Acequia, Inc., In re
| Citation | 787 F.2d 1352 |
| Decision Date | 22 April 1986 |
| Docket Number | No. 84-4364,84-4364 |
| Parties | , Bankr. L. Rep. P 71,111 In re ACEQUIA, INC., Debtor. ACEQUIA, INC., Plaintiff-Appellee, v. Vernon B. CLINTON, Defendant-Appellant. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Alan R. Lepene, Steven D. Cundra, Thompson, Hine & Flory, Cleveland, Ohio, for plaintiff-appellee.
Brenda Flanders, Roe & Fowler, Salt Lake City, Utah, for defendant-appellant.
Appeal from the United States District Court District of Idaho.
Before WALLACE and THOMPSON, Circuit Judges, STEPHENS, District Judge. *
Vernon B. Clinton ("Clinton"), a 50% equity security holder of Acequia, Inc. ("the Debtor"), appeals from the district court's order affirming the bankruptcy court's confirmation of the Debtor's proposed Second Amended Plan of Reorganization (the "Plan"). We affirm.
The Debtor, a family-owned corporation, was incorporated in 1974 under Idaho law. All of its outstanding shares of capital stock were registered in Clinton's sole name. Although the Debtor was initially organized to conduct farming operations, land management subsequently became its principal business activity. In October 1981 Clinton and his wife, Rosemary Haley ("Haley") obtained a divorce. Under the terms of the marital settlement agreement and decree of divorce, Clinton and Haley divided substantially all of their assets, including the shares of stock in the Debtor. One-half of the shares of stock in the Debtor were transferred to Clinton and one-half to Haley.
In July 1982 the Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code (the "Code"). At the time of the filing, Clinton continued to control the day-to-day operations of the Debtor. However, the relationship between Clinton and Haley had become acrimonious. Haley refused to attest to the accuracy of the Debtor's Schedules and Statement of Affairs and sent a letter to Presiding Bankruptcy Judge Merlin S. Young alleging that Clinton had willfully failed to disclose pertinent information and had mismanaged the Debtor. Haley also alleged she had been denied access to the Debtor's books and records. Haley requested and was granted authority to take depositions of Clinton, and the Debtor's accountant and auditor concerning the accuracy of the Schedules and Statement of Affairs. After taking the depositions, Haley applied to the bankruptcy court for the appointment of a trustee (the "Application"). The Application alleged that Clinton had persisted in failing to disclose the Debtor's affairs and had mismanaged the Debtor. Prudential Insurance Company of America and Seattle First National Bank, two secured creditors, also applied for appointment of a trustee alleging Clinton's failure to disclose corporate assets and personal transactions with the Debtor.
The hearing on the Application (the "Trustee Hearing") was held in December of 1982. The Debtor, Haley, and Clinton each appeared with separate counsel. At the beginning of the hearing, Clinton's attorney objected to certain testimony. Judge Young asked the attorney whom he was representing, and counsel responded that he was representing the "personal interests" of Clinton. Judge Young stated that Clinton's activities as an officer of the Debtor, and not his personal liability, were at issue, and that Clinton had no "standing" to raise matters of personal liability. 1 Judge Young ruled that the Debtor's attorney could adequately represent the Debtor, and that Clinton's attorney could not make objections or present testimony, but could advise Clinton during his testimony on matters of personal liability.
At the Trustee Hearing, Haley entered into evidence a number of documents which indicated that in schedules which Clinton had filed on behalf of the Debtor, Clinton had failed to disclose that he had withdrawn more than $1.6 million in cash from the Debtor. He contended that these withdrawals had been made to repay himself money he had lent to the Debtor, but the Debtor's tax returns did not reflect such loans. Also, the auditor who had reviewed the records of the Debtor pursuant to the marital settlement agreement and decree of divorce testified that at the time the Debtor's petition and schedules had been prepared and filed, Clinton had failed to disclose and had ordered the auditor to withhold information concerning the existence of several assets which, according to the auditor, belonged to the Debtor and had values that exceeded $1 million. The auditor characterized these nondisclosures as "grossly misleading" and "fraudulent."
Notwithstanding Judge Young's ruling that Clinton's attorney would not be permitted to represent Clinton's individual interests at the Trustee Hearing, as the hearing progressed his counsel raised several objections, including an objection to the auditor's testimony regarding Clinton's nondisclosures. 2 Clinton's attorney also addressed the court from time to time, but did not examine or cross-examine witnesses.
After three days of hearing, but before the bankruptcy court ruled on the Application, Clinton, Haley, Prudential Insurance Company, and Seattle First National Bank entered into a stipulation dated December 3, 1982, which became the order of the bankruptcy court. The stipulation and order provided that the Application, together with the secured creditor's application, would be provisionally withdrawn upon the condition that Clinton deliver to Haley an irrevocable proxy permitting Haley to vote Clinton's stock in the Debtor and to manage the Debtor for two and one-half years.
In December 1983 the Debtor submitted the Plan and Disclosure Statement. The Disclosure Statement recited the allegations of misconduct considered at the Trustee Hearing, and stated that Haley and her family would continue to control the reorganized Debtor during the pendency of the Plan. The Disclosure Statement also specified that creditors would be paid by 1992, primarily through the remittance of rental income and the sale of the Debtor's assets. After notice and hearing, Judge Young approved the Disclosure Statement and ordered that the Plan, a ballot, and the Disclosure Statement be mailed to all creditors, equity security holders, and other parties in interest.
The Plan provided details of the sale of assets (the "Sale Provisions") and management of the Debtor (the "Management Provisions"). The Management Provisions provided that Haley and her two sons would manage the Debtor and serve as its directors during the pendency of the Plan. If any director could no longer serve, the other directors would choose a successor. Shareholders were prohibited from removing directors. The Debtor's articles of incorporation and by-laws would be amended to reflect these provisions. The Plan also classified all shareholders in the same class and stated that the shareholders' interests were not impaired. Finally, the Plan stated that the bankruptcy court would retain jurisdiction during the pendency of the Plan.
In February of 1984 Judge Young conducted a hearing on confirmation of the Plan (the "Confirmation Hearing"). Clinton appeared with counsel. Although Clinton had voted against and filed an objection to the Plan, he did not offer any evidence or call any witnesses. No other creditor or equity security holder objected to the Plan. The Debtor presented two witnesses to testify on the feasibility of the Plan. At the close of testimony, counsel for the Debtor referred to the evidence presented at the Trustee Hearing on Clinton's alleged misconduct. Counsel for Clinton objected to the reference, but Judge Young stated that:
I am aware what was presented, I have never ruled upon it, although I was prepared to do so at the time this matter was settled. I do think it has some relevance here because of the peculiar status of this corporation. I will give it whatever weight I think it is worth. I will not totally discard it.
Counsel for the Debtor then proceeded to summarize the testimony presented at the Trustee hearing.
At closing argument, Clinton contended the Management Provisions deprived him of his shareholder voting rights and violated the Code's provisions on conformity to law, equality of treatment, impairment, and nonvoting securities. Clinton also argued that the Sale Provisions were not feasible. The bankruptcy court ruled that the Plan complied with the Code's provisions on confirmation, and that the Management Provisions were necessary to preserve the Debtor's reorganization. 3 The bankruptcy court confirmed the Plan and the district court affirmed.
1. Did the bankruptcy court err by considering the evidence presented at the Trustee Hearing in ruling on confirmation?
2. Does the Plan comply with the Code's requirements governing conformity to law, equality of treatment, impairment, nonvoting securities, and feasibility?
Because we are in as good a position as the district court to review the bankruptcy court's findings, we independently review the bankruptcy court's decision. Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir.1986). We "review ... the bankruptcy court's findings of fact under the clearly erroneous standard and its conclusions of law de novo. " Id.; In re Pizza of Hawaii, 761 F.2d 1374, 1377 (9th Cir.1985). See also Bankr.R. 8013.
Whether the Code limits the bankruptcy court to consideration of evidence presented at the confirmation hearing in ruling on confirmation is a question of statutory interpretation subject to de novo review. See In re Pacific Far East Line, Inc., 713 F.2d 476, 478 (9th Cir.1983) (involving statutory interpretation). Similarly, whether the Plan impairs Clinton's interest is a question of law. See In re Madison Hotel Assocs., 749 F.2d 410, 418 (7th Cir.1984).
The remaining principal issues presented in this appeal--equality of treatment, 4 fairness, and feasibility--present questions of fact...
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