In the Matter of Grimland Inc.

• Decision Date: 12 March 2001
• Docket Number: No. 00-50301,00-50301
• Citation: 243 F.3d 228
• Parties: (5th Cir. 2001) In The Matter Of: GRIMLAND, INC., Debtor TNB FINANCIAL, INC., Appellant, v. JAMES F. PARKER INTERESTS, Appellee
• Court: U.S. Court of Appeals — Fifth Circuit

Page 228

243 F.3d 228 (5th Cir. 2001)

In The Matter Of: GRIMLAND, INC., Debtor

TNB FINANCIAL, INC., Appellant, v. JAMES F. PARKER INTERESTS, Appellee.

No. 00-50301

UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT

March 12, 2001

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

Before: JOLLY and DAVIS, Circuit Judges, and RESTANI, Judge.^*

RESTANI, Judge:

This is an appeal of a district court order affirming a bankruptcy court order of surcharge. The surcharged lienholder appeals. We hold that the bankruptcy court erred in not granting the lienholder's objection to the surcharge. Any technical failure to meet the deadline for objections should not have been determinative under the unique facts of this case.

FACTS AND PRIOR PROCEEDINGS

Grimland, Inc. ("Grimland") operated an automotive transmission and engine rebuilding business in Austin, Texas, before it filed a petition for bankruptcy under Chapter 7 in January of 1999. [R2-50-247.] Grimland had stored over a hundred barrels of waste oil on its premises, which it leased from James F. Parker Interests ("Parker"). [Id.] The trustee of Grimland's estate moved to abandon all of Grimland's personal property, including the waste oil. [Id.] Parker objected to the abandonment, and as part of an agreed order settling the abandonment dispute, Parker was granted an administrative expense claim of up to $45,000 to cover the costs of removing the waste oil and as a reasonable rental for storing the estate's personal property on its premises pending liquidation. [Id. at 247-248.]

During these proceedings, the trustee auctioned off all the personal property of Grimland. [Id. at 248.] Appellant TNB Financial, Inc. ("TNB"), which held a perfected purchase money security interest in all of Grimland's personal property securing a debt of approximately $20,000, did not object to the sale based on assurances from the trustee that its position would be protected. The sale generated proceeds of approximately $70,000, which left the estate with funds of about $75,000 to distribute to creditors. [R2-71-313 to 314.] Thus, after the sale TNB was substantially oversecured and, except for the surcharge at issue, would have been repaid in full.¹

As of July of 1999, the actual costs to dispose of the waste oil were more than $65,000, and the rental for storage of Grimland's personal property pending liquidation was almost $24,000. [R2-50-249.] The total costs of the waste oil remediation and the rental of the premises were thus almost twice what Parker had previously been allowed as an administrative expense. Parker presumably realized by May of 1999 that its expenses, for rent and for environmental remediation, would greatly exceed its administrative expense claim. On May 21, 1999, without specifying the amount of the costs, Parker moved to have the collateral securing TNB's lien surcharged for the remediation and rental costs Parker had incurred pursuant to 506(c) of the Bankruptcy Code. [R2-36.] In accordance with Local Bankruptcy Rule 9014 of the Western District of Texas, Parker's motion notified all the creditors who had been served with the motion that they had 20 days in which to request a hearing to object to the motion. [Id.] On May 28, 1999 Parker filed a supplemental surcharge motion to cover additional rental and remediation expenses and estimated therein a surcharge "exceed[ing] $70,000." [R2-38-209.]

TNB was served with Parker's surcharge motions. [R2-36-175; R2-38-223.] It did not object to Parker's first motion, however, within the 20-day window provided by Local Rule 9014. [R2-78-315 to 316.] Thus, on June 21, 1999, more than 20 days after the filing of Parker's first motion and still with no objection by TNB, the bankruptcy court granted Parker's first open-ended surcharge motion. [R2-42.] On June 22, 1999, the very next day, TNB filed an objection to Parker's first motion. [R2-43.] The clerk of the bankruptcy court treated the objection as a response to Parker's second, supplemental surcharge motion. A hearing on the second motion was set for July 20, 1999.² At the hearing, the bankruptcy court stated that surcharging TNB's collateral for the rental and remediation costs was clearly contrary to Fifth Circuit precedent. [R2-78-317.] The bankruptcy court also stated, however, that TNB had had ample time to object to Parker's first surcharge motion and had not done so. [Id. at 315 to 316.] Accordingly, the bankruptcy court granted the second surcharge motion, which, when combined with the first surcharge motion, had the effect of completely stripping TNB of its lien. [Id. at 321.]

TNB then filed, on July 26, 1999, motions for rehearing on both of Parker's surcharge motions. [R2-47-242; R2-46-245.] The bankruptcy court held a hearing on September 7, 1999, at which it refused to reconsider the two orders it had entered in response to Parker's motions. [R2-79.] It reasoned that as it had done nothing more than enter an order in response to an unopposed motion, and as it was the responsibility of creditors to protect their own interests, there were no grounds under Fed. R. Civ. P. 60(b) to reconsider the first surcharge motion. [Id. at 341 to 342.] With regard to the second motion, the bankruptcy court concluded that its disposition of the first surcharge motion was dispositive. [Id. at 342.]

TNB appealed the bankruptcy court's refusal to reconsider its surcharge order to the district court. [R1-2.] The district court affirmed both the entry of the first surcharge order and the bankruptcy court's refusal to reconsider its actions. [R1-7-112 to 114.]

DISCUSSION³

I.Equitable Mootness

Parker argues that this appeal is equitably moot. Unlike constitutional mootness, equitable mootness in the context of a bankruptcy appeal is not rooted in the requirements of Article III of the Constitution. Rather, it is a doctrine that courts have developed in response to the particular problems presented by the consummation of plans of reorganization under Chapter 11.⁴ An appeal is equitably moot when a plan of reorganization has been so substantially consummated that a court can order no effective relief even when there may still be a live dispute between parties to the bankruptcy proceeding. The doctrine rests on the need for finality, and the need for third parties to rely on that finality, in bankruptcy proceedings. See generally Nationwide Mut. Ins. Co. v. Berryman Prods., Inc. (In re Berryman Prods., Inc.), 159 F.3d 941 (5th Cir. 1998); Manges v. Seattle-First Nat'l Bank (In re Manges), 29 F.3d 1034 (5th Cir. 1994), cert. denied, 513 U.S. 1152 (1995).

This Circuit has set forth a three-factor test for when a bankruptcy case is equitably moot. These factors are, (1) whether the complaining party has failed to obtain a stay, (2) whether the plan (here, the liquidation) has been substantially consummated, and (3) whether the relief requested would affect the rights of parties not before the court or the success of the plan. Berryman, 159 F.3d at 944. Neither party disputes that TNB did not seek and has not won a stay of the distribution in this case, or that all of Grimland's assets have been sold and all the proceeds distributed. The parties disagree as to the effect of the relief TNB seeks on persons not currently before this court.

TNB argues that third parties will not be disturbed if the surcharge order is reversed. It argues that reversal would require simply that Parker repay TNB the value of its secured claim. Parker responds that reversing the surcharge order would require it to demand from the contractors responsible for cleaning up the Grimland premises the monies it paid for their services. Parker further contends that reversing the surcharge order would require the other administrative claimants in this case to disgorge some of their recoveries.

First, reversing the surcharge order would have no effect on payments to the various parties who cleaned up the waste oil on the Grimland premises. Parker's responsibility to remedy the property is independent of the administration of the bankruptcy proceedings, see 42 U.S.C. 9607(a) (1994); the bankruptcy proceedings simply provided a mechanism for Parker to reach agreement with Grimland over its share of the costs.

Second, assuming arguendo that the administrative claimants are the types of third parties the equitable mootness doctrine was meant to protect, reversing the surcharge order would have no direct effect on the other administrative claimants.⁵ The other administrative claimants in this case would be affected if the surcharge under 11 U.S.C. 506(c) (1994) acted to strip TNB of its priority so as to benefit all the parties junior to it. Though TNB may have been stripped of its lien in effect, it was not formally stripped of it. Rather, the 506(c) surcharge simply required TNB to pay Parker for certain expenses of Parker that supposedly benefitted TNB. Reversing the surcharge order would simply require Parker to repay TNB. As the surcharge order did not formally reorder the priorities of TNB, Parker, and the other administrative claimants, this appeal presents a simple dispute between TNB and Parker.⁶ Accordingly, the appeal is not equitably moot.

II.The Surcharge Order

TNB argues on appeal that the bankruptcy court, and the district court on appeal, should have granted its motion to reconsider under Fed. R. Civ. P. 60(b).⁷ TNB argues that in granting Parker's motions to surcharge, the bankruptcy court made a mistake, which is a basis for relief under Rule 60(b).⁸

The bankruptcy court opined, at the July 20 hearing, that the surcharge order was clearly contrary to Fifth Circuit precedent. Parker has not rebutted this point. Indeed, 11 U.S.C. 506(c) provides that, "The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such...