Schaefer v. Superior Offshore International, Inc.

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit

FILED
December 14, 2009
No. 09-20213
Charles R. Fulbruge III
Clerk
In the Matter of: SUPERIOR OFFSHORE INTERNATIONAL, INC.

Debtor

_______________________________

LOUIS E SCHAEFER, JR.; SCHAEFER HOLDINGS LP,

Appellants

v.

SUPERIOR OFFSHORE INTERNATIONAL, INC; OFFICIAL COMMITTEE OF
UNSECURED CREDITORS OF SUPERIOR OFFSHORE INTERNATIONAL,
INC,

Appellees

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

Before JONES, Chief Judge, and SMITH and DeMOSS, Circuit Judges.
EDITH H. JONES, Chief Judge:
Louis E. Schaefer, Jr. and Schaefer Holdings, LP (collectively, the
“Appellants”) appeal the bankruptcy court’s confirmation of Superior Offshore
International, Inc.’s Chapter 11 liquidation plan. Because the plan satisfies the
Bankruptcy Code provisions governing treatment of unliquidated securities suit
 No. 09-20213

claims, shareholder interests, and unsecured claims, the confirmation order is
AFFIRMED.
I. BACKGROUND
Before bankruptcy, Superior provided subsea design, construction, and
commercial diving services to oil and gas industry entities. Initially, Superior
was privately held by Schaefer Holdings. In 2007, Superior conducted an initial
public offering and Schaefer sold a significant amount of his holdings. Within
one year of the IPO, Superior filed a Chapter 11 bankruptcy petition. The
parties quickly agreed that a liquidation was the best course of action. Pursuant
to the bankruptcy court’s orders, Superior sold all of its tangible assets for cash
and subsequently filed a reorganization plan (the “Plan”). Superior retained
intangible assets that were potentially valuable. It was and remains unclear
how much money the estate will ultimately generate.1 To account for the
uncertainty, the Plan created a liquidation waterfall. After providing for priority
claims, the Plan stated that unsecured claims (Class 5) would be paid first. If
liquidating the intangible assets generated additional proceeds, then
subordinated unsecured claims (Class 6) would receive value. If Class 6 received
100% of its claims, then equity interests (Classes 7 and 8) would receive any
additional value.
Class 7 comprises securities litigation claims. Just before Superior filed
for bankruptcy, several shareholders alleged that Superior’s IPO violated the
Securities Act of 1933 due to misrepresentations made by the registration
statement and Superior’s officers, including Mr. Schaefer. These cases were

1
While it was highly speculative whether the Plan would generate sufficient cash to
satisfy all unsecured claims, it is increasingly likely that there will be some money left for
equity priority classes. As of oral argument, nearly 90% of unsecured claims are satisfied.

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consolidated.2 When Superior filed for bankruptcy, the consolidated lawsuit was
stayed. The Plan allows shareholders to pursue their claims, establishing a
Post-Confirmation Equity Subcommittee (“the Subcommittee”) to review,
prosecute, and settle all the Class 7 claims. The Plan listed the Subcommittee’s
duties, named the two members of the Subcommittee, and explained how
members of the Subcommittee would be appointed and compensated.
Classes 7 and 8 have equal priority. Class 8 is composed of equity
interests (common stock shares). Despite holding litigation claims, Class 7 is
also equity-level priority. Unlike other litigation claims, the Bankruptcy Code
does not treat securities claims as general unsecured claims. 11 U.S.C. § 510(b).
The Plan accordingly states that if all superior claims are satisfied, Classes 7
and 8 will share any surplus proceeds pro rata. However, the Plan expresses no
formula for converting Class 7 claims to comparable units of Class 8 interests;
Class 7 is denominated in dollars, while Class 8 is denominated in shares.3 The

2
In re: Superior Offshore International, Inc. Securities Litigation, Civil Action
No. 08-cv-00687, is pending in the United States District Court for the Southern District of
Texas.
3
The Plan itself states:

Class 7 - Subordinated Securities Claims. Each holder of an Allowed
Class 7 Subordinated Securities Claim shall look first to the proceeds of the
Debtor’s available insurance policies for satisfaction of its Claim to the extent
that such Claim is covered by insurance. Any remaining unpaid Allowed Class
7 Subordinated Securities Claim shall receive a Pro-Rata share, in accordance
with procedures that shall be established by further order of the Bankruptcy
Court upon motion of the Post-Confirmation Equity Subcommittee, with all
Allowed Class 8 Interests of all remaining Available Cash and Plan Agent
Recovery after payment in full, with interest as provided herein, of all Class 1,
2, 3, 4, 5 and 6 Claims.
Class 8 - Interests. All Equity Interests shall be canceled as of the
Effective Date. Holders of Allowed Equity Interests shall receive a Pro-Rata

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Plan provides that a conversion mechanism will be determined only if proceeds
are sufficient to satisfy all senior classes.
The Plan was unanimously accepted by all other classes of creditors
casting votes and by a majority vote of the shareholders. Apparently, only the
Appellants, who owned half of Superior’s stock, voted against the Plan. Their
equity class (Class 8) became a non-consenting class. Appellants objected to the
Plan on two grounds. First, because the Plan offered no method to convert
Class 7 claims to Class 8 interests, it violated 11 U.S.C. § 1123(a)(3). Second, the
Plan did not sufficiently reveal the affiliations of the Subcommittee members as
required by 11 U.S.C. § 1129(a)(5)(A)(i). After a confirmation hearing, the
bankruptcy court overruled Appellants’ objections and confirmed the Plan
pursuant to cramdown procedures. See 11 U.S.C. § 1129(b). Appellants
appealed and the bankruptcy court certified its confirmation order for direct
appeal to this court. 28 U.S.C. § 158(d). However, the bankruptcy court did not
stay the confirmation order and the Plan became effective February 11, 2009.
II. EQUITABLE MOOTNESS
Before discussing the merits of the case, this court must first briefly
address the issue of equitable mootness. “Equitable mootness is a kind of
appellate abstention that favors the finality of reorganizations and protects the
interrelated multi-party expectations on which they rest.” In re Pacific Lumber

share with all Allowed Class 7 Claims remaining after application of any
available insurance proceeds of all remaining Available Cash and Plan Agent
Recovery after payment in full, with interest as provided herein, of all Class 1,
2, 3, 4, 5 and 6 Claims. The Post-Confirmation Equity Subcommittee will file a
motion with the Bankruptcy Court seeking to establish distribution procedures
and rights relative to Class 7 Claims and Class 8 Interests.
The Plan, paragraphs 5.4, 5.5.

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Co., 584 F.3d 229, 240 (5th Cir. 2009). When determining whether a bankruptcy
issue is equitably moot, the court considers “(1) whether a stay was obtained,
(2) whether the plan has been ‘substantially consummated,’ and (3) whether the
relief requested would affect either the rights of parties not before the court or
the success of the plan.” In re Manges, 29 F.3d 1034, 1039 (5th Cir. 1994). Here,
the first and third factors predispose toward equitable mootness, but the
doctrine does not prevent this court from addressing the issues on appeal. One
important consideration is whether the court can fashion effective relief without
interfering with the finality of a confirmed plan. Pacific Lumber,584 F.3d at 24.
Although the Appellants seek reversal of the confirmation order, their
complaints center on increased disclosure about the Subcommittee members and
on specificity about how Class 7 and Class 8 will share in any money available
for equity-level interests. Remedies can be crafted for these deficiencies without
completely undoing the Plan.4 Under these circumstances, equitable mootness
does not apply.
III. DISCUSSION
Appellants raise issues of law on appeal. This court reviews bankruptcy
courts’ conclusions of law de novo. In re Berryman Prods. Inc., 159 F.3d 941, 943
(5th Cir. 1998).
A. Failure to provide a conversion method
Several of Appellants’ objections to the Plan rest on a single alleged
infirmity: the Plan does not express a method to convert Class 7 claims into
Class 8 shareholder interests. Under § 1123(a)(3), a Plan must “specify the
treatment of any class of claims or interests that is impaired under the plan”

4
Moreover, the absolute priority issue raised by Appellants is meritless.

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before it can be confirmed. 11 U.S.C. § 1129(a)(1). The Plan provides that
Classes 7 and 8 will share any remaining liquidation proceeds pro rata, but as
noted above, it specifies no mechanism to convert Class 7 claims (denominated
in dollars) into Class 8 interests (denominated in shares). Appellants contend
that without a conversion mechanism, the Plan fails to comply with § 1123(a)(3).
Whether the Bankruptcy Code requires a Chapter 11 plan to provide an
explicit conversion mechanism between subordinated securities claims and
equity interests seems to be an issue of first impression. We suspect this is
because equity interests so rarely receive any payment following a corporate
bankruptcy. The court approved the Plan language only after the parties failed
to reach agreement on a conversion formula between Class 7 claims and Class 8
interests. Neither the failure to agree nor the decision to resolve conversion at
a later date is surprising or subject to criticism. Class 7 claimants are required
to look first to directors’ and officers’ insurance proceeds to satisfy their claims.
Only after insurance proceeds are paid and further litigation occurs will the
overall size and individual claims of Class 7 members be known. The
interrelation of Classes 7 and 8 is contingent and presently unknowable. The
court’s decision to approve a plan that provides, at the end of the day, for
statutorily correct pro rata treatment of Classes 7 and 8, adjudicated in an
adversary proceeding if necessary, furnished adequate specificity and complied
with § 1123(a)(3).5
As the Appellees explain, the Plan identified the source of distributions,
the proportionate share of distributions among classes, and the respective

5
Moreover, 11 U.S.C. § 502(c) authorizes the court to estimate claims for various
purposes in bankruptcy. Appellants could have sought a § 502(c) hearing to estimate the value
of Class 7 claims. They did not do so, however, so the issue is waived.

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priority of distributions. The post-confirmation procedure approved by the court
deals with the allowance of Class 7 and 8 claims and interests, rather than their
treatment. This situation is no different from a plan that states that “all”
unsecured claims will share in the proceeds from sales of assets. The class of
unsecured claims typically includes some that are unliquidated or contingent.
A party to a rejected executory contract with the debtor, for instance, would have
to liquidate his damages, possibly in an adversary proceeding, before receiving
compensation from the plan. 11 U.S.C. § 502(g). Other unsecured creditors
would not know their pro rata recovery until the unliquidated claim becomes
fixed. Despite the uncertainty and lack of an articulated ex ante formula to
convert the executory contract’s damages into dollars, however, there is no
impediment to confirming a reorganization plan with unsecured claims treated
in this way.
Appellants also contend that the absence of a conversion mechanism
violates 11 U.S.C. § 1123(a)(4), which requires that the Plan “provide the same
treatment for each claim or interest of a particular class” unless the holder
agrees to less favorable treatment. According to Appellants, without a
conversion mechanism for Classes 7 and 8, the parties cannot determine if this
provision will be fulfilled. This argument is meritless. Section 1123(a)(4) only
requires equal treatment of members within the same class. Despite having
equal priority, Class 7 and Class 8 are different classes, and the Plan treats
them “pro rata” as required by 11 U.S.C. § 510(b).
B. Subcommittee members’ disclosures
Appellants next assert that the Plan does not comply with 11 U.S.C.
§ 1129(a)(5)(A)(i) because it fails to disclose the affiliation of the Equity

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Subcommittee members who will be responsible for pursuing the securities
litigation to conclusion. Section 1129(a)(5)(A)(i) requires a Plan to disclose:
the identity and affiliations of any individual proposed to serve,
after confirmation of the plan, as a director, officer, or voting trustee
of the debtor, an affiliate of the debtor participating in a joint plan
with the debtor, or a successor to the debtor under the plan
The Subcommittee members hold none of these positions. Accordingly, the Plan
does not violate § 1129(a)(5)(A)(i).
C. Absolute Priority Rule
Appellants’ final contention is that the plan violates the absolute priority
rule because Class 5 (unsecured claims) is impaired, while Classes 7 and 8
receive property (causes of action) from the estate. The law is settled contrary
to their position. Because Class 5 voted in favor of the plan, the absolute
priority rule unambiguously does not apply to Class 5 claims. Norwest Bank
Worthington v. Ahlers, 485 U.S. 197, 202, 108 S. Ct. 963, 966 (1988) (“the
absolute priority rule provides that a dissenting class of unsecured creditors
must be provided for in full before any junior class can receive or retain any
property under a reorganization plan”) (internal quotation and citations omitted)
(emphasis added).
CONCLUSION
Although it delays measuring Class 7 claims, the Plan properly specifies
the treatment of Classes 7 and 8 and otherwise complies with 11 U.S.C.
§§ 1123(a)(3), 1123(a)(4), and 1129(a)(1). Appellants’ other objections to the Plan
are meritless. Accordingly, the judgment of the bankruptcy court is
AFFIRMED.

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