In re: SCH Corp. et al
Filing
20
MEMORANDUM ORDER granting 9 MOTION to Dismiss filed by Carl Singley. The court declines to award sanctions in this instance. Singley's motion to dismiss is granted, as CFI's appeal is equitably moot. ***Civil Case Terminated. Signed by Judge Sue L. Robinson on 7/8/2013. (fms)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
In re:
SCH CORP., eta/.,
Liquidating Debtors.
CFI CLASS ACTION CLAIMANTS,
)
) Chapter 11
) Bank. No.09-10198(BLS)
) (Jointly Administered)
)
)
)
)
)
)
) Civ. No. 12-1577-SLR
)
)
)
)
)
Appellants,
v.
CARL SINGLEY,
Appellee.
MEMORANDUM ORDER
At Wilmington this &"day of July, 2013 having reviewed Carl Singley's
("Singley") motion to dismiss the appeal filed by CFI Class Action Claimants ("CFI"), and
the papers filed in connection therewith;
IT IS ORDERED that said motion to dismiss (D. I. 9) is granted, for the reasons
that follow:
1. Background. Singley is the disbursing agent, litigation designee, and
responsible officer for SCH Corp., American Corrective Counseling Services, Inc. and
ACCS Corp., the liquidating debtors (collectively, the "debtors").
2. Prior to the debtors' bankruptcy filings, class action litigations against the
debtors occurred in California, Florida, Indiana, and Pennsylvania, alleging, among
other harms, violations of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et
seq. (the "FDCPA") and certain similar state statutes. (/d. at 1J1 0)
3. On January 19, 2009 (the "Petition Date"), the debtors each filed a voluntary
petition for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). (/d. at 1J 8) The plaintiffs in California ("Del Campo"), Florida, and
Indiana were given the acronym of the "CFI Claimants" and were actively represented
by counsel in the chapter 11 case. (/d. at 1J11)
4. On or about May 22, 2009, the debtors filed a proposed plan to sell its
business to National Corrective Group, Inc. ("NCG"), an affiliate of the debtors' primary
secured lender, Levine Leichtman Capital Partners Ill, L.P. ("LLCP"). (/d. at 1J1J12, 18,
22). This plan provided third-party releases from liability, in exchange for a total
consideration of approximately $2.5 million. (/d. at 1J22) This plan was rejected by CFI,
and the debtors abandoned the plan.
5. On August 5, 2009, the debtors proposed a new plan (the "amended plan"),
which removed the third-party releases and included a $1 million payment to debtors
paid in five $200,000 installments, one payment per year. (/d. at 1J24) However, NCG
would be able to offset certain litigation costs up to $200,000 per year. (/d.)
2
6. With the support of CFI, 1 the amended plan was confirmed by a confirmation
order from the Bankruptcy Court on November 2, 2009. (/d. at 1J1J25-26) The effective
date was December 21, 2009. (/d.)
7. On January 4, 2010, Christina Smith and other plaintiffs initiated a new class
action suit against LLCP, NCG, and others (the "Smith" action), alleging claims under
the Fair Debt Collection Practices Act, RICO, and state law. (/d. at 1J27) lrv Acklesberg
("Acklesberg") and Paul Arons ("Arons"), counsel for CFI prior to and during the
bankruptcy cases, along with other counsel, filed the complaint on behalf of the
plaintiffs. (/d.)
8. On March 9, 2011, the United States District Court for the Northern District of
California granted a motion that forced the withdrawal of Acklesberg and Arons, on the
grounds that they had a disqualifying conflict of interest - costs accrued defending the
Smith litigation reduced amounts recoverable under the amended plan. (/d. at 1J1J2829)
9. After that disqualification, one or more defendants moved to disqualify
plaintiff's counsel in the Del Campo litigation. On September 29, 2011, the United
States District Court for the Northern District of California granted that motion. (/d. 1J at
30)
1
"On August 4, 2009, LLCP filed the Plan and Disclosure Statement and
thereafter negotiated with the Class Representatives for the various prepetition
litigations. The Class Representatives executed Plan Support Agreements and have
voted in favor of the Plan consistent with such agreements." In re SCH Corp., eta/.,
Civ. No. 09-10198, D.l. 672 at 3 (Bankr. D. Del Sept. 14, 2012).
3
10. After disqualification, counsel for CFI asserted that the bankruptcy cases
should be dismissed for lack of good faith. (/d.~ at 33)
11. On September 14, 2012, following a three-day evidentiary hearing on the
motion to dismiss and Singley's motion to approve a compromise, the Bankruptcy Court
issued an oral ruling denying CFI's motion to dismiss and granting Singley's motion.
(/d.~
at 37)
12. Standard of Review. This court has jurisdiction to hear an appeal from the
bankruptcy court pursuant to 28 U.S.C. § 158(a). In undertaking a review of the issues
on appeal, the court applies a clearly erroneous standard to the bankruptcy court's
findings of fact and a plenary standard to that court's legal conclusions. See Am. Flint
Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). With
mixed questions of law and fact, the court must accept the bankruptcy court's "finding of
historical or narrative facts unless clearly erroneous, but exercise[s] 'plenary review of
the [bankruptcy] court's choice and interpretation of legal precepts and its application of
those precepts to the historical facts."' Mellon Bank, N.A. v. Metro Communications,
Inc., 945 F.2d 635, 642 (3d Cir. 1991) (citing Universal Minerals, Inc. v. C.A. Hughes &
Co., 669 F.2d 98, 101-02 (3d Cir. 1981)). The district court's appellate responsibilities
are further informed by the directive of the United States Court of Appeals for the Third
Circuit, which effectively reviews on a de novo basis bankruptcy court opinions. In re
Hechinger, 298 F. 3d 219, 224 (3d Cir. 2002); In re Telegroup, 281 F.3d 133, 136 (3d
Cir. 2002).
4
13. Analysis. Constitutional mootness requires that an appeal be dismissed
when "an event occurs while a case is pending on appeal that makes it impossible for
the court to grant 'any effectual relief whatever' to a prevailing party." Church of
Scientology v. United States, 506 U.S. 9, 12 (1992) (quoting Mills v. Green, 159 U.S.
651, 653 (1895). An appeal "is not moot when a court can fashion 'some form of
meaningful relief, even if it only partially redresses the grievances of the prevailing
party."' In re Neilson Nutraceutical, Inc., 2008 WL 4532514, at *2 (D. Del. Oct. 9, 2008)
(quoting In re Continental Airlines, 91 F.3d 553, 558 (3d Cir. 1996)).
14. As the court could find error in the Bankruptcy Court's denial of CFI's motion
to dismiss based on bad faith (including a possibility for sanctions against the debtors),
at least some form of meaningful relief, albeit partial relief, could be provided.
Therefore, this appeal is not constitutionally moot.
15. The equitable mootness doctrine should only apply when doing so will
"[unscramble] complex bankruptcy reorganizations when the appealing party should
have acted before the plan became extremely difficult to retract." In re Philadelphia
Newspapers, LLC, 690 F.3d 161, 169 (3d Cir. 2012), as corrected (Oct. 25, 2012)
(quoting Nordhoff Investments, Inc. v. Zenith Electronics Corp., 258 F.3d 180, 185 (3d
Cir. 2001 )). In determining whether the doctrine applies, courts in the Third Circuit are
to consider the following prudential factors:
(1) whether the reorganization plan has been substantially
consummated, (2) whether a stay has been obtained, (3)
whether the relief requested would affect the rights of parties
not before the court, (4) whether the relief requested would
affect the success of the plan, and (5) the public policy of
affording finality to bankruptcy judgments.
5
I
f
t
In re Continental Airlines, 91 F.3d 553, 560 (3d Cir. 1996). Courts may extend this
principle to liquidation plans. See In reNew Century TRS Holdings, Inc., 407 B.R. 576,
587-88 (D. Del. 2009) (equitable mootness may apply in cases involving a liquidating
plan); In re Kainos Partners Holding Co., LLC., 2012 WL 6028927 (D. Del. Nov. 30,
2012) (dismissing an appeal of a bankruptcy order approving a settlement as moot).
16. The Bankruptcy Code defines "substantial consummation" as the:
(A) transfer of all or substantially all of the property proposed
by the plan to be transferred; (B) assumption by the debtor
or by the successor to the debtor under the plan of the
business or of the management of all or substantially all of
the property dealt with by the plan; and (C) commencement
of distribution under the plan.
11 U.S.C. § 1101 (2). If this definition is satisfied, the court must then look to whether a
successful appeal would unravel the plan. See Philadelphia Newspapers, LLC, 690
F.3d at 168; In re Zenith Electronics Corp., 329 F.3d 338, 344-45 (3d Cir. 2003).
Where a plan that has been substantially consummated can be "reversed without great
difficulty and inequity," this factor does not weigh in favor of equitable mootness. See
New Century, 407 B.R. at 588.
17. The amended plan at bar has been substantially consummated. 2 Debtors'
assets have been transferred to NCG (D. I. 9 at 1J19) and some professionals have
2
Singley argues the substantial consummation element is satisfied because the
amended plan provides "[o]n the effective date, the [p]lan shall be deemed substantially
consumated ... ,"and the amended plan is not subject to further revocation. (D. I. 9 at
1J51) This argument meets neither of the requirements for substantial consummation
under Philadelphia Newspaper. See Philadelphia Newspaper, 690 F.3d at 168-69.
First, simply stating in the plan that it is "substantially consummated" does not meet the
definition of substantial consummation as defined in 11 U.S.C. § 1101 (2). Second,
these statements do not indicate how "allowing the appeal to move forward will
undermine the plan." See id.
6
been paid under the amended plan (id. at 1J 52). However, there have been no
distributions to any unsecured claimants. 3 (D. I. 19 at 1J18) Arguably, the only aspects
of plan implementation that require reversal are the limited number of distributions that
have occurred. Therefore, the record does not indicate that reversing the amended
plan would result in "great difficulty or inequity." The first factor, therefore, weighs
against dismissal.
18. All other prudential factors weigh in favor of dismissal. No stay has been
sought either during confirmation of the amended plan or in the three years since the
liquidation plan was confirmed. (D. I. 9 at W 25, 51) The relief requested would affect
third parties not presently before the court, including both Pennsylvania class claimants
who have received a final and non-appealable judgment allowing a $2.55 million proof
of claim under the amended plan, and the professionals who have had funds distributed
to them under the amended plan. (D.I. 9 at 52; In re SCH Corp., Civ. No. 09-10198,
D. I. 715) The relief requested would rescind the amended plan in its entirety, reducing
the debtors' ability to liquidate. Further, public policy affords finality to bankruptcy
judgments. See New Century, 407 B.R. at 590.
19. Appellate Rule 38 provides for sanctions "[i]f a court of appeals shall
determine that an appeal is frivolous." Fed. R. App. P. 38; see also Quiroga v. Hasbro,
Inc., 943 F.2d 346, 34 7 (3d Cir. 1991) ("An appeal is frivolous if it is wholly without
merit."). Here, while prudential factors weighed against CFI's motion, the court does
3
While no distributions have been made to unsecured claimants, the plan
incorporates a waterfall distribution for a. substantial claim pool. After reviewing the
relevant documents, the court concurs with the Bankruptcy Court that "the prospects for
... a meaningful distribution to unsecured creditors ... do not look good." In re SCH
Corp., Civ. No. 09-10198, D.l. 932 at 11.
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not find the case was without merit. Therefore, the court declines to award sanctions in
this instance.
20. Conclusion. For the reasons explained, Singley's motion to dismiss is
granted, as CFI's appeal is equitably moot.
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