Solomon v. Milbank

UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT

________________

No. 96-11201
(Summary Calendar)
_________________
In The Matter Of: ALPHONSO SOLOMON,

Debtor.

ALPHONSO SOLOMON, JANET M SOLOMON

Appellants,

versus

ROBERT MILBANK, Trustee, ET AL.,

Appellees.

_____________________

No. 96-11528

(Summary Calendar)

_____________________

In the Matter of: ALPHONSO SOLOMON,

Debtor.

ALPHONSO SOLOMON, JANET M SOLOMON,

Appellants,

versus

ROBERT MILBANK, Trustee,

Appellee.

_____________________

No. 96-11529

(Summary Calendar)
 _______________________

In the Matter of: ALPHONSO SOLOMON,

Debtor.

ALPHONSO SOLOMON,

Appellant,

versus

GRAHAM BARBER COLLEGE, INC.,

Appellee.

Appeals from the United States District Court
For the Northern District of Texas

September 25, 1997

Before DAVIS, EMILIO M. GARZA, and STEWART, Circuit Judges.

PER CURIAM:*

The debtor, Alphonso Solomon, appeals the district court’s

affirmance of three orders issued by the bankruptcy court (1)

entering a nondischargeable judgment against Solomon and his

estate, (2) confirming Solomon’s plan of reorganization as modified

by a settlement agreement negotiated by the trustee, Robert

Milbank, and (3) converting his case from chapter 11 to chapter 7.

We affirm.

*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this
opinion should not be published and is not precedent except under the limited
circumstances set forth in 5TH CIR. R. 47.5.4.

2
 I

In May 1994, Solomon filed a voluntary petition for bankruptcy

relief under chapter 11 of the Bankruptcy Code. The bankruptcy

court subsequently converted Solomon’s case to chapter 7 and

appointed Milbank as trustee of the estate. Solomon converted the

case back to chapter 11, and Milbank remained as chapter 11

trustee.

At the time he filed his bankruptcy petition, Solomon was

involved in litigation in Texas state court with LaFrance Graham,

as executrix of the Estate of Johnny Graham, Sr., and Graham Barber

College (collectively, “the College”) concerning Solomon’s alleged

breaches of fiduciary duty during his tenure as president of the

College. The state court action was removed to bankruptcy court

and, after trial, the bankruptcy court entered a judgment against

Solomon in the amount of $224,724 plus pre-judgment interest. The

court further ordered the judgment nondischargeable under sections

523(a)(2)(A), (a)(4), and (a)(6) of the Bankruptcy Code1 and

entered an order allowing the judgment against Solomon’s estate.

1
Section 523(a) of the Bankruptcy Code excludes certain debts from
discharge in bankruptcy. The relevant portions of the section provide that:
(a) discharge [under this title] does not discharge an individual
debtor from any debt))
(2) for money . . . to the extent obtained by . . .
actual fraud . . .;
(4) for fraud or defalcation while acting in a fiduciary
capacity, embezzlement, or larceny;
(6) for willful and malicious injury by the debtor to
another entity or to the property of another entity
. . . .
11 U.S.C. § 523(a).

3
Solomon appealed the damage award and nondischargeability judgment

to the district court, but did not appeal the court’s order

allowing the claim against the estate.

Solomon filed a proposed plan of reorganization (“the Plan”)

which the bankruptcy court confirmed on December 15, 1995. The

Plan provided for the creation of a trust for the liquidation of

all assets of the estate until such time as the creditors were paid

in full. The Plan further provided that Milbank would continue as

liquidating trustee after confirmation. As part of the Plan,

Solomon agreed to pay $50,000 in post-confirmation income to the

liquidating trust on or before January 31, 1996.

Prior to confirmation of the Plan, Milbank negotiated a

4
compromise and settlement of the College’s claim against the estate

(the “Compromise”) which provided that, in exchange for the

transfer of all right, title, and interest held by the bankruptcy

estate in the stock and assets of the College, the College would

release the nondischargeable judgment, waive all claims against

Solomon and his bankruptcy estate, including a $103,000 proof of

claim filed by LaFrance Graham, and dismiss all pending proceedings

with prejudice. In addition, Graham agreed to pay $80,000 cash to

the estate in settlement of a separate judgment held by the estate

against Graham (the “Payne judgment”) which had an approximate face

value of $110,000 including interest. The bankruptcy court

approved the Compromise, finding it “fair, equitable, and in the

best interests of the [estate] and its creditors” and “eliminates

the largest known or allowed claim . . . and locks in a discharge

for the Debtor.” The bankruptcy court then approved the Plan as

modified by the Compromise. Solomon appealed the bankruptcy

court’s order approving the Compromise and the order confirming the

Plan insofar as it conditioned confirmation on the Compromise. The

district court consolidated the two appeals.

While Solomon’s appeal of the confirmation order was pending

5
before the district court, Milbank and the College implemented the

Compromise. The College paid $80,000 to the trust and the trust

transferred the stock to the College. In addition, the bankruptcy

court entered orders releasing the nondischargeable judgment

against the estate and Solomon and authorizing withdrawal of all

claims against the estate.

After confirmation of the Plan, Solomon failed to contribute

the required $50,000 in post-confirmation income by January 31,

1996, as required by the Plan. In accordance with Article 11.2 of

the Plan, Milbank filed a motion to show cause why the case should

not be converted to chapter 7 under section 1112(b) of the

Bankruptcy Code.2 Following a hearing, the bankruptcy court found

that Solomon had not fulfilled his obligation to make the payment,

that failure to make the payment constituted a material default

under the Plan, and that conversion of the case for continued

liquidation under chapter 7, rather than dismissal, would be in the

best interests of the creditors. Accordingly, the bankruptcy court

converted the case to chapter 7. Solomon appealed the conversion

order.

2
Section 1112(b) provides:
(b) Except as provided in subsection (c) of this section, on request of a
party in interest or the United States trustee or bankruptcy
administrator, and after notice and a hearing, the court may convert a
case under this chapter to a case under chapter 7 of this title or may
dismiss a case under this chapter, whichever is in the best interest of
creditors and the estate, for cause, including))
. . .
(8) material default by the debtor with respect to a confirmed plan
. . .
11 U.S.C. § 1112.

6
 Soon after the bankruptcy court converted the case, the

district court dismissed Solomon’s appeal of the bankruptcy court’s

order confirming the Plan, reasoning that since the case had been

converted to chapter 7, the appeal of confirmation of a chapter 11

plan of reorganization is moot. Several months later, the district

court affirmed the bankruptcy court’s order converting the case to

chapter 7 and dismissed Solomon’s appeal of the nondischargeability

judgment. Solomon appeals each of these three orders by the

district court.

II

We will first address Solomon’s appeal of the district court’s

affirmance of the bankruptcy court’s order converting his case from

chapter 11 to chapter 7. A determination of whether cause under

section 1112(b) exists rests in the sound discretion of the

bankruptcy court. Sullivan Central Plaza I, Ltd. v. Bancboston

Real Estate Capital Corp. (Matter of Sullivan Cent. Plaza I, Ltd.),

935 F.2d 723, 728 (5th Cir. 1991). We review a bankruptcy court’s

findings of fact for clear error and its determination of issues of

law de novo. Border v. McDaniel (Matter of McDaniel), 70 F.3d 841,

842-43 (5th Cir. 1995).

A

Solomon first argues that the district court erred in

affirming the bankruptcy court’s determination that his failure to

pay $50,000 in post-confirmation income to the Trust constituted a

7
material default under the Plan. Alphonso insists that Janet

Solomon made this payment on his behalf when she contributed her 50

percent interest in the proceeds from the sale of community

property to the Trust.

Janet held a 50 percent interest in all community property

assets immediately prior to commencement of the bankruptcy

proceeding. After Alphonso filed his petition, Janet, as non-

debtor spouse, became a creditor of the estate based on her

interest in that property. Several months prior to confirmation of

the Plan, Janet filed a motion to order Milbank to release her

share of the proceeds from the sale of community property assets

pursuant to 11 U.S.C. § 363(j).3 Before the bankruptcy court ruled

on the motion, however, Alphonso filed a proposed modification of

the Plan by which Janet would reserve the right to contribute to

the estate, as an additional source of funding, her share of those

assets up to the amount of $138,000. The Solomons argue that the

bankruptcy court granted this modification and accepted Janet’s

contribution of $138,000, including $50,000 in satisfaction of

Alphonso’s obligation under the Plan.

Solomon mischaracterizes the bankruptcy court’s bench ruling.

As the district court correctly noted, the bankruptcy judge did not

3
Section 363(j) states: “After a sale of property to which subsection
(g) or (h) of this section applies, the trustee shall distribute to the debtor’s
spouse or the co-owners of such property, as the case may be, and to the estate,
the proceeds of such sale . . . according to the interests of such spouse or co-
owner, and of the estate.”

8
rule on Janet’s motion for distribution of her community property

interest but rather carried the motion until such time as $276,000

in community property assets had been distributed.4 At any rate,

Janet Solomon is not entitled to collect any part of her one-half

interest in community property assets until the estate is

completely administered. See In re Melenyzer, 140 B.R. 143, 148

n.16 (Bankr. W.D. Tex. 1992) (finding that “the mere fact that

certain property belongs to the community estate does not make the

non-debtor spouse immediately entitled to receive and spend her

one-half interest”). Section 541(a)(2) of the Bankruptcy Code

includes as property of the estate “[a]ll interests of the debtor

and the debtor’s spouse in community property” that is “(A) under

the sole, equal, or joint management and control of the debtor; or

(B) liable for an allowable claim against the debtor . . . .” 11

U.S.C. § 541(a)(2). The bankruptcy court specifically found that

Alphonso Solomon had either sole or joint control and management of

all of the community property in question. In addition, under

Texas law, community property subject to sole or joint control of

a spouse is subject to the liabilities of that spouse. Tex. Fam.

Code Ann. § 3.202(c) (West 1997) (formerly Tex. Fam. Code Ann.

§ 5.61(c)). Therefore, under section 541(a)(2), Janet Solomon’s

4
The bankruptcy court reasoned that at that time, Janet’s motion may
be moot since the $276,000 distributed to creditors would include Janet’s
proposed contribution of $138,000 in additional funding for the estate. In doing
so, however, the court specifically declined to rule on the question of whether
Janet was actually entitled to distribution of $138,000 so as to enable her to
make the proposed contribution.

9
share of community property assets became property of the estate

upon commencement of the case, subject to administration by the

trustee and payment to creditors.

Janet, however, asserts that she has an immediate right to the

proceeds of the sale of her community property interest under 11

U.S.C. § 363(j). Section 363(j), however, provides for payment of

the non-debtor spouse’s interest in property sold by the trustee

only if the property is also subject to section 363(g) or (h). It

is clear that subsection (g), which governs “dower or curtesy,”

does not apply in this case. Moreover, by its terms, section

363(h) applies only to property owned jointly by the estate and a

third party, not to property wholly-owned by the estate.5 Through

the operation of section 541(a), the estate acquired both

Alphonso’s and Janet’s interests in the community property and is

therefore the sole owner. Section 363(h) is simply inapplicable.6

See In re Hendrick, 45 B.R. 976, 987-88 (Bankr. M.D. La. 1985)

(holding that § 363(h) does not apply to community property); In re

Verges, 1992 WL 77791 *6 (E.D.La. 1992) (finding that § 363(j) does

not apply to distribution of proceeds of sale of former community

5
Section 363(h) allows the trustee, under certain circumstances, to
“sell both the estate’s interest . . . and the interest of any co-owner in
property in which the debtor had, at the time of the commencement of the case,
an undivided interest as a tenant in common, joint tenant, or tenant by the
entirety.”

6
Our conclusion is further bolstered by the language of section 363(i)
which specifically distinguishes between jointly-owned property to which
subsection (h) applies and property of the estate that was community property
immediately prior to commencement of the case.

10
property held by estate). Therefore, Janet was not entitled to

distribution of the proceeds of the sale of community property

under section 363(j).

In sum, since Janet Solomon’s share of community property was

already property of the estate, her “contribution” of that interest

could not constitute satisfaction of Alphonso’s obligation to

contribute $50,000 in post-confirmation income to the estate. It

is undisputed that Solomon did not otherwise make the required

payment under the Plan. Therefore, the bankruptcy court did not

err in finding that Solomon had materially breached the Plan.

B

Solomon presents a litany of other arguments in support of his

appeal of the conversion order, only two of which merit discussion.

First, Solomon argues that the bankruptcy court failed to evaluate

whether converting the case to chapter 7, as opposed to maintaining

the case in chapter 11, best served the interests of the creditors.

However, the test under section 1112(b) is not whether continued

administration of the reorganization plan or conversion is better

for creditors, but whether conversion or dismissal of the case best

serves their interests. 11 U.S.C. § 1112(b) (“[T]he court may

convert a case under this chapter to a case under chapter 7 of this

title or may dismiss a case under this chapter, whichever is in the

best interests of creditors and the estate, for cause . . . .”).

Solomon does not argue how dismissal of the entire case as opposed

to continued liquidation of trust assets in chapter 7 would better

11
serve the creditors.7 The bankruptcy court has broad discretion to

convert a case to chapter 7 upon a showing of cause and need not

give exhaustive reasons for its determination. Koerner v. Colonial

Bank (Matter of Koerner), 800 F.2d 1358, 1367-68 (5th Cir. 1986).

We find no abuse of discretion.

Second, Solomon argues that only a creditor may request

conversion under 11 U.S.C. § 1112(b); therefore, Milbank did not

have standing to file a motion to show cause in the bankruptcy

court. Section 1112(b), however, provides that the court may

convert a case “on request of a party in interest.” 11 U.S.C.

§ 1112(b). Section 1109(b) explicitly includes the trustee as “a

party in interest” with the right to raise any issue in a case

under chapter 11. Milbank clearly was a proper party to move for

conversion of the case.

We find all other arguments raised by Solomon to be meritless.

The district court did not err in converting Solomon’s case from

chapter 11 to chapter 7.

7
Solomon simply cites In re T.S.P. Industries, Inc., 117 B.R. 375,
377-78 (Bankr. N.D. Ill. 1990), for the proposition that, because all property
of the estate vests in the debtor upon confirmation of the plan of reorganization
under section 1141(b) and does not subsequently revest in the estate upon
conversion under section 1112(b), conversion to chapter 7 after confirmation
would result in an estate with no assets. See also In re Winom Tool and Die,
Inc., 173 B.R. 613, 620-21 (Bankr. E.D. Mich. 1994). Therefore, he concludes
that conversion cannot possibly be in the best interests of the creditors because
the estate could not thereafter make distributions to creditors.
Solomon misses the mark. Section 1141(b) vests property of the estate in
the debtor upon confirmation “except as otherwise provided in the plan.” 11
U.S.C. 1141(b) (emphasis added). Here, Article VII of the Plan explicitly
provided that all property of the estate, except exempt property or property
subject to allowed secured claims, vested in the liquidating trust upon
confirmation, not Solomon. Therefore, In re T.S.P. Industries is clearly
distinguishable.

12
 III

We next consider Solomon’s appeal of the district court’s

affirmance of the bankruptcy court’s judgment of

nondischargeability8 and its order confirming the Plan. The

district court dismissed both appeals as moot. We agree that

Solomon’s appeal of the confirmation of the Plan is moot since the

Plan is no longer in effect in this chapter 7 proceeding.

Solomon’s appeal of the nondischargeability action is moot because,

pursuant to the terms of the Compromise, the College has completely

released both the estate and Solomon individually from the

nondischargeable judgment. Thus, there is no judgment left to

appeal.

Solomon, however, urges that the bankruptcy court erred in

approving the Compromise because it grossly undervalued the stock

of the College and allowed the settlement of the Payne judgment for

less than its face value. Solomon also asserts that approval of

the Compromise unfairly extinguished his right to appeal the

judgment of liability. Solomon asks that we completely undo the

Compromise and reinstate the $224,000 nondischargeable judgment

against him.9

8
The district court consolidated the appeal of the bankruptcy court’s
judgment of liability in the underlying suit and the judgment of
nondischargeability of the claim under 11 U.S.C. § 523(a).
9
It is questionable that we may afford Solomon the relief he seeks
after consummation of the Compromise. The estate’s suit against LaFrance Graham
and the estate of Johnny Graham, Jr. for collection of the Payne judgment has
been dismissed with prejudice by the Probate Court of Dallas County, Texas, and
this court is powerless to resurrect that cause of action. See Thibaut v. Ourso,

13
 We strongly question the wisdom of such a request. Solomon

admits that he filed his voluntary petition for bankruptcy in

anticipation of the judgment against him; the Compromise between

Milbank and the College afforded Solomon the very discharge he

desired. If we were to undo the Compromise to allow Solomon to

appeal the liability judgment against him and he is then

unsuccessful in that appeal, he cannot later obtain a discharge of

the debt. 11 U.S.C. § 523(a).

At any rate, we find that Solomon has failed to demonstrate

that the bankruptcy court erred in approving the Compromise. We

review a bankruptcy court’s approval of a compromise settlement

under Bankruptcy Rule 9019(a) for abuse of discretion. Connecticut

General Life Ins. Co. v. United Companies Financial Corp. (In re

Foster Mortg. Corp.), 68 F.3d 914, 917 (5th Cir. 1995). We review

705 F.2d 118, 120-121 (5th Cir. 1983) (finding that appeal of settlement was moot
where parties had dismissed state causes of action in reliance on court’s order
approving the settlement). Moreover, even if some form of relief could
conceivably be fashioned, Solomon’s challenge to the Compromise may still be
barred under the doctrine of “equitable mootness” if implementation of that
relief would be inequitable. See Manges v. Seattle First National Bank (Matter
of Manges), 29 F.3d 1034, 1038-39 (5th Cir. 1994), cert. denied, 513 U.S. 1152,
115 S. Ct. 1105, 130 L. Ed. 2d 1071 (1995); Official Comm. of Unsecured Creditors
of LTV Aerospace & Defense Co. v. Official Comm. of Unsecured Creditors of LTV
Steel Co. (In re Chateaugay Corp.), 988 F.2d 322, 325 (2d Cir. 1993). The
concept of mootness from a “prudential standpoint protects the interests of non-
adverse third parties who are not before the reviewing court but who have acted
in reliance upon the plan as implemented.” Manges, 29 F.3d at 1039. Although
it is clear from the record that both Milbank and the College acted in reliance
on the bankruptcy court’s approval of the Compromise and confirmation of the
Plan, both of whom are parties to the present appeal, neither Milbank nor the
College state precisely how third parties have relied upon approval of the
Compromise or how their rights would be affected by the relief requested.
Because we find that Solomon’s challenge to the Compromise fails on the merits,
we decline to rule whether that challenge is moot under Manges.

14
the court’s findings of fact de novo, but will not disturb findings

of fact absent clear error. Id.

A bankruptcy court may approve a compromise settlement only

when it is fair and equitable and in the best interests of the

estate. Id. In making this determination, the bankruptcy court

must consider: (1) the probability of success in the litigation,

with due consideration for the uncertainty in fact and law, (2) the

complexity and likely duration of the litigation and any attendant

expense, inconvenience and delay, and (3) all other factors bearing

on the wisdom of the compromise. Id. The interests of the

creditors, not the debtor, are paramount in determining the

fairness of the settlement. Id.

The bankruptcy court properly applied the Foster Mortgage test

in ruling on the motion to approve the Compromise. The Court found

that all parties in interest other than the Solomons supported the

Compromise. Moreover, the Court noted that the terms of the

agreement permitted the estate to extinguish its largest claim

while disposing of an asset of the estate))the stock of a closely-

held corporation))that is not easily valued or readily salable in

the marketplace. The court weighed Solomon’s likelihood of success

in his appeal with the expense and delay of continued litigation

and determined that the settlement was in the best interests of the

estate, as well as Solomon, since the Compromise would lock in a

guaranteed discharge for him. In addition, the court held that the

15
agreement would allow for the estate to collect on the Payne

judgment against the estate of Johnny Graham, Jr., immediately and

cheaply, rather than pursuing payment of the judgment in probate

court.

Solomon vehemently asserts that Milbank and the bankruptcy

court undervalued the estate’s interest in the stock of the

College, and that the swap of the stock for release of the judgment

was not a fair exchange. In addition, he asserts that Milbank and

the bankruptcy court gave inadequate consideration to his

probability of success on the merits of his appeal of the

nondischargeable judgment and his equitable subordination claim

against the College. Solomon contends, with little explanation,

that he is almost assured of success in the litigation.

However, a trustee “realistically cannot be required to

demonstrate to the satisfaction of every individual creditor and

the debtor, or to any compelling degree of certitude, that the

settlement benefit to the [estate] and the value of the settled

claim comprise a matched set.” Kowal v. Malkemus (In re Thompson),

965 F.2d 1136, 1145 (1st Cir. 1992). The trustee need only reach

an informed judgment that it would be “prudent to eliminate the

“inherent risks, delay and expense of prolonged litigation in an

uncertain cause.” Id. Solomon has not shown that Milbank failed

to make such an informed judgment.

Moreover, Solomon has the burden of proving that the fact

16
findings made by the bankruptcy court in ruling on the approval of

the Compromise are clearly erroneous. However, Solomon failed to

include a copy of the transcript of the hearing upon which the

bankruptcy court’s rulings are based. Thus, it is unclear from the

record what evidence the court considered in ruling on the motion.

In the absence of a transcript, we must presume the bankruptcy

court’s findings of fact are correct and supported by the evidence;

therefore, Solomon simply cannot meet his burden on appeal. See,

e.g., Trujillo v. Grand Junction Reg’l Ctr., 928 F.2d 973, 976

(10th Cir. 1991) (“When a trial transcript is not designated as

part of the record on appeal, an appellate court cannot review the

district court’s factual findings and must accept them as

correct.”). We find that the bankruptcy court did not abuse its

discretion in approving the Compromise.10

10
We note that a chapter 7 debtor does not ordinarily have standing to
appeal the settlement of a claim against the estate. In re Williams, 181 B.R.
532 (D.Kan. 1995); Martin v. O’Connor (In re Martin), 201 B.R. 338, 343 (Bankr.
N.D. NY 1996). Upon commencement of the case, all of the debtor’s property
becomes property of the estate, 11 U.S.C. § 541(a), and the appointment of a
trustee makes the trustee the representative of the estate. 11 U.S.C. § 323(a).
To have standing to appeal a bankruptcy order, a debtor must show that he was
directly or adversely affected pecuniarily by the order, or that the order
diminished his property, increased his burdens, or impaired his rights. Cajun
Elec. Power Coop., Inc. v. Central La. Elec. Co., Inc. (In re Cajun Elec. Power
Coop., Inc.), 69 F.3d 746, 748 (5th Cir. 1995), opinion withdrawn in other part
on reh’g, 74 F.3d 599 (5th Cir. 1996, cert. denied, ___ U.S. ___, 117 S. Ct. 51,
136 L. Ed. 2d 15 (1996).
As a general rule, the debtor in a liquidation proceeding is hopelessly
insolvent, and thus has no pecuniary interest in the administration of the
estate. In re Martin, 201 B.R. at 344. However, if the debtor can show that a
successful appeal will generate assets in excess of liabilities, thus entitling
him to a distribution of surplus under 11 U.S.C. § 726(a)(6), then the debtor is
a “person aggrieved” with standing to appeal. In re Thompson, 965 F.2d at 1144
n.12. Solomon asserts that return of the stock of the College to the estate and
his successful appeal of the nondischargeable judgment will generate a surplus
for the estate. Because we find that in any case, Solomon cannot show that the

17
 As a result of the implementation of the Compromise, the

judgment of nondischargeability against Solomon has been fully

released. Therefore, there is no judgment against him from which

he may appeal.

IV

Solomon’s motion to file his reply brief in Case No. 96-11201

out of time is GRANTED. We AFFIRM the district court’s affirmance

of the bankruptcy court’s order converting Solomon’s case from

chapter 11 to chapter 7, and we AFFIRM the district court’s

dismissal of Solomon’s appeals of the confirmation order and the

dischargeability judgment as moot.

bankruptcy court erred in approving the Compromise, we will assume that Solomon’s
assertion is correct and that he has standing to prosecute this appeal.

18