Case: 09-50990 Document: 00511361961 Page: 1 Date Filed: 01/26/2011
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 26, 2011
No. 09-50990
Lyle W. Cayce
Clerk
SAVE OUR SPRINGS (S.O.S.) ALLIANCE, INC.,
Doing Business as Save Our Springs Alliance, Inc.,
Doing Business as S.O.S. Alliance,
Debtor,
SAVE OUR SPRINGS (S.O.S.) ALLIANCE, INC.,
Doing Business as Save Our Springs Alliance, Inc.,
Doing Business as S.O.S. Alliance,
Appellant,
versus
WSI (II)-COS, L.L.C.,
Appellee.
Appeal from the United States District Court
for the Western District of Texas
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No. 09-50990
Before JOLLY, HIGGINBOTHAM, and SMITH, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Save our Springs (S.O.S.) Alliance, Inc. (“S.O.S.”), contests the bankruptcy
court’s refusal to confirm its reorganization plan. If confirmation is denied, it ar-
gues in the alternative that it should not be held to the 300-day deadline for plan
confirmation under 11 U.S.C. § 1121(e)(2) because its designation of itself as a
small business debtor in its bankruptcy petition was incorrect. We affirm the
district court’s affirmance of the orders of the bankruptcy court, concluding that
the bankruptcy court correctly denied plan confirmation and that S.O.S. is judi-
cially estopped from denying that it is a small business debtor after enjoying the
benefits of that status throughout the bankruptcy proceedings.
I.
S.O.S. is a nonprofit charitable organization that sues municipalities and
developers to ensure what it believes is responsible use of the Edwards Aquifer
in the Texas Hill Country. Two of its lawsuits resulted in sizable awards of at-
torney’s fees to the defendants in those suits. One of the defendants, the Lazy
Nine Municipal Utility District, assigned its award to Sweetwater Austin
Properties, L.L.C. (“Sweetwater”).1 Unable to pay the awards, S.O.S. filed for
bankruptcy in April 2007.
Five months later, S.O.S. filed its reorganization plan, which proposed to
supply a $60,000 Creditor Fund with charitable contributions from S.O.S.’s don-
ors within sixty days of plan confirmation. The fund would then be distributed
pro rata to S.O.S.’s unsecured creditors, and all remaining unsecured debts
would be discharged.
1
While this appeal was pending, Sweetwater transferred its interest in the award to
WSI (II)-COS, L.L.C. Because Sweetwater was the interested party at all relevant times, this
opinion refers to “Sweetwater” throughout.
2
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At the five-day confirmation hearing, S.O.S. presented evidence of its
strong fundraising history, indicated that it had pledges for $20,000 of the fund
after soliciting its top donors, and expressed confidence that it could raise the
rest within the sixty-day period. S.O.S.’s executive director testified, however,
that it would be difficult to raise the rest of the funds, because many of S.O.S.’s
donors wanted to prevent their money from going to judgment creditors in
bankruptcy. Moreover, the executive director noted that it would be “extremely
difficult” to take money from S.O.S.’s general operating fund, because “[w]e
struggle to meet our monthly overhead every month,” and S.O.S. had told its
general-fund donors that their money would not go to pay judgment creditors.
Although the plan treated all unsecured creditors alike, it separated them
into three classes. Class 4 contained Sweetwater’s claim, class 5 the claim of the
other attorney’s fee award recipient, and class 6 the claims of all remaining un-
secured creditors, including friendly suppliers and an S.O.S. board member.
S.O.S. stated that it placed Sweetwater in a separate class because of the ongo-
ing hostility between S.O.S. and Sweetwater about development projects in the
Hill Country and because S.O.S. might bring further litigation against Sweet-
water to contest the attorney’s fee award.
Six months after the hearing, the bankruptcy court issued an opinion re-
fusing to confirm the reorganization plan. It explained that the plan was not
feasible, because S.O.S. had not demonstrated a sufficiently firm commitment
from its donors to contribute the $60,000. In re Save Our Springs (S.O.S.) Alli-
ance, Inc., 388 B.R. 202, 239-44 (Bankr. W.D. Tex. 2008). Moreover, it held that
the plan improperly classified Sweetwater separately from the other unsecured
creditors in an attempt to gerrymander the class voting. Id. at 233-38.
S.O.S.’s bankruptcy petition designated S.O.S. a “small business debtor”
under 11 U.S.C. § 101(51D), so it could file a reorganization plan only within 300
days of the petition date. See 11 U.S.C. § 1121(e)(2); 11 U.S.C. § 301(b). By the
3
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time the bankruptcy court had issued its opinion, that period had elapsed, so
Sweetwater filed a motion to dismiss the petition. In response, S.O.S. moved to
amend its filing to specify that it was not a “small business debtor.”
The bankruptcy court denied S.O.S.’s motion and dismissed the petition
on the ground that S.O.S. was judicially estopped from changing its small-busi-
ness designation. In re Save Our Springs (S.O.S.) Alliance, Inc., 393 B.R. 452
(Bankr. W.D. Tex. 2008). The district court affirmed. In re Save Our Springs
(S.O.S.) Alliance, Inc., No. A-08-CA-727-LY (W.D. Tex. Sept. 29, 2009).
II.
A.
To obtain confirmation of its reorganization plan, a debtor must show by
a preponderance of the evidence that its plan is feasible, which means that it is
“not likely to be followed by . . . liquidation, or the need for further financial
reorganization.” 11 U.S.C. § 1129(a)(11). We typically review a bankruptcy
court’s conclusions about plan feasibility for clear error.2 S.O.S. argues that
clear error review is not appropriate, however, because the district court applied
the wrong law.3 Specifically, it contends that the bankruptcy court required cer-
tainty of success when “[o]nly a reasonable assurance of commercial viability is
required.” Heartland Fed. Sav. & Loan Ass’n v. Briscoe Enters., Ltd., II (In re
Briscoe Enter., Ltd., II), 994 F.2d 1160, 1166 (5th Cir. 1993) (citation omitted).
As S.O.S. acknowledges, the bankruptcy court correctly stated that cer-
2
See Fin. Sec. Assurance Inc. v. T-H New Orleans Ltd. P’ship (In re T-H New Orleans
Ltd. P’ship), 116 F.3d 790, 801 (5th Cir. 1997); Pizza, Inc. v. Shakey’s, Inc. (In re Pizza of Haw.,
Inc.), 761 F.2d 1374, 1377 (9th Cir. 1985) (“The issue whether a plan is feasible . . . is one of
fact, which we review under the clearly erroneous standard.” (citation omitted)).
3
See Wilson v. Huffman (In re Missionary Baptist Found. of Am., Inc.), 712 F.2d 206,
209 (5th Cir. 1983) (“When a finding of fact is premised on an improper legal standard, or a
proper one improperly applied, that finding loses the insulation of the clearly erroneous rule.”
(citation omitted)).
4
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tainty is not required. S.O.S., 388 B.R. at 240. In support of its argument,
S.O.S. nevertheless points to the court’s statement that S.O.S. “offered no evi-
dence at the hearing to show that it could [raise the $60,000]SSno commitments,
no evidence of relevant past performance, nothing.” Id. S.O.S. contends that it
did present evidence showing a reasonable assurance of success, so the state-
ment that there was “no evidence” makes sense only if the court was improperly
looking for certainty.
S.O.S.’s argument fails, because there was no evidence showing even a rea-
sonable assurance of success. S.O.S. points to its past financial statements
showing successful fundraising campaigns. But raising funds during bankruptcy
is more difficult than at other times. That is particularly true here, given that
S.O.S.’s donors are hesitant to give for the purpose of paying off judgment credi-
tors. The bankruptcy court’s conclusion that past donations are not evidence of
future fundraising ability is thus appropriate.4
S.O.S. also asserts that the $20,000 in pledges are evidence of a reasonable
assurance of success. S.O.S.’s executive director explained, however, that those
pledges were “voluntary donations” and “oral pledges,” not “contracts . . . that
commit [the donors] to give money in the future.” S.O.S. presented no evidence
that the donors would be or were capable of honoring the pledges, and absent
any such evidence, these voluntary pledges alone are too speculative to provide
evidence of feasibility.5 The court thus applied the correct standard when con-
cluding that there was “no evidence.”
S.O.S. next contends that the bankruptcy court failed to recite the common
4
See 7 COLLIER ON BANKRUPTCY ¶ 1129.02[11] (16th ed. rev. 2010) (stating that the
court “has significant leeway on the types of evidence it may consider, including preferring re-
sults during the pendency of the case over prior results” (footnote omitted)).
5
See Canal Place Ltd. P’ship v. Aetna Life Ins. Co. (In re Canal Place Ltd. P’ship), 921
F.2d 569, 579 (5th Cir. 1991) (“Speculative, conjectural or unrealistic projections by Debtor
cannot support Debtor’s predictions of future performance.” (citation omitted)).
5
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six-factor test for feasibility.6 There is no requirement, however, that the court
consider all six factors.7 That is particularly true where, as here, feasibility de-
pends almost exclusively on the willingness of S.O.S.’s donors to give. The bank-
ruptcy court applied the correct law, so we review its conclusions for clear error.
Applying that standard, we conclude that there is ample evidence support-
ing the conclusion that S.O.S.’s plan was not feasible. S.O.S. had $20,000 in
pledges but no evidence of any firm commitments; it secured those pledges only
after tapping all of its large donors who historically had given more than a few
thousand dollars a year. Even assuming that the $20,000 would arrive as
pledged, there was no evidence that S.O.S. could raise an additional $40,000 in
only sixty days when its largest donors had already been tapped. S.O.S.’s
executive director speculated that more donors would contribute after plan
confirmation, but such speculation is insufficient.8
S.O.S. argues that it could have used its general operating money to fund
the plan. But S.O.S.’s managing director testified that none of its general in-
come for 2007 was set aside for the Creditor Fund, because “we’re getting that
6
The list typically includes “(1) the adequacy of the debtor’s capital structure; (2) the
earning power of the debtor’s business; (3) economic conditions; (4) the ability of the debtor’s
management; (5) the probability of the continuation of the same management; and (6) and [sic]
any other related matter which determines the prospects of a sufficiently successful operation
to enable performance of the provisions of the plan.” In re M & S Assocs., Ltd., 138 B.R. 845,
849 (Bankr. W.D. Tex. 1992) (citation omitted).
7
See Briscoe Enters., 994 F.2d at 1166 (failing to recite the test and considering only
three factors).
8
Many courts have found debtors’ statements that funding is forthcoming to be insuffi-
cient in the absence of concrete evidence that the contributors are willing to give and capable
of giving. See, e.g., In re Repurchase Corp., 332 B.R. 336, 343 (Bankr. N.D. Ill. 2005) (deciding
that president’s statement that his wife will provide capital is insufficient); In re Ralph C. Ty-
ler, P.E., P.S., Inc., 156 B.R. 995, 997 (Bankr. N.D. Ohio 1993) (ruling that debtor’s statement
that outside sources would provide funding is insufficient without other evidence of “firm”
commitments); In re Wiston XXIV, Ltd. P’ship., 153 B.R. 322, 327 (Bankr. D. Kan. 1993) (find-
ing that partner’s promise to contribute $100,000 in cash is not probative, because he testified
that he did not have the money and did not know how he would get it).
6
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money separately from our operating expenses.” S.O.S.’s executive director also
testified that it would be “extremely difficult” to take money from the general
fund, because “[w]e struggle to meet our monthly overhead every month,” and
S.O.S. had told its general-fund donors that their money would not go to pay
judgment creditors. In sum, the evidence did not provide reasonable assurance
that S.O.S. could fund the plan.
B.
The bankruptcy court can approve a reorganization plan only if it conforms
to the requirements of the Bankruptcy Code. 11 U.S.C. § 1129(a)(1). Those re-
quirements include that the plan must place each creditor’s claim in a class and
specify the treatment of each class. 11 U.S.C. § 1123(a)(1). At least one class
that is impairedSSthat is, that will not receive the full value of its claimsSSmust
approve the plan.9 A claim can be put into a class only if it “is substantially sim-
ilar to the other claims or interests of such class.” 11 U.S.C. § 1122(a). Thus,
“ordinarily ‘substantially similar claims,’ those which share common priority and
rights against the debtor’s estate, should be placed in the same class.” Phoenix
Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Ven-
ture), 995 F.2d 1274, 1278 (5th Cir. 1991). In particular, debtors cannot place
claims into separate classes to gerrymander the voteSSthat is, to create an im-
paired class that will approve the plan. Id. at 1279.
S.O.S.’s plan treats all its unsecured creditors identically, so they should
all have been in the same class absent a legitimate reason to classify them sepa-
rately. The bankruptcy court found no such reason, instead holding that S.O.S.
had gerrymandered the vote by putting Sweetwater’s claim into a separate class,
thus ensuring that S.O.S.’s friendly creditors in class 6 could constitute an im-
9
For a class to approve a plan, at least one-half of the claims holding two-thirds of the
total dollar amount must vote in favor. 11 U.S.C. § 1126(c).
7
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paired class that would approve the plan.10
S.O.S. contends that the bankruptcy court erred, because Sweetwater has
two11 “non-creditor interests” justifying separate classification. A non-creditor
interest can justify separate classification if it gives Sweetwater “a different
stake in the future viability” of S.O.S. that may cause it to vote for reasons other
than its economic interest in the claim. Teamsters Nat’l Freight Indus. Negoti-
ating Comm. v. U.S. Truck Co. (In re U.S. Truck Co.), 800 F.2d 581, 587 (6th Cir.
1986). If such non-creditor interests in fact exist, they would justify S.O.S.’s
classification scheme. Because the existence of the alleged non-creditor interests
is a factual question, we review for clear error the bankruptcy court’s conclusion
that there were no non-creditor interests. See Greystone, 995 F.2d at 1281 n.7.
The first non-creditor interest is Sweetwater’s alleged desire to cause
S.O.S.’s dissolution to prevent S.O.S. from funding further litigation about its at-
torney’s fee award.12 The desire to avoid litigation can be a non-creditor interest,
but usually only where the potential litigation is unrelated to the creditor’s
claim.13 Moreover, there is no evidence that the desire to avoid litigation affected
Sweetwater’s vote on the plan. The litigation funding came directly from one of
10
S.O.S., 388 B.R. at 233-38. If all of the unsecured creditors’ claims were classed to-
gether, Sweetwater’s claim was so large that it would make up one-third of the dollar amount
in the class, giving it a veto on the class vote.
11
S.O.S.’s brief lists three such interests, but the thirdSSSweetwater’s antagonism to-
ward S.O.S.SSis merely a more general statement of the secondSSconflicts between S.O.S. and
Sweetwater about development in the Hill CountrySSso we will consider both together.
12
Although the award had been litigated to a final judgment and all appeals had been
exhausted, S.O.S. planned to raise a collateral challenge based on the argument that the state
judge who heard the case should have been disqualified.
13
See In re Heritage Org., L.L.C., 375 B.R. 230, 300 (Bankr. N.D. Tex. 2007) (where
debtor’s litigation against creditor was unrelated to creditor’s claim but instead sought dam-
ages for breach of contract). Where the litigation is related to the creditor’s claim, considera-
tions related to it are part of the creditor’s interest as a creditor and thus are appropriate mo-
tivations for voting that do not justify separate classification.
8
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S.O.S.’s donors, so the bankruptcy court correctly concluded that that funding
would continue even if S.O.S.’s plan were not confirmed.14 Sweetwater’s vote
was not dependent on its interest in avoiding litigation.
Second, S.O.S. points to its ongoing conflict with Sweetwater about water
development in the Hill Country. In support, it notes that S.O.S. was opposing
one of Sweetwater’s applications for a water permit, that Bill Gunn, Sweet-
water’s managing partner, considered S.O.S.’s activity to be “harassment,” and
that the two parties were likely to clash again in the future.
There was also evidence, however, that the animosity did not motivate
Sweetwater’s voting. For example, Gunn was not aware that S.O.S. opposed
Sweetwater’s permit, and he stated that putting S.O.S. out of business would not
end opposition to Sweetwater’s projects, which came from many sources. Al-
though there is conflicting evidence on this point, deference to the bankruptcy
court is particularly important on the highly factual question of Sweetwater’s
motivation. We thus conclude that S.O.S. has failed to present sufficient evi-
dence to overturn the bankruptcy court’s conclusion that animosity toward
S.O.S. did not motivate Sweetwater’s vote.
C.
Usually, debtors can amend filings with the court “as a matter of course
at any time before the case is closed.” F ED. R. B ANKR. P. 1009(a). Judicial es-
toppel, however, is an equitable doctrine that can prevent an amendment where
“intentional self-contradiction is being used as a means of obtaining unfair ad-
vantage in a forum provided for suitors seeking justice.” Kane v. Nat’l Union
Fire Ins. Co., 535 F.3d 380, 385 (5th Cir. 2008) (citing Superior Crewboats, Inc.
14
In fact, the litigation did continue past the dismissal of the bankruptcy, and Sweet-
water’s award was upheld. See Sweetwater Austin Props., L.L.C. v. SOS Alliance, Inc., 299
S.W.3d 879 (Tex. App.SSAustin 2009, pet. denied).
9
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v. Primary P & I Underwriters (In re Superior Crewboats, Inc.), 374 F.3d 330,
334-35 (5th Cir. 2004)). Courts consider three factors when deciding whether
judicial estoppel applies: “(1) whether the party’s later position is clearly incon-
sistent with its earlier position; (2) whether the party has succeeded in persuad-
ing a court to accept that party’s earlier position; [and] (3) whether the party
seeking to assert an inconsistent position would derive an unfair advantage or
impose an unfair detriment on the opposing party if not estopped.” Peoples State
Bank v. Gen. Elec. Capital Corp. (In re Ark-La-Tex Timber Co.), 482 F.3d 319,
332 (5th Cir. 2007) (citing New Hampshire v. Maine, 532 U.S. 742, 750-51
(2001)). The bankruptcy court’s application of judicial estoppel should be re-
versed only if it was an abuse of discretion. See Kane, 535 F.3d at 384.
Here, each of the factors supports the application of estoppel. First,
S.O.S.’s new assertion that it is not a small business debtor is clearly inconsis-
tent with its original designation. Second, the court accepted S.O.S.’s original
position by treating S.O.S. as a small business debtor. For example, the court
allowed S.O.S. to file its plan without a disclosure statement under 11 U.S.C.
§ 1125(f), shortened the notice period for creditors because of the time con-
straints on small business debtors under 11 U.S.C. §§ 1121(e) and 1129(e), and
expedited the hearings on confirmation and other issues.
Third, because S.O.S. has already enjoyed the benefits of those expedited
hearings, it should not now be allowed to avoid the costs of the small-business
designation at the expense of its creditors. Sweetwater and the other creditors
faced additional expense to meet the expedited deadlines. Forcing them to con-
tinue to participate in prolonged bankruptcy proceedings at additional expense
by changing S.O.S.’s designation would unfairly punish those creditors.
Additionally, S.O.S.’s filings with the bankruptcy court show that it was
aware, as early as October 31, 2007, that the designation might be incorrect.
Nonetheless, it knowingly enjoyed the benefits of the designation for almost nine
10
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months thereafter, only moving to amend on July 17, 2008, after the deadline
had passed and the designation had led to adverse consequences. That timeline
shows the opportunistic behavior that judicial estoppel is designed to prevent.
S.O.S. argues that if its small business designation was incorrect, then it
was void under Coleman Enterprises, Inc. v. QAI, Inc. (In re Coleman Enterpris-
es, Inc.).15 Coleman, however, involved a creditor’s attempt to prevent a debtor
from gaining the benefits of small business status. It did not consider the need
for judicial estoppel to prevent a debtor’s attempt to change its designation to
avoid the costs of its choice.
Finally, S.O.S. maintains that if it cannot amend its petition, it should be
allowed to file a new reorganization plan on the theory that the new plan will
“relate back” to the date of filing of the old plan.16 Both of the cases it cites dealt
with immaterial changes to plans that had not yet been adjudicated. Here, by
contrast, the court has already adjudicated S.O.S.’s plan, and any amendments
to make the plan acceptable must involve material changes. Thus, allowing
amendments is not a matter of mere administrative inconvenience but would re-
quire the court to reconsider the entire matter. S.O.S.’s cited cases do not re-
quire that result.
For the reasons explained, the judgment of the district court, which af-
firmed the decisions of the bankruptcy court, is AFFIRMED.
15
275 B.R. 533, 535 (B.A.P. 8th Cir. 2002) (“Debtors, by definition, were not small busi-
nesses at the time they filed their Chapter 11 petitions. They, therefore, did not satisfy the
condition precedent to making a small-business election, making the election void ab initio.”)
16
See In re Fla. Coastal Airlines, Inc., 361 B.R. 286, 290 (Bankr. S.D. Fla. 2007) (hold-
ing that an amended plan filed after deadline relates back to original, because it is “fundamen-
tally a cleaned-up version of” the original); Bertram Commc’ns LLC v. Netwurx, Inc., 2009 WL
3809800, at *1 (E.D. Wis. 2009) (No. 09-CV-1037) (allowing amendments after deadline to
“clarify [the debtor’s] previous plan”).
11