In re Circle K Corp., Bankruptcy No. B-90-5052-PHX-GBN to B-90-5075-PHX-GBN. Adv. No. 93-1123-GBN.
| Citation | 171 BR 666 |
| Decision Date | 23 August 1994 |
| Docket Number | Bankruptcy No. B-90-5052-PHX-GBN to B-90-5075-PHX-GBN. Adv. No. 93-1123-GBN. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Arizona |
| Parties | In re The CIRCLE K CORPORATION; Circle K Convenience Stores, Inc.; Circle K Management Company; Lar-Lin, Inc.; First Circle Properties, Inc.; Utotem, Inc.; Utotem Markets of Arizona, Inc.; U Totem of Alabama, Inc.; U-Tote'm of Colorado Inc.; U-Tote'm of Miami, Inc.; Tic Toc Systems, Inc.; Monterre Properties, Inc.; Shop & Go, Inc.; Circle K General, Inc.; Circle K Hawaii, Inc.; Combined Aviation Co.; Charter Marketing Company (Connecticut); Charter Marketing Company; Mr. B's Oil Co., Inc.; Mr. B's Food Mart, Inc.; NPI Corporation; Old Colony Petroleum Company, Inc.; New England Petroleum Distributors, Inc.; and 44th Street & Camelback Limited Partnership, Debtors. S.N. PHELPS & COMPANY, Commonwealth Oil Refining Company, Inc. and Realmark Holdings, Inc., Plaintiffs, v. The CIRCLE K CORPORATION and its affiliated companies, and CK Acquisitions Corp., Defendants. |
D.J. Baker, Weil, Gotshal & Manges, Houston, TX, Susan G. Boswell, Streich Lang, P.A., Phoenix, AZ, for defendants/debtors.
Mitchell A. Karlan, Gibson, Dunn & Crutcher, New York City, for defendants.
Richard L. Epling, Winthrop, Stimson, Putnam & Roberts, Thomas F. Puccio, New York City, for plaintiffs.
Plaintiffs are debenture holders asserting claims against debtors in the approximate amount of $90 million. Under the terms of a Chapter 11 reorganization plan confirmed on June 16, 1993, Circle K was sold to CK Acquisitions Corporation for $399.5 million in cash. CK Acquisitions Corporation was controlled by an investment entity known as Investcorp.
In a timely filed complaint under 11 U.S.C. § 1144, plaintiffs alleged defendants perpetrated a fraud during confirmation of debtors' plan. The amended complaint charges defendants concealed the fact management would hold an equity stake in the reorganized debtor post-confirmation. Plaintiffs further allege defendants falsely represented that the only post-confirmation owners of the reorganized debtors would be Investcorp, its affiliates and certain Middle Eastern investors. Amended Complaint at 17-19; 23-27, placed under seal by stipulation. Plaintiffs also complain defendants falsely represented the value of Circle K in the confirmation process. Supra at 20-21, 28-31.
These same parties participated in an appeal of the confirmation order. In an unpublished memorandum decision filed March 15, 1994, the Ninth Circuit affirmed the District Court dismissal of plaintiffs' appeal. S.N. Phelps & Co., et al. v. The Circle K Corp., et al. (In re The Circle K Corporation, et al.), No. 93-16278, 1994 WL 83319.1 The Circuit concluded that, given the lack of a stay pending appeal, the confirmation process had sufficiently advanced that effective relief could not be fashioned if appellants prevailed. Memorandum at 3-5.
Defendants now move to dismiss plaintiffs' adversary complaint on the same mootness grounds. This Court must accept as true, all the complaint's allegations in their entirety,2 and draw all reasonable inferences in favor of plaintiffs. Pelletier v. Federal Home Loan Bank of San Francisco, 968 F.2d 865, 872 (9th Cir.1992). Even given such favorable inferences, the Court concludes this timely section 1144 complaint should nevertheless be dismissed for mootness.
Contrary to plaintiffs' argument, neither Civil Rule 60(b)(3), Fed.R.Civ.P., nor 11 U.S.C. § 105(a) apply in this adversary. The complaint and prayer are exclusively premised on section 1144. Although plaintiffs included the pro forma "such other and further relief as this Court may deem just and proper" in their prayer, this is an insufficient vehicle for now asserting additional theories in response to the dismissal motion.
An order confirming a Chapter 11 reorganization plan may be revoked only in accordance with 11 U.S.C. § 1144. Dale C. Eckert Corp. v. Orange Tree Associates, Ltd. (In re Orange Tree Associates, Ltd.), 961 F.2d 1445, 1447 (9th Cir.1992).
The result is that Congress reduced from 1 year to 180 days the time for revoking a confirmation order under Civil Rule 60(b)(3). Id.
Although courts have held that other remedies may be available to creditors injured by fraud, such as a separate damages action, In the Matter of Newport Harbor Associates, 589 F.2d 20, 24 (1st Cir.1978), the complaint in the instant case is exclusively grounded on section 1144. The Court should examine that section in determining whether to grant the motion to dismiss, not other remedies raised by plaintiffs for the first time in response to defendants' motion.
Circle K argues this adversary must be dismissed because the Court cannot fashion any remedy under section 1144. Thus, the adversary is deemed moot. Plaintiffs argue there are numerous remedies that can be fashioned.
Mootness is premised on the principle federal courts hear only live controversies. If a court finds for plaintiff, but it is impossible to grant effectual relief, the court will not proceed to judgment, but will dismiss the matter as moot. Chang v. Servico, Inc. (In re Servico, Inc.), 161 B.R. 297, 300 (S.D.Fla.1993). Servico dealt with a district court appeal of the dismissal of a section 1144 action.
Does the concept of "mootness" apply in a section 1144 action pending in Bankruptcy Court? In Servico, the Bankruptcy Court had ruled it was unable to fashion effective relief under section 1144 to protect those who relied on the confirmation order. Supra, at 300. On appeal, the district court recognized there was a "slight difference" between confirmation order appeals and appeals from section 1144 rulings. Id. However, Id. at 300-301.
Defendants make much of the Ninth Circuit ruling that the plan is so far implemented it was impossible to fashion effective relief. Phelps at 3. Plaintiffs correctly note the Circuit was focusing on an appeal of the confirmation order, not a pending section 1144 complaint.
In Servico, supra, the court stated the mootness doctrine applies in a section 1144 action if the plan is substantially consummated and no effective relief can be fashioned. 161 B.R. at 300-301. Central to any mootness finding is whether effective relief can be granted. First Union Real Estate Equity and Mortgage Investments v. Club Associates (In re Club Associates), 956 F.2d 1065, 1069 (11th Cir.1992). The Court must examine whether it can fashion an order that would revoke debtor's discharge, restore the status quo existing before confirmation and protect those who relied in good faith on confirmation.
Section 1144 recognizes that revocation of a Chapter 11 plan impacts innocent third parties. Congress knew a plan will be at least partially implemented when a revocation order is entered.
The statutory language expressly considers that parties rely on a confirmation order. That arguably could distinguish this case from the Phelps appeal. The Ninth Circuit was not required to address section 1144's language and instead was reviewing a direct appeal, which, if successful, would undo the reorganization.
Although section 1144 anticipates a plan is at least partially implemented, a court cannot ignore the extent of that implementation in determining whether it can fashion relief. How far debtors progressed in plan implementation is examined and balanced against the practical ability to protect innocent parties.
In this case, many transactions have taken place since confirmation. As noted in Phelps, after all stays expired, CK Acquisitions paid $395,000,000 to the disbursing agent and received newly issued stock in the reorganized debtors. Old stock was canceled. CK Acquisitions borrowed $235,000,000 from banks that were not parties to the appeal. Debtors and their subsidiaries underwent mergers. The disbursing agent made distributions to the bank group, senior secured noteholders and unsecured creditors. Workers' compensation suits, stayed during the case, have begun proceeding forward. Trade creditors commenced doing business with the reorganized debtors. Memorandum at 3-4.
Plaintiffs argue creditors who received the bulk of disbursements were parties to the appeal. Even if so, the $10 million paid to unsecured creditors and $3.9 million paid to environmental claimants could not be returned to the estate. Another $11,600,000 can not be disturbed without jeopardizing settlements. These parties did not participate in the appeal. This inability to undue that which had been done precluded the Appellate Court from fashioning effective relief. Supra at 4.
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