IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
July 8, 2008
No. 07-20571 Charles R. Fulbruge III
Clerk
IN THE MATTER OF: ZOUHAIR HILAL, also known as Danny Hilal
Debtor
-------------------------------------------------------------------------
ZOUHAIR HILAL, also known as Danny Hilal
Appellant
v.
CHAPTER 11 TRUSTEE RANDY W. WILLIAMS
Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before JONES, Chief Judge, and BARKSDALE and STEWART, Circuit Judges.
EDITH H. JONES, Chief Judge:
An extraordinarily litigious debtor1 challenges in this appeal two aspects
of the Chapter 11 Plan confirmed at the instance of the Trustee and creditors,
principally the IRS. We hold that the appeal is not equitably moot,
1
The debtor has filed numerous other actions related to his bankruptcy, including
challenges to his IRS tax liability, challenges to the Trustee’s compromise with a judgment
creditor, and challenges to an order approving the Trustee’s employment of attorneys.
No. 07-20571
notwithstanding that the Plan has been substantially consummated and the
debtor neither obtained a stay or posted a bond pending appeal. The debtor’s
merits issues, which challenge only the Plan’s exculpatory clause for the Trustee
and the Trustee’s percentage compensation arrangement, border on frivolous.
We accordingly vacate the district court’s dismissal of the appeal and affirm the
bankruptcy court confirmation order.
BACKGROUND
The procedural history of this appeal is straightforward. Zouhair Hilal
(“Hilal”) filed a Chapter 11 bankruptcy petition in early 2005, a trustee was
appointed, and a year and half later, after several iterations of a reorganization
plan were proposed and thoughtful revisions were required by the bankruptcy
court, a confirmation order was entered. The plan called for liquidation of the
debtor’s assets, and its objectives have been substantially achieved.
Hilal appealed the plan confirmation order to the district court and
challenged two provisions: the release of the Trustee from liability for
negligence and breach of fiduciary duty but not for gross negligence or willful
misconduct; and the compensation of the Plan Agent on a percentage basis
pursuant to 11 U.S.C. § 326(a), rather than on an hourly basis. The district
court dismissed the appeal as equitably moot. Hilal appealed to this court.
DISCUSSION
1. Equitable Mootness
Hilal is correct that because he narrowly framed his attack on the
confirmation order, his appeal should not have been dismissed by the district
court as equitably moot. The doctrine of equitable mootness should be and often
is applied to forestall bankruptcy appeals from confirmed bankruptcy plans,
because the appellate courts recognize that “there is a point beyond which they
cannot order fundamental changes in reorganization cases.” In re Manges,
29 F.3d 1034, 1039 (5th Cir. 1994). Equitable mootness is a prudential, not a
2
No. 07-20571
constitutional, doctrine that evolved in response to the particular necessities
surrounding consummation of confirmed bankruptcy reorganization plans. In
re Grimland, Inc., 243 F.3d 228, 231 (5th Cir. 2001). An appeal is equitably
moot when a plan of reorganization has been so substantially consummated that
a court cannot order effective relief even though a live dispute remains among
some parties to the bankruptcy case. Id. Manges articulated a three-part test
for determining equitable mootness, two of whose factors are undisputed in this
case: Hilal did not seek a stay of the plan confirmation order, and the plan has
been substantially consummated. The remaining Manges factor is whether the
relief requested on appeal would affect the rights of parties not before the court
or the success of the plan. 29 F.3d at 1039.
The third factor does not favor equitable mootness in this case. Even if
this court adopted Hilal’s positions and revised the plan provisions concerning
the Trustee, no third parties would be adversely affected by the outcome of the
appeal. The liquidation of the debtor’s assets would not have to be modified, and
any distributions previously made to creditors would not be reduced. The
Trustee’s argument to the contrary reflects his erroneous premise that Hilal is
appealing the entire confirmation order. Instead, Hilal opposes only provisions
relating to the Trustee. Indeed, were Hilal to persuade us that the plan overpaid
the Trustee, the Trustee might have to reimburse the estate, yielding more
money for the creditors. Further, a change in the scope of the release would
affect only the Trustee and other professionals, who are no strangers to the plan
and who have been on notice of this contingent exposure since early in the
confirmation process.
Not only is there no potential adverse effect on the plan or third parties
from our hearing the appeal, but equity strongly supports appellate review of
issues consequential to the integrity and transparency of the Chapter 11 process.
The terms of professional compensation are integral to maintaining these
3
No. 07-20571
standards, as is the extent to which bankruptcy professionals may be released
from liability for their errors. Bankruptcy professionals exercise significant
influence in negotiating, drafting, and carrying out reorganization plans. Their
fees are paid by the debtor’s estate, and overpayments diminish the pot
ultimately available to repay creditors. Finally, bankruptcy professionals who
are to be compensated by the estate bear fiduciary responsibilities of high order
to the estate and creditors. Allowing equitable mootness to insulate critically
important aspects of professional conduct and compensation from appellate
scrutiny, especially where the issues, as raised here, are peripheral to the plan’s
consummation, would disserve bankruptcy administration.
Other circuits have agreed that equitable mootness need not foreclose an
appeal from aspects of Chapter 11 plan confirmation that solely concern
professional compensation and releases. See In re Zenith Elecs. Corp., 329 F.3d
338, 346-47 (3d Cir. 2003) (appeal seeking disgorgement of fees paid to
professionals not equitably moot); In re United Artists Theatre Co. v. Walton,
315 F.3d 217, 228 (3d Cir. 2003) (appeal concerning indemnity provision
releasing professionals not equitably moot); In re PWS Holding Corp., 228 F.3d
224, 236-37 (3d Cir. 2000) (appeal concerning release of committee members and
professionals not equitably moot); In re Continental Airlines, 203 F.3d 203, 209-
11 (3d Cir. 2000) (appeal concerning release of officers and directors of debtor not
equitably moot); In re S.S. Retail Stores Corp., 216 F.3d 882, 884-85 (9th Cir.
2000) (appeal seeking disgorgement of attorneys’ fees not equitably moot); In re
Int’l Envtl. Dynamics, Inc., 718 F.2d 322, 325-26 (9th Cir. 1983) (appeal
challenging award of counsel fees not equitably moot). We agree with their
application of the doctrine. We conclude that the district court abused its
discretion in dismissing this appeal for equitable mootness.
4
No. 07-20571
2. Trustee Release
Hilal’s attack on the scope of the release for the Trustee is foreclosed by
binding Fifth Circuit precedent. In this circuit, trustees cannot be subjected to
personal liability for damages to the bankruptcy estate unless they are found to
have acted with gross negligence. In re Smyth, 207 F.3d 758, 762 (5th Cir. 2000).
Because the release does not relieve the Trustee of liability for gross negligence,
the release merely states the existing standard of liability for trustees. This
panel cannot overrule prior Fifth Circuit authority, and Hilal has presented no
sound reason why we should urge en banc reconsideration.2
3. Percentage Compensation of Plan Agent
Hilal asserts that if the Trustee were compensated on an hourly basis,
rather than through the statutory percentage scale authorized by the plan, his
fees would be lower and the estate would benefit. He offered no evidence in the
bankruptcy court supporting his contention, while the Trustee earnestly argued
that he has foregone a much larger return on his work by being reimbursed on
a percentage basis. Hilal’s argument fails for want of factual support.
For the foregoing reasons, we VACATE the decision of the district court
and AFFIRM the bankruptcy court judgment.
2
The release also exculpates “Professionals retained by the trustee.” Smyth would not
foreclose a challenge to this aspect of the provision, as the case does not address the scope of
liability for other bankruptcy professionals. We do not reach this potential issue, however,
because Hilal has not challenged this aspect of the release.
5