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In re Sneed Shipbuilding, Inc.

United States Court of Appeals, Fifth Circuit

February 5, 2019

In The Matter of: SNEED SHIPBUILDING, INCORPORATED, Debtor
v.
ALLISON D. BYMAN, Chapter 11 Trustee of Sneed Shipbuilding, Incorporated; ESTATE OF MARTIN M. SNEED, SR., Appellees NEW INDUSTRIES, INCORPORATED, Appellant

          Appeal from the United States District Court for the Southern District of Texas

          Before KING, HIGGINSON, and COSTA, Circuit Judges.

          GREGG COSTA, CIRCUIT JUDGE

         In bankruptcy, the right to appeal must sometimes give way to a heightened interest in finality. Perhaps the most prominent example is equitable mootness, a judicially created doctrine preventing appeals that threaten to unravel a particularly interrelated confirmation plan. See In re Manges, 29 F.3d 1034, 1038-39 (5th Cir. 1994). Bars on appeals can also be found in the Bankruptcy Code, such as the statute that prevents "reversal or modification on appeal of an authorization . . . of a sale or lease of [estate] property" unless that order was stayed pending appeal. 11 U.S.C. § 363(m); see also In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir. 1994) ("Several provisions of the Bankruptcy Code of 1978 provide that courts should keep their hands off consummated transactions.").

         The bankruptcy trustee in this case invokes both equitable and statutory mootness to try and block an appeal of a bankruptcy court's approval of a sale of key estate assets, including a settlement necessary to facilitate the transaction. Equitable mootness is inappropriate here, but we conclude that section 363(m) made the bankruptcy court's approval the final word on the subject when the objector did not obtain a stay of that ruling.

         I.

         Sneed Shipbuilding owned two shipyards in Texas, including one in Channelview. It filed for bankruptcy in 2016 and, after reorganizing turned tumultuous, the court appointed a trustee. The trustee then filed a complaint against the probate estate of Sneed Shipbuilding's longtime principal Martin Sneed and several other Sneed family members. The complaint alleged that Martin attempted to fraudulently transfer ownership of the Channelview shipyard to himself, among other fraudulent activities. It sought to avoid (bankruptcy-speak for "undo") those transactions and have the court declare that Sneed Shipbuilding was the true titleholder to the Channelview shipyard.

         While the bankruptcy progressed slowly, operations at the Channelview shipyard ground to a halt as a barebones staff serviced the one remaining customer. Conversion to Chapter 7 and liquidation loomed as a real and unpleasant possibility, so the trustee tried to sell the shipyard. San Jac Marine was interested in purchasing it, but only if the bankruptcy estate and Martin's probate estate resolved their dispute over the title. To get clean title, the trustee had two undesirable options: years of litigation against the probate estate, during which the shipyard would lose much of its value, or settlement with the probate estate on unfavorable terms. She chose the latter.

         The sale to San Jac Marine was made conditional on bankruptcy approval of the settlement. The parties structured the settlement and sale together along these lines: San Jac Marine paid Sneed Shipbuilding nearly $15 million and the trustee used those funds to ensure that the title it transferred was clean; encumbrances from a secured creditor, the debtor-in-possession's lender, and property taxes were all paid off. In addition, Martin's probate estate gave up both its claim to the Channelview property and any other claims in the bankruptcy for about $8 million and the trustee's agreement to release any other avoidance actions. All told the settlement and sale looked something like this:

         (Image Omitted)

         The bankruptcy court approved the settlement and sale in a single order, finding its provisions "non-severable and mutually dependent." New Industries, an unsecured creditor which claimed that Sneed Shipbuilding owed it $550, 000 from a construction contract, unsuccessfully objected to the disbursement of funds to the probate estate. It did not seek a stay of the court's approval of the transaction.

         New Industries appealed. The trustee asked the district court to dismiss the appeal, citing both equitable mootness and 11 U.S.C. § 363(m). The district court dismissed the appeal as moot without identifying whether it was applying equitable or statutory mootness.

         II.

         The parties focus on whether equitable mootness applies. This doctrine allows courts to abstain from appeals of plan confirmation orders, allowing the interrelated web of parties to rely on a final decision. See In re Pacific Lumber Co., 584 F.3d 229, 240 (5th Cir. 2009). As many courts have noted, equitable mootness is not constitutional mootness. In a sense, the bankruptcy doctrine presents the opposite concern of Article III mootness. A case is not equitably moot because an appellate reversal would have no effect; it is equitably moot when a reversal might have too much effect. See Pacific Lumber, 584 F.3d at 240; In re Continental Airlines, 91 F.3d 553, 569 (3rd Cir. 1996) (Alito, J., dissenting). Without an express basis in the Bankruptcy Code, equitable mootness is controversial. Compare In re One2One Communications, LLC, 805 F.3d 428, 441 (3rd Cir. 2015) (Krause, J., concurring); In re Continental Airlines, 91 F.3d at 569 (Alito, J., dissenting), with In re Tribune Media Co., 799 F.3d ...


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