The bankruptcy process often moves more quickly toward a final result than litigation in other courts. In many bankruptcy cases, courts recognize that urgent and final judicial action will better preserve the value of the debtor's assets, increase the chances for the debtor's successful reorganization and maximize recoveries for creditors. Indeed, chapter 11 plans of reorganization are often consummated just days after confirmation by the court—which can undermine the efforts of an objecting party to pursue an effective appeal, in part because of the judicially-created doctrine of "equitable mootness."
Although equitable mootness has historically been viewed as a powerful tool for debtors to limit appellate review of orders confirming their chapter 11 plans, recent decisions in the Fifth and Tenth Circuits may suggest an inclination of some appellate courts to apply a more flexible standard toward review of confirmation decisions on appeal.
What is equitable mootness?
Equitable mootness is the doctrine under which appellate courts refrain from hearing bankruptcy appeals relating to plan confirmation when it would be "inequitable" to do so. Distinct from "constitutional mootness," equitable mootness does not relate to an appellate court's inability to hear a case on the ground that there is no longer a live case or controversy, but the court's unwillingness to do so on the ground that providing relief after a plan has become effective is simply impractical. See In re Pacific Lumber Co., 584 F.3d 229, 240 (5th Cir. 2009) (noting constitutional mootness "prevents adjudication when cases are no longer 'live'" and equitable mootness "abdicates appellate review of very real, continuing controversies"). As the Fifth Circuit has aptly noted, equitable mootness is "a kind of appellate abstention that favors finality of reorganizations and protects the interrelated multi-party expectations on which they rest." Id.
The goal of equitable mootness is to "strike the proper balance between the equitable considerations of finality and good faith reliance on a judgment and competing interests that underlie the right of a party to seek review of a bankruptcy order adversely affecting him." In re Manges, 29 F.3d 1034, 1039 (5th Cir. 1994). Each of the 12 regional Circuit Courts of Appeals has adopted some form of the doctrine.1
Generally, courts have agreed that the "substantial consummation" of a chapter 11 plan—the point when the debtor has implemented the major transactions contemplated by the plan—is the key moment after which a confirmation appeal may become equitably moot. For this reason, a party pursuing a confirmation appeal is best served by seeking and obtaining a stay pending appeal so that the debtor is enjoined from substantial consummation, and so that the plan's effectiveness is essentially put on hold while the appeal proceeds. But many times, an appellant is unsuccessful in obtaining a stay pending appeal because the bankruptcy court confirming the plan (and the appellate court considering a motion for an emergency stay) is concerned that a delay in plan implementation will adversely affect the debtor and creditors as a whole.
Recent decisions may suggest more flexibility for appellants.
Whether the reorganization plan has been substantially consummated and whether a stay of the confirmation decision has been obtained pending appeal remain two important factors for courts considering equitable mootness. But three recent cases, one from the Fifth Circuit and two from the Tenth, make clear that, before a reviewing court refrains from hearing an appeal, it must consider the equities of the situation, including the equities as they relate to the appellant. These decisions may indicate a somewhat greater ability of an appellant to convince a district court, bankruptcy appellate panel, or court of appeals to hear the merits of an appeal even where there is no stay pending appeal and where the plan has already been substantially consummated.
In re Blast Energy Services, Inc., 593 F.3d 418 (5th Cir. 2010)
First, in Blast, the Fifth Circuit Court of Appeals criticized the district court for too easily reaching a conclusion that a confirmation appeal was equitably moot.
In Blast, Alberta Energy Partners ("Alberta") sought to appeal two orders: (1) the denial of its motion for rehearing of the district court's earlier dismissal of Alberta's appeal of the confirmation order; and (2) the district court's denial of Alberta's appeal of the rulings permitting debtors—Blast Energy Services, Inc. and Eagle Domestic Drilling Operations, LLC ("Blast")—to assume an executory contract between Alberta and the debtors. Although Alberta had been unsuccessful in obtaining a stay and the plan had been substantially consummated, the parties stipulated that the confirmation order would have no effect with respect to the appeals relating to the assumption of the executory contract and that granting that relief would not affect the reorganization or any third parties. The parties also agreed and represented to the district court that the assumption of the contract was not essential to Blast's reorganization. Despite these representations, the district court dismissed all appeals as equitably moot and also as statutorily moot pursuant to Section 1127(b) of the Bankruptcy Code, a provision of the Bankruptcy Code that permits a debtor to modify a plan, with court approval, between confirmation and substantial consummation "if circumstances warrant such modification." 11 U.S.C. § 1127(b).
With respect to statutory mootness, the district court reasoned that the appeals "would require modification of the substantially consummated Plan" in violation of 11 U.S.C. § 1127(b). In re Blast Energy Services, Inc., 593 F.3d at 423 n.1. But the Fifth Circuit disagreed, holding—consistent with the statutory language—that Section 1127(b) applies only to bar changes to reorganization plans by the plan proponent post-confirmation, and does not apply to changes in a plan necessitated by a confirmation appeal by a party objecting to confirmation. Id. at 426-27.
As for equitable mootness, the Fifth Circuit reiterated its previously-announced three-pronged analysis under which a court weighs the following factors to determine whether an appeal is equitably moot: (1) whether a stay has been obtained; (2) whether the plan has been substantially consummated; and (3) whether the relief requested would affect either the rights of the parties not before the court or the success of the plan. Id. at 424. In addition, a court may also consider (1) the degree of prejudice to third parties and to some of the litigants and (2) the "arbitrariness" of the ruling being appealed. Id. at 425 n.4.
The Fifth Circuit found that, in the face of the parties' stipulation, the district court's unsupported conclusion that "the parties not before the court, including the recipients of the monies already distributed, would be harmed by the modification or that the modification would put the success of the Plan at risk" was clearly erroneous. Accordingly, the district court had abused its discretion in refusing to hear the merits of the appeal on the ground that it was equitably moot. The Fifth Circuit remanded the matter to the district court with instructions to fully consider the equitable mootness question and to "articulate in detail the reasons for its conclusion, with references to the record." Id. at 426.
Search Market Direct v. Jubber (In re Paige), 584 F.3d 1327 (10th Cir. 2009)
Second, in Paige, the Tenth Circuit Court of Appeals announced a new rule for equitable mootness that requires the reviewing court to conduct a more detailed analysis of the circumstances surrounding the appeal before it may reach the conclusion that an appeal from plan confirmation is equitably moot.
Paige involved competing bankruptcy reorganization plans. The plan confirmed by the bankruptcy court was not supposed to become effective until after "any pending appeals were resolved," but that requirement was waived by the plan proponents. Fearing substantial consummation, the sponsor of the rejected plan—SMDI—sought a stay pending appeal. The bankruptcy court denied the stay, and SMDI appealed the confirmation order to the district court. The district court dismissed the appeal as both constitutionally and equitably moot.
As for the former, the Tenth Circuit held that so long as some form of relief on appeal—even partial relief—could be granted, an appeal is not constitutionally moot. In re Paige, 584 F.3d at 1336. In this case, because the court could reverse the confirmation order and provide SMDI an opportunity to seek approval of its own plan or to propose a new plan, some relief was possible. Id.
With respect to equitable mootness, the court outlined a six factor test:
It seems that under the doctrine of equitable mootness a court should decline to hear an appeal of a bankruptcy court's decision where the answers to the following six questions indicate that reaching the merits would be unfair or impracticable: (1) Has the appellant sought and/or obtained a stay pending appeal? (2) Has the appealed plan been substantially consummated? (3) Will the rights of innocent third parties be adversely affected by reversal of the confirmed plan? (4) Will the public-policy need for reliance on the confirmed bankruptcy plan—and the need for creditors generally to be able to rely on bankruptcy court decisions—be undermined by reversal of the plan? (5) If appellant's challenge were upheld, what would be the likely impact upon a successful reorganization of the debtor? And (6) based upon a quick look at the merits of appellant's challenge to the plan, is appellant's challenge legally meritorious or equitably compelling?
Id. at 1338-39.
The Tenth Circuit stated that the plan proponent seeking to prevent appellate review bears the burden of proving that, in light of these factors, the court should abstain from reaching the merits. In this regard, it rejected the view of other Circuits that if the plan has been substantially consummated, the burden shifts to the party seeking review of the challenge to the plan. See id. at 1340 (rejecting In re Chateaugay Corp., 94 F.3d 772, 776 (2d Cir. 1996)).
The Tenth Circuit also noted that the six factors it had identified "are not necessarily conclusive, nor will each factor always merit equal weight." Id. at 1339. But the court provided some guidance into the application of these factors. For example, if the plan proponents have tried to accelerate the consummation process, courts should be less inclined to find the appeal to be equitably moot. Id. at 1341-42. With respect to the stay factor, the court noted that if a party sought a stay of the appeal—regardless of whether a party was successful—the court would be more inclined to review the merits of the decision below. Id. at 1340-41. The Tenth Circuit also held that it is important for the district court to take a "quick look" at the merits of the claim because claims that went to the integrity of the bankruptcy process or the good faith of the parties "should not be lightly swept under the rug in the name of equitable mootness." Id. at 1348.
In re Centrix Financial LLC, ---F.3d---, 2009 WL 4609652 (10th Cir. Dec. 8, 2009)
Third, in Centrix Financial, the Tenth Circuit had an opportunity to apply the new standard it had announced in Paige.
In Centrix Financial, the appellants had filed a notice of appeal of the confirmation order, but had not sought a stay of consummation of the plan pending appeal. The trustee of the liquidating trust created under the plan thereafter filed a motion to dismiss the appeal, arguing that, because the plan had been substantially consummated, a reversal of confirmation was impractical and inequitable. The district court agreed and determined that the appeal was equitably moot.
On appeal, the Tenth Circuit noted that the district court had decided the question before the Tenth Circuit had issued its decision in Paige, and therefore, the district court had not had the benefit of the Tenth Circuit's guidance that it should consider all of the factors outlined in the Paige decision. Specifically, the district court had not considered the sixth question of the analysis: "whether Appellants' challenge to the Plan is legally meritorious or equitably compelling 'based upon a quick look at the merits.'" In re Centrix Financial LLC, 2009 WL 4609652, at *2. The court of appeals also drew a distinction between the question that the district court had considered—whether the relief requested by Appellants would affect the success of the plan—and the question that the Tenth Circuit had found relevant in Paige—the likely impact of an appellant's challenge to the successful reorganization of the debtor (whether under this or another plan). Id. The Tenth Circuit remanded the case to the district court to allow it to weigh and apply those factors in the first instance.
What are the implications?
These decisions highlight efforts by the appellate courts to reconcile a federal court's "virtually unflagging obligation" to exercise the jurisdiction Congress has granted by statute with the need for finality in bankruptcy reorganization plans, and suggest that the balance may be tipping in favor of exercising jurisdiction. In all three decisions, the courts gave teeth to the equity component of the analysis by making clear that the reviewing court must engage in an analysis of the equities of the case and that the failure of the would-be appellant to obtain a stay and the appellee's substantial consummation of a reorganization plan by themselves are not enough to invoke the equitable mootness doctrine. The Tenth Circuit went even further and required the district court to take "a quick look at the merits" to consider whether the appellant's challenge is legally meritorious or equitably compelling.
To the extent these decisions suggest a trend of favoring review of confirmation orders over abstention, plan proponents should be prepared to defend confirmation orders on appeal even when their plans have been substantially consummated. In addition, the possibility of review and reversal on appeal makes it all the more important for plan proponents to try to build consensus and to make their best effort to settle disputes before confirmation in order to avoid the risk associated with reversal of a substantially consummated plan. Indeed, if a higher likelihood of review exists, objecting parties may find themselves with more leverage in confirmation disputes.
1See In re Pub. Serv. Co. of New Hampshire, 963 F.2d 469, 473 (1st Cir. 1992); In re Chateaugay, 988 F.2d 322, 325 (2d Cir. 1993); In re Continental Airlines, 91 F.3d 553, 559 (3d Cir. 1996); Mac Panel Co. v. Virginia Panel Corp., 283 F.3d 622, 625 (4th Cir. 2002); In re Manges, 29 F.3d 1034, 1038-39 (5th Cir. 1994); In re United Producers, 526 F.3d 942, 947 (6th Cir. 2008); In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir. 1994); In re Smith, 209 Fed.Appx. 607, 607 (8th Cir. Dec. 14, 2006) (unpublished) (per curiam); In re Roberts Farms, Inc., 652 F.2d 793, 798 (9th Cir. 1981); In re Paige, 584 F.3d 1327, 1337 (10th Cir. 2009); In re East Coast Beverage Corp., 143 Fed.Appx. 259, 260 (11th Cir. Aug. 30, 2005) (unpublished) (per curiam); In re AOV, 792 F.2d 1140, 1147 (D.C. Cir. 1986).