In re American Homepatient, Inc.

• Citation: 420 F.3d 559
• Decision Date: 16 August 2005
• Docket Number: No. 03-6501.,No. 03-6500.,03-6500.,03-6501.
• Parties: In re: AMERICAN HOMEPATIENT, INC., Debtor. Bank of Montreal et al., Appellants/Cross-Appellees, v. Official Committee of Unsecured Creditors et al., Appellees/Cross-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

420 F.3d 559

In re: AMERICAN HOMEPATIENT, INC., Debtor.

Bank of Montreal et al., Appellants/Cross-Appellees, v. Official Committee of Unsecured Creditors et al., Appellees/Cross-Appellants.

No. 03-6500.

No. 03-6501.

United States Court of Appeals, Sixth Circuit.

Argued: July 20, 2005.

Decided and Filed: August 16, 2005.

COPYRIGHT MATERIAL OMITTED

ARGUED: Robin E. Phelan, Haynes & Boone, Dallas, Texas, for Appellants. Frank J. Wright, Hance, Scarborough, Wright, Ginsburg & Brusilow, Dallas, Texas, for Appellees. ON BRIEF: Robin E. Phelan, Alan Wright, Haynes & Boone, Dallas, Texas, James R. Kelley, Neal & Harwell, Nashville, Tennessee, for Appellants. Frank J. Wright, C. Ashley Ellis, Hance, Scarborough, Wright, Ginsburg & Brusilow, Dallas, Texas, Michael R. Paslay, Waller, Lansden, Dortch & Davis, Nashville, Tennessee, Robert J. Mendes, Robert J. Gonzales, Jr., Mendes & Gonzales, Nashville, Tennessee, for Appellees.

Before: CLAY, GILMAN, and COOK, Circuit Judges.

OPINION

GILMAN, Circuit Judge.

In July of 2002, American HomePatient, Inc. (American) filed for relief under Chapter 11 of the Bankruptcy Code. Despite objections by a group of secured lenders to American's proposed plan of reorganization, the bankruptcy court imposed the plan on the lenders pursuant to the Bankruptcy Code's so-called "cramdown" provisions set forth in 11 U.S.C. § 1129(b). The bankruptcy court further concluded that the appropriate cramdown interest rate for the lenders was 6.785%, and it fixed their collateral value at $250 million.

Displeased with these rulings, the lenders appealed the order of confirmation to the district court. American responded by filing a motion to dismiss the lenders' appeal on the grounds of equitable mootness. The district court denied American's motion, but then concluded on the merits that the bankruptcy court had properly determined both the cramdown interest rate and the collateral value. Both parties appealed. For the reasons set forth below, we AFFIRM the judgment of the district court.

I. BACKGROUND

American is a publicly-held company based in Brentwood, Tennessee. It specializes in providing home healthcare services and products and has more than 280 affiliates and subsidiaries in 35 states. Over the course of its operations, American borrowed a significant amount of money. Most of this debt was incurred between 1994 and 1998, when American invested in dozens of new branch offices. The lenders in this case are 24 entities that loaned money to American during this time frame. Although the parties disagree as to the exact total owed to the lenders, both sides acknowledge that the principal balance is in the range of $278 to $290 million.

Following American's voluntary filing for bankruptcy protection under Chapter 11 of the Bankruptcy Code in July of 2002, the company and its affiliates filed a Joint Plan of Reorganization. American filed a Second Amended Joint Plan of Reorganization in January of 2003. This amended plan was approved by all but the lenders in the present case. American then sought to have the plan confirmed pursuant to the Bankruptcy Code's cramdown provisions set forth in 11 U.S.C. § 1129(b), which allow a reorganization plan to go into effect notwithstanding the fact that it has not been accepted by all of the impaired classes.

The bankruptcy court held a five-day hearing on the lenders' claims. During this hearing, the court heard from various witnesses who testified as to the appropriate cramdown interest rate to be applied to the lenders' allowed secured claim. The bankruptcy court was ultimately persuaded by the testimony of American's expert witness David Rosen, who opined that the appropriate cramdown interest rate was 6.785%, which was equal to the interest rate on a six-year Treasury note plus 3.5%. It determined that the lenders' proposed interest rate of 12.16% was inappropriate because it would result in a windfall to the lenders.

The bankruptcy court also heard testimony regarding the lenders' collateral value in order to determine the amount of the lenders' allowed secured claim. Patrick Hurst, another of American's expert witnesses, testified that the value of this collateral was between $235 and $275 million. The lenders' expert witness, Gerald Benjamin, opined that the correct valuation was between $300 and $320 million. After weighing this conflicting evidence, the bankruptcy court found that Hurst's testimony was significantly more credible. It then fixed the lenders' collateral value, and thus their allowed secured claim, at $250 million.

On May 14, 2003, the bankruptcy court overruled the lenders' objections and directed American to submit a proposed order confirming the amended reorganization plan. This confirmation order was entered by the bankruptcy court on May 27, 2003. The lenders subsequently appealed to the district court and petitioned first the bankruptcy court and then the district court for a stay of the confirmation order. This request was denied by both courts, and the lenders did not seek a stay from this court. As a result, the amended reorganization plan became effective on July 1, 2003.

On August 15, 2003, American filed a motion to dismiss the lenders' appeal before the district court on the basis of equitable mootness. The district court denied the motion, but affirmed the bankruptcy court's decision to confirm the plan on the merits. This appeal by the lenders and cross-appeal by American followed.

II. ANALYSIS

A. Standard of review

"In appeals from the decision of a district court on appeal from the bankruptcy court, the court of appeals independently reviews the bankruptcy court's decision, applying the clearly erroneous standard to findings of fact and de novo review to conclusions of law." Zirnhelt v. Madaj (In re Madaj), 149 F.3d 467, 468 (6th Cir.1998) (citations and quotation marks omitted). Furthermore, when a question in the bankruptcy context involves a mixed question of law and fact, "we must break it down into its constituent parts and apply the appropriate standard of review for each part." Wesbanco Bank Barnesville v. Rafoth (In re Baker & Getty Fin. Servs., Inc.), 106 F.3d 1255, 1259 (6th Cir.1997) (citation and quotation marks omitted).

B. American's motion to dismiss on equitable mootness grounds

American argues in its cross-appeal that the lenders are equitably estopped from pursuing this appeal. In bankruptcy proceedings, a "case that is equitably moot is not technically moot, but rather equitable mootness occurs where the plan of reorganization is substantially consummated, and where it is no longer `prudent to upset the plan of reorganization.'" Guardian Sav. & Loan Ass'n v. Arbors of Houston Assocs. Ltd. P'shp. (In re Arbors of Houston Assocs. Ltd. P'shp.), No. 97-2099, 1999 WL 17649, at *2 (6th Cir. Jan. 4, 1999) (unpublished) (citation omitted).

This court has yet to delineate with clarity the appropriate standard for addressing claims of equitable mootness. Generally, "[w]hen determining the mootness of an appeal of a bankruptcy reorganization order, this Court inquires as to whether the plan has been substantially consummated at the time of the appeal, and, if so, whether piecemeal modification of the bankruptcy reorganization plan is possible or desirable." Unofficial Comm. of Co-Defendants v. Eagle-Picher Indus., Inc. (In re Eagle Picher Indus., Inc.), Nos. 96-4309 & 97-4260, 1998 WL 939869, at *4 (6th Cir. Dec. 21, 1998) (unpublished) (citation and quotation marks omitted). This court in City of Covington v. Covington Landing Ltd. Partnership, 71 F.3d 1221, 1225 (6th Cir.1995), on the other hand, cited with approval two other formulations of the governing standard. One is employed by the Seventh Circuit, in which the reviewing court "asks whether it is `prudent to upset the plan of reorganization at this late date,'" id. (quoting In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir.1994)), and the other is utilized by the Fifth Circuit, in which the court examines "(1) whether a stay has been obtained; (2) whether the plan has been `substantially consummated'; and (3) whether the relief requested would affect either the rights of parties not before the court or the success of the plan." Id. (citing Manges v. Seattle-First Nat'l Bank (In re Manges), 29 F.3d 1034, 1039 (5th Cir.1994)). The court in City of Covington, however, concluded that the record before it was inadequate to support equitable estoppel, 71 F.3d at 1226, so it "did not explicitly adopt a formula for this equitable doctrine." Arbors of Houston Assocs. Ltd. P'shp., 1999 WL 17649 at *2.

We are now squarely faced with the issue. After due consideration, we adopt the Fifth Circuit's standard quoted above, which we believe presents the clearest synthesis of the relevant factors. Under this standard, the first factor to consider is whether a stay has been obtained. The lenders concede that they did not pursue a stay of the confirmation order in this court. American argues that this fact establishes that "the Lenders assumed the risk that the Appeal would be equitably mooted." The lenders, for their part, argue that to pursue a stay before the Sixth Circuit would have been futile because of the high burden required for injunctive relief. From a strategic perspective, they argue, pursuing such a stay made little sense.

This court has in the past acknowledged that "[t]he failure to seek a stay . . . is not necessarily fatal to the appellant's ability to proceed." City of Covington, 71 F.3d at 1225-26; see also UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir.1994)("[R]equesting a stay is not a mandatory step comparable to filing a timely notice of appeal."). In sum, while this first factor weighs somewhat against the lenders, their failure to seek a stay before this court is not fatal.

The next factor to be considered is whether the plan has been substantially consummated. City of Covington, 71 F.3d at 1225. Again, the lenders have...