EquitableMootnessinthe21stCentury:TheNewParameters1
MootnessDoctrine
Cheekilydefinedby“TheDevil’sDictionaryofBankruptcyTerms:2
HistoryoftheMootnessDoctrineintheThirdCircuit
The Third Circuit adopted the doctrine of equitable mootness in 1996 in Continental
Airlines.3 The court held that a court may dismiss an appeal concerning a confirmed plan by
analyzing five factors: (1) whether the reorganization plan has been substantially
consummated;(2)whetherastayhasbeenobtained;(3)whetherthereliefrequestedwould
affecttherightsofpartiesnotbeforethecourt;(4)whetherthereliefrequestedwouldaffect
thesuccessoftheplan;and(5)thepublicpolicyaffordingfinalitytobankruptcyjudgments.The
court noted that the most important factor is whether the plan has been substantially
consummated,especiallyinreorganizationswithintricatetransactionsoroutsideinvestments.
1
The materials were prepared by Christopher A. Ward and Jarrett Vine of Polsinelli PC
(www.polsinelli.com).
2
TheDevil’sDictionaryofBankruptcyTerms(PeppercornPress2007,2012),PolsinelliPC,appversion
available
for
free
on
iTunes:
https://itunes.apple.com/us/app/devils-dictionarybankruptcy/id972399918?mt+8.
3
91F.3d553(3dCir.1996).
53343418.2
Over time, the Third Circuit has shifted to a much more limited application of the
doctrine of equitable mootness. In 2013 in In re Semcrude, L.P.,4 the court replaced the
Continental Airlines factor test with a two-step test: (1) whether a confirmed plan has been
substantiallyconsummated;and(2)ifso,whethergrantingthereliefrequestedwill(a)fatally
scrambletheplanand/or(b)significantlyharmthirdpartieswhohavejustifiablyreliefonplan
confirmation.TheThirdCircuitinlatercasesrefinedthistesttoidentifythesecondstepasthe
most important. Further, the court determined that the third parties equitable mootness
primarilyseekstoprotectarethosewhoinvestinconfirmedplans,notopaquegroupssuchasa
debtor’screditors,suppliers,orcustomers.Agoodanalogywouldbe:Canyouunscramblethe
egg?
WhatfollowsisananalysisofwherethemootnessdoctrinebeganintheThirdCircuit,
its evolution over time, and where it stands today. While much, much harder to establish in
2016thanitwasin1996,thedoctrineofequitablemootnessstillexistsintheThirdCircuit.
Analysis:
ContinentalAirlines(1996)
In 1996, the Third Circuit in In re Continental Airlines joined a large number of other
circuits by adopting the equitable mootness doctrine.6 In that case, a trustee representing a
series of certificate holders who were secured in a large portion of the debtors’ aircraft and
engines appealed the bankruptcy court’s confirmation of the debtors’ plan of reorganization
andthecourt’sdeterminationthatthetrustee’s$117millionclaimforadequateprotectionfor
acertainperiodoftimewasnotentitledtoadministrativeexpensepriority.Whileonappealat
thedistrictcourtandthenThirdCircuit,thetrusteefailedtoobtainastayoftheconfirmation
orderandtheplaninvestorsfundedover$400millionundertheplan.
5
The Third Circuit dismissed the appeal based on equitable mootness. The court first
explained that equitable mootness is not the same as Constitutional mootness. In
Constitutional mootness, a court may choose not to preside over a case because the court
cannot fashion some meaningful relief for the aggrieved party. Conversely, in equitable
mootness,thecourtcanfashionreliefforthepartybutdoingsosimplywouldbeinequitable
under the circumstances of the case. The Third Circuit detailed five prudential factors that
determinewhetheranappealisequitablymoot:
1. whetherthereorganizationplanhasbeensubstantiallyconsummated;
2. whetherastayhasbeenobtained;
3. whetherthereliefrequestedwouldaffecttherightsofpartiesnotbeforethecourt;
4
728F.3d314(3dCir.2013).
5
TheNinth,D.C.,Fifth,Eleventh,First,Second,andSeventh.
6
91F.3d553(3dCir.1996).
2
53343418.2
4. whetherthereliefrequestedwouldaffectthesuccessoftheplan;and
5. thepublicpolicyaffordingfinalitytobankruptcyjudgments.
The court noted that the overriding factor is whether the plan has been substantially
consummated,especiallyinreorganizationswithintricatetransactionsoroutsideinvestments.
The Third Circuit held the trustee’s appeal was equitably moot. The court focused
mainlyonthefactthattheinvestorshadalreadyfundedtheplanwithover$400millionincash
andtheonlystepremainingwasmakingdistributions.Thecourtfurtherrejectedthetrustee’s
argument that its appeal does not overturn the plan because the plan contains postconfirmationadministrativeclaimdisputeprocedures.Thecourtrejectedthisargumentnoting
thattheinvestorswouldnothavefundedtheplanifthetrustee’sclaimwasstilloutstandingon
theeffectivedateandmayhavetobepaid.Toreinstatethetrustee’sclaimwouldthrowthe
plan back prior to consummation and funding, which is what equitable mootness seeks to
avoid.
Judge Alito, now a Supreme Court Justice, dissented and was joined by five other
colleagues.JudgeAlitostatedhewaspuzzledbythemajority’sdecisionsincethedisputewas
not “moot in any proper sense of the term,” and pointing out that the court has statutory
jurisdiction,givingita“virtuallyunflaggingobligation”toexercisethatjurisdiction.Hefurther
questioned the underlying basis for the doctrine.7 Judge Alito argued that one basis for the
doctrine–analogizingtosection363(m)’sgoodfaithprotection–isinapplicablesincesection
363(m)isverynarrowstatuteandisbeingappliedtoobroadlytosupportthisdoctrine.Second,
he criticized what appeared to be the amorphous adoption of equitable mootness as federal
commonlawto“fillinagap”intheBankruptcyCode’sprotectionofconfirmedplans.8
JudgeAlitowentontoassertthatthetrusteeisnotseekingtoupsettheplan.Ratherit
istryingtoreceivewhatitsaysitisowedundertheplan.But,byusingequitablemootness,the
court is telling the trustee that it is owed nothing without ever reviewing their claims. Judge
Alitoidentifiedthemajority’sbartoreliefasanapplicationofConstitutionalmootness,yetthat
cannotapplyinthecase.
PhiladelphiaNewspapers(2012)
For years following In re Continental Airlines, courts in the Third Circuit followed the
majority’s factor test, “modestly pulling back the reins on its original ruling where it viewed
Continentalasbeingstretchedtoofar.”9In2012,apaneloftheThirdCircuityankedbackhard
7
Id.at568.
8
Id.at569.
9
Weil Bankruptcy Blog, Equitable Mootness on Life Support: The Third Circuit Further Pares Back the
Abstention Doctrine in One2One Communications, available at http://business-financerestructuring.weil.com/jurisdiction/equitable-mootness-on-life-support-the-third-circuit-further-paresback-the-abstention-doctrine-in-one2one-communications/#hov8(lastvisitedMay26,2015).
3
53343418.2
onthereinsinInrePhiladelphiaNewspapers,LLC.10Inthatcase,theThirdCircuitreversedthe
districtcourt’srulingthattheappealofaconfirmationorderwasequitablymootbutaffirmed
the court’s decision on the merits. The appellants in Philadelphia Newspapers filed
administrativeexpenseclaimsagainstthedebtorsbasedonadefamationaction.Inthataction,
theappellantsallegedthedebtorsdefamedthembypublishingmisleadingarticlesinthepaper
andonawebsitepre-andpost-petitionconcerningtheirmanagementofcharterschools.The
debtorsthenobjectedtotheclaimsandobtainedexpeditedconsiderationoftheclaimssothey
couldbeconsideredbeforeeffectivenessoftheplan.Thedebtorsallegedtheywereaboutto
closeontheconfirmedplan’sfinancingandawardingtheclaimsafterclosingwouldadversely
affecttheirpost-closingworkingcapital.
Thejudgeultimatelydeniedtheappellant’sadministrativeexpenseclaims.Buttheplan
funding did not close. The debtors then conducted an auction for their assets and
consummateda$105millionsaleunderadifferentconfirmedplan.
Onappealofthebankruptcycourt’srejectionoftheadministrativeexpenseclaims,the
district court ruled that the appeal was equitably moot since the plan was substantially
consummatedandtheappellantsdidnotobtainastay.Thedistrictcourtfurtherrejectedthe
appellant’sclaimsontheirsubstantivebasisaswell.
AlthoughtheThirdCircuitaffirmedthedistrictcourt’sdecisiononthesubstantivebasis
oftheadministrativeexpenseclaims,thecourtheldthattheappealwasnotequitablymoot.
The Third Circuit began its analysis by stating the five prudential factors established by the
majority in Continental Airlines, but then adopted the dissent’s criticism of the majority’s
analysis. The Third Circuit agreed with the dissent that “the extraordinary nature of the
equitablemootnessdoctrinerequired,attheveryleast,amorelimitedapplication.”11Further,
the court endorsed the dissent’s criticism that the majority adopted the equitable mootness
doctrine from other circuits without any independent analysis. The court agreed with the
dissent’swarningthat,bypreventingappellatereview,thedoctrineasadoptedbythemajority
inContinentalAirlinesplaced“fartoomuchpowerinthehandsofbankruptcyjudges.”12
In that specific case, the Third Circuit rejected the district court’s equitable mootness
reasoningbecausethedistrictcourtonlyanalyzedtwofactors:substantialconsummationand
thelackofastay.Thedistrictcourtdidnotanalyzetheotherfactorseventhoughthedoctrine
was supposed to be applied narrowly after reviewing all factors. Further, the court asserted
that allowing the administrative claim to proceed would not upset the plan since the plan
provided procedures for the resolution and payment of administrative expense claims. While
the Continental Airlines court rejected the argument that the post-confirmation resolution
procedures was a basis to reject equitable mootness, the Philadelphia Newspapers court
distinguishedthatpointbynotingthattheContinentalAirlinesplanhadacaponadministrative
10
690F.3d161(3dCir.2012).
11
Id.at169n.12.
12
Id.
4
53343418.2
expense claims. Thus, the existence of the procedures was beside the point. In Philadelphia
Newspapers,therewasnocapsotheproceduresevidenceanincorporationoftheappellant’s
claims within the confirmed plan. This decision began to change the application of the
equitablemootnessdoctrineintheThirdCircuit.
Semcrude(2013)
EquitablemootnesstookanotherhitintheThirdCircuitayearlaterinInreSemcrude,
L.P.13 In the opinion’s introduction, the Third Circuit panel criticized the doctrine on multiple
fronts. First, the court noted that the Seventh Circuit went as far as actually “banishing” the
term “equitable mootness” since it has nothing to do with mootness at all. While the Third
Circuitsaiditwouldnotgothatfarbecausetheterm“isencrustedenoughthatwesufferits
continuedusage.”14Second,thecourtthenopinedthatthedoctrinelikelyhasnosoundbasisat
all:“Courtshaverarelyanalyzedthesourceoftheirauthoritytohearanappealonequitable
mootnessgrounds.”15Third,thecourtnotedthatwhileitasapaneloftheThirdCircuithasto
followdecisionsofthefullThirdCircuit,thedoctrinewasonlyadoptedina7-6decision.
In Semcrude, the appellants were oil and gas producers in Oklahoma who sought to
assertpriorityoverotherunsecuredcreditorstomoneythedebtorsreceivedfromcustomers
for distributing the producer’s oil to those customers. But because the debtors operated in
multiple states, they moved to establish representative adversary proceedings in the
bankruptcycourtforproducersineachstatetodetermineeachproducer’spriorityunderthat
particular state’s law. The appellants objected to these representative proceedings but saw
their objection overruled. The appellants then refused to participate in the representative
proceedings. Ultimately, the debtors obtained a settlement with the various participating
producers, which was incorporated into a confirmed plan. The appellants appealed the
confirmationorder,arguingtheirclaimscouldnotbedischargedintheplanwithoutaseparate
adversaryproceeding.Thedistrictcourtheldthattheirappealwasequitablymootduetothe
consummationoftheplan’snumerousreorganizationtransactionsandsecuritiesissuances.
Illustratingthepullbackonequitablemootness,theThirdCircuitstatedthatthecourt
“must be almost certain [that the appeal will] produce a perverse outcome – chaos in the
bankruptcy court from a plan in tatters and/or significant injury to third parties. Only then is
equitablemootnessavalidconsideration.”16Thecourtthenexplainedthatwhiletherearefive
prudentialfactorsfromContinentalAirlines,thosefactorsreallycombineinatwo-stepanalysis:
“(1) whether a confirmed plan has been substantially consummated; and (2) if so, whether
13
728F.3d314(3dCir.2013).
14
Id.at316n.2.
15
Id.at317.
16
Id.at320.
5
53343418.2
grantingthereliefrequestedwill(a)fatallyscrambletheplanand/or(b)significantlyharmthird
partieswhohavejustifiablyreliefonplanconfirmation.”17
Inaddition,beforeturningtothemeritsoftheappeal,theThirdCircuittookthischance
to determine the burdens of the parties arguing over equitable mootness. The Third Circuit
stated that the party moving for dismissal of the appeal should bear the burden of proving
equitable mootness based on the evidentiary record. The court rejected the view of other
jurisdictionsthatshiftstheburdentotheappellantiftheplanwassubstantiallyconsummated.
Thecourtreasonedthatsubstantialconsummationdependsonwhetherastaywasissued.And
inallcases,whetherastaywasissuedhasnobearingontheviabilityofanappeal.Thus,the
ThirdCircuitruledthattheburdenisalwaysonthepartyassertingequitablemootness,which
providedyetanotherhurdleforlegaltacticiansattemptingtoassertthedoctrine.
Turningtothespecificappeal,theThirdCircuitdeterminedthatthedistrictcourterred
in dismissing the as appeal equitably moot. The Third Circuit accepted the district court’s
findingsthattheplanwassubstantiallyconsummatedandastaywasnotobtained,butrejected
the finding that granting the appellant’s their relief would undermine the plan or harm third
parties.TheThirdCircuitsaiditmustlookbeyondgeneralizedharmsandaskwhethergranting
theappellant’stheirrelief“willhavethefearedoutcomes—collapsingtheplanandsignificantly
injuring third parties who reasonably relied on its implementation—with which equitable
mootnessisultimatelyconcerned.”18
Underthistest,theThirdCircuitrejectedthedebtors’argumentsthattheappealwould
ruin the plan. The court noted that the appellants have already received approximately
$200,000 under the plan and, if successful on their claims, would obtain only an additional
$200,000more.Thatadditionalamountwaslessthan0.13%ofthe$160milliondistributedto
producersundertheplan,andpalesincomparisontothe$2billionreorganization.Further,no
otherproducerswouldbeabletoassertclaimssimilartotheappellantsastheappellantswere
the only producers to challenge the representative proceeding mechanisms and the plan
discharge.
TheThirdCircuitalsorejectedthedebtors’argumentthatpermittingtheappealwould
harmthirdparties:thelenders,equityinvestors,customers,andsuppliers.Thecourtsaidthe
argument concerning the lenders was counterintuitive since it would require the lenders to
terminate the credit facility and harm themselves. Further, the court was not persuaded by
harm to others (equity and unsecured creditors) as the appellant’s claim was small and the
debtorshad$73millionincashand$140millioninworkingcapitalpost-confirmationtofund
anyadditionaldistributiontotheappellants.
17
Id.at321.
18
Id.at323.
6
53343418.2
One2OneCommunications(2015)
In One2One Communications, LLC,19 the Third Circuit indicated that the equitable
mootness doctrine likely is inappropriate for smaller reorganizations as the plans are simpler
anddonotinvolvecomplicatedtransactionswithoutsideinvestors.Inthiscase,thedebtorwas
a billing services technology company. The appellant held the single largest claim against the
debtoranditsofficersfor$9million.Thedebtorobtainedconfirmationofabankruptcyplan,
over the objections of the appellant, involving $200,000 in funding from a plan sponsor and
waiver of preference claims. The appellant appealed its objection (based on violations of the
absolute priority rule). The district court never reached the substance of the appeal, simply
dismissingitasequitablymoot.
In analyzing equitable mootness, the Third Circuit in this case adopted the framework
from Semcrude, namely pointing out that there are five prudential factors, but boiled the
analysis down to a two-step process. But beyond endorsing the two-step analysis, the Third
Circuit rejected the application of equitable mootness because the case and confirmed plan
was, essentially, small. The court stated that equitable mootness only applies “in complex
reorganizationswhentheappealingpartyshouldhaveactedbeforetheplanbecameextremely
difficulttoretract.”20TheThirdCircuitthenhighlightedpriorequitablemootnessdecisions,all
ofwhichinvolvedhundredsofmillionsofdollars,alargenumberofdebtors,andthousandsof
creditors. In this case, the debtor was small, the plan only provided for $200,000 cash
investment,andtherewerenocomplexnewfinancings,mergers,orissuancesofnewstockor
bonds.
The Third Circuit also held that the district court improperly placed the burden of
provingtheprudentialfactorsontheappellant.Thecourtsaidthatthedebtorhadtheburden
to demonstrate the prudential factors weighed in its favor in order to advance the theory of
equitablemootness.
The court also rejected the debtor’s argument that allowing the appellant’s claims to
proceedwouldunderminethenumeroustransactionsfollowingconfirmationoftheplan.The
court stated that none of the transactions post-confirmation – namely a new investment,
commencementofdistributions,hiringofnewemployees,andnewagreementswithsuppliers
and customers – are unique. Further, the rights of nebulous third parties – employees,
customers,andcreditors–applyineverybankruptcyreorganizationandthusdonotwarrant
theextremeprotectionofequitablemootness.
TribuneMediaCompany(2015)
The Third Circuit’s most recent decision detailing the application of the equitable
mootnessdoctrineisinInreTribuneMediaCo.21Tribunerejectedoverturningthedoctrineof
19
805F.3d428(3dCir.2015)
20
Id.at434.
21
799F.3d272(3dCir.2015).
7
53343418.2
equitablemootness,butreiterateditsnarrowapplication.Inlate2007,realestatemogulSam
ZellbelievedthattheTribuneCompanypresentedavaluableacquisitionasitwasoperatingina
challengingbusinessclimate.ZellorchestratedanLBOofTribune,whichbeforetheLBOhada
market capitalization of $8 billion and debt of $5 billion. After the LBO, Tribune was saddled
with an additional $8 billion of debt. A year later, Tribune filed for bankruptcy. After the
bankruptcy,AureliusCapitalManagement,L.P.bought$2billionofthepre-LBOdebt.
TheplanultimatelypursuedbythedebtorsprovidedforsettlementofLBOclaimsanda
waterfall payment structure in which the pre-LBO debtholders stood to receive the first $90
million of claim recoveries and 65% of the liquidation trusts recoveries over $110 million.
Aurelius objected and sought confirmation of its own non-settlement plan, arguing that the
claims were much more valuable if litigated rather than settled. The bankruptcy court
disagreed,statingitwasdoubtfulthatthedebtorscouldobtainafullavoidanceoftheclaims
and, therefore, confirmed the plan. Aurelius and a bondholder trustee appealed. Aurelius
appealedtheapprovaloftheLBOsettlementwhilethetrustee’sappealstemmedaroundthe
plan providing for a $30 million payment to a set of creditors that the trustee argued were
subordinatetothetrustee.
InTribune,theThirdCircuitbeganbyexplainingthatequitablemootness“isanarrow
doctrine.”22 “The Party seeking to involve the doctrine bears the burden of overcoming the
strongpresumptionthatappealsfromconfirmationorders...needtobedecided.”23Thecourt
should seek to provide relief “with a scalpel rather than an axe. To that end, a court may
fashionwhateverreliefispracticableinsteadofdecliningtoreviewsimplybecausefullreliefis
notavailable.”24
The court then detailed that the five factor test laid out in Continental Airlines was
established when the equitable mootness doctrine was in its infancy. Now, the more refined
doctrine involves the two-step process provided in Semcrude. The Third Circuit asserted that
the two-step inquiry “reduces uncertainty from the factors of Continental”25 and reflects the
importanceofthesecondstepintheSemcrudeanalysisthatequitablemootnessshouldnotbe
usedwhenthereliefsought“wouldneitherfatallyscrambletheplannorsignificantlyharmthe
interestsofthirdpartieswhohavejustifiablyreliedonplanconfirmation.”26
Thecourtalsoexplainedthatthethirdpartiesequitablemootnessseekstoprotectare
the outside investors who fund confirmed plans. The court explained that the equitable
mootnessdoctrineshouldbeusedtoprotectoutsideinvestorstoensurethatthefreeflowof
commerceunderbankruptcyplanscontinuestopermitsuccessfulreorganizations.Conversely,
22
Id.at278.
23
Id.at278-79.
24
Id.at279.
25
Id.at278.
26
Id.
8
53343418.2
because issues on appeal affecting “other creditors,” customers, and suppliers often do not
implicatethefundingofsuccessfulreorganizations,equitablemootnessprotectiondoesnotas
easilyapplytothosethirdparties.
Applying these principles to the case, the court ruled that Aurelius’s appeal was
equitablymoot.Thecourtquicklynotedthattheplanwassubstantiallyconsummatedandthen
turnedtothesecondfactorfromSemcrude.Underthisfactor,thecourtstatedthatpermitting
AureliustooverturnthesettlementandpursuetheLBOclaimswouldfatallyscrambletheplan
becausetheLBOsettlementwasthecentraltransactionintheplan.AndallowingAureliustodo
awaywiththeLBOsettlementwouldharmthirdpartyinvestorsastheoutsideinvestorsmade
their investment in reliance on the valuation of the confirmed plan/settlement. The Third
Circuitpointedoutthatonly3outof243creditorclassesvotedinfavorofAurelius’salternative
plan, which classes were comprised of 2 classes controlled by Aurelius and another class
controlledby1creditorholdinga$47claim.Thus,theanalogytounscramblinganegginorder
tosucceed.
Asforthetrustee’sappeal,thecourtnotedthatitwasnotequitablymoot.Thecourt
statedthatthereliefsoughtwouldnotunraveltheplanbecausethedisputewassimplyover
distribution of $30 million under a $7.5 billion confirmed plan. The court noted that even if
someofthe$30millionwasalreadydistributedtocreditors,itwasasmallgroupthatcouldbe
subject to disgorgement and the remaining money could be diverted to the rightful claimant
after the dispute is resolved. The court further disagreed with the district court’s conclusion
thatpermittingtheappealwouldharm“hundredsofindividualsmall-businesstradecreditors
[who] were entitled to rely upon the finality of the confirmation order.”27 The court felt that
conclusionputfinalityoverallotherconsiderationsanddidnotaddresstherealpartiestobe
protected–thethirdpartyinvestors.Allowingthetrustee’sappealtocontinuewouldnotharm
the third party investors because the appeal would not change the valuation of their
investment, it would only possibly change the identify of creditors receiving the $30 million
distribution.
27
Id.at283.
9
53343418.2
NATIONAL CONFERENCE
OF BANKRUPTCY JUDGES AMERICAN BANKRUPTCY INSTITUTE
OCTOBER 28, 2016
EQUITABLE MOOTNESS IN
ST
THE 21 CENTURY:
THE NEW PARAMETERS
Joseph D. Frank
Reed Heiligman
FrankGecker LLP
325 North LaSalle Street
Suite 625
Chicago, Illinois 60654
(312) 276-1400
[email protected]
[email protected]
{GEN00001/001/00046543.DOC/2}
EQUITABLE MOOTNESS IN THE 21ST CENTURY: THE NEW PARAMETERS1
These materials describe the doctrine of equitable mootness generally and set forth the
state of the law in various federal circuits.
WHAT IS EQUITABLE MOOTNESS?
Equitable mootness is a narrow doctrine applied when an appellate court deems it prudent
for practical reasons to forbear deciding an appeal because granting the requested relief would
undermine the finality and reliability of a consummated plan of reorganization. In re Tribune
Media Co., 799 F.3d 272, 277-78 (3d Cir. 2015), cert. denied sub nom. Aurelius Capital Mgmt.,
L.P. v. Tribune Media Co., 136 S. Ct. 1459 (2016). A party seeking to invoke the doctrine
“bears the burden of overcoming the strong presumption that appeals from confirmation orders
of reorganization plans—even those not only approved by confirmation but implemented
thereafter (called ‘substantial consummation’ or simply ‘consummation’)—need to be decided.”
Tribune, 799 F.3d at 277-78 (citing In re SemCrude, L.P., 728 F.3d 314, 321 (3d Cir. 2013)).
The doctrine “essentially derives from the principle that in formulating equitable relief [,]
a court must consider the effects of the relief on innocent third parties.” Duff v. Cent. Sleep
Diagnostics, LLC, 801 F.3d 833, 840 (7th Cir. 2015) (citing SEC v. Wealth Mgmt. LLC, 628 F.3d
323, 331 (7th Cir. 2010) (quotation marks omitted); accord United States v. Segal, 432 F.3d 767,
773–74 (7th Cir.2005); SEC v. Wozniak, 33 F.3d 13, 15 (7th Cir.1994), overruled on other
grounds by SEC v. Enter. Trust Co., 559 F.3d 649 (7th Cir.2009).
In applying the doctrine, an appellate court “may properly refuse to decide the merits of a
challenge to a bankruptcy or receivership plan where unwinding the plan (even if legally
justifiable) would be difficult and inequitable in light of the complexity of the transactions and
the reliance interests involved.” Duff, 801 F.3d at 840. Accordingly, equitable mootness “is not
‘real mootness’; the court has jurisdiction to alter the outcome, but equitable considerations make
it unfair or impracticable to intervene.” Id.; see also In re UNR Indus., 20 F.3d 766, 769 (7th
Cir.1994) (distinguishing the concept of equitable mootness from “real mootness”).
The Seventh Circuit has protested the use of the phrase equitable mootness:
Using one word for two different concepts breeds confusion. Accordingly, we
banish ‘equitable mootness’ from the [local] lexicon. We ask not whether this
case is moot, ‘equitably’ or otherwise, but whether it is prudent to upset the plan
of reorganization at this later date.
In re UNR Industries, Inc., 20 F.3d 766, 768-769 (7th Cir. 1994) (Easterbrook, J.). In In re
Envirodyne Industries, Inc., 29 F.3d 301, 303-304 (7th Cir. 1994), Judge Posner referred to
equitable mootness as the “now nameless doctrine” after “the name was anathemized by Judge
Easterbrook.” The Seventh Circuit has nonetheless used the term “equitable mootness” in more
recent decisions without regard to Judge Easterbrook’s banishment. See Duff v. Cent. Sleep
Diagnostics, LLC, 801 F.3d 833, 840 (7th Cir. 2015) (Sykes, J.). In In re SemCrude, the Third
1
The materials were prepared by Joseph D. Frank and Reed Heiligman of FrankGecker LLP.
{GEN00001/001/00046543.DOC/2}
Circuit noted that Judge Easterbrook had “banish[ed] ‘equitable mootness’ from the (local)
lexicon,” found that “the term ‘prudential forbearance’ more accurately reflects the decision to
decline hearing the merits of an appeal because of its feared consequences should a bankruptcy
court’s decision approving plan confirmation be reversed.” In re Semcrude, L.P., 728 F.3d 314,
317 n.2 (3d Cir. 2013).
RECENT DEVELOPMENTS – THIRD CIRCUIT
In In re Tribune Media Company, 799 F.3d 272 (3d Cir. 2015), cert. denied sub nom.
Aurelius Capital Mgmt., L.P. v. Tribune Media Co., 136 S. Ct. 1459 (2016), the Third Circuit
applied the doctrine of equitable mootness in dismissing the appeal of Aurelius Capital
Management, L.P., which sought to undo a global settlement that was the centerpiece of the
chapter 11 plan. The court ordered remand on an appeal filed by Law Debenture Trust Company
of New York and Deutsche Bank Trust Company Americas which sought to enforce a
subordination agreement, holding that the appeal was not equitably moot and could be decided
on the merits.
In applying the doctrine in the Third Circuit, courts look to “(1) whether a confirmed plan
has been substantially consummated; and (2) if so, whether granting the relief requested in the
appeal will (a) fatally scramble the plan and/or (b) significantly harm third parties who have
justifiably relied on plan confirmation.” Tribune, 799 F.3d at 278 (3d Cir. 2015) (quoting In re
SemCrude, L.P., 728 F.3d 314, 321 (3d Cir. 2013)).
In Tribune, the court focused on the second step of the analysis and identified “third
parties” that “equitable mootness is meant to protect,” including “lenders, customers, and
suppliers.” Tribune, 799 F.3d at 279. Here, it was the “outside investors” who had made equity
investments in the reorganized debtor:
[A]lthough parties other than equity investors may rely on plan consummation
and thus claim protection in the form of equitable mootness, they may not merit
the same outside investor status as those who make equity investments in a
reorganized entity.
Id. The court continued, noting that certain third parties may have interests “more worthy than
others” in this context because of the court’s desire “to encourage behavior (like investment in a
reorganized entity) that contributes to a successful reorganization.” Id. Similarly, under the
proper circumstances, courts should try to “further the free flow of commerce—a chief concern
of commercial bankruptcy—[by] declin[ing] to disturb ‘complex transactions undertaken after
the Plan was consummated’ that would be most difficult to unravel.” Id. To that end, the
doctrine of equitable mootness assures certain types of investors “that that a plan confirmation
order is reliable and that they may make financial decisions based on a reorganized entity's exit
from Chapter 11 without fear that an appellate court will wipe out or interfere with their deal.”
Id. at 280.
The court found that Aurelius’s appeal was equitably moot – even assuming that Aurelius
would have prevailed on the merits “because the idea of equitable mootness is that even if
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Aurelius is correct, it would not be fair to award the relief it seeks.” Id. at 281 (emphasis in the
original). The court went on to hold that Aurelius’s failure to post a $1.5 billion bond, or to seek
to post a more “manageable” bond led the court to “to conclude that [Aurelius] effectively chose
to risk a finding of equitable mootness and implicitly decided that an appeal with a stay
conditioned on any reasonable bond amount was not worth it.” Id.
RECENT DEVELOPMENTS – NINTH CIRCUIT
In In re Transwest Resort Props., Inc., 801 F.3d 1161 (9th Cir. 2015), the Ninth Circuit
Court of Appeals curbed the application of the equitable mootness doctrine where the appellant
sought to stay consummation of the plan. In Transwest, the Ninth Circuit identified four
equitable mootness considerations: (1) whether the appellant fully pursued its rights by seeking a
stay; (2) whether substantial consummation of the plan occurred; (3) the effect on third parties
not before the court; and (4) whether the bankruptcy court can fashion effective and equitable
relief without completely undoing the plan. Id. at 1167-69.
The court held that, although substantial consummation is a factor that weighs in favor of
equitable mootness, courts should consider the third and fourth factors, and focus on “whether
the bankruptcy court could fashion equitable relief without completely undoing the plan.” Id. at
1171. The court determined that the third party at hand was not the type of innocent party that
was meant to be protected. Rather, the third party was a “sophisticated investor” that helped
“craft a reorganization plan that ‘press[ed] the limits’ of the bankruptcy laws,” and the third party
investor should have known that “appellate consequences [we]re a foreseeable result.” Id. at
1170. Finally, and most importantly, according to the majority, “the bankruptcy court could
fashion equitable relief without completely undoing the plan.” Id. at 1171.
In a vigorous dissent, Judge Milan D. Smith, Jr. argued that the court’s ruling was grossly
inequitable. Judge Smith maintained that substantial consummation should be the foremost
consideration in assessing equitable mootness, and that substantial consummation, alone, should
create a presumption of equitable mootness. Id. at 1173. Judge Smith continued, stating that the
third-party investor should have been affirmatively encouraged to rely on the finality of the
confirmation order, and that such reliance is critical in facilitating complex reorganizations.
RECENT DEVELOPMENTS – SECOND CIRCUIT
The Second Circuit, in Ahuja v. LightSquared Inc., 2016 WL 1105109 (2d Cir. March 22,
2016), appeared to rein in the doctrine of equitable mootness. The March 22, 2016 nonprecedential summary opinion held that the appeal was “presumed equitably moot” because the
plan had been substantially consummated. LightSquared, 2016 WL 1105109 at *1.
Under LightSquared’s plan, no common equity holder of LightSquared Inc. received any
recovery meaning that appellant Ahuja, who held 8% of the common equity in LightSquared,
received no value in the reorganization. Id. The Second Circuit found that the appellant satisfied
all of the requirements set forth in In re Chateaugay Corp., 10 F.3d 944, 952–53 (2d Cir.1993)
for overcoming the presumption of mootness. The court, however, rejected Ahuja’s argument
that the “Court [could] still order effective relief without ‘affect[ing] the re-emergence of the
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[LightSquared] as a revitalized corporate entity’ or ‘knock[ing] the props out from under the
authorization for every transaction that has taken place’” by (1) by vacating the confirmation
order, or (2) by redistributing the equity in reorganized LightSquared. LightSquared Inc., 2016
WL 1105109 at *2. Rather, the Second Circuit held that it could provide Ahuja with effective
relief through the award of monetary damages:
We are convinced, however, that this Court can order at least some effective relief
in the form of monetary damages in this case—even as little as one dollar—
without knocking the props out from under the completed transaction or affecting
reorganized LightSquared's reemergence as a revitalized corporate entity.
Id. at *3. Despite overcoming the presumption of mootness, a remand was not possible because
“the Plan was fair and equitable, and complies with the equal treatment rule.” Id. Confirmation
by cramdown was therefore proper.
In this non-precedential opinion, the court approvingly cites Transwest Resort Properties
and the Fifth Circuit’s opinion in Texas Grand Prairie Hotel Realty LLC, 710 F.3d 324, 328 (5th
Cir.2013), where that court took a “narrow view” of the equitable mootness doctrine,
“particularly where pleaded against a secured creditor.”
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