Healthco Intern., Inc., In re

• Decision Date: 07 October 1997
• Docket Number: No. 97-1381,97-1381
• Parties: 39 Collier Bankr.Cas.2d 939, 32 Bankr.Ct.Dec. 133, Bankr. L. Rep. P 77,620 In re HEALTHCO INTERNATIONAL, INC., Debtor, HICKS, MUSE & CO., INC., et al., Appellants, v. William A. BRANDT, Jr., Trustee, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 45

136 F.3d 45

39 Collier Bankr.Cas.2d 939, 32 Bankr.Ct.Dec. 133,

Bankr. L. Rep. P 77,620

In re HEALTHCO INTERNATIONAL, INC., Debtor HICKS, MUSE & CO., INC., et al., Appellants, v. William A. BRANDT, Jr., Trustee, Appellee.

No. 97-1381.

United States Court of Appeals First Circuit.

Heard Oct. 7, 1997.

Decided Feb. 12, 1998.

David L. Evans, Boston, MA, with whom Harold B. Murphy, Daniel J. Lyne, D. Ethan Jeffery, Hanify & King, Boston, MA, Mike McKool, Jr., Jeffrey A. Carter and McKool Smith, Dallas, TX, were on brief, for appellants

Daniel C. Cohn, with whom David B. Madoff and Cohn & Kelakos LLP, Boston, MA, were on brief, for appellee.

Before STAHL, Circuit Judge, GODBOLD ^* and CYR, Senior Circuit Judges.

CYR, Senior Circuit Judge.

The question presented on appeal is whether the bankruptcy court abused its discretion by approving a settlement between the chapter 7 trustee for Healthco International, Inc. and a consortium of banks ("the Bank Group") which financed a prepetition leveraged buy-out ("LBO") of Healthco by appellants Hicks Muse & Co., Inc. and its coinvestors (collectively: "Hicks Muse"). We affirm.

I BACKGROUND

Appellant Hicks Muse financed the 1991 LBO with a $50 million term loan and a $65 million revolving credit facility from the Bank Group, secured by liens on all Healthco assets. Healthco filed its chapter 11 petition in June 1993 and continued to operate as a debtor-in-possession. Three months later an interim trustee was appointed and the reorganization was converted to a chapter 7 liquidation.

By the time the chapter 7 trustee ("Trustee") was appointed approximately one month later, Healthco's assets already were undergoing liquidation by the interim trustee, subject to bankruptcy court approval. In the chapter 11 schedules the Healthco assets were valued at $149 million, but were later assigned a liquidation value between $33 and $66 million.

After obtaining relief from the automatic stay, see Bankruptcy Code § 362, 11 U.S.C. § 362, the Bank Group proceeded to liquidate its Healthco collateral, having agreed to provide the Trustee with "full, complete, and detailed accounting[s]" of the liquidation on a monthly basis. Over the ensuing year the Trustee lodged several complaints, with the Bank Group and the bankruptcy court, that the promised accountings had not been forthcoming or were deficient. Eventually the Bank Group submitted a thirty-page accounting pursuant to court order and provided the Trustee with thirty cartons of raw invoices generated during the collateral liquidation process.

After declining to incur "the incredible cost ... of ... go[ing] through the[se] records item by item," the Trustee commenced an adversary proceeding against Hicks Muse and the Bank Group, asserting two principal claims. First, since the LBO had left Healthco insolvent, the Trustee claimed that the $115 million lien obtained by the Bank Group on the Healthco assets constituted a voidable fraudulent transfer (hereinafter: "the fraudulent transfer claim"). See Bankruptcy Code § 544(b), 11 U.S.C. § 544(b). Second, the Trustee claimed that the Bank Group had liquidated its Healthco collateral in a "commercially unreasonable" manner, see Mass. Gen. Laws Ann. ch. 106, § 9-504(3) ("UCC"), which yielded only $50-60 million on assets with an estimated value (per chapter 11 schedules) exceeding $149 million (hereinafter: "the UCC claim").

The Trustee subsequently proposed to dismiss both the fraudulent transfer claim and the UCC claim, see Fed. R. Bankr.P. 9019(a); ¹ see also Fed. R. Bankr.P. 9014 (contested matters), in return for the Bank Group's agreement to pay the chapter 7 estate $9 million in cash, waive roughly $1 million in allowed priority claims against the chapter 7 estate and a deficiency claim estimated at $35 million, and assign to the Trustee any LBO-related claims the Bank Group might have against third parties, including nonsettling defendants in the adversary proceeding. ² The Trustee in turn agreed not to oppose the $50-60 million secured claim asserted by the Bank Group against the Healthco collateral. Several codefendants, including Hicks Muse, objected to the settlement.

At the hearing before the bankruptcy court, the Trustee contended that the proposed $45 million settlement would serve the "best interests" of the chapter 7 estate, see Kowal v. Malkemus (In re Thompson ), 965 F.2d 1136, 1141 n. 5, 1145 (1st Cir.1992), for two reasons. First, the Trustee pointed out that the $45 million offer would return the chapter 7 estate ninety percent of the $50 million estimated maximum litigated value of the fraudulent transfer claim, without litigation risk. Second, the Trustee noted several factors central to his assessment that the UCC claim, fully litigated, could generate only minimal value for the chapter 7 estate. See infra Section II.B.1. The bankruptcy court approved the proposed settlement with one pertinent modification. ³

On intermediate appeal to the district court, Hicks Muse challenged the bankruptcy court finding that the settlement between the Trustee and the Bank Group had been negotiated in "good faith." The district court ruled the "good faith" test immaterial under the "best interests" standard applicable under Bankruptcy Rule 9019, and opined that a finding of "good faith" might be misperceived by state courts as a basis for barring Hicks Muse from pursuing its state-law contribution claim against the Bank Group. In all other respects the bankruptcy court order was affirmed by the district court.

II DISCUSSION

A. Appellate Jurisdiction

The Trustee contends that the appeal is moot because Hicks Muse knowingly disregarded his warning that the settlement would be consummated promptly absent a timeous stay of the bankruptcy court order approving the settlement. As Hicks Muse sought no stay, the Bank Group promptly disbursed $9 million to the Trustee, from which $2.5 million has since been used to defray professional fees. Thereafter, all claims in the adversary proceeding against the Bank Group were dismissed with prejudice.

1. Equitable Mootness

The "equitable mootness" doctrine imports both "equitable" and "pragmatic" limitations upon our appellate jurisdiction over bankruptcy appeals. See Institut Pasteur v. Cambridge Biotech Corp. (In re Cambridge Biotech Corp.), 104 F.3d 489, 492 n. 5 (1st Cir.), cert. denied, --- U.S. ----, 117 S.Ct. 2511, 138 L.Ed.2d 1014 (1997); Rochman v. Northeast Utils. Serv. Group (In re Public Serv. Co. of N.H.), 963 F.2d 469, 471 (1st Cir.1992).

The "equitable" mootness test inquires whether an unwarranted or repeated failure to request a stay enabled developments to evolve in reliance on the bankruptcy court order to the degree that their remediation has become impracticable or impossible. Id. at 472. In the instant case, however, Hicks Muse neither repeatedly ignored its right, nor significantly delayed utilizing its opportunities, to seek a stay of the order approving the Bank Group settlement. Cf. id. at 472-73 (noting that appellants ignored several opportunities to take interlocutory appeals from orders denying stays during sixteen-month period following confirmation of reorganization plan).

Nor has the Trustee met the "pragmatic" mootness test, which contemplates proof that the challenged bankruptcy court order has been implemented to the degree that meaningful appellate relief is no longer practicable even though the appellant may have sought a stay with all due diligence. Instead, the Trustee relies either upon more finely focused reorganization provisions not applicable here, see Bankruptcy Code § 1127(b), 11 U.S.C. § 1127(b) (barring plan modification after "substantial consummation"), or inapposite settlement provisions pursuant to which lawsuits in nonbankruptcy courts had already been dismissed with prejudice, or substantial distributions had been made to parties no longer amenable to bankruptcy court jurisdiction. Here, of course, the only dismissal with prejudice occurred in the instant adversary proceeding and there has been no showing that any portion of the settlement proceeds disbursed to the Trustee, or to persons employed by the Trustee, could not be recovered with relative ease. See In re The Gibbons-Grable Co., 141 B.R. 614, 617 (Bankr.N.D.Ohio 1992) (noting that interim disbursements of compensation under Bankruptcy Code sections 330 and 331 remain subject to reconsideration); see also In re Spillane, 884 F.2d 642, 644 (1st Cir.1989).

Accordingly, the equitable mootness doctrine does not bar the present appeal.

2. Section 363(m) Mootness

The Trustee further contends that the appeal is mooted by section 363(m), which states:

The reversal or modification on appeal of an authorization under [§ 363(b) or (c) ] of a sale or lease of property [of the estate] does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

Bankruptcy Code § 363(m), 11 U.S.C. § 363(m) (emphasis added). The Trustee argues that section 363(m) applies because the claims which were settled with the Bank Group constituted "property of the estate," see Bankruptcy Code § 541(a), 11 U.S.C. § 541(a), and therefore the settlement was the functional equivalent of a "sale ... of property" of the estate under section 363(m). The Trustee's contention is fraught with problems.

First, it is at odds with the unambiguous language employed in section 363(m). See Laracuente v. Chase Manhattan Bank, 891 F.2d 17, 22 n. 2, 23 (1st Cir.1989) (in construing Bankruptcy Code, "our inquiry ... ends where, as here, the plain language of the statute is unambiguous"). By its very nature a settlement resolves adversarial claims prior to their definitive determination by the court. In contrast, a "sale" effects a "[t]ransfer of [...