IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 28, 2008
No. 07-50912 Charles R. Fulbruge III
Clerk
In the Matter of: SI RESTRUCTURING, INC.; SRE RESTRUCTURING,
INC.
Debtors
-----------------------------------------
JOHN C. WOOLEY; JEFFREY J. WOOLEY
Appellants
v.
DENNIS FAULKNER, Plan Administrator of SI Restructuring, Inc.
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
*
District Judge for the Eastern District of Texas, sitting by designation.
No. 07-50912
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
1
No. 07-50872, 532 F.3d 355 (5th Cir. 2008).
2
The Wooleys also have unsecured claims against the estate, but those claims are not
the subject of this appeal.
3
The Wooleys posted a letter of credit in the amount of $2,939,200.00 with the Plan
Administrator which the Administrator was authorized to liquidate if the Wooleys’ secured
claims were subordinated.
2
No. 07-50912
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
3
No. 07-50912
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.
4
U.S. Dep’t of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir. 2003) (citing
Total Minatome Corp. v. Jack/Wade Drilling, Inc. (In re Jack/Wade Drilling, Inc.), 258 F.3d
385, 387 (5th Cir. 2001)).
5
Id. (citing Williams v. IBEW Local 520 (In re Williams), 337 F.3d 504, 508 (5th Cir.
2003)).
4
No. 07-50912
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
6
FED. R. BANKR. P. 8005.
5
No. 07-50912
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.”7 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,
7
Manges v. Seattle-First Nat’l Bank (Matter of Manges), 29 F.3d 1034, 1039 (5th Cir.
1994).
8
Id.
9
Id. at 1043 (citing Frito-Lay, Inc. v. LTV. Steel Co., (In re Chateaugay Corp.), 10 F.3d
944, 952 (2d Cir. 1993) (citing In re AOV Ind., 792 F.2d 1140, 1148 (D.C. Cir. 1986))).
6
No. 07-50912
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 a party who is not before the court. Further, Appellants cite persuasive
authority supporting their argument that equitable mootness ought not prevent
the disgorgement and return to the estate of attorneys’ fees. The Ninth Circuit
stated the rule as follows: “[A]n order compelling disgorgement of [attorneys’]
fees and expenses would not require the bankruptcy court to unravel a
complicated bankruptcy plan” but instead “would require only that one party
disgorge the money it has received, money that would then be distributed
pursuant to the bankruptcy court’s final decree.”11 The D.C. Circuit has also
found that a challenge to the disbursement of fees to attorneys is still capable of
resolution, regardless of the degree of plan consummation.12 Similarly, the First
Circuit has held that where monies disbursed to a Trustee could be recovered
with relative ease, equitable mootness ought not apply.13
In a recent opinion, this Court held that dismissal for equitable mootness
was inappropriate where the appeal dealt only with aspects of a Chapter 11 plan
confirmation that solely concerned professional compensation, reasoning that in
10
See id. at 1040.
11
See Focus Media, Inc. v. Nat’l Broad. Co. (In re Focus Media, Inc.), 378 F.3d 916,
923–24 (9th Cir. 2004) (citing S.S. Retail Stores Corp. v. Extreme (In re S.S. Retail Stores
Corp.), 216 F.3d 882, 884 (9th Cir. 2000)).
12
In re AOV Ind., 792 F.2d at 1149.
13
Hicks, Muse & Co., Inc. v. Brandt (In re Healthco Int’l, Inc.), 136 F.3d 45, 49 (1st Cir.
1998).
7
No. 07-50912
such a case, there is “no potential adverse effect on the plan or third parties.”14
We agree with these authorities and conclude that equitable mootness does not
prevent our consideration of the merits of this appeal.
B.
Turning to the merits of the appeal, our first task is to interpret the
language of the plan in order to determine the reason the $500,000.00 reserve
fund was established. Appellants contend that the fund was created for the
purpose of satisfying their allowed secured claims. Appellee argues that the
reserve had a dual purpose — that it was also intended to be used by the Plan
Administrator, upon his motion. Based on the plain language of the plan
provision quoted supra, both parties are correct. The primary purpose of the
reserve fund provision was to satisfy the Wooleys’ allowed secured claims.
Secondarily, the Plan Administrator was also allowed to move the bankruptcy
court to allow disbursal of that reserve for other purposes. Appellants do not
contend that the Plan Administrator had no authority to move the bankruptcy
court to disburse the funds to pay counsel. The issue for decision is whether the
district court erred in affirming the bankruptcy court’s grant of the Plan
Administrator’s motion allowing disbursal of the reserve funds to pay counsel.
Appellee contends that under this Court’s opinion in Wooley I, the Wooleys
have no allowed secured claims in excess of the $2,867,600.00 they have
received. Appellants contend, however, that the amount they received satisfies
only part of their allowed secured claims for two reasons. First, they argue that
their claim exceeded the amount paid to them and it was understood that the
amount of their claim would be resolved after the subordination issue was
14
Hilal v. Williams (Matter of Hilal) No. 07-20571, 2008 WL 2655796, at *2 (5th Cir.,
July 8, 2008) (citing, inter alia, 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 S.S. Retail
Stores Corp., 216 F.3d at 884–85 (appeal seeking disgorgement of attorneys’ fees not equitably
moot), and 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)).
8
No. 07-50912
decided. Second, they contend that they are also entitled to interest and
attorneys’ fees which should also be recognized as secured claims. We consider
first the Wooleys’ claim for interest and attorneys’ fees.
Section 506(b) of the Bankruptcy Code provides that:
[t]o the extent that an allowed secured claim is secured by property
the value of which . . . is greater than the amount of such claim,
there shall be allowed to the holder of such claim, interest on such
claim, and any reasonable fees, costs, or charges provided for under
the agreement or State statute under which the claim arose.15
The Revision Note and Legislative Reports for this provision state that a creditor
with an oversecured claim is entitled to reasonable fees (including attorneys’
fees), costs, or charges and specifies that these fees, costs, and charges “are
secured claims to the extent that the value of the collateral exceeds the amount
of the underlying claim.”16 The United States Supreme Court has explained that
“[r]ecovery of postpetition interest is unqualified. Recovery of fees, costs, and
charges, however, is allowed only if they are reasonable and provided for in the
agreement under which the claim arose.”17 NORTON BANKRUPTCY LAW AND
PRACTICE states that:
The Bankruptcy Code and Rules do not indicate how the holder of
an oversecured claim should assert its right to accumulated interest,
fees, etc. Presumably, the creditor could indicate on the face of its
proof of claim that it claims interest or other costs incurred after the
filing of the proof of claim.18
15
11 U.S.C. § 506(2)(b).
16
11 U.S.C. § 506 (West 2004) (Historical and Statutory Notes) (Revision Notes and
Legislative Reports; 1978 Acts).
17
U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989).
18
William L. Norton, Jr., 7 NORTON BANKRUPTCY LAW & PRACTICE § 146:11 (3d ed.
2008).
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No. 07-50912
Our record review confirms that the Wooleys were oversecured and that
they claimed interest and attorneys’ fees on their proofs of claim and
attachments thereto. The proofs of claim filed by the Wooleys clearly show the
amounts the Wooleys claimed, the value of the collateral (over)securing their
claim, the interest through the date of filing, and the promissory notes’
provisions for attorneys’ fees. Although no explicit agreement between the
parties or express ruling by the bankruptcy court deferred the determination of
interest and attorneys’ fees until after the subordination hearing, we are
persuaded from the record that the parties and the court were proceeding on this
assumption.
First, Local Bankruptcy Rule 7054(d) lays down the general rule that
statements of attorneys’ fees shall be submitted by motion after entry of
judgment. This is a sensible general rule that recognizes that it is inefficient to
hear evidence on fees and consider an award of attorneys’ fees before the court
has decided who is the prevailing party.
Additionally, the pretrial order does not list interest or attorneys’ fees as
issues or list witnesses to testify about the reasonableness of those fees. This
pretrial order is consistent with the Appellants’ argument that the parties and
the court contemplated following the general rule and litigating this issue after
it determined which party prevailed. In sum, the record does not support
Appellee’s argument that the Appellants were required to establish the amount
of its claim for interest and attorneys’ fees in the Adversary Proceeding.
We are also persuaded that a genuine unresolved dispute existed over the
amount of the Wooleys’ claim exclusive of interest and attorneys’ fees. The
Wooleys filed a Motion for Relief from Automatic Stay, or for Adequate
Protection, Regarding Secured Claims on May 18, 2005 and asserted that the
creditor's committee and the Wooleys "have agreed to a distribution of
$3,180,000.00 and the posting of a letter of credit in the amount of
10
No. 07-50912
$3,250,000.00" and that "[t]he actual amount of the secured claims of the
Wooleys will be determined in a future proceeding following the conclusion of the
adversary proceeding brought by the Creditors Committee.”
The Plan Administrator responded to that motion questioning "the
necessity and wisdom of paying disputed claims". The response stated further
that "however to the extent the Wooleys meet their burden of proof and convince
the Court that the relief requested is not harmful to the estate, the Debtors
acquiesce."
The court ruled on the Wooleys' motion by essentially granting it and
ordering debtors “to distribute up to the amount of $2,867,500.00 (Two Million
Eight Hundred Sixty-Seven Thousand Five Hundred Dollars and No Cents) as
directed by the Wooleys in exchange for an irrevocable letter or letters of credit
in the aggregate amount of $2,939,200.00 (Two Million Nine Hundred
Thirty-Nine Thousand Two Hundred Dollars and No Cents).” The only
explanation in the record for the variance in the amount of the Wooleys' claim
set forth in the motion ($3,180.000.00) and the amount transferred to the
Wooleys ($2,867,500.00) is from the Wooleys' filings asserting that they were
only able to obtain a letter of credit in the amount of $2,939,200.00 so that the
distribution to them was correspondingly reduced. Without commenting on
when the amount of the secured claims would be resolved, the court stated that
"[f]urther, such arrangement shall remain in place until the resolution of the
secured claims asserted against the Debtors' estates by the Wooleys pursuant
to a final order of this [c]ourt . . . ."19
19
Also in the hearing before the district court in which the Wooleys were seeking a stay
of the bankruptcy court order disbursing the reserve fund, counsel for the Plan Administrator
sought to make the point that a stay should not be granted:
First, the – the creditors made a decision a couple of years ago to go ahead and
enter into this agreement whereby a letter of credit would be posted and the
Wooleys would be paid the lion’s share of their asserted claim. In our view, it’s
the entire amount of their asserted claim. There’s a dispute over whether or not
11
No. 07-50912
Because we have determined that the Wooleys were oversecured and are
entitled to litigate the amount of their secured claims including post petition
interest and attorneys’ fees, we conclude that the bankruptcy and district courts
erred in determining that the reserve fund expressly negotiated by the parties
to protect the Wooleys’ secured claims in excess of the amount paid to them was
“superfluous.” For the reasons explained above, the bankruptcy court and the
district court erred in concluding that the Wooleys had no secured claims for
sums in excess of the amount paid to them.
Based on the foregoing, we conclude that the district court erred in
affirming the bankruptcy court’s order authorizing disbursal of the reserve fund
to pay the Plan Administrator’s counsel. Therefore, we vacate the judgments of
the district court and the bankruptcy court and remand this case to the
bankruptcy court with instructions to: (1) determine the amount of the Wooleys’
remaining allowed secured claims for attorneys’ fees and interest pursuant to 11
U.S.C. § 506(b); and (2) order disgorgement of Appellee’s counsel’s attorneys’ fees
paid out of the reserve fund not to exceed $500,000.00, in order to satisfy the
Wooleys’ allowed secured claims.
VACATED.
REMANDED.
it was. They’ve had that money for a couple of years ostensibly to invest
however they want. It hasn’t been in the control of the plan administrator.
(Emphasis added).
12