FILED JUL 12 2022 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

In re: BAP No. CC-21-1123-LGT CPESAZ LIQUIDATING, INC., fka Community Provider of Enrichment Bk. No. 9:20-bk-10554-DS Services, Inc.; NDS LIQUIDATING, INC., fka Novelles Developmental Services, Inc.; CPESCA LIQUIDATING, INC., fka CPES California, Inc., Debtors.

ROBERT BENNETTI; LINDA MARIANO; LINKI PEDDY; CHARLES FOUST, JR.; INDIVDUAL CPES ESOP PARTICIPANTS, Appellants, v. MEMORANDUM∗ CPESAZ LIQUIDATING, INC., fka Community Provider of Enrichment Services, Inc.; NDS LIQUIDATING, INC., fka Novelles Developmental Services, Inc.; CPESCA LIQUIDATING, INC., fka CPES California, Inc.; OXFORD RESTRUCTURING ADVISORS, LLC, Appellees.

∗ This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. 1 Appeal from the United States Bankruptcy Court for the Central District of California Deborah J. Saltzman, Bankruptcy Judge, Presiding

Before: LAFFERTY, GAN, and TAYLOR, Bankruptcy Judges.

INTRODUCTION

This is an appeal from the bankruptcy court’s order confirming

Debtors’ chapter 111 plan of liquidation (the “Plan”). Appellants are

participants in Debtors’ Employee Stock Ownership Plan and Trust

(“ESOP”). Their primary argument on appeal is that the bankruptcy court

erred in confirming the Plan without permitting them either to direct the

ESOP trustee’s vote via a “direction pass-through” vote (a vote directed by

plan participants and beneficiaries, i.e., shareholders) or to vote as

unsecured creditors; they claim this failure violated ERISA, 2 the ESOP

Document, and Arizona law. They also argue that the Plan is tainted by

conflict and contains impermissible provisions, including third-party

releases.

Appellants, however, have not shown that the bankruptcy court

abused its discretion in confirming the Plan or that it erred in its

underlying rulings. We AFFIRM.

1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532. “Rule” references are the Federal Rules of Bankruptcy Procedure. 2 “ERISA” stands for the Employee Retirement Income Security Act of 1974.

2 FACTS3

This case involves three debtors: CPESAZ Liquidating, Inc. fka

Community Provider of Enrichment Services, Inc. (“CPESAZ”); NDS

Liquidating, Inc., fka Novelles Developmental Services, Inc. (“Novelles”);

and CPESCA Liquidating, Inc., fka CPES California, Inc. (“CPESCA”)

(collectively, “Debtors”). CPESAZ and Novelles filed their chapter 11

petitions in April 2020, and CPESCA in August 2020. The cases were

ordered jointly administered, with CPESAZ as lead.4 No creditors’

committee was appointed.

Debtors were previously in the business of offering behavioral health

services. They operated day treatment centers and programs in California

and Arizona. As of the petition date, all shares of CPESAZ capital stock

were held by the Community Provider of Enrichment Services, Inc.

(“CPES”) ESOP. Appellants are former employees and individual

participants in the CPES ESOP (the “ESOP Participants”). Appellees are

Oxford Restructuring Advisors, LLC, the liquidating trustee of the CPES

Liquidating Trust (“Liquidating Trustee”), which was created pursuant to

the chapter 11 plan, and the Debtors.

3 Where necessary, we have exercised our discretion to take judicial notice of the dockets and imaged papers filed in debtors’ bankruptcy cases. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood),

, 233 n.9 (9th Cir. BAP 2003). 4 The other two entities are wholly owned subsidiaries of CPESAZ.

3 In November 2020, the bankruptcy court entered an order approving

the sale of substantially all Debtors’ assets. The sale order was not

appealed, and the sale has been consummated.

Thereafter, Debtors filed a liquidating plan and disclosure statement,

which were subsequently amended. The Plan, as amended, proposed a

100% payout to general unsecured creditors, with interest, to be overseen

by a liquidating trustee appointed by the bankruptcy court under

§ 1123(b)(3)(B). The three debtor entities were to be dissolved. The

liquidation analysis in the amended disclosure statement estimated that

$8.4 million would be available for distribution to the ESOP Trust after

payment of allowed claims, compared to $8 million in a chapter 7

liquidation.

The Plan provides that any ESOP Participant wishing to vote on the

plan must hold a claim in Class 3 (general unsecured creditors) that is

“separate and apart from” a direct ESOP claim and that any direct ESOP

claims would be asserted by the ESOP Trustee, Miguel Parades, on behalf

of all holders of beneficial interests in the ESOP. The ESOP Participants are

classified as Class 6 equity interests, to be treated as follows:

Each Equity Interest shall be canceled on the Effective Date of the Plan. Allowed Class 6 Equity Interests will be paid a Pro Rata dividend, if any, and only to the extent Allowed Class 3 General Unsecured Claims are paid in full, from the remaining net proceeds of the Liquidating Trust Assets. Notwithstanding anything to the contrary in this Plan, the ESOP Trustee shall retain responsibility, standing, and

4 authority to commence, prosecute and settle lawsuits or actions on behalf of the holders of beneficial interests to the Equity Interest in the ESOP. The Plan further provides, “The ESOP Trustee, on behalf of the ESOP

Trust, the sole Holder of Class 6 Equity Interests, is entitled to vote to

accept or reject the Plan.”

The motion to approve the disclosure statement included a request to

establish procedures for solicitation and tabulation of votes. Appellants

objected to the provision entitling the ESOP Trustee to exercise his

discretion to accept or reject the plan rather than permitting them to direct

the vote. The bankruptcy court overruled their objection and approved the

disclosure statement and voting procedures.

Appellants thereafter moved to appoint a chapter 11 trustee or

convert the case to chapter 7, alleging that the ESOP Trustee had conflicts

of interest and complaining that the proposed plan denied a vote to the

individual ESOP Participants. The bankruptcy court denied the motion.

Appellants also moved for temporary allowance of individual ESOP

Participants’ claims or an order estimating those claims for purposes of

voting on the plan (“Temporary Allowance Motion”), again arguing that

the ESOP Trustee could not vote the interests of the participants without a

“direction pass-through vote” by the participants. The bankruptcy court

denied the motion, finding that the ESOP Trustee was the proper party to

submit a vote on behalf of the ESOP participants. In the end, two of the

5 three impaired classes of creditors, Class 3, general unsecured creditors,

and Class 6, equity interests, voted to accept the Plan. The other impaired

class, Class 4 (intercompany claims), was deemed to have rejected the Plan,

as no votes were received.

Appellants filed an objection to confirmation of the Plan, asserting

that the Plan violated their voting rights and their right to bring claims for

breaches of ERISA fiduciary duties. They also objected to the release and

exculpation provisions of the Plan and argued that the Plan was

unconfirmable because it provided for a discharge of the Debtors and

because it violated the best interests of creditors test. Appellants also filed a

response to the Debtors’ confirmation memorandum and an objection to

the proposed findings of fact and conclusions of law regarding plan

confirmation. The bankruptcy court overruled the objections and

confirmed the Plan. Appellants timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction under

and

157(b)(2)(L). Subject to the discussion below, we have jurisdiction under

.

ISSUES

Should this appeal be dismissed?

Did the bankruptcy court err in denying the motion to appoint a

chapter 11 trustee or convert the case to chapter 7?

6 Did the bankruptcy court err in denying the Temporary Allowance

Motion?

Did the bankruptcy court abuse its discretion in confirming Debtors’

chapter 11 plan of liquidation?

STANDARDS OF REVIEW

We review the bankruptcy court’s order confirming a chapter 11 plan

for abuse of discretion. Beal Bank USA v. Windmill Durango Off., LLC (In re

Windmill Durango Off., LLC),

(9th Cir. BAP 2012). We also

review for abuse of discretion the bankruptcy court’s denial of a motion to

convert. Richter v. Klein/Ray Broad. (In re Klein/Ray Broad.),

, 511

9th Cir. BAP 1987).

A bankruptcy court abuses its discretion if it applies the wrong legal

standard, or misapplies the correct legal standard, or if it makes factual

findings that are illogical, implausible, or without support in inferences

that may be drawn from the facts in the record. United States v. Hinkson,

(9th Cir. 2009) (en banc).

Whether cause exists to appoint a chapter 11 trustee requires factual

findings that we review for clear error. In re Klein/Ray Broad.,

. A factual finding is clearly erroneous if it is illogical, implausible, or

without support from inferences that may be drawn from the facts in the

record. Retz v. Samson (In re Retz),

(9th Cir. 2010).

7 DISCUSSION

A. Appellees’ Motion to Dismiss Appeal and/or Strike

Appellees moved to dismiss this appeal on two jurisdictional

grounds, arguing that: (1) the Panel lacks jurisdiction over the issues raised

in the appeal because those issues were adjudicated in previous orders

entered by the bankruptcy court that were not appealed; and (2) the appeal

is equitably moot. Alternatively, Appellees ask the Panel to: (1) dismiss the

appeal because Appellants’ initial opening brief exceeds the page and word

limits set by Rule 8015; or (2) strike improper arguments and allegations

from Appellants’ opening brief and strike references to new evidence.

1. Jurisdiction

a. The Panel has jurisdiction over the issues raised in this appeal because the bankruptcy court’s prior rulings on those issues were not final. A bankruptcy court’s order may be immediately appealed if it

“finally dispose of discrete disputes within the larger case.” Bullard v. Blue

Hills Bank,

(2015). “The test for finality in bankruptcy

typically asks two questions: (1) whether the bankruptcy court’s order fully

and finally determined the discrete issue or issues it addressed; and

(2) whether it resolves and seriously affects substantive rights.” Jue v. Liu

(In re Liu),

, 870 (9th Cir. BAP 2020) (citing Eden Place, LLC v.

Perl (In re Perl),

(9th Cir. 2016) (additional citation and

internal quotations omitted).

8 Appellees contend that we lack jurisdiction to review the four issues

listed in Appellants’ opening brief because they were previously

addressed, either in the bankruptcy court’s order denying the Temporary

Allowance Motion or its order denying the motion to appoint a trustee.

Those issues are:

• Whether the bankruptcy court erred when it confirmed the Plan

without permitting ESOP Participants to vote either as equity (through a

direction pass-through vote under ERISA, the IRC, and applicable state

law) or as unsecured creditors.

• Whether the bankruptcy court erred when it confirmed the Plan

without requiring evidence regarding whether any of the Appellees were

unsecured creditors.

• Whether the bankruptcy court erred when it confirmed the Plan by

failing to appoint a chapter 11 trustee or convert the case to chapter 7 and

by failing to require and consider any evidence from Debtors, their counsel,

and/or the ESOP Trustee of his relationship to the Debtors.

• Whether the bankruptcy court erred by allowing the ESOP Trustee to

vote the interests of ESOP Participants when the evidence showed that

such individual was nothing more than a directed trustee and an

independent contractor at will of Debtors and had no authority or

resources to take positions contrary to the Debtors, its management and

board of directors, and its attorneys.

9 Although not included in their list of issues on appeal, Appellants

also argue in their opening brief—as they did in the bankruptcy court—

that the release and exculpation provisions of the Plan violate their rights

to bring claims for ERISA violations and that the Plan was unconfirmable

because it provided for a discharge of the Debtors’ debts and violated the

best interests of creditors test. These are confirmation issues over which we

have jurisdiction in this appeal. Appellees do not argue otherwise.

The issues regarding the bankruptcy court’s refusal to appoint a

chapter 11 trustee and whether the ESOP Trustee acted at the behest of

Debtors rather than the ESOP Participants were raised in the context of the

motion to appoint a trustee. But an order denying a motion to convert or

appoint a chapter 11 trustee is interlocutory. United States Bakery v.

Svenhard’s Swedish Bakery, 632 B.R 312, 320 (E.D. Cal. 2021), appeal filed, (9th

Cir. Nov. 29, 2021); In re Klein/Ray Broad.,

. The

bankruptcy court’s ruling on that motion did not become final until it

confirmed the Plan. We thus have jurisdiction to consider those issues.

The other two issues—whether the bankruptcy court erred in

refusing to permit the ESOP Participants a direction pass-through vote on

the Plan or to require evidence on whether any of the ESOP Participants

held general unsecured claims—were raised in the context of the

Temporary Allowance Motion. But the bankruptcy court’s ruling on that

motion was narrow and not the final word on anything other than whether

the ESOP Participants were entitled to have any claims estimated or

10 allowed for voting purposes. The bankruptcy court denied it because:

(1) Appellants had not met their burden to show that they had any claims

that could be allowed on a temporary basis; and (2) the assertion that

Appellants had pass-through voting rights under the ESOP documents and

applicable law was not supported by the evidence or the law. The court

qualified its ruling when it stated, “whether there is evidence out there that

would cause the Court to make a different ruling at a different point in

time, I’m not making that determination . . . .” Accordingly, the order

denying the Temporary Allowance Motion did not finally resolve the

identified issues.

b. This appeal is not equitably moot.

An appeal is equitably moot “if the case ‘presents transactions that

are so complex or difficult to unwind that debtors, creditors, and third

parties are entitled to rely on the final bankruptcy court order.’” JPMCC

2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props., Inc. (In re

Transwest Resort Props., Inc.),

(9th Cir. 2015) (quoting

Rev. Op. Grp. v. ML Manager LLC (In re Mortgs. Ltd.),

(9th Cir. 2014)). Unlike constitutional mootness, equitable mootness is a

judge-created doctrine that reflects not an inability to provide relief, but an

unwillingness to do so.

We are to assess four factors in considering a dismissal of an appeal

on equitable mootness grounds: (1) whether a stay was sought; (2) whether

substantial consummation of the plan has occurred; (3) the effect that a

11 remedy may have on third parties not before the court; and (4) whether the

bankruptcy court can provide “effective and equitable relief without

completely knocking the props out from under the plan and thereby

creating an uncontrollable situation for the bankruptcy court.”

at 1167-

68 (9th Cir. 2015) (quoting Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In

re Thorpe Insulation Co.),

(9th Cir. 2012)). In the Ninth

Circuit, this last consideration is the most important. Id. at 1171. “Even if

the relief would be only partial, ‘[w]here equitable relief, though

incomplete, is available, the appeal is not moot.’” Id. (quoting In re Thorpe

Insulation Co.,

).

Appellees point out that Appellants did not seek a stay pending

appeal. This factor weighs heavily in favor of a finding of equitable

mootness. In re Mortgages Ltd.,

. See also Cobb v. City of

Stockton (In re City of Stockton, Cal.),

(9th Cir. 2018). 5 But

5 In City of Stockton, the Ninth Circuit stated that it is “’obligatory’ that one seeking relief from plan confirmation ‘pursue with diligence all available remedies to obtain a stay of execution of the objectionable order.’ Failure to do so without adequate explanation should result in dismissal.”

(quoting Trone v. Roberts Farms, Inc. (In re Roberts Farms, Inc.),

(9th Cir. 1981). Although this language suggests a per se rule requiring dismissal whenever an appellant has failed to seek a stay pending appeal, we note that the City of Stockton court went on to analyze the remaining equitable mootness factors before ultimately deciding to dismiss the appeal.

. And we have found no Ninth Circuit authority for such a per se rule. Rather, courts look at whether the failure to seek a stay caused other parties to change position in reliance on the finality of the subject order such that it would be inequitable to reverse the order. See In re Roberts Farms, Inc.,

(“[I]t is obligatory upon appellant in a situation like the one with which we are faced to pursue with diligence all available remedies to obtain a stay of execution of the objectionable 12 the other factors weigh against such a finding. First, even if it can be

argued that substantial consummation has occurred, it is unlikely that third

parties would be prejudiced or that the bankruptcy court could not fashion

appropriate equitable relief without “knocking the props out from under

the plan.” The asset sale occurred long before the Plan was proposed, and

the Plan is a mechanism for determining claims and potential causes of

action to marshal and properly distribute the proceeds. According to

Appellants, those proceeds are approximately $15.5 million. Appellees

assert that $32,000 in administrative expenses has been paid and an

additional $148,000 has been approved to be disbursed to another

administrative claimant. They also state that $359,414 has been distributed

to general unsecured creditors. Appellants point out that these sums are a

mere fraction of the total proceeds and that numerous claims remain

unpaid.

As for prejudice to third parties, “for this factor to weigh in favor of

holding a party’s appeal to be equitably moot, the specific relief sought

must bear unduly on innocent third parties.” In re Transwest Resort Props.,

Inc.,

. Appellees have not made such a showing. In any

event, the payment of money can be undone and thus weighs against an

equitable mootness finding. See Elder v. Uecker (In re Elder),

(N.D. Cal. 2005). Appellees further argue that the replacement of the

order . . . if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from.” (emphasis added)). 13 Liquidating Trustee by a chapter 11 trustee would result in a costly

duplication of efforts, but to the extent this is a valid consideration in the

equitable mootness analysis, it does not mean the bankruptcy court could

not fashion any relief.

2. Failure to comply with Rule 8015

Appellees ask the Panel to dismiss the appeal on the ground that

Appellants’ initial opening brief exceeded the page and word number

limits of Rule 8015. After the motion was filed, Appellants filed an

amended brief that complied with the rule. Even if they had not, we would

not dismiss the appeal on this basis. See Ehrenberg v. Cal. State Univ.,

Fullerton Found. (In re Beachport Ent.),

(9th Cir. 2005)

(reversing BAP's summary dismissal of appeal for failure to provide certain

documents in the excerpts of record, as required under Rule 8009, on the

ground that "the sanction of summary dismissal was inappropriately harsh

in relation to the harm that was actually caused.”).

3. Motion to Strike

Finally, Appellees ask the Panel to strike portions of Appellants’ brief

that contain factual allegations and legal arguments that were not properly

raised in the bankruptcy court. We generally do not consider arguments

not properly raised before the bankruptcy court. See O'Rourke v. Seaboard

Sur. Co. (In re E.R. Fegert, Inc.),

(9th Cir. 1989). And to the

extent a factual assertion is not supported by the record, we need not

accept it.

14 Appellees also ask the Panel to strike new documents and

information that was not before the bankruptcy court. We generally do not

consider evidence that was not presented to the bankruptcy court unless it

bears on a jurisdictional issue such as mootness. Thus we see no need to

order the documents stricken. All relief requested in the motion to dismiss

and/or strike is DENIED.

B. The bankruptcy court did not err by declining to appoint a trustee or convert the case. Section 1104 provides that the bankruptcy court shall appoint a

trustee “for cause, including fraud, dishonesty, incompetence, or gross

mismanagement of the affairs of the debtor by current management, either

before or after the commencement of the case, or similar cause . . . .” Section

1112(b) provides that the bankruptcy court may convert a chapter 11 case

to chapter 7 “for cause.”

Appellants moved for appointment of a chapter 11 trustee based on

their lack of confidence in Debtors’ management and their belief that Mr.

Paredes was not an independent fiduciary who would vote in their

interests. They also believed that the actions of the Debtors’ directors,

officers, former ESOP fiduciaries, and the current and former ESOP Trustee

should be investigated to determine whether claims could be asserted

against those individuals. They alleged that Debtors had “extensive

conflicts of interest” based on an admitted overvaluation of the ESOP as of

the end of 2018 and Debtors’ expenditure of $2 million for the purchase of

15 fiduciary liability insurance and proposal of a plan that granted releases to

the persons subject to the insurance coverage. They also complained about

the amount of attorneys’ fees incurred by Debtors’ counsel.

Debtors pointed out in their opposition that the cost for the D&O

portion of insurance expenses was around $120,000 (not $2 million), claims

against the current and former ESOP Trustees were not released under the

Plan, and the Plan preserves claims against former officers and directors.

They also noted that Mr. Paredes was not installed on behalf of Debtors but

to oversee the ESOP assets. They pointed out that attorneys’ fees and costs

would be subject to bankruptcy court approval and that appointing a

trustee at that juncture would increase, not decrease, administrative costs.

The bankruptcy court denied the motion, finding that the evidence

did not establish cause to appoint a chapter 11 trustee or to convert the

case. The court noted that the concerns raised by Appellants regarding Plan

provisions could be addressed in the context of confirmation.

Appellants argue that the bankruptcy court erred in denying the

motion for the same reasons presented to the bankruptcy court. They also

contend that the court erred “by failing to require and consider any

evidence from the Debtors, their counsel, and/or the ESOP Trustee of his

relationship to the Debtors.” But Appellants, not Debtors, had the burden

to show cause for the appointment of a trustee. United Sur. & Indem. Co. v.

López-Muñoz (In re López-Muñoz),

(1st Cir. 2017).

16 Appellants also contend that the ESOP Participants’ lack of

confidence in, and acrimony toward, Debtors’ management and their

counsel constituted “cause” to appoint a trustee, citing In re Sundale, Ltd.,

(Bankr. S.D. Fla. 2009), and In re Eurospark Industries,

Inc.,

(Bankr. E.D.N.Y. 2010). But Appellants fail to

mention that the Sundale court did not appoint a trustee based on a lack of

confidence or acrimony and noted that those circumstances, while possibly

a ground for the appointment of a trustee, do not always support that

result. “There is no per se rule by which mere conflicts or acrimony

between debtor and creditor mandate the appointment of a trustee.” In re

Sundale, Ltd.,

(quoting In re Marvel Ent. Grp., Inc.,

(3d Cir. 1998) (internal quotations and alteration omitted)). And

the bankruptcy court in Eurospark appointed a trustee based on its finding

that the debtor’s sole shareholder had a conflict of interest; its decision was

bolstered by, but not wholly based upon, the fact that the U.S. Trustee and

creditors had lost confidence in the shareholder’s ability to fulfill his

fiduciary duties. In re Eurospark Indus.,

. Appellants have

cited no authority that a loss of confidence by creditors constitutes “cause”

to appoint a trustee as a matter of law. Rather, this determination is made

on a case-by-case basis. See In re Marvel Ent. Grp.,

.

Here, the only evidence offered by Appellants were declarations of

the ESOP Participants expressing their opinion that they had lost

confidence in Debtors’ management and in Mr. Paredes. But, as the

17 bankruptcy court observed, “feelings and perceptions do not rise to the

level of evidence establishing cause for what the [courts have] recognized

as an extreme remedy.”

Based on the record before us, the bankruptcy court did not err in

finding that Appellants did not establish cause for appointment of a trustee

or conversion to chapter 7. They did not produce evidence sufficient to

support a finding of mismanagement, conflict, or any other ground for

relief.

C. The bankruptcy court did not err in denying the Temporary Allowance Motion. Appellants moved for an order under Rule 3018(a) to allow

temporarily the unsecured claims of ESOP Participants, which were the

subject of unresolved objections by the Debtors. That rule provides, in

relevant part, “Notwithstanding objection to a claim or interest, the court

after notice and hearing may temporarily allow the claim or interest in an

amount which the court deems proper for the purpose of accepting or

rejecting a plan.” Rule 3018(a). The motion stated that the rights of the

ESOP Participants and beneficiaries were either equity or unsecured debt,

depending on the individual circumstances, but reaching a conclusion on

that issue would require an extensive audit of the Debtors’ records.

Debtors opposed the motion, pointing out that Appellants’ claims

were against the ESOP, not the Debtors, and that Mr. Paredes was the

proper party to assert claims on behalf of the ESOP Participants in his role

18 as ESOP Trustee. They also pointed out that the ESOP Document grants the

ESOP Trustee the power to vote, in his discretion, any stock held in the

ESOP Trust.

The bankruptcy court denied the motion on the ground that

Appellants had not established that there were any claims that were

capable of being allowed or estimated on a temporary basis.

Appellants argue that the bankruptcy court erred by failing to require

evidence regarding whether some or all ESOP Participants were unsecured

creditors. They argue that they had claims against the Debtors because the

plan called for termination of the ESOP, after which CPESAZ would be

obligated to fund their retirement. But they ignore that, to be allowed as

claims against the Debtors, any unsecured claims would have had to exist

as of the petition date. Although Appellants argue that the bankruptcy

court “should have” granted the motion, they have not identified any legal

or factual basis for concluding that the court erred in denying it. In any

event, as discussed below, we agree with the bankruptcy court that the

ESOP Trustee was the proper party to vote on the Plan on behalf of the

ESOP Participants.

D. The bankruptcy court did not abuse its discretion in confirming Debtors’ Plan. Appellants contend that the bankruptcy court abused its discretion in

several ways when it confirmed the Plan. Specifically, they argue that

(1) the bankruptcy court erred in confirming the Plan without requiring a

19 direction pass-through vote by the individual ESOP Participants; (2) the

Plan contained impermissible third-party releases; (3) the Plan is tainted by

conflict; (4) the Plan discharged the Debtors; and (5) the Plan violated the

“best interests test.”

1. The bankruptcy court did not err in confirming the Plan without requiring a direction pass-through vote. Appellants argue that confirmation of the plan without a direction

pass-through vote violated ERISA, the ESOP Document, and Arizona law.

We disagree. Nothing in the statutes or the ESOP Document required such

a vote.

ERISA provides that a tax credit employee stock ownership plan

qualifies under ERISA

only if each participant or beneficiary in the plan is entitled to direct the plan as to the manner in which voting rights under securities of the employer which are allocated to the account of such participant or beneficiary are to be exercised with respect to any corporate matter which involves the voting of such shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transaction as the Secretary may prescribe in regulations.

(e)(3).

The ESOP Document provides in part at Section 8 (entitled “Voting of

CPES Stock”):

Shares of CPES Stock in the Trust shall be voted in the manner determined by the Trustee. With respect to any corporate 20 matter which involves the voting of such shares at a shareholder meeting and which constitutes a merger, consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business or a similar transaction specified in regulations under Section 409(e)(3) of the Code, however, each Participant (or Beneficiary) will be entitled to give confidential instructions as to the voting of shares of CPES Stock then allocated to his Stock Account in accordance with procedures established by the Trustee. Finally, Arizona law provides:

A. On the terms and conditions and for the consideration determined by the corporation’s board of directors, a corporation may sell, lease, exchange or otherwise dispose of all or substantially all of its property, with or without the goodwill, other than in the usual and regular course of business, if the board of directors proposes and its shareholders approve the proposed transaction. B. For a transaction to be authorized: 1. The board of directors shall recommend the proposed transaction to the shareholders unless the board of directors determines that because of conflict of interest or other special circumstances it should make no recommendation and communicates the basis for its determination to the shareholders with the submission of the proposed transaction. 2. The shareholders entitled to vote shall approve the transaction.

.

Appellants complain at the outset that the asset sale that occurred

early in the case should not have been approved without giving the

individual ESOP Participants the opportunity to direct a vote. Based on the

21 plain language of the relevant statutes and Plan document, they may be

correct as to the sale. But Appellants did not move for reconsideration on

that ground nor do they assert on appeal that they were denied due

process. In any event, the order approving the sale was not appealed and is

now final.

Nothing in the quoted statutes or Plan Document requires that the

individual participants be allowed to direct a pass-through vote with

respect to confirmation of a chapter 11 plan. Mr. Paredes voted on behalf of

the ESOP Participants pursuant to his duties as ESOP Trustee. To the extent

Appellants object to the fact that Mr. Paredes voted to accept the Plan, they

have not explained how this vote violated his fiduciary duties.

2. The release, exculpation, and indemnification provisions in the plan do not violate the Bankruptcy Code or ERISA. Appellants argue that the releases, exculpation, and indemnification

provisions of the Plan violate their rights in two ways. First, they argue that

nonconsensual third-party releases and exculpations violate § 524. Second,

they argue that those provisions violate their rights under ERISA.

Release and exculpation provisions are found at Articles 9.2 and 9.3

of the Plan. Article 1.1 of the Plan defines “Exculpated Party” as “(a) the

Debtors; (b) the Patient Care Ombudsman, and (c) with respect to each of

the foregoing, such Entity’s successors and assigns and current affiliates,

subsidiaries, officers, directors, trustees, principals, employees, agents,

financial advisors, attorneys, accountants, investment bankers, consultants,

22 representatives, and other Professionals.” And Article 1.1 defines

“Released Parties” as “(a) the Debtors; (b) Faegre Drinker Biddle & Reath

LLP [Debtors’ counsel]; and (c) CohnReznick Capital Markets Securities,

LLC [Debtors’ investment banker].”

Article 9.2 of the Plan provides that Released Parties are released and

discharged from any and all claims of the Debtors and the Estates related

to Debtors’ restructuring efforts, intercompany transactions, the

formulation, preparation, dissemination, negotiation, or filing of the plan

documents, plan documents, contracts and releases, the chapter 11 cases,

the plan, the purchase agreements, consummation and administration of

the plan, and the business or contractual arrangements between Debtors

and any released party “taking place on or before the Effective Date

relating to any of the foregoing.” Article 9.2 also states that the releases do

not apply to post-effective date obligations of any person or entity under

the plan, any cause of action related to an act or omission that constitutes

actual fraud, willful misconduct, or gross negligence, or any of the

Litigation Claims as defined in the Plan.

Next, Article 9.3 provides:

Except as otherwise specifically provided in the Plan, no Exculpated Party shall have or incur, and each Exculpated Party is hereby released and exculpated from any Cause of Action for any claim related to any act or omission in connection with, relating to, or arising out of, the Chapter 11 Cases, the Disclosure Statement, the Plan, the Sale Transactions, the Purchase Agreements, or any Plan Document, contract,

23 instrument, release or other agreement or document (including providing any legal opinion requested by any Person or Entity regarding any transaction, contract, instrument, document, or other agreement contemplated by the Plan or the reliance by any Exculpated Party on the Plan or the Confirmation Order in lieu of such legal opinion) created or entered into in connection with the Disclosure Statement or the Plan, the filing of the Chapter 11 Cases, the pursuit of Confirmation, the pursuit of Consummation, the administration and implementation of the Plan, including the distribution of property under the Plan or any other related agreement, except for claims related to any act or omission that is determined in a final order to have constituted actual fraud, willful misconduct, or gross negligence, but in all respects such Persons and Entities shall be entitled to reasonably rely upon the advice of counsel with respect to their duties and responsibilities pursuant to the Plan. The Exculpated Parties have, and upon closing of the Chapter 11 Cases or the Effective Date shall be deemed to have, participated in good faith and in compliance with the applicable laws with regard to the solicitation of, and distribution of, consideration pursuant to the Plan and, therefore, are not, and on account of such distributions shall not be, liable at any time for the violation of any applicable law, rule, or regulation governing the solicitation of acceptances or rejections of the Plan or such distributions made pursuant to the Plan. The Ninth Circuit has held that § 524(e) precludes bankruptcy courts

from discharging the liabilities of non-debtors. Resorts Int’l, Inc. v.

Lowenschuss (In re Lowenschuss),

(9th Cir. 1995). That

subsection provides in relevant part that “discharge of a debt of the debtor

does not affect the liability of any other entity on, or the property of any

24 other entity for, such debt.”

(e). More recently, however, the

Ninth Circuit has held that “tailored” exculpation clauses are permissible.

Blixseth v. Credit Suisse,

(9th Cir. 2020). In Blixseth, the

Ninth Circuit held that a plan provision exculpating a creditor from

potential claims against it did not run afoul of § 524(e) because it was

narrow in scope and time.

. Specifically, the provision was

limited to releasing the parties for acts or omissions in connection with,

relating to, or arising out of the chapter 11 cases or the bankruptcy filing,

i.e., acts occurring during the bankruptcy proceedings and not before.

The provision also applied only to negligence claims; it excluded willful

misconduct and gross negligence.

. And it covered only

parties closely involved in drafting the plan.

. The court

concluded that Ҥ 524(e) does not bar a narrow exculpation clause of the

kind here at issue—that is, one focused on actions of various participants in

the Plan approval process and relating only to that process.” Id.

As can be seen, the release and exculpation provisions in the Plan

extend only to the estate’s professionals who worked to assist the Debtors

in effectuating a plan, and they exclude willful misconduct and gross

negligence. They do not include the ESOP Trustee as an exculpated party,

and Article 1.1(79) of the Plan (defining “Preserved D&O Claims”)

preserves claims and causes of action relating to the ESOP. As such, the

bankruptcy court did not err in concluding that the release and exculpation

25 provisions fell into the category of tailored, limited exculpation clauses that

are not prohibited under the Code or Ninth Circuit case law.

Appellants also contend that the indemnification provision of the

Plan violates ERISA. They quote Article 6.3 of the Plan, which provides:

All indemnification obligations in place as of the Effective Date (whether in the by-laws, certificates of incorporation or formation, limited liability company agreements, other organizational or formation documents, board resolutions, indemnification agreements, employment contracts, or otherwise) for the post-petition directors, officers, trustees, managers, employees, attorneys, accountants, investment bankers, and other professionals of the Debtors, as applicable, shall be assumed and remain in full force and effect after the Effective Date, and shall not be modified, reduced, discharged, impaired, or otherwise affected in any way, and shall survive Unimpaired and unaffected, irrespective of when such obligation arose. They then point out that the ESOP Trust Agreement contains a

provision under which CPES purports to indemnify “each individual

Trustee, to the extent permitted by law, against any personal liability or

expense resulting from his or her service as Trustee, except for liability or

expense incurred by reason of his or her own willful misconduct or gross

negligence.” Amendment 2015-2 to the CPES ESOP Document purports to

indemnify “each member of the [ESOP] Committee (to the extent permitted

by law) against any personal liability or expense resulting from his service

on the Committee, except such liability or expense as may result from his

own willful misconduct.”

26 They argue that these provisions, which they assume are

incorporated into the Plan by Article 6.3, violate

(a). That

statute provides, in relevant part, “any provision in an agreement or

instrument which purports to relieve a fiduciary from responsibility or

liability for any responsibility, obligation, or duty under this part shall be

void as against public policy.”

As Appellees point out,

also contains a provision

permitting the purchase of liability insurance for fiduciaries. And

Amendment 2015-2 to the ESOP Document provides, “to the extent

required under Section 412 of ERISA, CPES shall secure fidelity bonding

for the fiduciaries of the Plan.” It also provides that CPES may obtain

liability insurance for fiduciaries. Such insurance was purchased in

connection with the CPES ESOP, which is consistent with ERISA

requirements. The bankruptcy court did not err in approving the release,

exculpation, and indemnity provisions of the Plan.

3. There is no evidence of any conflicts of interest. Appellants contend that “the plan of liquidation is conflicted” for two

reasons. First, they assert that Mr. Paredes has a conflict because he was

previously represented by Debtors’ counsel, Faegre Drinker Biddle &

Reath, LLP (“Faegre Drinker”), and that representation was not disclosed,

and because they believe he is acting at the behest of Debtors’

management. Second, as explained below, they complain that the Plan

27 provisions create a conflict between the Liquidating Trustee and members

of the Trust Oversight Committee (“TOC”).

To begin, Appellants assert that Mr. Paredes’ appointment as ESOP

Trustee was “clouded in controversy.” Faegre Drinker did not disclose in

its appointment application that it had a prior relationship with

Mr. Paredes or that Mr. Paredes had executed a conflict of interest waiver.

The ESOP Trust Agreement and the ESOP Trustee’s engagement letter

permit the ESOP Trustee to resign upon 60 days’ written notice to CPES.

The ESOP Trustee may resign if given instructions or directions from CPES

with which he is unable or unwilling to comply. He may be removed at

any time by the board of directors of CPES. Based on these provisions,

Appellants characterize Mr. Paredes as an at-will employee of the Debtors

who acts at the discretion of Debtors’ management. But they cite no

evidence in the record to support this assertion.6

Appellants next point out that the Plan permits the ESOP Trustee to

be a member of the TOC, which oversees the Liquidating Trustee. The TOC

6 Notably, corporate managers are not prohibited from serving as ESOP fiduciaries. See

(c)(3) (“Nothing in section 1106 of this title [enumerating prohibited transactions, such as self-dealing] shall be construed to prohibit any fiduciary from serving as a fiduciary in addition to being an officer, employee, agent, or other representative of a party in interest.”). See also Grindstaff v. Green,

(6th Cir. 1998). The Grindstaff court explained that ESOPs are exempted from ERISA’s strict prohibitions against self-dealing because of the “distinctive dual nature and purpose of ESOPs as both a retirement plan and a means of corporate finance.”

(citation and internal quotations omitted). As such, ESOPs are not intended to guarantee retirement benefits; they place employee retirement assets at much greater risk than does the typical diversified ERISA plan.

28 is comprised of Mr. Paredes, CapGrow Holdings JV Sub IV LLC, Debtors’

largest unsecured creditor, and Sentry Insurance, CPES’s workers

compensation and employer liability insurer.

Under Articles 5.2 and 5.4 of the Plan, the Liquidating Trust is vested

with all Causes of Action. 7 The Liquidating Trustee has the authority to

enforce those causes of action, and the Liquidating Trust has the sole

responsibility and authority to pursue, settle, or abandon all Litigation

Claims 8 that are not expressly released or waived under the Plan.9 Under

7 “Causes of Action” is defined in Article 1.1(13) of the plan as “any and all claims, actions, causes of action, choses in action, suits, debts, damages, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, judgments, remedies, rights of set-off, third-party claims, subrogation claims, contribution claims, reimbursement claims, indemnity claims, counterclaims, and crossclaims (including all claims and any avoidance, recovery, subordination, or other actions against Insiders and/or any other Entities under the Bankruptcy Code, including Avoidance Actions) of any of the Debtors, the debtors in possession, and/or the Estates (including those actions set forth in the Plan Supplement), whether known or unknown, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, that are or may be pending on the Effective Date or commenced by the Liquidating Trustee after the Effective Date against any Entity, based in law or equity, including under the Bankruptcy Code, whether direct, indirect, derivative, or otherwise and whether asserted or unasserted as of the date of entry of the Confirmation Order.” 8 “Litigation Claims” are defined in Article 1.1(69) of the plan as “any and all

Causes of Action of any Debtor and/or any of the Estates against any Entity, including but not limited to, (a) all claims and Causes of Action related to or arising out of the ESOP that are not Direct ESOP Claims, (b) the Preserved D&O Claims, (c) all claims and Causes of Action arising under Chapter 5 of the Bankruptcy Code (other than Causes of Action that constitute Purchased Assets), and (d) all claims and Causes of Action against insiders of the Debtors.” 9 At oral argument, Appellants’ counsel stated that his clients want the ability to

assert derivative claims against Debtors. But it is not clear what evidence would support such claims; to the extent Appellants allege they were injured by the process 29 Paragraph 2.7 of the Liquidating Trust Agreement, the Liquidating Trustee

has the authority, with the TOC’s consent, to retain professionals to carry

out its duties under the agreement. Appellants assert that these

circumstances add up to a conflict of interest because the Liquidating

Trustee would be discouraged from bringing claims against any member of

the TOC.

Additionally, Appellants point out that the Liquidating Trustee could

replace the ESOP Trustee, but the ESOP Trustee is a member of the TOC

that maintains oversight over the Liquidating Trustee. They also note that

the fees for the Liquidating Trustee’s services are to be paid from the

Liquidating Trust and thus will reduce amounts to be distributed to the

ESOP Participants, but they are not subject to court approval. Appellants

acknowledge that the Liquidating Trustee is a fiduciary, but they argue

that the bankruptcy court should have required him to submit fee

applications that could be scrutinized by the ESOP Participants.

These arguments and circumstances do not establish any conflicts of

interest. To establish a conflict, it must be shown the party in question has

duties to different individuals or entities that have adverse interests. Under

ERISA, “[a] fiduciary with respect to a plan shall not . . . in his individual or

in any other capacity act in any transaction involving the plan on behalf of

a party (or represent a party) whose interests are adverse to the interests of

leading up to and including confirmation of the plan, any such injury has yet to be articulated. 30 the plan or the interests of its participants or beneficiaries.”

(b)(2). Appellants point to no evidence of any conflicts of interest

among Debtors, their counsel, and the ESOP Trustee. Although Debtors’

counsel has represented Mr. Paredes, that representation was limited to

Mr. Paredes’ professional capacity as a fiduciary for ESOP trusts. 10

Appellants cite no evidence of conduct by the ESOP Trustee that would

raise questions about his adherence to his fiduciary obligations.

With respect to the relationship between the Liquidating Trustee and

the TOC, the Liquidating Trustee is an independent fiduciary and, under

paragraph 2.4 of the Liquidating Trust Agreement, may be removed only

upon request of the TOC and approval by the bankruptcy court. Debtors’

directors and officers have no say in the Liquidating Trustee’s role or

continued employment. There is no evidence in the record that the

Liquidating Trust has claims against members of the TOC. And the

Liquidating Trustee does not control claims against the ESOP Trustee. All

claims against the ESOP Trustee are held by the ESOP Trust and governed

by ERISA, not the estates or the Liquidating Trust. See

(a)

(providing civil remedies for breach of fiduciary responsibilities).

10Appellants moved to disqualify Debtors’ counsel. The bankruptcy court recently ruled on that motion. It found that Faegre Drinker’s failure to disclose its prior relationship with Mr. Paredes did not amount to a disqualifying conflict, but it was a violation of Rule 2014. Accordingly, the bankruptcy court reduced the requested fees by $120,000 as a sanction. On May 11, 2022, Appellants appealed to this Panel the order denying their disqualification motion and the order approving the reduced fees (BAP No. CC-22-1090). 31 Appellants also complain that the Plan permitted Debtors and the

ESOP Trustee to choose the Liquidating Trustee. While this is true, the

appointment of the Liquidating Trustee was subject to bankruptcy court

approval. Moreover, Appellants point to no evidence in the record of any

impropriety in the selection of the Liquidating Trustee.

In short, Appellants’ assertion that conflicts exist is speculative and

not based on any evidence in the record.

4. The Plan does not discharge Debtors.

Appellants argue that the Plan improperly provides for a discharge

of the Debtors. It does not. In fact, Article 9.4 of the Plan provides,

“confirmation of this Plan does not operate to discharge the Debtors;

provided, however, that upon confirmation of the Plan, the occurrence of

the Effective Date, and the distributions provided for under the Plan, the

Holders of Claims and Equity Interests may not seek payment or recourse

against or otherwise be entitled to any distribution from the Estates or

Liquidating Trust except as expressly provided in the Plan.” Appellants

have not cited any authority suggesting that this provision is

impermissible.

5. The Plan does not violate the “best interests” test.

Section 1129(a)(7) requires that each holder of an impaired claim or

interest must either accept the plan or receive on account of its claim or

interest property of a value, as of the effective date of the plan, that is not

less than the amount the holder would receive if the debtor were liquidated

32 under chapter 7. Ordinarily, this determination is made using a liquidation

analysis showing a comparison of estimates of how much would be

available for distribution under the plan versus a chapter 7. As noted, the

liquidation analysis attached to the disclosure statement estimated that $8.4

million would be available for distribution to the ESOP Trust after

payment of allowed claims, compared to $8 million in a chapter 7

liquidation.

Appellants do not quibble with the liquidation analysis itself, but

they contend that the releases and exculpations granted to Debtors’

insiders, the ESOP Trustee, TOC members and other fiduciaries and

attorneys would not have been granted in a chapter 7 liquidation.

Appellants assert, with no citation to evidence in the record or any

analysis, that a chapter 7 trustee would have had an opportunity to pursue

“these claims” for the benefit of the estate. Appellants do not identify any

such claims, nor do they cite any legal authority suggesting that this is a

basis for finding that the Plan did not meet the best interests of creditors

test. This argument is frivolous.

CONCLUSION

For all these reasons, the bankruptcy court did not err in denying

Appellants’ motion to appoint a chapter 11 trustee and the Temporary

Allowance Motion. Nor did it abuse its discretion in confirming the Plan.

We AFFIRM.

33