In re Focus Media, Inc.

Decision Date02 August 2004
Docket NumberNo. 03-55808.,03-55808.
PartiesIn re FOCUS MEDIA, INC., Debtor, Focus Media, Inc., Appellant, v. National Broadcasting Company Inc.; ABC Inc.; Paxson Communications Inc., Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Julie M. McCoy, Newport Beach, CA, for the appellant.

Bruce A. Wessel, Irell & Manella, LLP, Los Angeles, CA, for the appellees.

Appeal from the United States District Court for the Central District of California, Alicemarie H. Stotler, District Judge, Presiding. D.C. No. CV-01-01146-AHS.

Before T.G. NELSON, TASHIMA and FISHER, Circuit Judges.

FISHER, Circuit Judge.

This appeal arises from an involuntary Chapter 7 bankruptcy petition filed by eight putative creditors of Focus Media, Inc. ("Focus"). These creditors consisted of appellees National Broadcasting Company, Inc. ("NBC"), ABC Inc. ("ABC") and Paxson Communications, Inc. ("Paxson"), as well as five affiliates of ABC (collectively with appellees, "petitioning creditors"). Focus appeals the district court's order affirming the bankruptcy court's orders (1) granting the petitioning creditors' motion for summary judgment and (2) denying Focus' motions to disqualify the bankruptcy judge. Appellees contend that this appeal is moot and that, in any event, the bankruptcy and district courts correctly decided the merits.

We do not dismiss Focus' appeal as moot. However, because Focus did not present evidence that creates a triable issue of fact regarding the involuntary petition requirements of 11 U.S.C. § 303, and the bankruptcy judge did not abuse her discretion in deciding not to recuse herself, we affirm.

BACKGROUND

Focus was a media-buying company that placed commercial spots for its clients on television and radio stations. Its two major clients were Sears, Roebuck & Co. ("Sears") and Universal City Studios, Inc. ("Universal"), each of which paid Focus in advance for booking commercial time on various media outlets, such as the petitioning creditors. Focus, in turn, would pay the media outlets for the booked commercial spots.

Universal and Sears fired Focus in 1999 and 2000, respectively. Sears subsequently filed a civil suit against Focus in California superior court, alleging that funds it had paid Focus "were transferred for the specific purpose of Focus paying the Media Outlets on Sears' behalf." According to Sears, the funds had not in fact been used to pay the media. Thus, Sears sought a preliminary injunction against Focus, alleging that the money paid to Focus belonged to Sears and not Focus.1 Focus, however, argued that it owed millions of dollars to the media for spots it had booked for Sears and others and thus should be permitted to keep the payments Sears had advanced to Focus. The superior court granted Sears a preliminary injunction on May 9, 2000, prohibiting Focus from distributing or transferring any of Sears' funds.

On October 6, 2000, NBC, ABC and Paxson filed an involuntary petition for Chapter 7 bankruptcy against Focus, pursuant to 11 U.S.C. § 303. Five ABC affiliates joined the petition in January 2001. The involuntary petition triggered an automatic stay of the state court proceedings under 11 U.S.C. § 362.

On October 24, 2000, Sears moved in the bankruptcy court for relief from the automatic stay, so that it could pursue its state court action. The next day, Sears filed an alternative motion for the appointment of an interim trustee. On October 27, the bankruptcy court granted the motion for an interim trustee.

The bankruptcy court proceedings were tense and hard-fought. On November 13, 2000, Focus moved to disqualify the bankruptcy judge, who heard the motion on December 27 and denied it on January 11, 2001. On July 18, 2001, Focus moved again to disqualify the bankruptcy judge, who, after a hearing, also denied this second motion on September 25. In addition to these two disqualification motions, Focus' chief financial officer also filed a judicial misconduct complaint against the bankruptcy judge with the Judicial Council of the Ninth Circuit.2

Meanwhile, on December 8, 2000, Focus filed a motion for summary judgment of the involuntary petition. The bankruptcy judge heard the motion on January 24, 2001, denying it on February 2.

On August 1, 2001, the petitioning creditors filed their own motion for summary judgment. Under 11 U.S.C. § 303, petitioners may impose involuntary bankruptcy on an alleged debtor only if certain conditions are met. If the debtor has more than 12 total creditors, which Focus did at the time of the petition, the petitioners must show that (1) there are at least three qualified petitioning creditors; (2) they each hold claims against the debtor not subject to bona fide dispute and totaling at least $10,775; and (3) the debtor is not generally paying debts as they become due. 11 U.S.C. § 303(b)(1), (h)(1).3

On September 25, the bankruptcy court granted the petitioning creditors' motion as to these three issues. Specifically, the bankruptcy court found that there was not a genuine issue for trial as to the petitioning creditors' showing that (1) seven of the eight petitioning creditors — ABC being the exception — had claims against Focus; (2) the claims of these seven petitioning creditors were not in bona fide dispute and totaled over $3 million; and (3) Focus's debt structure revealed that it was not generally paying its debts as they became due.4

The bankruptcy court, however, denied the petitioning creditors summary judgment on Focus' affirmative defense of bad faith as to ABC. Expressing concern that a reviewing court might conclude that bad faith by ABC could defeat the petition entirely, the bankruptcy judge therefore declined to issue an order for relief in favor of the petitioning creditors. Instead, she held over for trial the issues of whether ABC had a claim against Focus and whether ABC had filed against Focus in bad faith. After a trial, the bankruptcy court ruled in favor of ABC on these issues and entered an order for relief on October 22, 2001. Focus promptly filed a notice of appeal to the district court from the order for relief and, after the district court affirmed the bankruptcy court, filed a combined notice of appeal with this court on May 12, 2003. Although Focus has appealed the bankruptcy court's grant of summary judgment and denials of its disqualification motions, it has not appealed its claim of bad faith by ABC.

DISCUSSION

"We independently review the bankruptcy court's ruling without deference to the district court's decision." Virtual Vision, Inc. v. Praegitzer Indus., Inc. (In re Virtual Vision, Inc.), 124 F.3d 1140, 1143 (9th Cir.1997). Whereas the bankruptcy court's decision to grant summary judgment is reviewed de novo, its factual findings are reviewed for clear error. See Am. Broad. Sys., Inc. v. Beta Communications, Inc.(In re Betacom of Phoenix, Inc.), 240 F.3d 823, 828(9th Cir.2001). Summary judgment is appropriate "if the record shows that `there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.'" Arrow Elecs., Inc. v. Justus (In re Kaypro), 218 F.3d 1070, 1073 (9th Cir.2000) (quoting Fed.R.Civ.P. 56(c)). Further, we review for abuse of discretion the bankruptcy court's denial of Focus' motions for disqualification. United States v. Wilkerson, 208 F.3d 794, 797 (9th Cir.2000). Because Focus' prior claim of bad faith by ABC is not before us, the order of relief can be sustained if we uphold the district court's affirmation of the bankruptcy court's summary judgment order and denial of Focus' motions for disqualification.

I. Mootness

Appellees contend that Focus' appeal is moot because Focus failed to obtain a stay in either the bankruptcy court or the district court and failed to seek one in this court. According to appellees, the trustee has filed and abandoned various claims in the bankruptcy proceeding and granting relief to Focus would create an unmanageable situation in the bankruptcy court.

Bankruptcy appeals may become moot in one of two (somewhat overlapping) ways. First, events may occur that make it impossible for the appellate court to fashion effective relief. Bennett v. Gemmill (In re Combined Metals Reduction Co.), 557 F.2d 179, 187 (9th Cir.1977). For example, when a trustee has already sold assets to third parties, a court may be powerless "to undo what has already been done." Id. However, "[t]he party asserting mootness has a heavy burden to establish that there is no effective relief remaining for a court to provide." Pintlar Corp. v. Fid. & Cas. Co. (In re Pintlar Corp.), 124 F.3d 1310, 1312 (9th Cir.1997). Second, an appeal may become equitably moot when "[a]ppellants have failed and neglected diligently to pursue their available remedies to obtain a stay of the objectionable orders of the Bankruptcy Court," thus "permitt[ing] such a comprehensive change of circumstances to occur as to render it inequitable... to consider the merits of the appeal." Trone v. Roberts Farms, Inc. (In re Roberts Farms, Inc.), 652 F.2d 793, 798 (9th Cir.1981). In Roberts Farms,"[a]ppellants did not at any time apply to the bankruptcy judge for a stay," id. at 795, and we concluded that dismissal for mootness was appropriate, id. at 798.

Fashioning relief in this case would not be impossible. Focus seeks relief primarily under 11 U.S.C. § 303(i). When a court dismisses an involuntary petition, § 303(i)(1) allows an award of costs and attorney's fees from the petitioners to the debtor. Here, Focus also asks us to order the disgorgement of attorney's fees previously paid out of Focus' estate to the petitioning creditors' attorneys. To clear the way for the relief Focus seeks, we would have to return control of the business to Focus, discharge the trustee and dismiss the involuntary petition. See Semel v. Dill (In re Dill), 731 F.2d 629, 632 (9th...

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