Baker & Drake, Inc., In re

• Decision Date: 07 September 1994
• Docket Number: No. 92-16983,92-16983
• Parties: Bankr. L. Rep. P 76,065 In re BAKER & DRAKE, INC., dba "Yellow Cab", et al., Debtor. BAKER & DRAKE, INC., Appellant, v. PUBLIC SERVICE COMMISSION OF NEVADA, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1348

35 F.3d 1348

Bankr. L. Rep. P 76,065

In re BAKER & DRAKE, INC., dba "Yellow Cab", et al., Debtor.

BAKER & DRAKE, INC., Appellant, v. PUBLIC SERVICE COMMISSION OF NEVADA, Appellee.

No. 92-16983.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 11, 1994.

Decided Sept. 7, 1994.

Geoffrey Giles, Reno, NV, for appellant.

Neil E. Grad, Asst. Gen. Counsel Nevada Bar, Public Service Com'n of Nevada, Carson City, NV, for appellee.

Appeal from the United States District Court for the District of Nevada.

Before: FLETCHER, KOZINSKI and TROTT, Circuit Judges.

FLETCHER, Circuit Judge:

Baker & Drake, Inc. ("Baker") appeals the district court's decision that the Bankruptcy Code, 11 U.S.C. Sec. 1 et seq., does not preempt Nevada Administrative Code, ch. 706, Sec. 706.371 (1992) [hereinafter "NAC 706.371"], a state regulation which requires that the drivers for taxicab companies be employees of the companies rather than independent contractors. We have jurisdiction pursuant to 28 U.S.C. Sec. 158(d), and we affirm.

FACTS

Baker operates a taxicab company in Nevada. Until its reorganization under Chapter 11 of the Bankruptcy Code, Baker's approximately 200 drivers were employees driving cabs owned by Baker.

Claiming, among other things, to be burdened with numerous personal injury lawsuits, Baker filed for Chapter 11 reorganization on April 10, 1991. Part of Baker's proposed reorganization involved its employee-drivers becoming independent contractors who would lease their cabs from Baker. To be treated as independent contractors under agency and tort law, the drivers had to have considerable freedom in the performance of their jobs. This arrangement would shift the ultimate control over taxi services from Baker to the drivers themselves. Apart from the effect it had on Baker's tort liability and insurance premiums, Baker stood to save a good deal of money because it would no longer be liable for payroll taxes.

Baker's plan admittedly was inconsistent with state law. In Nevada, common motor carriers are required to obtain a "certificate of public convenience and necessity." Nev.Rev.Stat. Sec. 706.386 (1987). These certificates are awarded based on considerations of public safety, efficiency, and financial responsibility. Id. Sec. 706.151. Nevada Administrative Code section 706.371 specifically forbids the holder of such a certificate to lease a taxicab to another person, and states that "[e]very driver of a taxicab must be either the holder of a certificate or the employee of a holder of a certificate." NAC 706.371.

The bankruptcy judge not only approved the proposed reorganization plan, but also enjoined the Nevada Public Service Commission ("PSC") from enforcing NAC 706.371 against Baker. Order of January 14, 1992. The judge found that Nevada's regulation of the taxi business was not essential to the protection of the health and welfare of its citizens, and that the regulation conflicted with and frustrated the Bankruptcy Code's explicit goal of fostering reorganizations. Although the judge questioned the rationality of NAC 706.371, he ultimately couched his holding in terms of preemption:

I'm setting the [state] law aside in this instance. I'm not applying it. The Constitution of the United States says that Congress shall prescribe bankruptcy laws. It has. It takes precedence in given situations, and I think this is one.

Transcript of Hearing, Jan. 13, 1992.

The PSC appealed to the federal district court on February 18, 1992, but did not seek a stay of the bankruptcy court's injunction. ¹ After initial briefing, the district court remanded the matter to the bankruptcy court for the limited purpose of determining the impact of NAC 706.731 upon public health and safety. The bankruptcy court, after reviewing affidavits submitted by both parties, found that there were "affidavits going both ways," and that NAC 706.731 "has a rational basis.... [b]ut it's [only] one of several ways of dealing with the problem." Transcript of Hearing, July 10, 1992, at 38.

The district court disagreed: "[t]he record clearly shows that NAC 706.731 is designed to protect the public health, safety, and welfare." Order of Oct. 22, 1992, at 4. The district court found that under Baker's plan, the PSC would be forced to increase the size of its staff, because it would now have to deal individually with 200 independent contractors instead of with one employer that supervised 200 employees. Id. at 5. The court also found that since Baker would no longer be primarily responsible for providing liability insurance, the public would be at risk. The district court concluded that NAC 706.371 addressed health and safety issues in addition to economic matters, and that the bankruptcy

court had erroneously found that its injunction would not interfere with legitimate state interests. On these grounds, the district court held that NAC 706.731 was not preempted by the federal Bankruptcy Code, and vacated the bankruptcy court's injunction. Id. at 6-7. Baker appeals.

DISCUSSION

I. Mootness

Baker promptly sought and obtained a stay of the district court's decision vacating the bankruptcy judge's injunction. Minute Order of Nov. 5, 1992. The PSC, on the other hand, did not seek a stay of the bankruptcy court's injunction, or of the implementation of Baker's Chapter 11 plan. Baker, Baker's drivers, and Baker's creditors proceeded with the implementation of the reorganization plan following its approval in January of 1992. Baker's drivers allegedly have taken the steps required of all self-employed independent contractors under Nevada's tax and licensing laws. The district court rejected Baker's argument that these circumstances make the case moot because no meaningful relief can be given. Mootness is a jurisdictional issue which we review de novo. See Friends of the Payette v. Horseshoe Bend Hydroelectric Co., 988 F.2d 989, 996 (9th Cir.1993); In re Castlerock Properties, 781 F.2d 159, 161 (9th Cir.1986).

The classic example of mootness in the bankruptcy context is a case in which the debtor has failed to seek a stay of foreclosure and the debtor's property has been sold. The transfer to a third party precludes meaningful relief. See In re Onouli-Kona Land Co., 846 F.2d 1170 (9th Cir.1988).

We also dismiss an appeal as moot if a party opposing a reorganization plan has failed to obtain a stay pending appeal, and the plan has been carried out to "substantial culmination." In re Roberts Farms, Inc., 652 F.2d 793 (9th Cir.1981); see In re Public Serv. Co. of New Hampshire, 963 F.2d 469 (1st Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 304, 121 L.Ed.2d 226 (1992). In Roberts Farms, where the plan had "been so far implemented that it [was] impossible to fashion effective relief for all concerned," and where a disapproval of the plan at the appellate level "would do nothing other than create an unmanageable, uncontrollable situation for the Bankruptcy Court," the appeal was dismissed as moot. Roberts Farms, 652 F.2d at 797.

Failure to obtain a stay, standing alone, is often fatal but not necessarily so; nor is the "substantial culmination" of a relatively simple reorganization plan. Public Service Co. of New Hampshire, 963 F.2d at 473 & n. 13. In both Roberts Farms and Public Service Co. of New Hampshire, no stays were obtained and reorganization plans for complex, multi-million dollar debtors had proceeded almost to completion. The courts found themselves powerless to "unscramble the eggs" and grant effective relief:

the innumerable transfers legitimately effected to and among innocent third parties in the absence of a stay, and in reliance on the order of confirmation and the rate agreement challenged on appeal ... plainly represent so substantial a consummation of the reorganization plan as to render the requested appellate relief impracticable.

Public Serv. Co. of New Hampshire, 963 F.2d at 474.

On the other hand, in In re Spirtos, 992 F.2d 1004, 1006 (9th Cir.1993), we found the Roberts Farms line of cases inapplicable. We could fashion effective relief simply by ordering the debtor to disburse money which had been withheld as exempt from the creditors because the case did not involve the rights of third parties not before the court. Id. at 1007; see also In re International Envtl. Dynamics, Inc., 718 F.2d 322, 325-26 (9th Cir.1983) (appeal not moot where court of appeals could simply order attorney, who was party to the appeal, to repay fees he had won in bankruptcy court).

This case falls between the extremes. Here, unlike in Spirtos, third parties are involved: the taxi drivers, in reliance on the bankruptcy court's order have taken steps to become independent contractors. ² But unlike Ultimately, the decision whether to unscramble the eggs turns on what is practical and equitable. Public Serv. Co. of New Hampshire, 963 F.2d at 473 & nn. 11-12 (citing, inter alia, Roberts Farms, 652 F.2d at 798). We must therefore decide whether it would be practical and equitable for Baker's drivers to reassume employee status. They have undertaken some effort and expense, but Baker has not submitted any information about the extent of their expenditure. ³ We are certain that Baker's claim that the cabbies have "committed their financial futures" to their independent contractor status, making disapproval of the plan impossible, Appellant's Opening Brief at 7, is unsupported and overblown. None of the dire consequences Baker predicts ⁴ seem severe enough to render relief impracticable. Were the bankruptcy court's injunction permanently vacated, it would suffice to treat the independent contractor arrangement as valid for the two years during which the injunction was in place.

Roberts Farms and Public Serv. Co. of New Hampshire, Baker's reorganization plan is not a complex, billion-dollar affair that has affected "innumerable" third parties. Moreover, the transfer of property to the cab drivers has been by lease, not sale.

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