Envirodyne Industries, Inc., Matter of

• Decision Date: 12 July 1994
• Docket Number: No. 93-4070,93-4070
• Citation: 29 F.3d 301
• Parties: In the Matter of ENVIRODYNE INDUSTRIES, INCORPORATED, Debtor-Appellee. Appeal of UNOFFICIAL COMMITTEE OF 13 1/2% NOTEHOLDERS OF ENVIRODYNE INDUSTRIES, INCORPORATED.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 301

29 F.3d 301

25 Bankr.Ct.Dec. 1447

In the Matter of ENVIRODYNE INDUSTRIES, INCORPORATED,

Debtor-Appellee.

Appeal of UNOFFICIAL COMMITTEE OF 13 1/2% NOTEHOLDERS OF

ENVIRODYNE INDUSTRIES, INCORPORATED.

No. 93-4070.

United States Court of Appeals,

Seventh Circuit.

Argued April 20, 1994.

Decided July 12, 1994.

Allan Sweig, Chicago, IL, Steven E. Greenbaum (argued), Stephen B. Selbst, Andrew Dash, Berlack, Israels & Liberman, New York City for appellant.

James E. Spiotto, Stephen L. Garcia, Chapman & Cutler, Chicago, IL, Edwin G. Schallert, Steven R. Gross, Debevoise & Plimpton, New York City, for intervenor-appellee.

Howard M. Hoffmann, David I. Herbst, Gregg E. Szilagyi, Michael A. Reiter, Allan S. Brilliant (argued), Holleb & Coff, Chicago, IL, Stephen M. Schuster, Envirodyne Industries, Incorporated, Oak Brook, IL, for debtor-appellee.

Before POSNER, Chief Judge, and RIPPLE and KANNE, Circuit Judges.

POSNER, Chief Judge.

This appeal arises out of an objection by creditors to a plan of reorganization filed by Envirodyne Industries, Inc., a Chapter 11 debtor. Envirodyne had three levels ("tranches," as they are called) of unsecured debt. One, the most senior, consisted of Senior Discount Notes. The plan called for the holders of these notes to receive notes of equivalent value in the reorganized firm. The next level consisted of 14% Senior Subordinated Debentures, and was junior to the Senior Discount Notes. The third level consisted of 13.5% Subordinated Notes and was junior to both the 14% notes (as we shall call them) and the Senior Discount Notes. The 13.5% notes had actually been issued before the Senior Discount Notes and the 14% notes (both issued in 1989 as part of a leveraged buyout of the company), but had been made subordinate to them by the indenture pursuant to which the 13.5% notes were issued. That indenture provided that in the event of a default, "all Superior Indebtedness" (defined to include the 14% notes, though issued later as we have said, together with the Senior Discount Notes) "shall first be paid in full before the Noteholders, or the Trustee, shall be entitled to retain any assets (other than shares of stock of the Company, as reorganized or readjusted or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated, at least to the same extent as the Notes, to the payment of all Superior Indebtedness which may at the time be outstanding)."

The plan of reorganization called for the distribution to the 14% noteholders of common stock worth $121 million in the reorganized firm in partial payment of their notes, the face amount of which was $200 million. The 13.5% noteholders, although owed $100 million, received only $20 million worth of stock, on the theory that by virtue of the subordination provision we quoted they were entitled to nothing until the holders of the Senior Discount Notes and the 14% notes received stock or other securities sufficient in value to satisfy their claims in full. The 13.5% noteholders objected to being subordinated in this fashion. They argued that the words "other than shares of stock in the Company" entitled them to be treated the same as the 14% noteholders if the distribution to creditors took the form of stock rather than new notes, as it has done. The bankruptcy judge rejected the objection and confirmed the plan. The 13.5% noteholders appealed to the district court, which affirmed the bankruptcy judge. They tried but failed to get a stay from the district court and from this court pending their appeal. The plan of reorganization was then implemented, and the first question is whether it is now too late to provide the appellants with any feasible relief, in which event we must dismiss the appeal without reaching its merits.

A case is moot if there is no possible relief which the court could order that would benefit the party seeking it. Church of Scientology v. United States, --- U.S. ----, ----, 113 S.Ct. 447, 449, 121 L.Ed.2d 313 (1992). The appeal in this case is not moot in that sense. At least partial relief is possible, and that is enough to satisfy the requirements of Article III. Id. at ----, 113 S.Ct. at 450; In re UNR Industries, Inc., 20 F.3d 766, 768 (7th Cir.1994). Maybe total relief is possible, though that of course is not essential to jurisdiction (relatively few plaintiffs get all they are seeking in their lawsuit). We could order the bankruptcy judge to modify the plan of reorganization to reallocate $20 million worth of the stock that the 14% noteholders received to the appellants, the 13.5% noteholders. Some of the 14% noteholders, it is true, have already sold their stock, but they could be ordered to surrender some or all of the proceeds to the appellants.

But even when relief is possible in a case such as this through modification of a plan of reorganization, courts will frequently refuse to modify the plan if it has already been implemented, because of the effects of modification on nonparties to the dispute. Id. at 769-70, and cases cited there. This principle went by the misleading name of "equitable mootness," until the name was anathematized by Judge Easterbrook in the UNR case. Id. at 769. The now nameless doctrine is perhaps best described as merely an application of the age-old principle that in formulating equitable relief a court must consider the effects of the relief on innocent third parties. International Brotherhood of Teamsters v. United States, 431 U.S. 324, 375, 97 S.Ct. 1843, 1874-75, 52 L.Ed.2d 396 (1977); Okaw Drainage District v. National Distillers & Chemical Corp., 882 F.2d 1241, 1248 (7th Cir.1989). So if modification of a plan of reorganization would upset legitimate expectations, it may be refused; but we cannot tell whether that is the case here. The 14% noteholders, arguing against the modification, claim that if they had known that they would not be getting all the common stock necessary to satisfy their claim in full, they would not have consented to the plan of reorganization, but would instead have attempted to force Envirodyne into liquidation. The appellants reply somewhat implausibly that this is nonsense, that the 14% noteholders would have received nothing in liquidation, so much less valuable would Envirodyne have been if sold on the auction bloc rather than continued under its present management. But the purchaser at the auction could hire back the present management; for the issue would not be whether to sell Envirodyne's assets piecemeal but whether the company was worth more sold to new owners or owned by the company's creditors.

The record before us is not adequate to enable us to decide whether modification of the plan of reorganization would bear unduly on the innocent. Therefore, if we had doubts about the merits (or rather lack thereof) of the 14% noteholders' claim, so that the issue of "equitable mootness" might be dispositive, we would have to remand the case to the bankruptcy court for a determination of that issue. But we have no doubts, and since, despite its former name, "equitable mootness" is not a jurisdictional doctrine (which is one reason the name has been discarded), we can with propriety elide the question of its applicability and come directly to the question of the indenture's meaning.

The parties agree that the parenthetical clause that is the focus of dispute is unambiguous. This use of the word "agree" may seem nonsensical,...