FishDish, LLP v. VeroBlue Farms USA, Inc. (In re VeroBlue Farms USA, Inc.)

6 F.4th 880

IN RE: VEROBLUE FARMS USA, INC., Debtor

FishDish, LLP, Appellant/Cross-Appellee

v.VeroBlue Farms USA, Inc.; Alder Aqua, LTD., Appellees

Broadmoor Financial, L.P., Appellee/Cross-Appellant

No. 19-3413

No. 19-3487

United States Court of Appeals, Eighth Circuit.

Submitted: January 12, 2021

Filed: August 5, 2021

Nathan E. Delman, Stavros S. Giannoulias, John W. Guzzardo, Aaron Hammer, HORWOOD & MARCUS, Chicago, IL, Jordan Michael Talsma, John R. Walker, Jr., BEECHER & FIELD, Waterloo, IA, for Appellant/Cross-Appellee FishDish, LLP.

Dan Childers, ELDERKIN & PIRNIE, Cedar Rapids, IA, Robert H. Lang, THOMPSON & COBURN, Chicago, IL, Joseph A. Peiffer, AG & BUSINESS LEGAL STRATEGIES, Hiawatha, IA, for Appellee VeroBlue Farms USA, Inc.

Kelsey Nicole Frobisher, Shannon D. Wead, FOULSTON & SIEFKIN, Wichita, KS, Jeffrey P. Taylor, KLINGER & ROBINSON, Cedar Rapids, IA, for Appellee/Cross-Appellant Broadmoor Financial, L.P.

Abram V. Carls, Eric W. Lam, SIMMONS & PERRINE, Cedar Rapids, IA, Eric J. Langston, MOYE & WHITE, Denver, CO, for Appellee Alder Aqua, LTD.

Before LOKEN, GRASZ, and KOBES, Circuit Judges.

LOKEN, Circuit Judge.

Debtors in this Chapter 11 bankruptcy proceeding are VeroBlue Farms USA, Inc., and affiliated entities ("Debtors"). A VeroBlue preferred shareholder, FishDish, LLP ("FishDish"), appeals the district court's order granting appellees’ motions to dismiss FishDish's appeal of the bankruptcy court order confirming Debtors’ Chapter 11 plan of reorganization over FishDish's objections, and certain pre-confirmation orders. Appellees are VeroBlue Farms, the reorganized debtor; Alder Aqua, Ltd. ("Alder Aqua"), Debtors’ plan of reorganization sponsor; and senior secured creditor Broadmoor Financial, L.P. ("Broadmoor"). In dismissing the appeal, the district court invoked equitable mootness, a bankruptcy doctrine adopted by our sister circuits (though not uniformly), and by the Eighth Circuit Bankruptcy Appellate Panel and Eighth Circuit district courts. We have never expressly adopted the doctrine,¹ nor has the Supreme Court. Alternatively, the court considered appellees’ jurisdictional defenses, including timeliness, and concluded it did have subject matter jurisdiction. Broadmoor cross appeals the district court's ruling that FishDish's appeal from one order, the "Claim Objection Order," though untimely under Rule 8002(a)(1) of the Federal Rules of Bankruptcy Procedure, was not subject to dismissal under 28 U.S.C. § 158(c)(2) because the statute only applies to appeals from the "final judgments, orders, and decrees" referred to in § 158(a)(1).

We agree that the district court and this court have statutory subject matter jurisdiction. However, we conclude the district court erred in limiting the mandatory but non-jurisdictional timeliness requirements of Rule 8002 to appeals from final bankruptcy court orders. As FishDish has conceded its appeal from the pre-confirmation Claim Objection Order was untimely under Rule 8002, we affirm the grant of appellees’ Partial Motion to Dismiss Appeal on this alternative ground.

Regarding the central issue on appeal, what has misleadingly come to be known as "equitable mootness," like the Tenth Circuit we agree with "[e]very other circuit to consider the issue ... that ‘equitable,’ ‘prudential,’ or ‘pragmatic’ considerations can render an appeal of a bankruptcy court decision moot even when the appeal is not constitutionally moot." In re Paige, 584 F.3d 1327, 1337 (10th Cir. 2009). However, invoking this doctrine often results in "the refusal of the Article III courts to entertain a live appeal over which they indisputably possess statutory jurisdiction and in which meaningful relief can be awarded." In re Cont'l Airlines, 91 F.3d 553, 571 (3d Cir. 1996) (Alito, J., dissenting), cert. denied sub nom. Bank of N.Y. v. Cont'l Airlines, Inc., 519 U.S. 1057, 117 S.Ct. 686, 136 L.Ed.2d 610 (1997). An Article III appellate court has a "virtually unflagging obligation" to exercise its subject matter jurisdiction. In re Semcrude, L.P., 728 F.3d 314, 320 (3d Cir. 2013) (quotation omitted). Therefore, as in Paige, Semcrude, and numerous other circuit court decisions, we conclude that the district court did not apply a sufficiently rigorous test to determine when bankruptcy equities and pragmatics justify foregoing Article III judicial review of a bankruptcy court order confirming a Chapter 11 plan. Accordingly, we remand for further district court proceedings.

I. Background.

Founded in 2014, Debtors were in the aquaculture business -- farming fish and selling those fish through wholesalers to restaurants and grocery chains. Kenneth Lockard, an Iowa businessman, formed FishDish to invest in the Debtors. In the summer of 2016, Debtors sold $6 million in preferred shares to FishDish and $28 million to Alder Aqua, a British Virgin Islands entity allegedly owned and controlled by Dr. Otto Happel and his family. In addition, certain Debtors borrowed $29 million from Amstar Group, LLC (the "Credit Facility"), also allegedly owned and controlled by Dr. Happel, a loan secured by substantially all of Debtors’ assets. As a result, Lockard and Alder Aqua representatives sat on the Debtors’ board. Lockard often voted en bloc with the founders. In December 2017, Amstar transferred its rights under the Credit Facility to Broadmoor. Alder Aqua loaned Debtors additional funds in 2018 and acquired a participation interest in the Credit Facility. By early 2018, Alder Aqua had taken control of the Debtors, terminating the founders and installing their appointees to the board and causing Lockard to resign from the board.

The Debtors filed a voluntary Chapter 11 bankruptcy petition on September 21, 2018, listing an undisputed obligation to the Credit Facility as approximately $54 million -- well in excess of Debtors’ assets. On motion of the Debtors, the bankruptcy court promptly entered an interim post-petition financing order authorizing Debtors to borrow $2 million from Alder Aqua as Lender to finance post-petition obligations and to grant Lender a "first priority priming lien" under 11 U.S.C. § 364(d) on its business assets, and granting Broadmoor an Adequate Protection Lien equal to the diminution in value of any valid pre-petition lien.

No interested party objected to the interim order. On October 17, the bankruptcy court entered a final debtor-in-possession financing order (the "DIP Order"). The DIP Order provided that "the Broadmoor Secured Debt and Broadmoor Lien shall be deemed to be allowed for all purposes in the Chapter 11 Cases ... and shall not be subject to challenge by any party in interest as to extent, validity, priority, or otherwise" unless "(i) the Debtors receive notice of a potential Challenge during the Investigation Period from the Committee and (ii) the Court rules in favor of the plaintiff in any timely and properly filed Challenge resulting therefrom." The DIP Order defined "Committee" as an "official committee in the Chapter 11 case." See 11 U.S.C. § 1102. Section 8(a) defined the Challenge Procedure. Section 8(b) provided that if "a Challenge is not timely commenced," the Broadmoor Secured Debt and Lien "shall be deemed to be allowed for all purposes ... and shall not be subject to challenge by any party in interest." No party appealed the DIP Order.

On October 24, the United States Trustee appointed the Official Committee of Unsecured Creditors ("Creditors Committee") under 11 U.S.C. § 1102. The Creditors Committee investigated the Broadmoor claim and on December 19 sent Debtors a lengthy and timely challenge notice under Section 8(a) of the DIP Order demanding that Debtors initiate an adversary proceeding against Broadmoor, Aqua Alder, Amstar, and others, or consent to the Creditors Committee's standing to prosecute an adversary proceeding, for breaches of fiduciary duty, corporate waste and usurpation of corporate opportunities, equitable subordination or recharacterization of Broadmoor's claim under the Credit Facility, and fraud (the "Challenge Notice"). The next day, an unofficial Ad Hoc Committee of Equity Security Holders ("AHC") -- consisting of FishDish and certain common shareholders of the Debtors -- sent Debtors a letter joining the Creditors Committee Challenge Notice. The AHC also filed an Objection to approval of Debtors’ Disclosure Statement for the plan. See 11 U.S.C. § 1125(b).

On January 14, 2019, the bankruptcy court held a hearing limited to the Debtors’ disclosures. Debtors filed a Modified Chapter 11 Plan and Modified Disclosure Statement on February 16. The bankruptcy court approved the amended disclosure statement and scheduled a preliminary confirmation hearing on March 20 (the "Disclosure Order").

On January 13, the AHC moved for an order "extending the procedural protections of paragraph 8 of the Final DIP Order" to the AHC. In early February, the AHC moved for an order "confirming" its derivative standing to pursue the claims demanded in the Challenge Notice (the "Standing Motion"). See generally In re Racing Servs., Inc., 540 F.3d 892, 904-05 (8th Cir. 2008). After a hearing on February 4, the bankruptcy court entered an order deferring ruling on AHC's Standing Motion pending plan confirmation proceedings.

On March 5, the Creditors Committee notified the bankruptcy court it had settled its claims against Debtors in return for proposed plan amendment providing relief for the unsecured creditors. Broadmoor moved to enforce the DIP Order's Section 8 claim bar against the AHC, and Debtors moved to bar AHC from further participation under Bankruptcy Rule 2019. After hearings, the bankruptcy court issued an order on April 3, 2019 (the "AHC Standing Order") stating in relevant part:

IT IS FURTHER ORDERED THAT, for all parties in interest, objections to the Broadmoor Secured Debt ... as well as any and all claims held by debtor, or derivative of Debtor's rights, for the recharacterization or equitable subordination of the Broadmoor Secured Debt, are

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