Peeples et al v. Barnwell County Hospital et al
Filing
25
ORDER AND OPINION granting 19 Motion to Dismiss and dismissing as moot Appellants' appeal of the Bankruptcy Court's Order Granting Debtor's Motion for an Order Authorizing a Substitute Asset Purchase Agreemen t in Aid of Implementation of the Plan and Approving the Notice and Application for Settlement and Compromise between Debtor and SC Regional Health System, LLC. (ECF Nos. 1, 19.) Signed by Honorable J Michelle Childs on 2/18/2014.(asni, ) (Main Document 25 replaced on 2/18/2014) (asni, ). Modified to replace document to correct spelling of appellant's name on 2/18/2014 (asni, ).
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF SOUTH CAROLINA
AIKEN DIVISION
Estate of Robert M. Peeples and Six
)
Participants of the Barnwell County Pension )
Plan,
)
)
Appellants,
)
v.
)
)
Barnwell County Hospital,
)
)
Appellee.
)
____________________________________)
Civil Action No. 1:13-01678-JMC
ORDER AND OPINION
This matter is before the court by way of an appeal by the Estate of Robert M. Peeples
and Six Participants of the Barnwell County Pension Plan (collectively the “Appellants”) from
an order filed by the United States Bankruptcy Court for the District of South Carolina (the
“Bankruptcy Court”) on April 18, 2013, and a motion to dismiss the appeal by Appellee
Barnwell County Hospital (the “Hospital”). (See ECF Nos. 1, 19.) Specifically, Appellants
appeal the Bankruptcy Court’s Order Granting Debtor’s Motion for an Order Authorizing a
Substitute Asset Purchase Agreement in Aid of Implementation of the Plan and Approving the
Notice and Application for Settlement and Compromise between Debtor and SC Regional Health
System, LLC (the “Order”).1 Appellants assert that the Bankruptcy Court erred in finding that
(1) the Barnwell County Council (“BCC”) had the authority to insert themselves as members of
the Hospital’s Board of Trustees in violation of the dual office holding prohibitions of S.C.
Const. Art. VI § 3 and Art. VII § 1A; (2) it had the authority to allow a post-confirmation
1
This matter is one (1) of four (4) appeals challenging orders entered by the Bankruptcy Court.
The other three appeals are identified as follows: In re: Barnwell Cnty. Hosp., C/A No. 1:1202265-JMC (D.S.C. Aug. 9, 2012); In re: Barnwell Cnty. Hosp., C/A No. 1:13-02032-JMC
(D.S.C. July 24, 2013); and In re: Barnwell Cnty. Hosp., C/A No. 1:13-02164-JMC (D.S.C. Aug.
9, 2013).
1
modification of the Hospital’s Chapter 92 Plan; and (3) the settlement between the Hospital and
SC Regional Health System (“RHS”) should be approved resulting in RHS being treated
differently and better than other unsecured creditors and not in accordance with the confirmed
Chapter 9 Plan. (ECF No. 17.) The Hospital responded to the appeal by moving to dismiss it on
the ground of mootness. (ECF No. 19.) For the reasons set forth below, the court GRANTS the
Hospital’s motion to dismiss and DISMISSES the appeal as moot.
I.
RELEVANT BACKGROUND
To support its findings, the Bankruptcy Court set forth the following detailed findings of
fact, which this court will not set aside unless clearly erroneous:
On October 5, 2011, Debtor filed a petition seeking relief under chapter 9 of the
United States Bankruptcy Code (“Bankruptcy Code”). Prior to the filing of its
petition, the Debtor had been unable to pay its debts as they became due. For
years, Barnwell County provided funding to keep Debtor operating, but Debtor
was informed that Barnwell County would no longer provide funding.
Furthermore, as a rural hospital, Debtor does not have the customer volume to pay
for new technology and facilities that larger hospitals in neighboring areas can
provide. Based upon those factors, Debtor, along with Bamberg County and
Bamberg County Memorial Hospital (“Bamberg Hospital”), sought a third party
purchaser to provide healthcare for the residents of Bamberg County and
Barnwell County.
On September 29, 2011, Debtor, along with Bamberg Hospital, Barnwell County,
and Bamberg County, executed an Asset Purchase Agreement (“Original APA”)
with RHS for the purchase of substantially all of the assets of Debtor and the
Bamberg Hospital. Debtor’s Amended Plan for Adjustment of Debts, as modified
by the Debtor’s Modification to First Amended Plan for Adjustment of Debts
(collectively, the “Plan”) was based on the transaction contemplated by the
Original APA. On May 23, 2012, the Bankruptcy Court entered its Order
confirming the Debtor’s Plan (the “Confirmation Order”).3
2
Chapter 9 of the Bankruptcy Code, 11 U.S.C. §§ 901-946, governs the adjustment of debts of
municipalities. Section 901 sets out which provisions of Title 11 apply to filings of
municipalities. See 11 U.S.C. § 901.
3
The Bankruptcy Court also found in the Confirmation Order that the dual office holding
prohibition of the South Carolina Constitution had not been violated and that the Hospital
met Chapter 9 eligibility requirements. (ECF No. 7-7 at 20-61.)
2
The transaction contemplated under the Original APA did not close, the reasons
for which were vigorously contested by Debtor and RHS. As a result of the
transaction not closing, RHS filed an application seeking payment of an
administrative expense claim (“RHS Application”) in the amount of
approximately $1,819,000.00 for liquidated damages under the Original APA and
for compensation and reimbursement of fees and expenses under a separate
Consulting Agreement between Debtor and RHS. Debtor objected to the RHS
Application and disputed that RHS was entitled to a claim against Debtor.
Additionally, Debtor asserted that it was entitled to damages against RHS, which
RHS disputed.
When the transaction did not close under the Original APA, Debtor sought a new
purchaser to be substituted for RHS and close the transaction in accordance with
the terms approved in the Plan. Debtor located a new purchaser and executed a
new Asset Purchase Agreement with BCH Acquisitions Group, LLC (“BCH
Acquisitions Group” or “New Purchaser”) dated November 26, 2012 (the “New
APA”). Thereafter, on December 7, 2012, Debtor filed the Substitution Motion
seeking an Order from this Court authorizing Debtor to substitute the New APA
in place of the Original APA and allowing Debtor to sell its assets to BCH
Acquisitions Group instead of RHS as contemplated in the Plan. Debtor’s Plan
cannot be fully consummated and implemented unless the Court authorizes this
substitution.
Under the Original APA, RHS was entitled to any payment incentives Debtor had
previously received or was entitled to receive at closing under the Health
Information Technology for Economic and Clinical Health Act (“HITECH Act”).
RHS planned to use the HITECH funds to pay the claims of HHS, First Citizens
Bank and Trust Company, Inc. (“First Citizens”), and the South Carolina Office
of Rural Health (“SCRH”) as provided in the confirmed Plan, and then keep the
remainder of the HITECH funds, with none of the remaining funds being used to
pay creditors. Under the New APA, Debtor is entitled to retain all HITECH funds
for the two fiscal years ending September 30, 2011, and September 30, 2012,
which total approximately $2,578,000.40. Since Debtor is retaining these
HITECH funds under the New APA, these funds are available to pay operating
expenses and claims. Additionally, under the New APA, BCH Acquisitions
Group, as part of the purchase price, is paying all the amounts RHS had agreed to
pay to Stroudwater Capital, HHS, First Citizens, and SCRH without using the
HITECH funds, as well as paying $50,000 in costs Debtor has incurred during
bankruptcy.
3
In addition to seeking an administrative expense priority claim against Debtor in
the amount of approximately $1,819,000.00, RHS filed an objection to the
Substitution Motion. The Court held a hearing on the Substitution Motion on
January 9, 2013. After the hearing on the Substitution Motion, Debtor and RHS
mediated their dispute and entered into the Settlement Agreement which resolves
all issues between RHS and Debtor, including the RHS Application and the
objection of RHS to the Substitution Motion. As part of the settlement, RHS
agrees to withdraw with prejudice the RHS Application and its objection to the
Substitution Motion upon payment of the settlement funds.
At the April 8, 2013 hearing, Mary Valient, who has been the Chief Executive
Officer (“CEO”) of Debtor since 2009, testified Debtor currently owes about $2.2
million to vendors. She testified that Debtor has funds to operate for three more
months, and at that point, Debtor would need to turn to Barnwell County for
additional funds. This projection includes using the HITECH funds as well as
money the State of South Carolina seizes from the tax refunds of individuals who
owe money to Debtor.
At the April 8, 2013 hearing, a representative of BCH Acquisitions Group
testified that BCH Acquisitions Group is ready to move forward with finalizing
and closing the transaction described in the New APA. He also testified BCH
Acquisitions Group will have a capitalization of $4 to $8 million at the closing of
the New APA.
(ECF No. 9-1 at 2-5.)
On June 19, 2013, Appellants filed a notice to appeal the Order to this court pursuant to
28 U.S.C. § 158(a) or (b). (ECF No. 1.) On June 20, 2013, the Clerk of Court entered a
document that notified the parties of the filing of the bankruptcy appeal and set up a briefing
schedule for their submissions.4 (ECF No. 3.) On August 8, 2013, Appellants filed their brief in
which they identified the issues on appeal as “(I) Whether the Bankruptcy Court erred in finding
that Hospital Board members were not in violation of the dual office holding prohibitions of S.C.
Const. Art. VI § 3 and Art. VII § 1A and thus was properly authorized to file the bankruptcy
petition[][;] (II) Whether the Bankruptcy Court erred in Modifying a Chapter 9 Plan After
Confirmation When a Plain Reading of the Act Shows Congress Intentionally Omitted That
4
The briefing schedule for a bankruptcy appeal to a federal district court is established by law.
See Fed. R. Bankr. P. 8009. According to Rule 8009, an appellant has fourteen days after filing
a notice of appeal within which to file a supporting brief. Id. at 8009(a)(1).
4
Power[][;] (III) Whether the Bankruptcy Court Erred in Approving the Settlement Between
Debtor Barnwell County Hospital and SC Regional Health System, LLC to the Effect that SC
Regional Health System, LLC was Treated Differently and Better Than Other Unsecured
Creditors and Not in Accordance with a Confirmed Chapter 9 Plan[][;] and (IV) Whether the
Bankruptcy Court made clear errors in its Finding of Facts.” (ECF No. 17 at 2.)
On August 19, 2013, the Hospital filed a motion to dismiss the appeal for mootness.
(ECF No. 19.) Appellants did not file opposition to the Hospital’s motion to dismiss.
II.
A.
LEGAL STANDARD
Bankruptcy Appeals
This court has jurisdiction to hear appeals from final orders of the bankruptcy court. 28
U.S.C. § 158; see, e.g., In re Kirkland, 600 F.3d 310, 314 (4th Cir. 2010) (noting district court’s
“capacity as a bankruptcy appellate court”). The standard of review of a bankruptcy appeal by
a district court is the same as when a court of appeals reviews a district court proceeding. See 28
U.S.C. § 158(c)(2). Accordingly, the bankruptcy court’s findings of fact are reviewed under a
“clearly erroneous” standard. Fed. R. Bankr. P. 8013. A finding of fact is clearly erroneous
when the entire record demonstrates convincingly to the reviewing court that “a mistake has been
committed.” United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948); United States v. Hall,
664 F.3d 456, 462 (4th Cir. 2012). A bankruptcy court’s conclusions of law are subject to de
novo review. In re Biondo, 180 F.3d 126, 130 (4th Cir. 1999); In re K & L Lakeland, Inc., 128
F.3d 203, 206 (4th Cir. 1997).
B.
The Doctrine of Mootness
“Article III of the Constitution limits federal courts to the adjudication of actual, ongoing
controversies between litigants.” Deakins v. Monaghan, 484 U.S. 193, 199 (1988) (citations
5
omitted). “‘[T]he doctrine of mootness constitutes a part of the constitutional limits of federal
court jurisdiction . . . .’” Townes v. Jarvis, 577 F.3d 543, 546 (4th Cir. 2009) (quoting United
States v. Hardy, 545 F.3d 280, 283 (4th Cir. 2008)). “Federal courts lack jurisdiction to decide
moot cases because their constitutional authority extends only to actual cases or controversies”
under Article III of the Constitution. Iron Arrow Honor Soc’y v. Heckler, 464 U.S. 67, 70
(1983). “A case becomes moot when the issues presented are no longer ‘live’ or the parties lack
a legally cognizable interest in the outcome.” Warren v. Sessoms & Rogers, P.A., 676 F.3d 365,
370 (4th Cir. 2012) (internal quotation marks omitted).
Mootness in bankruptcy appeals arises in two forms: constitutional mootness and
equitable mootness. Carr v. King, 321 B.R. 702, 705 (E.D. Va. 2005). Constitutional mootness
refers to the well-settled notion that “[w]hen there is no longer a case or controversy in the
constitutional sense, an Article III court is without jurisdiction to adjudicate.” Cent. States, Se.
& Sw. Areas Pension Fund v. Cent. Transp., Inc., 841 F.2d 92, 95 (4th Cir. 1988). A federal
court lacks authority “to give opinions upon moot questions or abstract propositions, or to
declare principles or rules of law which cannot affect the matter in issue in the case before it.”
Church of Scientology v. United States, 506 U.S. 9, 12 (1992) (quoting Mills v. Green, 159 U.S.
651, 653 (1895)). Therefore, “if 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, the appeal
must be dismissed.” Id. (quoting Mills, 159 U.S. at 653).
In contrast, “the doctrine of equitable mootness is a pragmatic principle, grounded in the
notion that, with the passage of time after a judgment in equity and implementation of that
judgment, effective relief on appeal becomes impractical, imprudent, and therefore inequitable.”
Mac Panel Co. v. Va. Panel Corp., 283 F.3d 622, 625 (4th Cir. 2002). Equitable mootness is
6
“[a]pplied principally in bankruptcy proceedings because of the equitable nature of bankruptcy
judgments” and “is often invoked when it becomes impractical and imprudent ‘to upset the plan
of reorganization at this late date.’” Id. at 625 (quoting In re UNR Indus., Inc., 20 F.3d 766, 769
(7th Cir. 1994)). Moreover, in applying equitable mootness, a court “does not employ rigid
rules,” but must “determine whether judicial relief on appeal can, as a pragmatic matter, be
granted.” Id. Specific “[f]actors in making this determination include (1) whether the appellant
sought and obtained a stay; (2) whether the reorganization plan or other equitable relief ordered
has been substantially consummated; (3) the extent to which the relief requested on appeal
would affect the success of the reorganization plan or other equitable relief granted; and (4) the
extent to which the relief requested on appeal would affect the interests of third parties.” Id.
C.
Motions to Dismiss for Mootness
The appropriate means for challenging the mootness of a case is a motion under Fed. R.
Civ. P. 12(b)(1).
See Friends of Animals v. Salazar, 670 F. Supp. 2d 7, 11 (D.D.C. 2009)
(holding that “[a] motion to dismiss for mootness is properly brought under Federal Rule of Civil
Procedure 12(b)(1)”). The burden of showing subject matter jurisdiction on a Rule 12(b)(1)
motion rests with the party invoking it. See Adams v. Bain, 697 F.2d 1213, 1219 (4th Cir.
1982).
III.
ANALYSIS
In this appeal, Appellants argue that the Bankruptcy Court erred in issuing the Order.
(See ECF No. 17.) Before considering the merits of the appeal, the court must address first
the issue of whether the appeal is barred by mootness, because mootness is a jurisdictional issue.
See, e.g., Church of Scientology of Cal., 506 U.S. at 12 (“[I]f an event occurs while a case is
pending on appeal that makes it impossible for the court to grant any effectual relief whatever to
7
a prevailing party, the appeal must be dismissed,” for federal courts have “no authority to give
opinions upon moot questions or abstract propositions, or to declare principles or rules of law
which cannot affect the matter in issue in the case before it.”); Constantine v. Rectors & Visitors
of George Mason Univ., 411 F.3d 474, 480 (4th Cir. 2005) (“A federal court has an independent
obligation to assess its subject-matter jurisdiction, and it will ‘raise a lack of subjectmatter
jurisdiction on its own motion.’”) (quoting Ins. Corp. of Ir., Ltd. v. Compagnie des Bauxites de
Guinee, 456 U.S. 694, 702 (1982)).
A.
Motion to Dismiss for Mootness
1.
The Parties’ Arguments
The Hospital moves for dismissal of the appeal, arguing that the appeal is both
constitutionally moot and equitably moot. (ECF No. 19.) In support of this argument, the
Hospital asserts that the Plan has been substantially consummated; Appellants failed to obtain a
stay of the Order pending the appeal; the court cannot grant effective relief on appeal even if
Appellants’ arguments have merit; and even if the court could grant effective relief,
implementation of that relief would be inequitable. (Id. at 2.)
To show that the Plan has been substantially consummated, the Hospital submitted
evidence via affidavit that on June 12, 2013, in accordance with the Plan: (1) all of the
Hospital’s assets were transferred to BCH Acquisitions Group, which took control of the
hospital facility and hired workers that had been previously employed by the Hospital 5; (2) BCH
5
In addition, BCH received the following from the Hospital: (1) all schedules and due diligence
items incident to the New APA; (2) a deed of the real property comprising the Hospital’s facility;
(3) the right, title and obligations of certain of the Hospital’s operating contracts; (4) Bills of Sale
for the Hospital’s personal property; (5) transfers and powers of attorneys for certain licenses for
the operation of the hospital, its rural facilities and its pharmacies; (6) proof of settlements of
certain indebtedness; and (7) certificates of Barnwell County and the Hospital regarding the
completion of certain conditions precedent to the sale. (ECF No. 19-2 at 5 ¶ 23.)
8
Acquisitions Group paid the Hospital closing and cure costs in the amount of $1,400,000.006; (3)
a Creditor’s Distribution Trust was created, which entity was the recipient of any remaining
non-purchased assets of the Hospital for collection and distribution to its unsecured creditors7;
and (4) the Hospital ceased operations. (ECF No. 19-2 at 5-6.) Based on the foregoing, the
Hospital argues that the appeal is constitutionally moot because Appellants seek to accomplish
the impractical and impossible by unwinding the Hospital’s bankruptcy. (ECF No. 19-1 at 1112.)
The Hospital also argues that the appeal is equitably moot because it would be “both
impractical and imprudent to upset the Hospital’s bankruptcy” and “[t]he four factors considered
. . . in determining whether to dismiss an appeal as equitably moot weigh heavily in favor of
dismissal in this case.” (Id. at 9-15.) In support of this argument, the Hospital asserts that (1)
Appellants failed to obtain a stay of the Order on appeal; (2) the Plan has been substantially
consummated; (3) the relief requested by Appellants would substantially affect the success of
the Plan; and (4) the Hospital’s creditors, BCH Acquisitions Group, and other third parties
would be significantly harmed if the court granted the relief requested in the appeal. (Id.)
Accordingly, the Hospital contends that the appeal should be dismissed for mootness.
Appellants do not oppose the Hospital’s motion to dismiss.
2.
The Court’s Review
Upon review, the court finds that this appeal is both constitutionally moot and equitably
6
Upon receipt of the $1,400,000.00, the Plan required the Hospital to disburse $701,382.24 to
the United States for Medicare overpayments, $47,500.00 to First Citizens Bank and Trust
Company, Inc., and $17,000.00 to South Carolina Rural Health. (ECF No. 19-2 at 6 ¶ 26.) In
total, the Hospital has paid allowed administrative expenses in the amount of $900,000.00, in
addition to final operating costs through June 12, 2013. (Id. at ¶ 27.)
7
The Plan required that the Hospital’s right to recover preferential and fraudulent transfers be
transferred and vested in a Creditors Distribution Trust. (ECF No. 19-2 at 5 ¶ 21.)
9
moot. This appeal is constitutionally moot because Appellants seek a remedy that would require
undoing the Plan in its entirety. In this regard, the Plan has been implemented such that a greater
part of the Hospital’s assets are in the possession of a non-party to this action and any remaining
assets have either already been distributed or are about to be distributed to other non-parties.
Moreover, most of the proceeds from the transfer of the Hospital’s assets have been distributed
to its creditors, who are also non-parties to this action. Based on the foregoing, the court finds
that it would be impossible to award Appellants effective relief under these circumstances.
Therefore, the court finds that the appeal should be dismissed as constitutionally moot.
Alternatively, upon consideration of the four (4) factors used to determine whether
judicial relief on appeal can be granted, the court finds that the appeal is equitably moot as well.
First, Appellants failed to seek a stay from the Bankruptcy Court or this court pending the
appeal.8 While a party is not required to seek a stay pending appeal, a party who fails to do so
incurs the risk that during the pendency of the appeal, the appeal may be rendered moot. In re
Shawnee Hills, Inc., 125 Fed. Appx. 466, 470 (4th Cir. 2005) (citing Taylor v. Austrian, 154
F.2d 107, 108 (4th Cir. 1946)); In re Kevin Blake Carr, 321 B.R. 702, (E.D. Va. 2005). In this
case, because this court was not asked to issue a stay pending the appeal, the Hospital was
authorized to carry out the Plan before this appeal could be heard.
As to the second factor, the consummation of the Plan has been more than substantial.
Substantial consummation as defined by the Bankruptcy Code requires three events: (1) transfer
of all or substantially all of the property proposed by the plan to be transferred; (2) assumption
by the debtor or by the successor to the debtor under the plan of the business or of the
Bankruptcy Rule 8005 expressly provides that “[a] motion for such relief, . . . may be made to
the district court or the bankruptcy appellate panel, but the motion shall show why the relief,
modification, or termination was not obtained from the bankruptcy judge.” Fed. R. Bankr. 8005.
8
10
management of all or substantially all of the property dealt with by the plan; and (3)
commencement of distribution under the plan. 11 U.S.C. § 1101(2); see Mac Panel, 283 F.3d at
625-26. Based on the facts made known to the court, all three of these events have occurred.
Moreover, Appellants do not dispute that the Plan was substantially consummated.
The third factor weighs against Appellants because they seek to undo the Plan
completely, as opposed to a less extreme measure, such as undoing one component of the Plan.
Finally, with respect to the fourth factor, the court finds that the remedy Appellants seek would
unduly harm innocent third parties, who are not before the court, including BCH Acquisitions
Group and any of the Hospital’s creditors to whom money was distributed. Therefore, using the
four-factor test set forth by the Fourth Circuit for evaluating equitable mootness, the court finds
that this appeal should be dismissed as equitably moot.
B.
The Appeal of the Bankruptcy Court’s Order
Because the appeal is moot, the court need not consider the merits of the appeal. Mills v.
Green, 159 U.S. 651, 653 (1895) (“It necessarily follows that when, pending an appeal from the
judgment of a lower court, . . . , an event occurs which renders it impossible for this court, . . . ,
to grant him any effectual relief whatsoever, the court will not proceed to a formal judgment, but
will dismiss the appeal.”)
IV.
CONCLUSION
For the foregoing reasons, the court hereby GRANTS the Hospital’s motion to
dismiss and DISMISSES as moot Appellants’ appeal of the Bankruptcy Court’s Order
Granting Debtor’s Motion for an Order Authorizing a Substitute Asset Purchase Agreement in
Aid of Implementation of the Plan and Approving the Notice and Application for Settlement and
Compromise between Debtor and SC Regional Health System, LLC. (ECF Nos. 1, 19.)
11
IT IS SO ORDERED.
United States District Judge
February 18, 2014
Greenville, South Carolina
12
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?