29 F.3d 1034 (5th Cir. 1994), 93-7328, Matter of Manges

Docket Nº:93-7328.
Citation:29 F.3d 1034
Party Name:In the Matter of Clinton MANGES, Debtor. Clinton MANGES, Duval County Ranch C and Man-Gas Transmission, Appellants-Cross Appellees, v. SEATTLE-FIRST NATIONAL BANK and SeaFirst American Corporation, Appellees-Cross Appellants. In the Matter of DUVAL COUNTY RANCH C, Debtor. Clinton MANGES, Duval County Ranch C and Man-Gas Transmission, Appellants-Cro
Case Date:August 29, 1994
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 1034

29 F.3d 1034 (5th Cir. 1994)

In the Matter of Clinton MANGES, Debtor.

Clinton MANGES, Duval County Ranch C and Man-Gas

Transmission, Appellants-Cross Appellees,

v.

SEATTLE-FIRST NATIONAL BANK and SeaFirst American

Corporation, Appellees-Cross Appellants.

In the Matter of DUVAL COUNTY RANCH C, Debtor.

Clinton MANGES, Duval County Ranch C and Man-Gas

Transmission, Appellants-Cross Appellees,

v.

SEATTLE-FIRST NATIONAL BANK and SeaFirst American

Corporation, Appellees-Cross Appellants (Two Cases).

In the Matter of MAN-GAS TRANSMISSION, Debtor.

No. 93-7328.

United States Court of Appeals, Fifth Circuit

August 29, 1994

Rehearing Denied Sept. 27, 1994.

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[Copyrighted Material Omitted]

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Richard Fuqua, Brent N. Whiteley, Fuqua & Assoc., Houston, TX, Deirdre Ruckman, Stephen D. Good, Stacy Obenhaus, Gardere & Wynne, Dallas, TX, for appellants.

J. Patrick Deely, Kevin Morris Warburton, Steve A. Peirce, McCamish & Martin, San Antonio, TX, for appellees.

Appeals from the United States District Court for the Southern District of Texas.

Before KING and SMITH, Circuit Judges, and KENT [*], District Judge:

KING, Circuit Judge:

Appellants, the debtors in a consolidated bankruptcy proceeding, appeal from the district court's order affirming the bankruptcy court's confirmation of the principal creditor's proposed plan of reorganization. By way of cross-appeal, the creditors request that we dismiss the appeal as moot. On the basis of the facts before us, we agree with the creditors and, upon finding the issues presented to be moot, dismiss the appeal.

I. Background

Appellant Duval County Ranch Company (the "Ranch Company") owned the surface estate of a 99,000-acre ranch in Duval County, Texas. Appellant Man-Gas Transmission Company ("Man-Gas") owned the mineral rights under the ranch property. Both of these companies were wholly owned by the individual debtor and appellant, Clinton Manges ("Manges"). 1 The ranch was undisputedly and by far the largest asset of the Manges debtors. Seattle First National Bank ("Seattle") made a loan to the Ranch Company in 1980, which was secured by a mortgage on the ranch surface estate and personally guaranteed by Manges.

A. The Agreed Judgment and Foreclosure

The loan went into default, and Seattle filed suit against the Ranch Company and Manges in the United States District Court for the Western District of Texas, San Antonio Division, to recover the sums owed. Eventually, in August of 1988, the parties entered into an agreed judgment pursuant to which the Ranch Company and Manges would make periodic payments on the loan.

After the Ranch Company and Manges subsequently failed to make one of the scheduled payments under the agreed judgment, the Ranch Company filed a voluntary Chapter 11 bankruptcy petition to prevent foreclosure under the agreed judgment. Soon after, Manges and Man-Gas also entered Chapter 11 proceedings.

Seattle requested relief from stay, but agreed to abandon that request temporarily if certain conditions were met. The court signed an "Agreed Order On Motion For Relief From Stay" on September 5, 1990. Pursuant to that order, the Manges debtors were to obtain insurance coverage for improvements to the ranch within ten days of the order's entry. When the Ranch Company failed to obtain the requisite binder for coverage within the agreed time-period, Seattle gave notice of default. After the Ranch Company received the notice and failed to cure the default, the automatic stay was lifted, and the San Antonio court entered an order of sale of the ranch property on October 30, 1990. Although this order was stayed temporarily, the ranch was eventually sold at auction by federal marshals on January 16, 1991 (the "January 16 foreclosure"), and was purchased by SeaFirst American Corporation ("SeaFirst"), a wholly-owned subsidiary of Seattle. The San Antonio court confirmed the sale on January 17, 1991, and

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the Manges debtors appealed both the order of sale and confirmation of sale to this court. 2

B. The Plan of Reorganization

The Manges debtors proposed several plans of reorganization, but the bankruptcy court refused to confirm any of the debtors' proposed plans. Instead, by order entered June 10, 1991, the bankruptcy court confirmed the plan proposed by Seattle and SeaFirst (the "Plan") after balloting and a four-day confirmation hearing. In connection with the confirmation order, the bankruptcy court issued findings of fact and conclusions of law, including the following: (i) that the Plan complied with all requirements of 11 U.S.C. Secs. 1123 and 1129, as well as other applicable law; (ii) that the Plan "was proposed in good faith and not by any means forbidden by law"; (iii) that "[t]he principal purpose of the [ ] Plan is not the avoidance of taxes ..."; and (iv) that the debtors had "no equity in any of the property of the estates subject to the liens." 3

Under the Plan, a liquidating trust would be created to hold legal title to the debtors' assets for sale and distribution of proceeds to the various creditors (the "Trust"). The Plan appointed a vice-president of Seattle to serve as liquidating trustee, overseeing the payment of approximately $80 million in creditors' claims with approximately $35 million in trust assets. The Manges debtors were required to execute the trust agreement creating the Trust as well as a "blanket conveyance" transferring all of their assets to the Trust. In the event the Manges debtors failed to do so, third parties were authorized to execute the appropriate documents. The Plan also provided that, upon its confirmation, the January 16 foreclosure would be rescinded and all liens existing prior to the foreclosure would be reinstated. Another important aspect of the Plan was that SeaFirst would create a $1.3 million creditor fund to pay administrative expenses, priority wage claims, and general unsecured claims. Additionally, SeaFirst voluntarily subordinated its estimated $36 million unsecured claim to those of the remaining unsecured creditors, and Seattle and SeaFirst waived their approximately $1.7 million administrative expense claims.

With respect to tax consequences, the Plan specifically provided that the Trust would be a non-taxable grantor trust--i.e., that the Trust would not be liable for any taxes resulting from the sale of property. The Plan included an express provision that the trustee was under no duty to file federal tax returns or to pay income taxes of any kind. Nor was the trustee obligated to make available trust assets or sale proceeds to satisfy the tax claims. The IRS, one of the Manges' creditors, at first lodged objections, but, during the confirmation hearings, withdrew any objections it had to the Plan. Interestingly, the bankruptcy court, in its June 10 findings and conclusions, specifically found that "[t]here should not be any significant post-confirmation income tax liability to Manges due to the availability of tax attributes, the value of the collateral, the availability of subchapter S termination, 4 and the lack of personal liability to Manges for [the Ranch Company's] taxes." 5

C. The Appellate Efforts

The Manges debtors took an appeal from the confirmation order to the district court and unsuccessfully applied for a stay of the Plan pending appeal from both the bankruptcy court and the district court. They also

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sought a writ of mandamus from this court to compel the district court to issue the stay, but that request was similarly denied. Seattle and SeaFirst urged the district court to dismiss the appeal as moot, but the district court refused, concluding that the Plan had not been substantially consummated. Specifically, the court below found that the most substantial asset of the debtors--the ranch property--had not been sold, though it recognized that a substantial amount of the Trust property had otherwise been alienated. Reaching the merits, the district court affirmed the confirmation order by order entered May 4, 1993 (the "May 4 order").

The Manges debtors then commenced the instant appeal. Two days after filing their notice of appeal, on May 14, 1993, the Manges debtors sought and were denied an emergency stay from the district court of its May 4 order pending appeal to this court. This court denied a similar motion for stay on May 25, 1993. On September 7, 1993, the Manges debtors filed an amended motion to stay the Plan pending appeal, but that motion was also denied a week later.

D. The Administration of the Trust

As a consequence of the failure to obtain a stay, numerous events have taken place pursuant to the Plan. The Trust has been created, and, soon after the Plan was confirmed, SeaFirst funded the creditor fund, much of which was subsequently disbursed to administrative claimants and priority wage claimants. According to affidavits filed in the district court while the first tier of this appeal was before that court, the Trust paid over $1.5 million in creditors' claims and over $2.5 million in repairs and operating expenses...

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