Alberta Energy Prt v. Blast Energy Svc Inc ( 2010 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
January 7, 2010
No. 08-20702 Charles R. Fulbruge III
Clerk
IN RE: BLAST ENERGY SERVICES INC; EAGLE DOMESTIC
DRILLING OPERATIONS LLC
Debtors
----------------------------------------------
ALBERTA ENERGY PARTNERS
Appellant
v.
BLAST ENERGY SERVICES INC; EAGLE DOMESTIC DRILLING
OPERATIONS LLC
Appellees
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______________________
Cons. w/ No. 08-20709
______________________
IN RE: BLAST ENERGY SERVICES INC, doing business
as Rocker & Spike Entertainment Inc, doing business as
Reconstruction Data Group Inc, doing business as Verdisys
Inc; EAGLE DOMESTIC DRILLING OPERATIONS LLC
Debtors
----------------------------------------------
Nos. 08-20702 & 08-20709
ALBERTA ENERGY PARTNERS
Appellant
v.
BLAST ENERGY SERVICES INC; EAGLE DOMESTIC DRILLING
OPERATIONS LLC
Appellees
Appeals from the United States District Court
for the Southern District of Texas
Before JOLLY, DeMOSS, and PRADO, Circuit Judges.
JOLLY, Circuit Judge:
This appeal arises from the Chapter 11 bankruptcy proceedings of debtors
Blast Energy Services, Inc., and Eagle Domestic Drilling Operations, LLC
(“Blast”). Alberta Energy Partners (“Alberta”) seeks to appeal a final order of
the district court. The order decided two distinct appeals from the bankruptcy
court. First, it denied Alberta’s motion for rehearing of the district court’s
earlier dismissal of Alberta’s appeal from the bankruptcy court’s confirmation
order. Second, it denied Alberta’s Consolidated Appeals of the bankruptcy
court’s two rulings permitting Blast to assume an executory contract between
Blast and Alberta. Primarily, in this opinion we address the equitable mootness
of the Confirmation Appeal and the effect of 11 U.S.C. § 1127(b) on this appeal.
For the reasons that follow, we reverse specifically the district court’s denial of
Alberta’s motion for rehearing and remand to the district court for its further
consideration of the order underlying that motion.
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Nos. 08-20702 & 08-20709
I.
The procedural background is a bit of a maze, but is a facet of the appeal
that we need to keep straight in our minds. Blast filed for Chapter 11
reorganization in January 2007. Blast and Alberta were then, and still are,
parties to a 2006 contract (the “Contract”) under which Alberta transferred to
Blast a 50 percent interest in a technology developed by Alberta. According to
the Contract’s terms, the parties were to work together to develop and manage
the technology.
In April 2007, during Blast’s bankruptcy proceedings, Alberta filed a
Motion to Deem Executory Contract Rejected, arguing that § 365 of the
Bankruptcy Code prohibited Blast from assuming the contract without Alberta’s
consent. Alberta later filed a Motion to Compel Rejection of Executory Contract.
Both motions were denied by the bankruptcy court on October 3, 2007. Alberta
subsequently filed a Motion to Compel Assumption or Rejection of Executory
Contract in October 2007. That motion was also denied by the bankruptcy court
and Alberta appealed both bankruptcy court orders to the district court;
ultimately, the appeals were consolidated in the district court (the “Consolidated
Appeals”). The district court never ruled on the Consolidated Appeals before
confirmation.
We now move to February 26, 2008, when the bankruptcy court issued an
order (the “Confirmation Order”) confirming Blast’s reorganization plan (the
“Plan”), which provided for Blast’s assumption of the Contract. The day the Plan
was confirmed, Alberta appealed the Confirmation Order (the “Confirmation
Appeal”) and filed motions with the bankruptcy and district courts requesting
a stay of the Confirmation Order pending appeal. The bankruptcy court denied
the stay. That evening, Alberta also filed emergency motions for a stay pending
appeal and for expedited consideration. Between the confirmation on February
26 and the requested hearing on February 27, Blast distributed over $2 million
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pursuant to the Plan, thereby substantially consummating the Plan. The
district court denied the motion for a stay pending appeal on February 27, 2008.
On April 24, 2008, the district court issued an order (the “Dismissal
Order”) granting Blast’s motion to dismiss the Confirmation Appeal. Alberta did
not appeal the district court’s Dismissal Order, but, instead, filed a timely
motion for rehearing in the district court (the “Rehearing Motion”), requesting
clarification or reconsideration of the Dismissal Order.
While Alberta’s motion for rehearing was pending, and in an effort to
reach an agreement under which Alberta would withdraw its Confirmation
Appeal, the parties filed a joint stipulation on May 27, 2008, in which they
proposed that the Confirmation Order would not have res judicata or collateral
estoppel effect with respect to the Consolidated Appeals, which the district court
had not yet addressed. At a status conference in the district court, Blast
expressly stated that despite the fact that the Plan had already been
substantially consummated, granting relief to Alberta on the Consolidated
Appeals would not affect the reorganization or any third parties. Similarly, the
parties agreed in a joint statement on July 3, 2008, that the assumption of the
Contract was not essential to Blast’s reorganization and that a decision in
Alberta’s favor on the Consolidated Appeals would not require the parties to
amend the reorganization plan in violation of the Bankruptcy Code.
The district court was not impressed. On July 30, 2008, the court entered
an order rejecting the joint stipulation (“Stipulation Order”). Then, on October
1, 2008, the district court denied Alberta’s Rehearing Motion on the basis of
equitable mootness, and sua sponte denied Alberta’s Consolidated Appeals in the
same order. Alberta timely appealed the October 1 order to this court.
II.
In its appeal today, Alberta challenges the district court’s conclusion that
its appeals are equitably moot. It is clear that the district court stated that the
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Confirmation Appeal was equitably moot. However, the district court appears
to have dismissed the Consolidated Appeals for reasons of both equitable
mootness and mootness based upon the statutory bar imposed by 11 U.S.C.
§ 1127(b).1
A.
We review the district court’s denial of Alberta’s Rehearing Motion for an
abuse of discretion.2 Coliseum Square Ass’n, Inc. v. Jackson, 465 F.3d 215, 247
(5th Cir. 2006). A ruling based on an incorrect view of the law or on a clearly
erroneous assessment of the evidence is an abuse of discretion. In re Sealed
Appellant, 194 F.3d 666, 670 (5th Cir. 1999). The district court’s holding that
the Consolidated Appeals are moot because of the effect of 11 U.S.C. § 1127(b)
was a legal conclusion subject to de novo review. In re Mirant Corp., 378 F.3d
511, 517 (5th Cir. 2004).
B.
Blast seems to have strategically retreated from its earlier stipulation, and
now attempts to avoid engaging the substantive issues in the Confirmation
Appeal with a preliminary challenge to our jurisdiction over that appeal based
on mootness. Article III of the U.S. Constitution empowers the federal courts to
1
The district court stated that “[t]he appeal of the Confirmation Order and the
Consolidated Appeals essentially seek modification of the Plan by disallowing the assumption
of the Agreement,” and concluded that the request for such a modification made the appeals
equitably moot. The court further “denied as moot” the Consolidated Appeals, and stated that
they “would require modification of the substantially consummated Plan” in violation of
§ 1127(b).
2
Alberta filed its Rehearing Motion under both Federal Rule of Civil Procedure 59(e)
and Federal Rule of Bankruptcy Procedure 8015 (which provides for rehearing motions to a
district court acting as an appellate court in a bankruptcy case). The district court determined
that reviewing its prior order for “manifest errors of law or fact or . . . newly discovered
evidence” (the standard of review for Rule 59(e) motions) would also satisfy the standard for
reviewing a Rule 8015 motion (the standard for which the Fifth Circuit has not indicated).
Alberta does not contest the standard the district court applied. We therefore review the
district court’s decision as we would a denial of a Rule 59(e) motion: for an abuse of discretion.
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Nos. 08-20702 & 08-20709
hear only live cases and controversies. U.S. CONST. art. III § 2. If an appellate
court is unable to grant any remedy for an appellant, its opinion would be merely
advisory and it must dismiss the appeal as moot. American Grain Ass’n v. Lee-
Vac, Ltd., 630 F.2d 245, 247 (5th Cir. 1980).
Blast’s mootness argument is premised on the fact that Alberta’s notice of
appeal to this court facially covers only the district court’s October 1 order
dismissing the Rehearing Motion, and not the underlying Dismissal Order. The
time to appeal the Dismissal Order has now passed. Because Alberta did not
appeal the Dismissal Order, Blast contends that the Confirmation Appeal is
moot because we cannot now provide a remedy to the Dismissal Order. Even if
so, however, it is possible to provide Alberta a remedy by reversing the court’s
denial of the Rehearing Motion, which has been appealed. On remand, the
district court must then reconsider its Dismissal Order. The relief requested by
Alberta in its Rehearing Motion is that the district court either (a) issue “a
clarification that the Dismissal Order will not preclude the full consideration of
the [Consolidated Appeals] and a determination that Blast may not assume the
[Contract],” or (b) “that the Dismissal Order be reconsidered and vacated and
that the Confirmation Appeal be reinstated.” The district court can still address
and grant either of those requested remedies on remand, so the appeal before us
is not moot.3
3
In any case, Alberta’s appeal effectively included an appeal of the Dismissal Order.
Although Alberta’s notice of appeal only referred expressly to the October 1, 2008, order on the
rehearing motion, it certainly implied that it was appealing the entire case. The Fifth Circuit
is “lenient” in interpreting notices of appeals, and maintains “a policy of liberal construction
. . . where the intent to appeal an unmentioned or mislabeled ruling is apparent and there is
no prejudice to the adverse party.” C.A. Marine Supply v. Brunswick Corp., 649 F.2d 1049,
1056 (5th Cir. 1981). Alberta’s appeal was styled, in part, as an appeal of a Rule 59(e) motion;
we have specifically treated appeals of such motions as appeals of the underlying judgment
when the intent to do so was clear. Fletcher v. Apfel, 210 F.3d 510, 512 (5th Cir. 2000); Trust
Co. Bank v. U.S. Gypsum Co., 950 F.2d 1144, 1148 (5th Cir. 1992). Blast does not claim any
prejudice resulted from Alberta’s failure to designate the earlier dismissal order in its notice
of appeal, and both parties fully briefed the issue of equitable mootness, which was the basis
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Nos. 08-20702 & 08-20709
C.
Because we have concluded that we have jurisdiction over the
Confirmation Appeal, we will now turn to the merits of that appeal. In its
October 1, 2008, order, the district court refused to reconsider its earlier
dismissal of the Confirmation Appeal as equitably moot. We hold that the court
abused its discretion by basing its conclusion on a clearly erroneous assessment
of the evidence.
1.
Equitable mootness authorizes an appellate court to decline review of an
otherwise viable appeal of a Chapter 11 reorganization plan, but only when the
reorganization has progressed too far for the requested relief practicably to be
granted. In re Manges, 29 F.3d 1034, 1039 (5th Cir. 1994). Unlike Article III
mootness, equitable mootness is prudential, not jurisdictional. In re Vineyard
Bay Dev. Co., 132 F.3d 269, 271 (5th Cir. 1998). In addressing whether an
appeal of a confirmation plan is equitably moot, the Fifth Circuit considers a
three-pronged analysis: “(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.” Manges, 29 F.3d at 1039.4 There is no set weight given to the respective
for both district court orders (the October 1 order and the underlying Dismissal Order) and
Alberta’s Rehearing Motion. Even if Alberta’s Rehearing Motion should have been brought
only under Federal Rule of Bankruptcy Procedure 8015 as Blast contends, we treat the appeal
as encompassing the underlying Dismissal Order by analogy to our treatment of Rule 59(e)
appeals, and the district court on remand is not precluded from addressing all issues raised by
the Dismissal Order.
4
Although this test is useful, it is not inclusive of all considerations that may sometimes
be appropriate. Manges, 29 F.3d at 1043. As the doctrine is an equitable one, principles of
equity are generally relevant to the analysis, and it is possible that in some cases the three
prongs will be only partially instructive. Other factors not directly included in the test, such
as the degree of prejudice to third parties and to some of the litigants, the arbitrariness of the
ruling being appealed, etc., may be pertinent.
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Nos. 08-20702 & 08-20709
prongs. In some cases, a single prong may be determinative, but more often the
first two are relevant only insofar as they affect the answer to the third question;
if no stay has been obtained and the plan has been substantially consummated,
the more likely the third prong indicates equitable mootness. Nevertheless,
although substantial consummation is a “momentous event,” it is not necessarily
fatal to the appeal of a confirmed reorganization plan. Id. at 1042–43. Only
when the relief that a party requests will likely unravel the plan does it become
impracticable and inappropriate for a court to grant such relief; in such a case,
the court abstains from reviewing the appeal. In re Pac. Lumber Co., 584 F.3d
229, 240 (5th Cir. 2009). However, when a court applies the doctrine of equitable
mootness, it does so “with a scalpel rather than an axe.” Id. To that end, a court
may “fashion whatever relief is practicable” instead of declining review simply
because full relief is not available. Id. at 241. Similarly, a court considering
whether an appeal is equitably moot should “scrutinize each individual claim,
testing the feasibility of granting the relief against its impact on the
reorganization scheme as a whole.” Id. (quoting In re AOV Indus., 702 F.2d
1140, 1148 (D.C. Cir. 1986)).
2.
The first two equitable mootness considerations, referred to above, are
neither in dispute nor determinative here. Although Alberta attempted to
obtain a stay pending the resolution of its appeals, the bankruptcy and district
courts both denied its motions. In addition, Blast had either paid or arranged
for payment of all of its creditors within a day of the Plan’s confirmation,
rendering the Plan substantially consummated. The question today is whether,
notwithstanding that no stay was obtained and that the Plan has been
substantially consummated, the success of this particular appeal seriously
threatens the success of the Plan or will have a disruptive effect on the rights of
third parties.
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In ruling on Alberta’s Rehearing Motion, the district court affirmed its
earlier dismissal of the Confirmation Appeal as equitably moot because it
determined that this third consideration for equitable mootness supported such
a finding.5 After describing the general importance that the assumption or
rejection of executory contracts can have for reorganization plans, the district
court noted that the relief sought by Alberta was a modification to the Plan
excising Blast’s assumption of the Contract. Without referencing the specific
executory contract between Blast and Alberta, the court concluded that
“[b]ecause the rejection or assumption of contracts is a core component of and
essential to the reorganization plan . . . the court concludes that parties not
before the court, including the recipients of the monies already distributed,
would be harmed by the modification or that the modification would put the
success of the Plan at risk.”
This conclusion is not supported in the record before us. The parties have
never contended that this third requirement of equitable mootness was satisfied
and no evidence was introduced to support the district court’s finding that it had
been. To the contrary, the record suggests that the assumption or rejection of
the Contract would have had little or no adverse effect on Blast’s reorganization
or on any third party. Apparently, Blast is not using the technology licensed
under the Contract and has no plans to do so. Nor does the record before us
indicate that Blast’s loss of the Contract would affect past or future payments
under the Plan: nothing visible to us would be undone or threatened by removal
5
We focus here on the district court’s October 1 order denying Alberta’s Rehearing
Motion, but our disagreement extends also to the district court’s underlying Dismissal Order.
Like the October 1 order, the Dismissal Order based its equitable mootness conclusion on a
determination that the relief Alberta requests would adversely affect third parties and the
Plan’s success. That determination seemed to be based on an assumption that Alberta’s
requested relief would unravel the entire Plan and require Blast to undo every action it had
already undertaken, but the order did not refer to any support in the record for such an
assumption.
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Nos. 08-20702 & 08-20709
of the Contract from the Plan. Thus, the actions that Blast took to substantially
consummate the Plan before Alberta could obtain a stay do not insulate the Plan
from an appellate challenge.
Further, Blast expressly represented to the District Court at a status
conference that the Contract assumption was not essential to its successful
reorganization. Although the parties’ statements are not absolutely binding on
the parties or on the court, the district court’s refusal to accept, without
adequate explanation, those statements, when there was no basis in the record
to disregard them, was an abuse of discretion. Because the court provided no
basis for rejecting Blast’s express position that the Contract was not essential
to its reorganization plan,6 and because we can find no basis in the record for its
rejection, or, for that matter, for its ultimate conclusion on equitable mootness,
the court’s denial of Alberta’s Rehearing Motion as to the Confirmation Appeal
was an abuse of discretion.
However, the district court also referred to Alberta’s allegation that
“significant monetary payments are due to it [from Blast]” as an additional
reason that the third equitable mootness factor had been met. Alberta had
alleged in the bankruptcy court that, pre-petition, Blast had failed to make
payments, register stock, and issue warrants for shares of stock as required by
the Contract, and, further, that it had breached and anticipatorily repudiated
several other provisions of the Contract. Nothing in the record illumines the
present effect on the Plan of these allegedly due payments, and the parties have
not argued the point on appeal. We therefore cannot say whether this assertion
supports or contradicts the district court’s finding on the third equitable
mootness factor; we can say, however, that the evidence before us and the
position taken by the parties that the modification would have no effect on third
6
In its Stipulation Order, the district court only explained its reasons for rejecting the
parties’ Joint Stipulation relating to the res judicata effect of the Confirmation Order.
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Nos. 08-20702 & 08-20709
parties or the success of the Plan is clear, and is not expressly contradicted by
the district court’s assertion regarding alleged payments due to Alberta.
Because, on the record before us, we cannot find an adequate basis for the
district court’s conclusion that the appeal was equitably moot, we reverse the
district court’s denial of the Rehearing Motion. On remand, the district court
may fully consider the equitable mootness question anew, and should articulate
in detail the reasons for its conclusion, with references to the record.7
D.
1.
Still further, we think the district court erred when it held that 11 U.S.C.
§ 1127(b) rendered the Consolidated Appeals moot. A plain reading and specific
application of § 1127(b) indicate that it has no relevancy either to the
Consolidated or to the Confirmation Appeals, each of which was brought by a
creditor and challenger of the Plan.
It seems to be true that § 1127(b) of the Bankruptcy Code—which provides
that the debtor or proponent of a confirmed reorganization plan may modify the
plan before it has been substantially consummated—is “the sole means for
modification of the plan of reorganization after it has been confirmed.”8 7
COLLIER ON BANKRUPTCY ¶ 1127.04 (15th ed. rev. 2009). It can also operate to
prohibit other actions in the bankruptcy court that are essentially attempted
7
As we have earlier indicated, the district court’s order can be read to dismiss Alberta’s
Consolidated Appeals based on both equitable mootness and the effect of § 1127(b). We note
that the Consolidated Appeals ask for the same relief as the Confirmation Appeal, so it is likely
that if the court addresses the Confirmation Appeal it will have addressed the Consolidated
Appeals as well.
8
Section 1127(b) provides, in relevant part, that “[a] proponent of a plan or the
reorganized debtor may modify such plan at any time after confirmation of such plan and
before substantial consummation of such plan.” This section operates to prohibit any
modification after substantial consummation. In re U.S. Brass Corp., 301 F.3d 296, 307 (5th
Cir. 2002); see also 7 COLLIER ON BANKRUPTCY ¶ 1127.04 (15th ed. rev. 2009).
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Nos. 08-20702 & 08-20709
modifications to a confirmed plan. See In re U.S. Brass Corp. 301 F.3d 296,
306–08 (5th Cir. 2002) (holding that a proposed settlement agreement between
the debtor and its claimants would modify the confirmed plan and was
prohibited by § 1127(b)). However, § 1127(b) does not apply to pre-confirmation
modification, which is governed by another section of the Code. See 11 U.S.C.
§ 1127(a). It also “does not expressly limit appellate review of plan confirmation
orders”; such review is limited instead by the equitable mootness doctrine. Pac.
Lumber, 584 F.3d at 240.9
2.
As we have indicated, here neither the debtor nor a proponent of the
confirmed Plan is attempting to modify it; instead, Alberta, which is a creditor
and a plan challenger, is attempting to appeal bankruptcy court orders. The
Consolidated Appeals arose before the Plan had been confirmed, and as pre-
confirmation filings they do not fall into the ambit of § 1127(b). The
Confirmation Appeal, on the other hand, is governed by the equitable mootness
doctrine, and not by § 1127(b). Neither the language of § 1127(b) itself nor our
jurisprudence applying the statute indicate that it should be applied either to
confirmation appeals or to appeals of pre-confirmation bankruptcy rulings.10 An
9
U.S. Brass Corp., 301 F.3d at 306–08, cited by the district court in its Stipulation
Order and by Blast on appeal, is not to the contrary. In that case, we held that a proposed
“settlement agreement” between the debtor and its claimants, which would have replaced the
reorganization plan’s agreement to litigate all claims with an agreement to arbitrate them,
was actually a modification of the plan that was prohibited by § 1127(b). There, we were
reviewing a debtor’s motion in the bankruptcy court, made after substantial consummation,
to approve the proposed settlement agreement. Here, on the other hand, we are reviewing a
creditor’s pre-confirmation appeal of a bankruptcy court ruling, to which § 1127(b) does not
apply.
10
The district court cited Manges, 29 F.3d 1043 at n.13, in support of its conclusion that
§ 1127(b) barred consideration of the Consolidated Appeals. We read Manges to hold simply
that, once an appeal is equitably moot, the appellate court does not have the authority to reach
the result requested in the mooted appeal by applying § 1127(b) to modify the confirmed plan.
Stated differently, equitable mootness closes the door to relief under § 1127(b). In this case,
for example, if we had held that the district court was correct in finding that the appeal was
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Nos. 08-20702 & 08-20709
application of § 1127(b) that limits appellate review of bankruptcy orders would
mean that no bankruptcy court action could be reviewable after substantial
consummation of a plan. Under this scheme, highly liquid debtors could shield
their reorganization plans, and any underlying bankruptcy court orders, from
appellate review. Indeed, such an application could also render the doctrine of
equitable mootness superfluous. In short, the district court erred in its
application of § 1127(b) to this case.
III.
To summarize, the district court erred in two respects. First, it abused its
discretion when it dismissed Alberta’s appeals as equitably moot, without
adequately explaining its rejection of the parties’ contentions that the appeals
would not disturb the Plan or the rights of third parties, and without identifying
any evidence to support its conclusion. Second, it committed a legal error when
it applied § 1127(b) to these appeals.
As we have noted, however, the district court did make an oblique remark
that the Plan might be disrupted by Alberta’s appeal because of money owed by
Blast to Alberta. The district court did not explain the possible disruption and
the parties have not clarified the court’s cryptic reference. Therefore, we find it
necessary to reverse and remand for further consideration and for fuller
explanation as to either why the appeal is, or why it is not, equitably moot.
For the reasons stated above, the Order denying Alberta’s Rehearing
Motion is REVERSED, the district court’s Dismissal Order is VACATED, and
the case is REMANDED to the district court for further proceedings not
inconsistent with this opinion.
REVERSED, VACATED, and REMANDED.
equitably moot, it could not have granted the relief Alberta seeks by simply modifying the Plan
under § 1127(b). When an appeal is not equitably moot, however, § 1127(b) does not affect the
appeal.
13