New Indus., Inc. v. Byman (In re Sneed Shipbuilding, Inc.)

Citation: 916 F.3d 405Docket: No. 18-40350

Court: Court of Appeals for the Fifth Circuit; February 5, 2019; Federal Appellate Court

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In bankruptcy proceedings, the right to appeal is sometimes limited by the principle of finality, illustrated by the doctrine of equitable mootness, which prevents appeals that could disrupt a confirmed plan. The Bankruptcy Code also restricts appeals concerning the sale or lease of estate property unless a stay was obtained prior to appeal, as outlined in 11 U.S.C. § 363(m). In this case, a trustee sought to prevent an appeal regarding a bankruptcy court's approval of a sale involving key estate assets, including a settlement necessary for the sale. The court determined that equitable mootness was not applicable, but upheld that section 363(m) rendered the bankruptcy court's approval final since the objector did not obtain a stay.

The case involved Sneed Shipbuilding, which filed for bankruptcy in 2016. Following turmoil, a trustee was appointed and filed a complaint against Martin Sneed and his family, alleging fraudulent transfers of ownership of a shipyard. The trustee faced a choice between lengthy litigation or settling with the probate estate under unfavorable terms to sell the shipyard to San Jac Marine. The settlement required bankruptcy court approval and was structured to ensure clean title, with San Jac Marine paying nearly $15 million, and the probate estate relinquishing its claims for about $8 million.

The bankruptcy court approved the settlement and sale in one order, deeming the provisions interdependent. An unsecured creditor, New Industries, which claimed a debt from Sneed Shipbuilding, objected to the funds' disbursement but did not seek a stay before appealing. The trustee moved to dismiss the appeal based on equitable and statutory mootness, leading the district court to dismiss it as moot without specifying the grounds.

Equitable mootness is being examined, allowing courts to dismiss appeals regarding plan confirmation orders to uphold final decisions across related parties. Unlike constitutional mootness, equitable mootness arises when a reversal could excessively disrupt established plans rather than having no effect. The doctrine is controversial due to its lack of explicit grounding in the Bankruptcy Code, with differing opinions among courts on its application. Typically, equitable mootness requires a "substantially consummated" reorganization plan. In the case of Sneed Shipbuilding, the bankruptcy has not reached this advanced stage since no plan has been proposed. While some courts have applied equitable mootness to complex settlement agreements, this case lacks such complexity, as indicated by the simplicity of the Channelview transaction. Consequently, reversal on appeal would minimally impact only a few involved parties, suggesting that this case does not warrant expanding equitable mootness.

The trustee raised the issue of mootness under 11 U.S.C. § 363(m), which restricts appellate court reviews of estate property sales once the bankruptcy court's sale approval order is not stayed. This statute aims to encourage bidding on estate property by assuring potential buyers that approved sales will not be subject to later appellate challenges, thereby fostering prompt and conclusive transactions. Although this limits full judicial review, Congress deemed it necessary to attract buyers and revitalize assets. New Industries contends it is not challenging the sale itself but rather the cash disbursement to the probate estate; however, it fails to provide authority for this isolated challenge. The payment to the probate estate is integral to the sale, as it was necessary for the release of claims against the property. Courts have previously found appeals moot when parties attempted to dissect components of a sale. Here, without the payment, the deal would not have proceeded, and the bankruptcy court determined the sale and settlement are interdependent. Consequently, due to the lack of a stay, the appeal is deemed moot, and the district court's dismissal is affirmed.