Haden v. Pelofsky

• Decision Date: 23 April 1999
• Docket Number: Nos. 98-3035,98-3036,s. 98-3035
• Citation: 212 F.3d 466
• Parties: (8th Cir. 2000) Hugh Wilson Haden; Karen Sue Haden; Richard D. Hughes; Edith May Hughes; Jerry D. Clay, Debtors-Appellees, v. Joel Pelofsky, U.S. Trustee; Fredrich J. Cruse, Standing Trustee, Appellants. Submitted:
• Court: U.S. Court of Appeals — Eighth Circuit

Page 466

212 F.3d 466 (8th Cir. 2000)

Hugh Wilson Haden; Karen Sue Haden; Richard D. Hughes; Edith May Hughes; Jerry D. Clay, Debtors-Appellees, v. Joel Pelofsky, U.S. Trustee; Fredrich J. Cruse, Standing Trustee, Appellants.

Nos. 98-3035, 98-3036

United States Court of Appeals FOR THE EIGHTH CIRCUIT

Submitted: April 23, 1999

Filed: April 12, 2000

Appeal from the United States District Court for the Eastern District of Missouri

[Copyrighted Material Omitted] Before McMILLIAN, MURPHY, and MONTGOMERY,¹ Circuit Judges.

McMILLIAN, Circuit Judge.

Joel Pelofsky, United States Trustee ("UST"), and Fredrich J. Cruse, Standing Trustee ("standing trustee") (collectively "trustees"), appeal from a final order entered.² for the Eastern District of Missouri affirming the bankruptcy court's ³ confirmation of three Chapter 12 bankruptcy plans over the trustees' objections. See Cruse v. Haden (In re Haden), No. 2:96CV00092 ERW (E.D. Mo. June 2, 1998) (hereinafter "Dist. Ct. Order"), aff'g Nos. 94-20111-293/94-20178- 293/93-20183-293 (Bankr. E.D. Mo. Oct. 3, 1996) (hereinafter "Bankr. Ct. Order"). For reversal, the trustees argue that the district court below erred in reading In re Wagner, 36 F.3d 723 (8th Cir. 1994) (Wagner), to mandate confirmation of Chapter 12 plans in which the debtors propose to pay certain creditors directly, without the oversight of the Chapter 12 trustee and without payment of trustee's fees. For the reasons discussed below, we affirm the district court order.

Jurisdiction

Jurisdiction in the district court was proper based upon 28 U.S.C. 158(a). Jurisdiction in this court is proper under 28 U.S.C. 158(d). The notice of appeal was timely filed pursuant to Fed. R. App. P. 4(a).

Background

The three sets of debtors in the instant case -- Hugh Wilson and Karen Sue Haden (together "the Hadens"), Richard D. and Edith May Hughes (together "the Hugheses"), and Jerry D. Clay (collectively "debtors") -- are family farmers in Missouri. Separately and at different times during 1994 and 1995, the debtors. petitioned for Chapter 12 reorganization and protection.⁴ See Bankr. Ct. Order at 1-3. Each family's Chapter 12 plan contained proposed language permitting the debtors to pay some of their creditors directly, rather than through the intermediary standing trustee.⁵ No creditors objected to these direct payments by the debtors. See id. at 12 n.4. With respect to such direct payments, the plans also purported to exclude trustee's fees. See id. at 2-3.

The bankruptcy court confirmed each of the plans, subject only to its subsequent ruling on the trustees' objections as to the direct payments. See id. After the parties consolidated their arguments and submitted briefs on the direct payment issue, the court entered an order overruling all but one of the trustees' objections. Based on Wagner ⁶ the bankruptcy court reasoned that Chapter 12 plans containing provisions for direct payments to a debtor's impaired secured creditors were confirmable over the trustees' objections. See id. at 10. Moreover, because "the financial impact of allowing direct payments on the stability of the Chapter 12 program does not appear to be a deciding factor in allowing the Debtors to pay their creditors directly," the court determined that it could not "deny[] confirmation of a Chapter 12 plan that provides for direct payments to impaired secured creditors." Id. at 11. Similarly, the bankruptcy court rejected the trustees' objections to the direct surrender of secured collateral as well as the direct payment of unimpaired secured claims and administrative expenses. See id. at 12-15. However, the court did order Clay to direct child support arrearage payments through the trustee. See id. at 15.

The district court affirmed, holding that such direct payment plans were permitted under Wagner. See Dist. Ct. Order at 3. The debtors have since made payments in accordance with the confirmed plans. In fact, discharges were entered with respect to the Hadens and the Hugheses in August 1997 and June 1998, respectively; no discharge has been entered for Clay, although he has apparently finished making all payments under the plan. See Brief for Appellant UST at 12 n.4; Supp. Brief for Appellant UST at 5; Supp. Brief for Appellees at 5. Pending appeal, the debtors have held in escrow trustee's fees on all disputed payments, equal to the amount required if the trustees' objections were sustained. See Brief for Appellant Standing Trustee at vi. These appeals followed.

Discussion

Mootness

Before considering the merits of the trustees' separate appeals, we must decide whether we have jurisdiction. See Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 94-95 (1998). Article III of the United States Constitution limits the jurisdiction of the federal courts to actual, ongoing cases and controversies. See Missouri ex rel. Nixon v. Craig, 163 F.3d 482, 484 (8th Cir. 1998) (Craig). "It is of no consequence that the controversy was live at earlier stages in this case; it must be live when we decide the issues." South Dakota v. Hazen, 914 F.2d 147, 150 (8th Cir. 1990). When, during the course of litigation, the issues presented in a case "lose their life because of the passage of time or a change in circumstances . . . . and a federal court can no longer grant effective relief," the case is considered moot. Beck v. Missouri State High Sch. Activities Ass'n, 18 F.3d 604, 605 (8th Cir. 1994). "[I]f this case is indeed moot, we must refrain from reaching the merits because any opinion issued would be merely 'advisory' and rest on hypothetical underpinnings." Craig, 163 F.3d at 484. With these principles in mind, we examine whether the trustees' separate appeals remain alive, given that all three sets of debtors have completed payments under their respective plans and that the Hadens and the Hugheses have been discharged from bankruptcy proceedings.

Debtors claim that the appeals of both the UST and the standing trustee are moot, in light of the execution of all plan payments and the discharge of two sets of debtors. Debtors contend that, because all plan payments have been made and therefore no administrative work remains, the standing trustee cannot be entitled to any fees for the debtors' direct payments to creditors. See Supp. Brief of Appellees at 6-7. Accordingly, debtors argue that the trustee's fees issue is moot

The UST now asserts effective relief may still be available with respect to each of the three plans and thus his appeal is not moot.⁷ See Supp. Brief of Appellant UST at 9, 13 n.2. Such effective relief could include the bankruptcy court either (1) disgorging certain payments from creditors and rerouting payments through the standing trustee or (2) ordering that the standing trustee collect some portion of the fees being held in escrow. See id. at 9, 11. Although the UST concedes that the former outcome may conflict with Eighth Circuit precedent, see id. at 10, the UST asserts that the latter falls within the bankruptcy court's "considerable equitable discretion in fashioning an appropriate bankruptcy remedy" pursuant to 11 U.S.C. 105. Id. at 11 (quoting In re Reeves, 65 F.3d 670, 674 (8th Cir. 1995)).

The standing trustee similarly argues that his appeal is not moot. In addition to contending that the cases below are "capable of repetition, but evading review," and thus not moot, Southern Pac. Terminal Co. v. ICC, 219 U.S. 498, 515 (1911), the standing trustee asserts that a discharge order cannot moot an issue collateral to the bankruptcy, such as the propriety of trustee's fees for certain payments to creditors. See Supp. Brief of Appellant Standing Trustee at 4 (citing Wagner, 36 F.3d at 726).

We hold that, under Wagner, neither the UST's nor the standing trustee's appeal is moot. In Wagner, the debtors had been discharged from bankruptcy proceedings. The trustee sought neither a stay nor an appeal of the discharge. This court rejected the debtors' assertion that the trustee's appeal was moot. This court reasoned:

A discharge under the bankruptcy code discharges "debts provided for by the plan." Trustee's fees are not "debts provided for by the plan," but are fees levied for services provided in administering the plan. A claim against the debtors for trustee's fees is collateral to the bankruptcy action and the obligation to pay such fees is not relieved by a discharge from the bankruptcy proceedings. If we find that [the trustee's] arguments have merit we may grant effective relief, and [his] appeal thus is not moot.

Wagner, 36 F.3d at 726 (citation omitted). Similarly, the discharges and completion of payments in the bankruptcy plans at issue here cannot render moot the trustees' claims with respect to fees. Because effective relief would be available if we find merit to the trustees' claims for fees, the trustees' separate appeals are not moot.

Direct Payments and Trustee's Fees

As the second reviewing court, our standards are the same as those of the district court; we review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. See In re Mathiason, 16 F.3d 234, 235 (8th Cir. 1994).

For reversal, the UST contends that the courts below misread Wagner to bar bankruptcy courts "from ever considering the impact that removing trustee oversight from a Chapter 12 debtor's payment of impaired secured creditors may have on the feasibility of the debtor's plan." Brief for Appellant UST at 13. According to the UST, the bankruptcy court incorrectly concluded that Wagner created an "absolute right" for debtors to make such direct payments, reasoning that "[t]he language used by the Court in Wagner prevents this Court from denying confirmation of a Chapter 12 plan that provides for direct payments to impaired secured creditors." Brief for Appellant UST at 10-11 (quoting Bankr. Ct. Order at 11). Similarly, the district court viewed the question presented as "whether [Wagner]...