In re Si Restructuring, Inc.

• Citation: 542 F.3d 131
• Decision Date: 28 August 2008
• Docket Number: No. 07-50912.,07-50912.
• Parties: In the Matter of: SI RESTRUCTURING, INC.; SRE Restructuring, Inc., Debtors. John C. Wooley; Jeffrey J. Wooley, Appellants, v. Dennis Faulkner, Plan Administrator of SRE Restructuring, Inc., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

542 F.3d 131

In the Matter of: SI RESTRUCTURING, INC.; SRE Restructuring, Inc., Debtors John C. Wooley; Jeffrey J. Wooley, Appellants, v. Dennis Faulkner, Plan Administrator of SRE Restructuring, Inc., Appellee.

No. 07-50912.

United States Court of Appeals, Fifth Circuit.

August 28, 2008.

Gregory Scott Coleman (argued), Yetter, Warden & Coleman, LLP, Austin, TX, J. Scott Rose, Julia Wommack Mann, Jackson Walker, San Antonio, TX, Dori Elana Kornfeld, Yetter, Warden & Coleman, LLP, Houston, TX, for Appellants.

Donald Frederick Campbell, Thomas Butler Alleman (argued), Matthew Thomas Ferris, Winstead, P.C., Dallas, TX, for Appellee.

Appeal from the United States District Court for the Western District of Texas.

Before DAVIS and SOUTHWICK, Circuit Judges, and CLARK, District Judge.^*

W. EUGENE DAVIS, Circuit Judge:

This is an appeal from a district court order affirming a bankruptcy court's order granting a Plan Administrator's motion ("motion") authorizing disbursal of a reserve fund in the amount of $500,000.00, which had been established to pay the additional secured claims of John and Jeffrey Wooley ("Appellants" or "the Wooleys"). Because the bankruptcy court erred in granting the motion, we vacate the district court order and remand this case to the bankruptcy court with instructions to reinstate the reserve through disgorgement of Appellee's attorneys' fees in an amount necessary to compensate Appellants for their additional allowed secured claims, up to $500,000.00. The amount Appellants are entitled to receive from the reserve fund is to be determined by the bankruptcy court on remand.

I.

This appeal is closely related to Wooley v. Faulkner (In re SI Restructuring, Inc.) (Wooley I),¹ which we decided on June 20, 2008. By way of background, in that case, we held that the bankruptcy and district courts erred in equitably subordinating the Wooleys' claims from secured claims to unsecured claims.² During the pendency of the equitable subordination litigation, the plan provided partial protection to the Wooleys by requiring a distribution to the Wooleys of $2,867,600.00.³ The plan provided protection for the remainder of Appellant's claims in a reserve fund. This plan provision provides:

Notwithstanding the foregoing, pending further order of the [C]ourt after notice and a hearing in [the] Adversary Proceeding [to determine, in part, whether the Wooleys' secured claims should be equitably subordinated] . . . the Debtors shall segregate and hold not less than $500,000.00 in the Distribution Reserve for satisfaction of any of the Wooleys' Claims that become Allowed Secured Claims. The Plan Administrator may seek to reduce the amount held for satisfaction of the Wooleys' Claims or seek to spend or otherwise disburse such funds through motion to the Bankruptcy Court. The final allowance or disallowance of the Wooleys' Claims and the validity, extent[,] and priority of the liens securing the Wooleys' Claims shall be determined by the Bankruptcy Court in Adversary Proceeding 05-5055. . . .

This paragraph in the plan was primarily designed to preserve no less than $500,000.00 in the estate for payment of the Wooleys' allowed secured claims against the estate. Secondarily, this paragraph recognized the right of the Plan Administrator to seek the approval of the bankruptcy court to disburse funds from the fund for other purposes.

After the bankruptcy court rendered judgment in favor of the Plan Administrator and equitably subordinated the Wooleys' claims, the Plan Administrator moved the bankruptcy court for permission to disburse the $500,000.00 reserve fund to pay the Plan Administrator's attorneys' fees. The bankruptcy court granted the motion. The bankruptcy court reasoned that it was no longer necessary to maintain the reserve fund for satisfaction of the Wooleys' claims. The court concluded that, even if the Wooleys were to prevail on appeal, they had already been paid in full on their secured claims. In summary, the bankruptcy court granted the motion because it reasoned that the Wooleys had no allowed secured claims and, therefore, the $500,000.00 reserve was "superfluous."

The district court affirmed the bankruptcy court. The district court explained that because the Wooleys lost in the Adversary Proceeding in the bankruptcy court (which ruling was affirmed by the district court) they had no allowed secured claims, and the bankruptcy judge was justified in granting the Plan Administrator's motion to begin disbursing the reserve fund. Although the district court acknowledged that the Wooleys' appeal of the Adversary Proceeding was still pending in this Court, it concluded that Appellants could not show a likelihood of success on the merits of the appeal.

By reversing the judgment of the district court in Wooley I, this Court determined that the Wooleys' secured claims should be fully recognized.

The question that remains for this Court to decide is whether the Wooleys' allowed secured claims exceed the $2,867,600.00 they have already received and, if so, whether disbursal of the $500,000.00 reserve was in error. For reasons we discuss below, we conclude that the Wooleys are so entitled, and the district court should not have affirmed the bankruptcy court's order allowing for disbursal of the $500,000.00 reserve.

II.

This Court reviews the decision of a district court, sitting as an appellate court, by applying the same standards of review to the bankruptcy court's findings of fact and conclusions of law as applied by the district court.⁴ Generally, a bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo.⁵

A.

We deal first with Appellee's argument that this Court does not have jurisdiction to hear the appeal. The jurisdictional argument has four premises: (1) that the appeal is untimely, (2) that Appellants failed to exhaust remedies in the bankruptcy court, (3) that this action is a collateral attack on the judgment in the Adversary Proceeding and (4) that the action is equitably moot.

Appellee argues first that this appeal is untimely. The bankruptcy court entered the order allowing disbursal of the reserve funds on April 23, 2007. Upon counsel's oral request, the bankruptcy court granted the Wooleys a ten-day stay to give them time to seek a stay from the district court. The Wooleys sought such a stay from the district court, which was denied on May 30, 2007. On July 13, 2007, the district court entered an order affirming the bankruptcy court's order allowing disbursal of the reserve funds. The Wooleys filed their notice of appeal to this Court on July 18, 2007. Appellee argues that the Wooleys' appeal came more than thirty days after the district court's denial of a stay. This appeal, however, is not from the order denying the stay; it is an appeal of the district court's order affirming the bankruptcy court's order permitting the disbursal of the $500,000.00 reserve. The appeal is timely and this argument has no merit.

Appellee argues next that Appellants failed to exhaust their remedies in the bankruptcy court. Appellee contends that Appellants did not comply with Bankruptcy Rule 8005, which requires that a motion for stay be presented to the bankruptcy judge in the first instance.⁶ Appellants initially moved for a stay in the bankruptcy court, and the bankruptcy judge granted a ten-day stay, adding that Appellants would need to then seek further affirmative stay relief. Appellants accordingly filed a motion for a stay in the district court, which was denied. The district court explained that, technically, Rule 8005 was not complied with, but it noted that when the bankruptcy court granted a ten-day stay, it was "abundantly clear that no stay, other than a ten[-]day stay to allow appellate review" would be granted by the bankruptcy court. Thus, we agree with the district court that, under the circumstances, the Appellants' failure to seek an additional stay from the bankruptcy court in this case did not violate Rule 8005.

Appellee argues next that Appellants' claim to funds in the reserve is a collateral attack on the judgment in the Adversary Proceeding. Because this Court has reversed the lower court's judgment in the Adversary Proceeding, this argument is without merit.

Appellee argues finally that this appeal is equitably moot because the reserve fund has been disbursed, the plan has been substantially consummated and the relief Appellants seek would undermine the plan. "The concept of [equitable] `mootness' from a prudential standpoint protects the interest of non-adverse third parties who are not before the reviewing court but who have acted in reliance upon the plan as implemented."<sup>7</sup> The ultimate question to be decided is whether the Court can grant relief without undermining the plan and, thereby, affecting third parties. For the doctrine of equitable mootness to apply, the Court must determine: ". . . (i) whether a stay has been obtained, (ii) whether the plan has been `substantially consummated,' and (iii) whether the relief requested would affect either the rights of parties not before the court or the success of the plan."⁸

Assuming a stay of the bankruptcy court's disbursal order was not obtained, we examine the second and third prongs. At this juncture, the plan has indisputably been substantially consummated. "Substantial consummation of a . . . plan is a momentous event, but it does not necessarily make it impossible or inequitable for an appellate court to grant effective relief."⁹ Thus, the third prong — whether granting Appellants' requested relief would unravel the plan or "unscramble the eggs,"¹⁰ so to speak, — is our concern. The relief requested by Appellants is a return to the reserve fund of monies which were paid to Appellee's counsel. They do not seek any return of money to the estate from third party creditors.

It is clear that Appellee's counsel, who was paid from the reserve fund, is not ...