In re Paige

584 F.3d 1327

In re Steve Zimmer PAIGE, Debtor.

Search Market Direct, Inc., and Magnet Media, Inc., Appellants, v. Gary E. Jubber, Trustee of the Bankruptcy Estate of Stephen Zimmer Paige, and Consumerinfo.Com, Appellees.

No. 08-4104.

United States Court of Appeals, Tenth Circuit.

November 3, 2009.

Adam S. Affleck (Michael N. Zundel, James A. Boevers, Andrew B. Clawson, and Erin M. Stone with him on the briefs) of Prince, Yeates & Geldzahler, P.C., Salt Lake City, UT, for Appellants.

Peter W. Billings of Fabian & Clendenin, P.C., Salt Lake City, UT (Gary E. Jubber and Douglas J. Payne of Fabian & Clendenin, P.C., Salt Lake City, UT, Robert E. Richards of Sonnenschein, Nath & Rosenthal, LLP, Chicago, IL, and Michael R. Johnson of Snell and Wilmer, LLP, Salt Lake City, UT, with him on the brief) for Appellees.

Before TACHA, EBEL, and LUCERO, Circuit Judges.

EBEL, Circuit Judge.

Appellants Search Market Direct, Inc. and Magnet Media, Inc. (collectively "SMDI") seek to appeal the bankruptcy court's decision confirming Appellees' joint bankruptcy reorganization plan (the "Joint Plan") and denying SMDI's competing plan. Following the bankruptcy court's confirmation of the Joint Plan, the trustee paid off most of the bankruptcy estate's creditors and the plan was substantially consummated. In light of the steps that had been taken to implement the Joint Plan, the district court dismissed SMDI's appeal, concluding that it had become both constitutionally and equitably moot. Exercising our jurisdiction pursuant to 28 U.S.C. § 158(d)(1), we REVERSE and REMAND this case to the district court for consideration of the merits of SMDI's appeal.

This case presents a somewhat unsettling — but we suspect common — set of facts. Two competing parties — Consumer-Info.Com ("ConsumerInfo") and SMDI — have proposed plans to administer Mr. Paige's bankruptcy estate. However, while both of these plans were crafted to be protective of the creditors' interests, neither of these parties is really interested in ensuring that the creditors are paid off. Rather, as the bankruptcy court observed, "the proponents' true intentions throughout this case ha[ve] been to acquire the right to own and use the [FreeCreditScore.com] Domain Name," In re Paige, No. 05-34474, 2007 WL 4143212, at *7 (Bankr. D.Utah 2007), the estate's most valuable asset. To that end, both ConsumerInfo and SMDI purchased substantial portions of the creditors' claims against the estate, thereby gaining the authority to propose bankruptcy plans for the estate that would further their respective desires to acquire the FreeCreditScore.com domain name.

At some point in these proceedings, it became clear that both ConsumerInfo and SMDI were willing to pay a lot of money for the domain name; far more than the aggregate amount of all the estate's debts and expenses. However, they would each like to pay as little as necessary to acquire the domain name and, in that regard, have used these bankruptcy proceedings to avoid standard asset-purchase procedures.

Although we are not particularly sympathetic to SMDI's request to prolong an already complex bankruptcy case, we conclude that SMDI's appeal is not constitutionally or equitably moot, and remand this case to the district court for consideration of the merits of SMDI's appeal.

We also take this opportunity to clarify this circuit's law on mootness in bankruptcy proceedings. First, we clarify that an appeal of a bankruptcy court's decision will only be constitutionally moot if the appellee demonstrates that a court could order no meaningful relief to the party seeking reversal of the bankruptcy court's decision. Second, we formally adopt the doctrine commonly known as "equitable mootness," pursuant to which a court will avoid deciding the merits of a bankruptcy appeal even though the appeal is not constitutionally moot.¹ We also clarify the factors that a court must consider before deciding to avoid reaching the merits of a bankruptcy appeal under the doctrine of equitable mootness. Finally, we stress that these doctrines are limited in their scope and the party that wishes the court not to decide the merits of an appeal bears the burden of proof.

I. Background

Steve Zimmer Paige filed for bankruptcy under Chapter 7 in September 2005. The case was subsequently converted into a Chapter 11 proceeding, and Gary Jubber was appointed as the Chapter 11 trustee for the estate.² Mr. Jubber was thereafter informed by an "anonymous tipster" that the estate might own a significant interest in a very valuable asset: the internet domain name "FreeCreditScore.com."

The debtor, Steve Paige, registered the "FreeCreditScore.com" domain name on or about May 2000, more than five years before declaring bankruptcy. At some contested point in time (either before or after declaring bankruptcy) Mr. Paige sold this domain name to a third party. The third party then sold that domain name to SMDI for $350,000.³

After learning that the estate may have an interest in the domain name, Mr. Jubber initiated an adversary proceeding ("AP") against a number of entities and individuals, alleging that Mr. Paige had wrongfully conveyed his interest in the domain name to them, and that any such transfer should be declared void. As the most recent purchasers of the domain name, SMDI is the primary defendant in the AP. Stephen May, who owns 100% of SMDI also purchased the debtor's "residual interest" in the domain name after the debtor filed for bankruptcy. That AP before the bankruptcy court is ongoing.

While the AP was proceeding, Mr. Jubber requested permission from the bankruptcy court to sell the estate's interest in the domain name, although the ultimate value of the estate's interest is largely dependent on the outcome of the AP.⁴ Over SMDI's objections, the bankruptcy court approved Mr. Jubber's motion to sell most of the estate's interest in the outcome of the AP to ConsumerInfo and approved the parties' Asset Purchase Agreement ("APA"). The APA provided, inter alia, that Mr. Jubber would "reasonably consult with [ConsumerInfo] regarding prosecution of the [Adversary Proceeding]." (Appx. at 317.) The APA further provided that Mr. Jubber "in his reasonable business discretion can settle or otherwise compromise the [AP] ... but will consult with [ConsumerInfo] first before entering into any settlement [of the AP,] and any such settlement will be subject to Bankruptcy Court approval and the opportunity of [ConsumerInfo] to object or to overbid...." (Id.) The APA continued to explain that, if Mr. Jubber receives court approval for a settlement of the AP that is not approved by ConsumerInfo, then the estate must refund $1,825,000 to ConsumerInfo. In exchange for most of the estate's interests in the domain name, ConsumerInfo agreed, inter alia, to give the trustee money to pay most of the outstanding claims against the estate. The court approved Mr. Jubber's proposed APA in part because it determined that the sale of those assets would not affect the trustee's ability "to determine strategy throughout the litigation," and "the Trustee will [still] have the sole discretion to settle the adversary proceeding." (Id. at 393.)

A. The Competing Plans

In addition to purchasing the estate's interest in the outcome of the AP, ConsumerInfo also purchased CCB Data Corporation's rights to bring claims against the estate to seek compensation for its efforts in developing the domain name, thereby acquiring the authority to propose a reorganization plan. See In re Paige, 2007 WL 4143212, at *4.

The trustee liked ConsumerInfo's plan and, together, they filed a Joint Plan with the bankruptcy court. Under the Joint Plan, the estate would use the $1.9 million it received from the sale of its interest in the AP to ConsumerInfo in order to pay its creditors, and ConsumerInfo agreed to provide an additional $300,000 "contingent payment" if needed to cover certain additional claims. Further, ConsumerInfo agreed that the right to prosecute the AP and other actions would vest in a liquidating trust, headed by Mr. Jubber, and that ConsumerInfo would fund its litigation costs.

Like ConsumerInfo, SMDI also purchased some creditors' claims, enabling it to propose a competing plan. See id. at *2. SMDI capitalized on that authority and proposed a competing Chapter 11 reorganization plan for Mr. Paige's estate. SMDI's plan, like the Joint Plan, proposes to pay off all of the estate's administrative expenses as well as all allowed claims. In exchange for SMDI's payment of the estate's debts, the estate would promise to dismiss the AP with prejudice, thereby leaving SMDI with total — or nearly total — ownership of the domain name. The confirmation of SMDI's plan is conditional on SMDI depositing money sufficient to cover those expenses into an account.⁵ In its filings before the bankruptcy court, SMDI estimated those expenses, less cash assets in the estate, at $2,600,000. Before the bankruptcy court hearing on the competing plans, SMDI demonstrated its ability to cover those costs by setting aside that amount in an account. See id. at *6.

B. The Bankruptcy Court's Decision

The bankruptcy court held a seven-day trial where it thoroughly considered the merits of the competing plans. See id. at *1. The bankruptcy court rejected SMDI's plan and confirmed the Joint Plan. The court found that SMDI's plan did not comply with 11 U.S.C. § 1129(a)(1) because it placed ConsumerInfo into a separate class than other similarly situated creditors. In re Paige, 2007 WL 4143212, at *10. The court acknowledged, however, "that this might make little difference here because SMDI's plan purports to pay all creditors ...." Id. Further, the bankruptcy court ruled that SMDI's plan violated 11 U.S.C. § 1129(a)(3), which requires that a plan be proposed in "good faith." Specifically, the court found that SMDI's plan inappropriately compelled the settlement of the AP. In re Paige, 2007 WL 4143212 at...