ERIC C. RAJALA, Trustee in Bankruptcy for the Estate of Generation Resources Holding Company, LLC, Plaintiff - Appellant, v. ROBERT H. GARDNER; ROBBIN M. GARDNER; R. JAMES ANSEL; VIRGINIA Z. ANSEL; WILLIAM W. STEVENS; AKIKO N. STEVENS; LOOKOUT WINDPOWER HOLDING COMPANY, LLC, a Missouri Limited Liability Company; FORWARD WINDPOWER HOLDING COMPANY, LLC, a Missouri Limited Liability Company; LOOKOUT WINDPOWER HOLDING COMPANY, LLC (MO); FORWARD WINDPOWER HOLDING COMPANY, LLC (MO); STEVENS FAMILY INVESTMENT COMPANY, LLC, a Missouri LLC, Defendants - Appellees, and FREESTREAM CAPITAL, LLC; GARDNER FAMILY INVESTMENT COMPANY, LLC, a Missouri LLC; WINDFORCE HOLDINGS, INC.; Consol Defendants - Appellees, and EDISON MISSION ENERGY, a California corporation; MISSION WIND PENNSYLVANIA, INC., a Delaware corporation; MISSION WIND PA TWO, INC., a Delaware Corporation; MISSION WIND PA THREE, INC., a Delaware corporation; LOOKOUT WIND POWER, LLC, a Delaware Limited Liability Corporation; FORWARD WIND POWER, LLC, a Delaware Limited Liability Company, Defendants.
No. 12-3113
UNITED STATES COURT OF APPEALS TENTH CIRCUIT
March 12, 2013
PUBLISH
Elisabeth A. Shumaker Clerk of Court
Scott J. Goldstein (Douglas M. Weems and Barry L. Pickens of Spencer, Fane, Britt & Browne, L.L.P, with him on the brief), Kansas City, Missouri, for Defendants - Appellees.
Tyler W. Hudson and Adam S. Davis of Wagstaff & Cartmell, L.L.P., Kansas City, Missouri, for Consol Defendant - Appellee
Before KELLY, MURPHY, and TYMKOVICH, Circuit Judges.
KELLY, Circuit Judge.
At issue is what constitutes property of the bankruptcy estate and whether allegedly fraudulently transferred property is subject to the Bankruptcy Code‘s automatic stay before a trustee recovers the property through an avoidance action. See
GRHC was formed in 2002 for the purpose of developing wind-generated power projects. Aplt. App. 69–70. As part of its development strategy, GRHC employed FreeStream to provide advisory services. Id. at 79. In June 2005, GRHC entered into a Memorandum of Understanding (MOU) with Edison Capital (Edison). Id. at 75–77. The MOU detailed Edison‘s contemplated purchase of three GRHC wind power projects, including the “Lookout” project. Id. Based on the MOU, development agreements were also drafted. Id. at 79.
Later that year, several GRHC insiders formed LWHC.1 Id. at 80. On February 3, 2006, LWHC closed a deal with Edison for the sale of the wind power projects. Id. at 83. According to the second amended complaint, the GRHC insiders caused a switch in the identity of the projects’ developer from GRHC to LWHC. Id.
On March 28, 2007, LWHC entered into a contract, the Lookout Redemption Agreement (LRA), with an Edison subsidiary. Id. at 96–97, 319–24. The LRA provided that once Lookout achieved commercial operation (at which point it would be fully owned by Edison), it would pay “25% of the Final Installment to FreeStream [], as full satisfaction of all amounts that may be due to
The Fraudulent Transfer Claims
In September 2009, the Trustee filed suit in Kansas federal district court against six individual defendants and numerous companies. Id. at 20, 58–67. The Trustee refers to several of the Defendants as “insiders,” based on their ownership and control of GRHC. Id. at 59. The second amended complaint contains numerous claims, including fraudulent transfer claims. Id. at 56–156. The Trustee alleges the insiders fraudulently transferred GRHC‘s development and redemption opportunities to insider-owned companies. Id. at 108-37.
The Pennsylvania Case
In April 2009, LWHC and FreeStream sued Edison in federal district court in the Western District of Pennsylvania, seeking the final installment due under the LRA Id. at 166. In an effort to suspend LWHC and FreeStream‘s suit, the Trustee requested that the Kansas federal district court stay the Pennsylvania case or hold that any judgment obtained could not result in collateral estoppel in the Kansas case. Id. at 157–58, 200–01. The Trustee contended that any proceeds would be property of GRHC‘s bankruptcy estate—thus related to the action in Kansas federal district court. Id. The Kansas federal district court denied the Trustee‘s motion, and the Pennsylvania case proceeded. Id.
On May 31, 2011, the Pennsylvania federal district court declined the Trustee‘s motion to stay or transfer, and proceeded to enter judgment in favor LWHC and FreeStream for approximately $9 million (75% to LWHC; 25% to FreeStream). Id. at 187, 197–98. However, the court transferred the issue of whether the judgment was part of GRHC‘s bankruptcy estate to the Kansas bankruptcy court. Id. at 195–96, 198. The Pennsylvania court also ordered that the judgment funds be deposited with the Kansas bankruptcy court. Id. 160–61, 198.
Once in Kansas bankruptcy court, LWHC and FreeStream successfully moved to withdraw the case to Kansas federal district court. Id. at 363. The court also consolidated the Pennsylvania case with the Trustee‘s pending claims. Id. at 227, 352-54.
The Distribution
Both LWHC and FreeStream filed motions to distribute the Pennsylvania judgment, arguing that the funds were not property of GRHC‘s bankruptcy estate. Id. at 181–86, 335–43. On April 9, 2012, the Kansas federal district court granted
On April 12, the district court issued a clarifying nunc pro tunc order directing the bankruptcy court to distribute the Pennsylvania judgment. Aplt. App. 398–99. The Trustee followed with a motion to certify that order for appellate review,
Discussion
A. Does this Court Have Appellate Jurisdiction?
Contrary to the arguments of the various Defendants, the Kansas federal district court did rule on the applicability of the automatic stay in granting the motions to distribute. Specifically, the court found that the Pennsylvania judgment was not property of GRHC‘s estate and, therefore, not subject to the automatic stay. Thus, the district court‘s order, which deemed
The grant or denial of relief from an automatic stay is generally an appealable final order. Franklin Sav. Ass‘n v. Office of Thrift Supervision, 31 F.3d 1020, 1022 n.3 (10th Cir. 1994); see 3 Collier on Bankruptcy ¶ 362.13 (collecting cases). We have explained that an immediate appeal “is necessary to effectuate Congress’ intent to settle these matters quickly.” Eddleman, 923 F.2d at 785.
Defendants do not contest the general rule. Rather, they argue that
We recognize that in Trinity Broad. Corp. v. Eller, we weighed in on one side of a circuit split in holding “that a judgment in a consolidated action that does not dispose of all claims shall not operate as a final, appealable judgment under
Defendants seek to distinguish Franklin Sav. Ass‘n. They argue that unlike Franklin Sav. Ass‘n, the underlying litigation in this case is ongoing. This argument is unpersuasive. First, the Trustee has not asserted any fraudulent transfer claims against FreeStream. Second, the pending fraudulent transfer claims against LWHC do not preclude us from treating the district court‘s decision as a final, appealable order.
Simply put, the scope of the automatic stay constitutes a discrete dispute. See Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 657 n.3 (2006) (“[O]rders in bankruptcy cases may be immediately appealed if they finally dispose of discrete issues within the larger case . . . .” (quotation omitted)). The narrow legal issue presented on appeal does not depend on the merits of the underlying fraudulent transfer claims. In fact, resolution of the fraudulent transfer claims would render the court‘s decision on the automatic stay “virtually unreviewable.” See Eddleman, 923 F.2d at 785. Accordingly, we have
Defendants raise another challenge to our jurisdiction. They argue the appeal is moot because we cannot grant the Trustee an effective remedy. See Aplee. Br. (FreeStream) 17–18. It is true that a lawsuit is moot where the court cannot possibly grant relief. See Calderon v. Moore, 518 U.S. 149, 150 (1996) (per curiam). But Defendants bear the heavy burden of proving there is no longer a live case. See In re Paige, 584 F.3d 1327, 1336 (10th Cir. 2009); see also Cnty. of LRA v. Davis, 440 U.S. 625, 631 (1979). And even “a partial remedy is sufficient to prevent a case from being moot.” Calderon, 518 U.S. at 150 (quotation omitted).
Here, the Trustee simply requests that we reverse the district court by holding that the $9 million is GRHC property and should be returned to the bankruptcy court pursuant to
We recognize the possibility that various Defendants have dissipated all or part of the funds. But money is fungible and we have no reason to think that $9 million could not be returned. Further, the Trustee is not required to demonstrate that he will obtain complete relief; it is likely that some measure of effective relief could be fashioned, hence, the case is not moot. See In re Paige, 584 F.3d at 1336-37.
B. Does Freestream’s 25% Contingency Fee Constitute Property of the Bankruptcy Estate Under § 541 ?
Whether the contingency fee constitutes property of the estate is a question of law reviewed de novo. In re Cranmer, 697 F.3d 1314, 1316 (10th Cir. 2012). The district court concluded that FreeStream‘s contingency fee could “never be” property of the estate. The court based its decision on the LRA, which required Lookout to pay “25% of the Final Installment to FreeStream [], as full satisfaction of all amount that may be due . . . from Lookout, Developer Member and/or Investor Member.” According to the district court, it is “clear that FreeStream‘s portion [came] directly from Lookout” and did “not pass through the Developer Member.” Rajala, 2012 WL 1189773, at *5.
The district court was correct—the plain language of the LRA clearly required FreeStream‘s payment to come directly from Lookout (owned by Edison). Further, as both the Pennsylvania and Kansas courts found, FreeStream was the intended third-party beneficiary of the LRA As such, FreeStream had a right to enforce the LRA, and FreeStream had its own right to payment. See John Julian Const. Co. v. Monarch Builders, Inc., 306 A.2d 29, 34 (Del. Super. Ct. 1973) (The LRA provided that it was to be governed by Delaware law.). Therefore, the district court correctly held that FreeStream‘s fee could not be considered property of GRHC‘s bankruptcy estate.
C. Does an Automatic Stay Apply to Unrecovered Property that Is the Subject of a Fraudulent Transfer Claim?
The underlying issue we must decide is whether a bankruptcy estate includes fraudulently transferred property that the Trustee has not yet recovered. Because the appeal presents a question of statutory interpretation, our review is
1. The Split
Under
The Fifth Circuit has held that fraudulently transferred property belongs to the estate under
In contrast, the Second Circuit rejected In re MortgageAmerica‘s analysis in favor of a narrower reading.4 See Fed. Deposit Ins. Corp. v. Hirsh (In re Colonial Realty Co.), 980 F.2d 125 (2d Cir. 1992). The court held that
2. Which Interpretation?
In general, “[t]he plain meaning of [a statute] should be conclusive, except in the rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.” United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242 (1989). Here, although
Section 541(a)(1) defines the bankruptcy estate as including “all legal or equitable interests” the debtor holds “as of the commencement of the case.” The Trustee alleges that GRHC‘s insiders fraudulently transferred the Lookout purchase price to Defendants. Accordingly, the Trustee urges us to adopt the In re MortgageAmerica rationale, under which the Debtor retains an “equitable interest” in fraudulently transferred property. See 714 F.2d at 1275; Aplt. Br. 41-44.
An equitable interest is “[a]n interest held by virtue of an equitable title or claimed on equitable grounds, such as the interest held by a trust beneficiary.” Black‘s Law Dictionary (9th ed. 2009). “Equitable title” is defined as “a beneficial interest in property [which] gives the holder the right to acquire formal legal title.” Id. Reading “equitable title” to include any property a trustee merely alleges to have been fraudulently transferred would violate the concept of equity. See Michael R. Cedillos, Note, Categorizing Categories: Property of the Estate and Fraudulent Transfers in Bankruptcy, 106 Mich. L. Rev. 1405, 1416–17 (2008). “[O]ne of the fundamental principles [of] equity jurisprudence is . . . that before a complainant can have [] standing in court he must first show that . . . [he has] a good and meritorious cause of action . . . .” Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240, 244 (1933). It follows that a mere allegation, without any showing of merit, cannot create “equitable title.”
Further, “[i]t is a cardinal principle of statutory construction that . . . if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.” TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001). Here,
In response, the Trustee argues that
Moreover, this is not one of the “rare cases” where the plain meaning of the statute leads to an absurd result. Both sides present plausible arguments regarding Congress‘s intent. Compare In re MortgageAmerica 714 F.2d at 1275 (citing H.R. Rep. No. 595 (1978)), with In re Colonial, 980 F.2d at 131 (citing structure of statute as evidence of legislative intent). Therefore, the plain meaning of the statutory language should control.
Finally, we are mindful that “where an otherwise acceptable construction of a statute would raise serious constitutional problems, the [courts should] construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress.” Solid Waste Agency of N. Cook Cnty. v. U.S. Army Corps of Eng’rs, 531 U.S. 159, 173 (2001) (quotation omitted). Although neither party addressed the issue, we note that a broad reading could potentially violate the Due Process Clause by allowing a trustee to enjoin another party‘s property rights based only on the allegation of fraud. See Connecticut v. Doehr, 501 U.S. 1, 10 (1991).
Both parties agree that fraudulent transfer claims are included in the bankruptcy estate. But according to the Trustee,
In the end, we need not pass upon the constitutionality of such a broad reading. Instead, we adopt the statute‘s plain meaning and hold that fraudulently transferred property is not part of the bankruptcy estate until recovered. This interpretation gives Congress‘s chosen language its ordinary meaning, and abides by the rule against surplusage. Further, our reading does not undermine the Bankruptcy Code‘s goal of equitable distribution, as there exist alternative means of protecting estate assets.
AFFIRMED. All pending motions are denied.