order provided for the immediate payment of the professional fees.
6 On October 12, a panel of this court entered an order granting a
temporary stay. On October 19, the Plan Proponents filed a
motion with this court to dismiss the appeal for mootness.
Finally, on November 1, 2000, the panel entered an order granting
Advantage’s motion for stay, expediting the appeal, and carrying
with the case the Plan Proponents’ motion to dismiss.
II. STANDARD OF REVIEW
In reviewing a district court’s dismissal of an appeal as
moot, the district court’s findings of fact are reviewed under
the clearly erroneous standard. See United States v. GWI PCS 1,
Inc. (In re GWI PCS 1, Inc.), 230 F.3d 788, 799 (5th Cir. 2000);
Ronit, Inc. v. Stemson Corp. (In re Block Shim Dev. Co.), 939
F.2d 289, 291 (5th Cir. 1991). The bankruptcy court’s
conclusions of law are reviewed de novo. See id.; see also
Manges v. Seattle-First Nat’l Bank (In re Manges), 29 F.3d 1034,
1038-44 (5th Cir. 1994) (conducting an independent review of the
district court’s dismissal for mootness).
III. THE APPEAL IS MOOT
The standard for mootness in the bankruptcy context differs
from a constitutional mootness analysis. See Nationwide Mut.
Ins. Co. v. Berryman Prods., Inc. (In re Berryman Prods., Inc.),
159 F.3d 941, 944 (5th Cir. 1998); Manges v. Seattle-First Nat’l
Bank (In re Manges), 29 F.3d 1034, 1038-39 (5th Cir. 1994). In
the bankruptcy setting, mootness is “not an Article III inquiry
7 as to whether a live controversy is presented; rather, it is a
recognition by the appellate courts that there is a point beyond
which they cannot order fundamental changes in reorganization
actions.” Manges, 29 F.3d at 1038-39. Consequently, a reviewing
court may decline to consider the merits of an appeal when it
determines that “effective judicial relief is no longer
available.” Id. at 1039; see also Berryman Prods., Inc., 159
F.3d at 944. This is so even if there is a viable dispute
between the parties on appeal. See Manges, 29 F.3d at 1039.
This court has traditionally turned to three factors to
determine whether mootness counsels against a review of the
merits: (1) whether a stay has been obtained, (2) whether the
plan at issue has been “substantially consummated,” and (3)
whether the relief requested would affect either the rights of
third parties not before the court or the success of the plan.
See id.; see also Ins. Subrogation Claimants v. U.S. Brass Corp.
(In re U.S. Brass Corp.), 169 F.3d 957, 959 (5th Cir. 1999);
Berryman Prods., Inc., 159 F.3d at 944; Ronit, Inc. v. Stemson
Corp. (In re Block Shim Dev. Co.), 939 F.2d 289, 291 (5th Cir.
1991). The Plan Proponents argue that each of these factors
favors a finding of mootness. We address each factor in turn.
A. Failure to Obtain a Stay
8 On June 21 and 30, 2000, Advantage filed emergency motions
for a stay with the bankruptcy court and district court,
respectively. These motions were denied. On October 6, 2000,
Advantage appealed the district court’s judgment and filed a
third motion for a stay. A panel of this court first granted a
temporary stay on October 12 and then granted a stay pending
appeal on November 1.
It is undisputed that at the time the district court found
the appeal moot, no stay was in effect. Advantage contends that
it “diligently sought” a stay; however, whether a stay was
diligently pursued is not the critical inquiry. Instead, “[a]
stay not sought, and a stay sought and denied, lead equally to
the implementation of the plan of reorganization.” Berryman
Prods., Inc., 159 F.3d at 944-45 (alteration in original)
(internal quotations omitted) (quoting Manges, 29 F.3d at 1040).
Advantage unsuccessfully petitioned both the bankruptcy
court and the district court for a stay and did not seek mandamus
relief with this court at the time the district court denied its
request. Following the denial of a stay in the bankruptcy court,
Susan Reese had paid the $901,000 required to consummate the Plan
and the FDIC had been paid and had executed the necessary
releases. During the expedited appellate process in the district
court, no stay was in effect, and the Plan was implemented even
further. Accordingly, because no stay was in place at the time
of consummation, this factor “militates in favor of dismissal for
9 mootness.” United States v. GWI PCS 1, Inc. (In re GWI PCS 1,
Inc.), 230 F.3d 788, 801 (5th Cir. 2000); see also Berryman
Prods., Inc., 159 F.3d at 945; Manges, 29 F.3d at 1040 (“In
short, the failure or inability to obtain a stay pending appeal
carries the risk that review might be precluded on mootness
grounds.”).
B. Substantial Consummation
The second consideration of the mootness inquiry is whether
the Plan has been substantially consummated.8 “‘Substantial
consummation’ is a statutory measure for determining whether a
reorganization plan may be amended or modified by the bankruptcy
court.” Manges, 29 F.3d at 1040 (citing 11 U.S.C. § 1127(b)
(1993)). This court has adopted the “substantial consummation”
yardstick “because it informs our judgment as to when finality
concerns and the reliance interests of third parties upon the
plan as effectuated have become paramount to a resolution of the
dispute between the parties on appeal.” GWI PCS 1, Inc., 230
8 Section 1101(2) of the Bankruptcy Code defines “substantial consummation” as:
(A) transfer of all or substantially all of the property proposed by the plan to be transferred; (B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and (C) commencement of distribution under the plan.
11 U.S.C. § 1101(2) (1993).
10 F.3d at 801 (internal quotations omitted) (quoting Manges, 29
F.3d at 1041).
We find that the Plan in the instant appeal has been
“substantially consummated” such that “effective judicial relief
is no longer available.” Manges, 29 F.3d at 1039; see also U.S.
Brass Corp, 169 F.3d at 961. Pursuant to the Plan, the $2.5
million Note has been executed; Susan Reese has executed a
$500,000 collection guaranty to secure the Note; Susan Reese has
infused $901,000 into the bankruptcy estates; the Lake Lewisville
Property has been transferred to Debtor Hammersmith9; at least
one lawsuit has been dismissed with prejudice; releases to Susan
Reese and other Reese entities have been granted; the reorganized
Hammersmith stock has been assigned to the creditor
representative as collateral for the $2.5 million Note; an
employment agreement has been executed between Debtor Reese and
the reorganized Hammersmith; $500,000 has been distributed to the
FDIC; on receipt of the $500,000 payment, the FDIC released its
lien against the Reese homestead, and Satisfaction of Judgment
was entered in its criminal restitution action; the $400,000 in
administrative fees has been disbursed to the administrative
professionals; and the Debtors have received their discharge.
9 Advantage points to the fact that title insurance on the Lake Lewisville Property has apparently not yet been obtained and argues that this fact alone prevents the Plan from being considered “substantially consummated.” We reject that argument, requiring, as it does, that we blind ourselves to the many Plan provisions that have been effectuated here.
11 The Plan Proponents argue that the only actions contemplated by
the Plan that remain are the “forward business operations” of the
reorganized Hammersmith and payment on the Note.
To unravel the Plan now would require reversal of each of
these transactions. Most convincingly, the FDIC would be forced
to return the $500,000, would likely be unable to reassert the
suit against Debtor Reese, and has very likely lost its first
lien priority on the Reese homestead. Moreover, Susan Reese
would be unable to recover the $901,000, as it has already been
disbursed to the FDIC and the administrative professionals, and
the superpriority claim that we are urged to give Ms. Reese in
its place is hardly the equivalent of cash. In sum, all or
substantially all of the property contemplated by the Plan to be
transferred has been transferred; Debtor Reese has assumed the
business and management of the reorganized Hammersmith and is
engaging in business activities in order to fund the Note secured
by the Hammersmith stock; and distribution under the Plan has, at
the very least, been commenced, if not completed. Accordingly,
in the absence of a stay, we find that the Plan has been
substantially consummated. See 11 U.S.C. § 1101(2) (1993); see
also U.S. Brass Corp., 169 F.3d at 961 (“We find the transactions
that have taken place to date, the exchange of mutual releases,
the disbursements already made, and the general implementation of
the plan by all the involved parties evidence substantial
12 consummation of the plan.”). As such, substantial consummation
weighs against reviewing the merits of the challenged Plan.
C. Effect on Third Parties or the Success of the Plan
Our final inquiry is whether the requested relief would
affect the rights of third parties not before the court or the
success of the Plan. While Advantage appears to argue that the
only relevant inquiry is the effect on third parties, we
recognize that the analysis of this factor has two dimensions:
(1) the effect on third parties or (2) the effect on the success
of the Plan. See Berryman Prods., Inc., 159 F.3d at 945-46; see
also Manges, 29 F.3d at 1039 (“whether the relief requested would
affect either the rights of parties not before the court or the
success of the plan” (emphasis added)). The Plan Proponents
argue that both of these dimensions are met in this case, and we
agree.
First, regarding the rights of third parties, the district
court found that the FDIC’s interests would be irreparably
injured if the Plan was unwound. Moreover, pursuant to the Plan
and by order of the bankruptcy court, Trustee Segner has since
disbursed $400,000 in payments to the administrative
professionals. These disbursements occurred before a stay was in
place and to reverse them would have a detrimental financial
effect on the FDIC and these administrative professionals.
In addition, as discussed above, unwinding the Plan would
require, inter alia, the return of property and distributions,
13 the reinstatement of lawsuits dismissed with prejudice, and the
reattachment of liens. It is unlikely that this court could
return the Debtor estates or the affected third parties to the
status quo as it existed before consummation of the Plan. As
alluded to above, in his affidavit, Frank Deramus, General
Counsel for the FDIC, stated that, by releasing its lien on the
homestead, the FDIC gave up its first lien priority. Deramus
contends that “it may not be able to now regain its first lien
priority position.” Therefore, the FDIC will “not voluntarily
disgorge the [$500,000] Payment, and will only do so upon court
order.” Finally, the bankruptcy court, in determining whether to
grant a stay, found that “[i]t appears that if the stay is
granted there could be harm to the FDIC and the administrative
claimants and Mr. Reese, and the feasibility of the plan will
decline with consequent harm to such other parties.”
Looking to the second dimension of the inquiry mandated by
Manges, we note that Advantage seeks to set aside the entire
Plan. The Plan Proponents assert that “the success of the Plan
is dependent upon the transactions which have taken place.” All
of the acts that have occurred, e.g., execution of the Note, the
infusion of $901,000 into the Plan by Susan Reese, the transfer
of the Lake Lewisville Property, and the execution of releases,
were all conditions to the Plan becoming effective. To reverse
these transactions at such a late date would result in “nothing
14 less than a wholesale annihilation of the Plan.” Manges, 29 F.3d
at 1043.
Moreover, the Plan was the result of extensive negotiations
between the Plan Proponents and the FDIC, one of the Debtors’
principal creditors. Causing the FDIC to return the $500,000
would most likely unravel the entire Plan. Therefore, we
conclude that allowing Advantage to set aside the Plan, would, by
definition, negatively impact its success. See In re Block Shim
Dev. Co., 939 F.2d at 291 (“Indeed, granting appellants the
relief they seek would not only jeopardize, but eviscerate, the
plan and thwart [the debtor’s] attempts to reorganize.”).
Therefore, we conclude that this factor also weighs in favor
of dismissal.
IV. CONCLUSION
For the foregoing reasons, we conclude that effective
judicial relief is no longer available to the parties and DISMISS
the appeal as moot.