### INTHE UNI TED S TATESCOU RT OFAPPEALS FORTHE FIFTH CIRCU IT

N o. 08- 40746 In the M a tter of: T H E P A C IF IC L U M B E R C O ; S C O T IAP A C IF IC CO M PAN Y LLC D e b t o r s

--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- - BA N KO F N EW YO RK TRU ST CO M PA N Y, N A, a s I nde nt ur e Tr us t e e f o rt he Ti m b e rNo t e s ; ANGELO GORDON & CO. L P, AUREL I US C AP I TA L M ANAGEM EN T LP , AN D D AVI DSO N KEM PNE R CAPI TAL M ANAGE M ENT L L C ; S C O T IAP A C IF IC C O M P A N YL L C ; C S G IN V E S T M E N T S ; S C O T IA REDW OOD FOUND AT I ON I NC A pp el l an t s v. O F F IC IA L U N S E C U R E D C R E D ITO R S ’C O M M ITT E E ; O f f i ci alU n secured Cr e d i t o r s ’C o mm i t t e e Ap p e l l e e , M ARA TH ON ST RU CTU RED FI NANC E F UND L P ; MENDOC I NO R ED W OOD C OMPA NYL L C; T HE P AC I F I C L UM BE R CO ; U N I T ED S T AT ES J US T I CE DE P AR T M ENT ; C AL I F OR NI A S TATE AG EN CI ES A pp el l ees

A pp ealf

rom t h e U n i t ed S t ates D i st ri ctC ou rt f ort he Sout her n D i st r i c tof Texas U SD C N o. 2: 08- M C
- 66 United States Court of App eals Fifth Circuit 

### F I L E D September

29, 2009 Cha rl es R. F ulb ru g e II I ClerkN o. 08- 40746

Debtor Scoti a Pacific initially joine d in this appeal, but it was dissolve d as part of th e 1 planof reorgani zationan d moved tobedismissed. 2 B ef ore JO N E S , C h i ef

Ju dg e, an d O W E N an d S O U T H W IC K , C i rcui tJu dg es: E D ITH H . JO N E S , C h i ef Ju dg e: In t h i s di rectapp ealf rom t h e ban kru ptc y c o u rt , T h e B an k of N ew Y ork (“In d e n tu re T ru ste e ”) a n d ce rta in N o te h o ld e rs ch a ll e n g e th e leg a li ty of a 1 confi rm ed C h ap t er 11 reor gan i zati on pl an ( “ pla n ” ) . N ei t h er t h e ban kru ptcy
c o u r t n o ra m o tio n s p a n e l o f th is co u r t s ta y e d p la n co n fir m a tio n p e n d in ga p p e a l. I n t he b r i e f i nt e r va l be t w e e n c o nf i r m at i o n and o r ala r gum e nti n t hi s c o ur t , t he pl an w as substan t i al l y consu m m ated. Plan propon en t s and current ow n ers of t h e reor gan i zed deb t ors, M en doci n o R edw ood C om pa n y ( “ M R C ” ) an d M arathon S tr u c t u r e d F in a n c e (“M a r a th o n ”), m o v e d to d is m is s th is a p p e a l a s e q u ita b ly
m ootdu e t o t h ei r i n t ervening acti on s. W e hol d that equit able m oot n ess d o e s n o t bar revi ew of i ssues rai sed on
a p p e a l c o n c e r n in gt h e t r e a tm e n t o f th e N o te h o ld e r s ’s e c u r e d cla im s ; n o rd o e s it b a rre -e v a lu a tio n o f w h e th e rth e ira d m in is tr a tiv e p r io r ity cla im w a s co r r e c tly
c al c ul at e d; no rdo e s i tb arr e vi e w o f t he p l an ’ s rel e as e c l aus e s i ns ul at i ng
m u l t i pl e pa rt i es f

rom l i abil i t y. E qu i t able m oot n ess does f orecl ose our revi ew of i s s u e s r e l a t e d t o t h e t r e a t me n to f i mp a i r e d a n d u n s e c u r e d c l a s s e s . F i n a l l y , we rej ectt h e N ot eh ol ders’com pl ai n t s agai n stt h e pl an ’ s payou tof cash i n f

u l lf orN o. 08- 40746

The other four debtor s were Britt Lumbe r C ompany, Inc., a m anufacturer of fe ncing 2 a n d de ckin gp ro duct s; S co ti aInn , I nc. , op er ato r of th e in ninScoti a , C alifo rnia ; Salm onC re ek , LL C, a holdingcompanyowning roughly1,300acres of timb erland; and Scoti a Develop ment Corp., LLC , a develop ment corpor atio n for exploring a ndfacilitatingdevelop ment opportuniti es with respect to c ommercial, indu strial , an d re sidentialpro pertie s inC aliforni a and Texas. Th ese fo ur entities and Scopac are all wholly owned byP alco . 3 t h e i r a l l o w e d s e c u r e d c l a i m, b u t w e r e ma n d t h e a d mi n i s t r a t i v e p r i o r i t y c l a i m. W e al so r everse i n part t h e broad n on - deb t or r el eases. BA CK GRO UND Si x af f i l i at ed e nt i t i es ( “ t he D ebt or s” ) i nvol ved i n t he gr ow i ng, har ves t i ng, a n d pr oce ssing of red w oo d ti m b er in H um bol dtC ount y, C al i forn i a , f i l ed sep a ra te C h ap t er 11 ban kru ptcy pet i t i on s on Jan u ary 18, 200 7, i n t h e S ou t h ern D i st ri ct of T exas ( a ven u e not kn ow n f or i t s r edw ood f

orest s) . Th e si x peti t i on s w ere pr o c e dur al l y, b utno ts u b s t a n t iv e l y , c o n s o l i d a t e d a nd j o i nt l y ad m i ni s t e r e d b y t he bank r up t c yc o ur t . Th i s a p p e a lc o nc e r ns t he r e o r g a ni z a t i o n o f t he p r i nci pal d e b to rs , P a cific L u m b e r C o m p a n y(“P a lco ”) a n d S co tia P a cific L L C (“S co p a c”). 2 P al co ow n ed an d op erat ed a saw m i l l , a pow er pl an t , an d the t ow n of S cot i a, C al i f

orni a. M arathon h el d a secured cl ai m aga i n stP al co’ s asset s, w h i ch ul t i m at el y r os e t o a bout$160 m i l l i on i ncl udi ng pre - and pos t - pet i t i on f i nanci ng. M arathon est i m ated P al co’ s asset s w ere w ort h on l y $11 0 m i l l i on at t h e date of f i l i ng.N o. 08- 40746

4 S cop a c w a s a D elaw a re spe ci a l p u rp ose en ti ty w h oll y ow n ed by P a l co. In 199 8, P al co tr an sferred ow n ershi p of m ore than 2 00, 000 acres of pri m e redw ood tim b e r la n d (“T im b e r la n d s ”) t o S c o p a c to fa c ilita te t h e s a le o f $ 8 6 7 .2 m illio n in not es s ec ure d by t he Ti m ber l ands and Sc opac ’ s ot heras se t s. Purs uant t o a n i nde nt ur e ag r e e m e nt , t he Bank o f N e w Yor k r e pr e s e nt s t he N o t e ho l de r s i n t he ban kru ptcy c a se s, bu tcer t ai n N ot eh ol ders ret ai n ed thei r ow n coun selan d are
n am ed ap pella n ts. O n t h e peti t i on date, Scop ac ow ed the N ot eh ol ders ap proxi m atel y $74 0 m i l l i on in p ri n ci pa la n d i n t ereston the n ot es. Scopa c al so ow ed $3 6 . 2 m i l l i on to B a n k o f A m erica on a s ecu red li n e of cre d i t w i th a ri gh t t o pa ym en tah ead of

t h e N ot eh ol ders. Pal c o a nd Scopacm ai nt ai ned s eparate c or por at e s t r uct ure s but w er e a n i nt egrated com pa ny. One o f Sc o pa c ’ s t hr e e di r e c t o r s s ato n Pal c o ’ s b o ar d, a nd th e co m p a n ie s h a d th e s a m e C E O , C F O , a n d G e n e r a l C o u n s e l fo rs u b s ta n tia lly al lof t h e rel evan tperi od. P a lco ha d the sol e ri gh tt o ha rvestScop ac’ s t i m ber,
w h i ch P a l co th en pr oce sse d an d sold. S cop a c w a s to rep a y th e N oteh olde rs w i th proceeds f

rom i t s s al es t o P al co. The Ti m be r l and s a r e he av i l y r e gul at e d b y fe de r ala nd s t at e a ge nc i e s . The U . S. Fi s h a nd W i l dl i f e Ser vi c e , t he N at i o nalM ar i ne F i s he r i e s Ser vi c e , and t he C a l i forn i a D ep ar t m entof Fi sh and G am e v i gor ous l y ad m i n i ster fed era lan d stateN o. 08- 40746

5 e n d a n g e r e d s p e c ie s re g u la tio n s . A n yn e w o w n e ro f th e T im b e r la n d s m u s t o b ta in R egi on al W ater Q u al i t y C on t rol B oard perm i t s t h at regulat e w aste d isc h arge, cl ean - u p an d ab atem en t, a n d si t e rem edi ati on . Th e C al i f orni a D epa rt m en tof F orest ry an d F i re Protec t i on requi res a t i m ber h arvest i n g pl an coveri n g i ssues l i k e re st oc ki ng, m i t i gat i ng t he e f fec t s of har ves t i ng and er os i on, r oad
m ai n t en an ce and sust ai n able yi el d requ i rem en t s. U n der t h e T i m berl an ds’
c ons er vat i on pl an, a t r ansf erof ow ner shi p m ustrun t he gam ut of pr e- appro val by allof t h ese agen ci es. A f t er a year passed w i t h ou tsuf f i ci en tprogress t ow ard a reorgan i zati on p l a n , t h e b a n k r u p t c yc o u r tt e r m i n a t e d t h e de b t o r s ’e x c l u s i v i t yp e r i o d ( 1 1 U. S . C. § 112 1) an d all ow ed the f i l i n g of f i ve com peti n g proposed pla n s. T h e court ap p rov ed a j oi n tdi scl osure st atem en tf or t h e pl an s and exped i t ed sol i ci t ati on and vot i ng s o t hata c onf i r m at i on hearin g cou l d beg i n i n ear l y Ap r i l2008. D u r in gth e e x te n d e d h e a r in g , th e D e b to r s w ith d r e w th e irp la n s , le a v in go n ly t w o. The I ndent ure Trust ee ’ s pl an c ove r ed t he as se t s of Sco pac al one, w hi l e t hat pr o po s e d b y M ar at ho n and M RC , t he l at t e rent i t y a c o m pe t i t o ro f Pal c o , s o ugh t t o reor gan i ze al lof

t h e D ebtor s.N o. 08- 40746

The c o urt c h ar ac t e ri z e d th e I n d e ntur e Tru s t e e ’ s p l a n a s a li qui d ati o n p l a n , n ot a 3 reorgani zationplan. Th e pl an p r ovided for a six-month perio d to market and sell Scopac’s assets. As evidence of the plan’s feasib ility, the In denture Trusteesolicit ed a“stalking horse” bid for $ 603millio n, b utt he bankruptcy court found that th e b id’s t erm sh eet cont ain ed numerous contingenci es. Furthe r, even the In denture Trustee did not acce pt th e term she et, which , th e co urt foun d, sugge sted th e b id’s unreliab ility. The court also foun d no evi denceth at the bidder, were it to win, was capable of operating the Ti mberl ands or complying with a multitu deo f environ me ntal re gulation s. See11 U.S.C. § 1126 (f), (g). These sectio ns e stablish, respectively , th at uni mpaire d 4 classes are presumed to h ave accepte d a plan , an d cl asses th at w il l r ec ei ve nothin g are presumed to h ave re

je cted a pl an. 6 O n Ju n e 6 , t he bankr upt c y c our thel d t he M R C /M ar at hon pl an confi rm able bu tt h e Inden t u re T rustee’ s pl an n otconf i rm able. Th e I n den t u re

3 T rustee h as not ap pea l ed t h e court ’ s r ej ect i on of i t s pl an . Th e M R C /M arathon p l a n pr op ose d to dissolve a l lsi x e n ti ti es, ca n cel i n tercom p a n y d eb ts, an d crea te t w o ne w e nt i t i e s , To w nc o and N e w c o . Al m o s ta l lo f Pal c o ’ s a s s e t s , i nc l udi ng t he t o w n o f Scoti a, Cal i f

o r ni a, w o ul d b e t r ans fe r r e d t o To w nc o . The Ti m be r l and s an d assets of

t h e saw m i l lw ou l d be p laced i n N ew co. M R C an d M arathon propo se d to con t ribu t e $58 0 m i l l i on t o N ew co t o pay cl ai m s agai n stScop ac. M arathon w ou l d a lso con verti t s $160 m i l l i on seni or s ecured cl ai m against P a lc o ’ s a s s e ts in to e q u ity , g iv in g i t fu l l o w n e r s h ip o f T o w n c o , a 1 5 % s ta k e in Ne wc o , a n d a n e w n o t e f o rt h e a m o u n to f

t h e s a wm i l l ’ s wo r k i ng c a p i t a l . M RC
w oul d ow n t he o t her85% of N ew c o a nd w oul d m anage a nd run t he c om pany. The pl an c r e at e d 12 c l as s e s , s e ve n o f w hi c h w e r e e l i gibl e t o vo t e , a nd f o ur 4 of w h i c h c o nt ai ne d c l ai m s a ga i ns tSc o pa c . Cl as s 5 pr o po s e d t o pa y Bank ofN o. 08- 40746

See1 1 U .S .C . § 1 1 2 4( definin gi mp air me nt) . 5 I n 199 6, P alcoan d it s ultimatepar ent company agreed to sell approximately5,6 00 6 acre s of old growth re dwood forest to th e Stat e of C al if ornia and to the Unit ed S tates in exchange for approximately$3 00 million and 7,75 5 acres of adj acent ti mberl and. C aliforni a and the Unit ed S tates also agreed to expe dite theregulatory approval process r equired befo re P alc o co uldlo gcertainof th es e l a n ds . Thisagre em ent i s call edth e "He a dwate rsAgre em ent. " Palco and Scopac su ed C aliforni a and two stat e e nviron mental a ge nci es alle gingbr each of this agreement. Although ther e i s noexplicit code provisionallowin g thi s practice, bankruptcycourts 7 have u sed various c ode provision s to ju stifyoth erwise ill eg alpreferentialpayment of pr e- pe tition u n se cure d cl aim s toc ertainven do rsn ec es saryf orth e re or ga niz ation . See Inre KmartC

orp. , 35 9 F .3d 8 66 (7thCir . 20 04) (discussin g the rationale and statutoryba ses for thisp ractic e) ; seeals o In re CoServ , LLC, 27 3 B .R. 487 , 49 2-95(B ankr. N.D. Tex. 200 2) (f in din gauthorityt o paycritical ven do rs). 7 A m e r ic a , th e s o le c la s s m e m b e r , $ 3 7 .6 m illio n , co n s is tin go f th e p r in c ip a l ($ 3 6 .2
m illio n ), a c c r u e d p o s t-p e tit io n in te r e s t, u n p a id fe e s , a n d a p p r o x im a te ly $1 m il li o n in defau l ti n t erestpaid over 12 m on t h s, t h u s i m pa i ri n g t h e cl ass. 5 C la s s 6 p r o p o s e d to p a y t h e N o te h o ld e r s ’s e c u r e d cla im th e v a lu e o f th e ir
c o l l at e r ala nd a l i e n o n pr o c e e ds f r o m pe ndi ng unr e l at e d l i t i ga t i o n a ga i ns tt he
s t a t e o f Ca l i f o r n i a , wh i c h t h e p a r t i e s r e fe rt o a s t h e He a d wa t e r s L i t i g a t i o n. 6 C l ass 8 proposed to pay u n secured cl ai m s agai n stScop ac by f orm er em pl oyees an d tr ad e ven dors n o t p revi ou sl y deem ed “c ri t i cal , ” bu tt h ese am ou n t s w ere 7 exp osed t o ong oi n g l i t i gati on regard in g a ssum pti on an d rej ect i on of executory
c o n t r a c t s , t h u s im p a ir in gth e c la s s . C la s s 9 w a s ta il o r e d to p a yS c o p a c ’sN o. 08- 40746

The In den t ur e Tr us t ee declined to elect und er 1 1 U .S.C. § 1 111 (b)(2) to h ave th e 8 entire a mount of its clai m treated as a se cure d cl aim. Its cl aim was th erefo re severed intoa secure d cl aim for the valueof the coll ater al and an unse cure d cl aim for the differe nce. 1 1 U .S .C . § 5 0 6 (a). The court also credited witness t estimony that th e Noteholder s w il l r eceivemore 9 und er the MRC/Marathon pla n thanu nder the In denture Trustee ’s plan or in Ch apter7, sati sf yin g1 1 § U .S .C . 1 1 2 9 (a)( 7). 8 rem ai n i n g gen eralun secured cl ai m s, consi st i n g of th e N ot eh ol ders’def i ci en cy c la im fo ro v e r$ 2 0 0 m illio n w ith a re c o v e r ye s tim a te d a s “u n k n o w n .”

8 A t l ea st on e i m p a i red S cop a c cl a ss h a d to vo te i n fav or of th e plan for i t t o be c o nf i r m ab l e as t o Sc o pa c . 11 U . S. C. § 11 29 ( a) . Cl as s e s 5 a nd 8 v o t e d f o rt he pl an . C la ss 6 (t h e N ot eh ol ders’sec u red cl ai m ) an d C l ass 9 (t h e N ot eh ol ders’ de f i c i e nc y c l ai m ) v o t e d a ga i ns tc o nf i r m at i o n. T o co nf i r m i t s pl an, M RC /M ar at ho n ha d t o “ c r am do w n” t he pl an o n t he di s s e nt i ng c l as s e s pur s uant to 1 1 U .S .C . § 1 1 2 9 (b ). A cen t ral q ue s t i o n f o rt he c o nf

i r m at i o n c r am - do w n was t he v al ue o f t he T i m berl an d s se cu rin g t h e N ot eh ol ders’cl ai m . To thi s end , t h e courthea rd 9
e xtens i ve v al uat i o n t e s t i m o ny o ve rs e ve r alda ys a nd u l t i m at e l y va l ue d t he T i m berl an ds at “ n otm ore than $ 510 m i l l i on . ” Th e ban kru ptcy c ou rtconcl u ded t h at $510 m i l l i on w as t h e “ i n du bi t able equ i valent” of t h e N ot eh ol ders’sec u red
c la im o n th e T im b e r la n d s , see11 U . S . C . §1 129(b) ( 2) (A ) ( i i i) , and t hatN o. 08- 40746

The planestabli shed a litigatio n trust to pursue variou s cau ses of action on beh alf 10 of th e Deb tors. Th e co urt hel d th at the proposed trust effecte d a subst antivecon solidation because it commingled potential recoverie s for Palco and Scopac debtor s. The court a dvi sed that th e trust shoul d eitherbedivided in t o one for Palco and onefor Scopac orsho uld separatelyac count forrec overywithin onetru st. Courts have impl iedin 11 U.S. C. § 507(b ) a right to a sup erp riority adm inis tra tive 11 clai m for the diminutio n of valu e of collateral duringth e o perationof the automatic stay (1 1 U .S .C . § 3 6 2 ). E.g. , In re Blackw ood As soc ia tes, L.P. , 1 5 3F .3 d 6 1 , 6 8(2 d C ir . 1 9 9 8); Inre Carpe t Ct r. Leasing

C o. , 4F .3 d 9 4 0 , 9 4 0( 1 1 thC ir . 1 9 9 3). See11 U.S.C . §§ 50 3(b)(3)(D), 507 (a)(2) (estab lishing th at the legal fees of an 12 inde nture trusteemakin g a substantia l c on t r ibutionto a chapt er 1 1 c ase are priority u n se cure d cl aim s) . 9 M R C /M a ra th on ’ s pl an, af t ers eve r alm i noral t er at i ons , ot her w i se c om pl i ed w i th 10 B an kru ptcy C ode requ i rem en t s. T w o m on th s ea rl i er, th e I n d en tu re T ru stee m ov ed fo r a s u p er-p ri ority
a d m i n i strative e xp en se claim , a rg u i n g it s coll a tera ldim i n i sh ed i n va l u e p ostp e tit io n . T h is m o t io n w a s reje c te d fo llo w in gh e a r in g s in la te J u n e a n d e a r ly

11 Jul y. Fo rt he f

i r s tt i m e , t he c o ur tv al ue d t he N o t e ho l de r s ’no n- t i m be r l and
c o l l at e r ala t$ 48 . 7 m i l l i o n o n t he pe t i t i o n da t e . Af t e ra de duc t i o n f

o rt he Bank
o f Am e r i c a’ s pr i m i ng l i e n a nd t he I nde nt ur e Tr us t e e ’ s l e ga lfe e s , t he r e m ai ni ng 12
v a lu e o f th e N o te h o ld e r s ’n o n -tim b e r la n d co lla te r a l w a s $ 3 .6 m i llio n . In to ta l, t he M RC /M ar at ho n pl an o f fe r e d t he N ot eh ol ders $ 51 3. 6 m i l l i o n i n c as h, a ny pa ym en t s t h at m i gh t f l ow t o t h ei r u n secured defi ci en cy cl ai m , an d a re t ai n ed l i en on an y H ead w ater s l i t i gati on proceeds.N o. 08- 40746

This court h as j uri sdictio n over this appeal directly from bankruptcycourt pursuant 13 to 28 U.S.C. § 158 (d)(2) base d on the certification by the bankruptcy court an dth is co ur t’s acquie scenceth erein. 10 O n Ju l y 8, t h e courtconf i rm ed the m odi f

i ed pl an an d d en i ed confi rm ati on of t he I ndent ure T r ust ee ’ s pl an. The nextday, t he I ndent ure Trust ee , j oi ned by Sco pac and i ndi vi dualN ot ehol der s, m ove d t o s t ay c onf i rm a ti on o f

t he pl an p e n d in ga p p e a l, a n d t h e I n d e n tu r e T r u s te e m o v e d t o c e r tify t h e a p p e a l d ir e c tly t o t hi s c o ur t . The ba nkr upt c y c o ur tg r ant e d t he m o t i o n t o c e r t i f y butde ni e d t he st ay p en di n g ap pea l . Am ot i on s p a n elof t h i s c ou rti ssued an i n t erl ocutory 13 order si m i l arl y den yi n g t h e Inden t u re T rustee’ s m ot i on t o sta y co n f i rm ati on p e n d in ga p p e a l. T h e In den t u re T rustee assert s on ap pea lcontenti on s of t h ree t yp es: t h ose c hal l engi ng t he t r eat m entof t hei rsec uri t y i nt er es t s; thos e chal l engi ng t he pl an c o nf i r m at i o n pr o c e dur e s ; a nd t ho s e r e l ati ng t o o t he rs pe c i f i c pl an t e r m s . The i s s ue s r ai s e d a r e t hatt he c o nf i r m e d M RC /M ar at ho n r e o r ga ni z at i o n pl an: ( 1) vi ol ates t h e absol u t e pri ori t y rul e by pa yi n g j u n i or P al co an d S copac cr edi t ors
w i t h t he N ot ehol der s’ c ol l at er al ; ( 2) i s not “ fai r and equi t abl e” be c ause t he pl an sold th e T i m b erlan d s coll a tera lw ith o u t p rov i d i n g th e N oteh olde rs a ri gh t t o credi tb i d; ( 3) v al ue s t he N o t e ho l de r s ’c o l l at e r alt o o l o w a nd b y an i m proper j udi c i alpr o c e s s ; ( 4) c r e at e s a n i l l e ga ls ubs t ant i ve c o nsol i da t i o n o f Sc o pa c a ndN o. 08- 40746

CompareI

n re C ont inen tal Airlines , 9 1 F. 3d55 3, 5 68-7 2 (en banc) (Alito , J ., 14 di sse ntin g) (dis cu ssin g th e origino f equit ab lemo otn es s doctrin e a n d co nclu din gth at, b ec au se it is neither jurisdiction al nor a que stion of ju sticiability , courts nee d not consi der equitab le mo otn es s b ef

or e th e me rits).

11 Pal c o ; ( 5) fai l s t o pa y i nt e r - c o m pa ny ad m i ni s t r at i ve pr i o r i t y c l ai m s i n c as h; (6 ) a r tific ia lly i m p a i r e d th e cla im o w e d to B a n k o f A m e r ic a a n d ille g a lly ger r ym and ere d th e v ot i ng c l as se s of unsec ure d c l ai m s i n cl as se s 8 and 9; ( 7) d i scr i m i n ates un fai rl y i n it s tr eatm en tof the N ot eh ol ders’C l ass 9 def i ci en cy cl ai m ; an d ( 8) i n cl u d e s u n au t h ori zed thi rd- pa rt y rel ease an d excu l pa t i on provi si on s. O n A u gu st 21 , M R C /M a ra th on , j oin ed by the U n i ted S tates a n d the S tate of C a l i forn i a , on the ba sis of t h eir resp ectiv e r e gu l a tory i n teres ts, m ov ed to di sm i ss t h i s app ealas equit ably m oot . B ecau se t h i s m ot i on l ogi cal l y precedes
con sider i n g th e m erits of t h e a p p ea l , w e con sider i t f i rst. 14 DI S CU S S I ON A . E q u i tab l e M o o tn ess A ppel l ee s c ont end t hat t hi s appeali s equi t abl y m oo ta n d m u st be di sm i ss ed be c ause no s t ay pe ndi ng appeal of c onf i r m at i on w as gr ant ed; t he pl an i s s u bstanti al l y consu m m ated; an d u n w i n di n g i tw i l lha ve an a dv erse ef fectonN o. 08- 40746

11 U.S.C . §§ 36 3(m), 3 64(e). These provision s prevent the appellate r eversalof an 15 order to sell property or obtain post-petitionfin ancing u nle ss suchord ers werestayed pe ndin g appeal. 11 U.S.C . § 112 7.

16 12 th ir d -p a r tie s a n d w ill p r e v e n t a s u c c e s s fu l re o r g a n iz a tio n . In reU N R I n d u st ri es Inc. , 2 0 F .3d 7 6 6 , 7 6 9 (7t h C ir. 1 9 9 4 ). “E q u ita b le m o o tn e s s ” h a s e v o lv e d in b a n k r u p tc ya p p e a ls to co n s tr a in ap pel l ate r evi ew , an d p ot en t i alrevers al , of orders confi rm i n g reorganizat i on pl ans . Equi t ab l e m o o t ne s s i s a ki nd o f a ppe l l at e a bs t e nt i o n t hatfav o r s t he f i nal i t y o f

r e o r ga ni z at i o n s a n dp r o t e c t s t h e i n t e r r e l a t e d m ul t i
- pa r t y e xp e c t at i o ns o n w h ic h th e yre s t. S ee In re Ma ng es , 2 9 F .3d 1 0 3 4 , 1 0 3 9 (5t h C ir. 1 9 9 4 ). D es pi t e i t s appar entvi r t ues , equi t abl e m oo t nes s i s a j udi c i alanom al y. Feder al courts “ h ave a vir t u al l y u n f l agg i n g obl i g a tion ” t o exerci se t h e j u ri sdi ct i on c o n fe r r e d o n th e m . C ol orad o R i ver W ate r Con ser vati on D i st . v. Un i t ed S t ate s , 41 4 U . S. 800 , 817 , 96 S. C t . 1 23 6, 1 24 6 ( 19 76 ) . Al t ho ugh t he Bankr upt c y Code forbids a p p ell a te rev i ew of certa i n u n -st a ye d ord ers a n d restric ts po st- 15 confi rm ati on pl an m odi f i cat i on s, i tdoes not expressl y l i m i tapp el l ate r evi ew of

16 pl an conf

irm a tion or d e rs . M o re o v e r, eq u ita b le m o o tn e ss ca n n otcl ai m l egi t i m acy ba s e d o n Ar t i c l e I I I m o o t ne s s . The l at t e rdo c t r i ne , o f c o ns t i t ut i on al o r i gi n, preven t s adj u di cat i on w h en cases are n o l on ger “ l i ve”; t h e f orm er a b d ic ates
a p p ell a te rev i ew of ve ry rea l, c on ti n u i n g co n trov ersies. A s th en -Ju d ge A l i toN o. 08- 40746

13 w r o t e , A r t i c l e I I I m o o t ne s s co nc e r ns ar i s e w he n a j udi c i alr ul i ng w o ul d ha ve no e ffec t; equ i t able m oot n ess ap pl i es w h en a j u di ci alrul i n g m i gh tha ve t oo m u ch
e ffe c t o n t h e p a r tie s to a co n fir m e d re o r g a n iz a tio n . In reCon t i n entalA i rl i n es , 9 1 F .3 d 5 5 3 , 5 6 9 (3d C ir. 1 9 9 6 ) ( e n b anc) (A lito , J ., d is s e n tin g). S ee als o In re U N R I n d u stri es , 2 0 F .3 d 7 6 6 , 7 6 9 (7 th C ir . 1 9 9 4 ) (E a s te r b r o o k , J .) (e q u ita b le
m o o tn e ss is a m isn o m e r). N evert h el ess, t h e rat i on al e f or equi t ab le m oot n ess i s not at i ssue h ere. T h e doct ri n e i s f

i rm l y root ed i n F i f

t h C i rcui tj u ri sprud en ce, as t h i s c ou rt att em pts to “ st ri k[e] the proper balance betw een t h e equ i t able consi derati on s of f i nal i t y and good fai t h re l i ance on a j udgm entand c om pet i ng i nt er es t s t hat
u n d e r lie th e rig h t o f a p a r ty to s e e k re v ie w o f a b a n k r u p tc yo r d e ra d v e r s e ly
a ff ecting h i m . ” In reManges , 2 9 F .3 d a t 1 0 3 9 ; I n r e H i l al , 5 3 4 F . 3 d 49 8 , 50 0 ( 5 th C ir . 2 0 0 8 ); In re G W

I P C S1 I

n c. , 2 3 0 F .3 d 7 8 8 , 8 0 0 & n .2 4 (5 th C ir . 2 0 0 0 ); In re B err ym an P rodu ct s, I

n c. , 159 F . 3d 941 , 944 ( 5 th C ir . 199 8) . Th i s c ou rt
ac c or di ngl y c ons i der s “ ( 1) w het hera st ay w as obt ai ned, ( 2) w het hert he pl an has b e e n ‘s u b stan ti a l l y co n su m m a ted , ’an d ( 3 ) w h eth er th e reli ef req u ested w ou ld
a ffe c t e ith e rth e rig h ts o f p a r tie s n o t b e fo r e th e co u r t o rt h e s u c c e s s o f th e p la n .” In reManges , 29 F. 3d at1039.N o. 08- 40746

14 It is im p o r ta n t t o o b s e r v e th a t a p p e lla te ca s e s g e n e r a llya p p lye q u ita b le
m o o tn e s s w ith a s c a lp e l ra th e rth a n a n a x e . T h is co u r t h a s b e e n e s p e c ia lly sol i ci t ou s of

t h e ri gh t s of

sec u red cr edi t ors f ol l ow in g c o n f

i rm ati on . Th u s, equi t abl e m oo t nes s di d nots t and i n t he w ay o f ourr eve r si ng an ord er t hat i m pro per l y r equi r ed a se c ure d l ender , as par t of a r eo r gani zat i on pl a n , to
r e im b u r s e e n v ir o n m e n ta l re m e d i a tio n e x p e n s e s in c u r r e d b yth e d e b to r . In re G r i m l and , 243 F . 3d 228 , 2 3 2 (5th C i r. 200 1) . I n an earl i er c ase, t h i s c ou rt
r e vi e w e d whet he rt he pr i nc i pa l secur e d l e nde rt o a de bt o rr e c e i ve d t he

“ i ndub i t ab l e eq ui va l e nt ” of i t s i nt e r e s tw he n i t s l i e n w as m o di f i e d b y t he pl an. In reS u n Cou n t ry D ev. , I n c. , 764 F . 2d 406 , 409 ( 5th C i r. 198 5) . Th i s c ou rtnoted t hatr e ve r s alo f

t he c o nf

i r m at i o n o r de rw o ul d s i m pl y r e qui r e r e i m po s i t i o n o f t he
o r ig in a l lie n . Id . at407 n. 1. Th i s c our t has al so c onduct ed appel l at e r evi ew of pl an pro vi sion s th at
r el i eve d a bankr upt c y t r ust ee f r om l i abi l i t y f

ol l ow i ng a c onf

i r m ed pl an, and has ordered att orneys to rei m bu rse sum s i m properl y al l ocat ed t o t h em f rom sec u red
c r e d ito r s . Se eIn r e H i l al , 5 3 4 F .3 d a t 5 0 1 ; I n r e SI Res t r uc t ur i ng , 542 F. 3d 131, 13 6- 37 ( 5t h Ci r . 2 00 8) . I n ne i t he ro f t ho s e c as e s had a s t ay be e n o bt ai ne d, a nd t h e reor gan i zati on pl an s had been substanti al l y consu m m ated. E a ch opi n i onN o. 08- 40746

15 f o und, ho w e ve r , t hatt he r e w o ul d be no s i gni f i c anta dv e r s e c o ns e que nc e s t o t he reorganizat i on f

rom app el l ate r evi ew of t h e parti cul ar i ssues. O t he rc o ur t s ha ve c ar e f ul l y w e i ghe d t he c o ns e que n ce s b e f o r e a ppl yi ng equ i t able m oot n ess t o i ssues rai sed on ap pea l of pl an confi rm ati o n ord ers. N ot ably, they h ol d t h at ap pel l ate revi ew n eed n otb e decl i n ed w h en , becau se a p la n h a s b e e n su b sta n tia ll yco n su m m a te d , a c re d itor c o u ldn o t o b ta in fu llre li e f. If th e a p p e a l s u c c e e d s , th e co u r ts s a y , th e ym a yfa s h io n w h a t e v e r r e l ie f is practi cabl e. A f

t er al l , ap pel l an t s “ w ou l d r ead i l y accept som e f ract i on alrec overy t h at does not i m pa i r f easi bi l i t y or af

fectparti es not bef

ore th is C o u rt , rat h er th a n s u ff

er th e m oo tn ess o f [ th eir] a p p ea la s a w h ole. ” I n r e Chat e aug ay Cor p. , 10 F. 3d 944, 954 ( 2d C i r . 1993) ( c i t i ng M CI T ele co m m u n ica tion s C o rp . v . C re d it B u i l d ers of

A m eri ca, I

n c. , 2 F . 3d 103 , 104 ( 5th C i r. 199 3) ( “ [A ] case i s not m oot ed b yth e fac t th a t a n im p e cu n iou s ju d g m e n t d e b to r m a ylac k th e m e a n s to sa tisfy
a j u d g m e n t.”) ) S ee als o I n reP WSHol d i ngs C orp. , 228 F . 3d 224 , 236
- 37 (3d C i r. 200 0) . A n ot h er c avea ti s t h at equ i t able m oot n ess ap pl i es t o speci f i c c l ai m s, not
en t i re app eal s. “ In e x erci si n g i t s di scr et i on ary pow er t o di sm i ss an app ealon
m oot n ess groun ds, a courtcan n o t a v o i d i t s obl i gati on t o sc ruti n i ze each i ndi vi dualc l ai m , t es t i ng t he f eas ibi l i t y o f

gr ant i ng t he r el i ef

agai ns ti t s pot ent i alN o. 08- 40746

Twoo f our de ci sion s d eclinin gt o review b a nkru ptcyapp ealso ne quit ab lemo otn es s 17 ground s arenot to the co ntr ary. InI nre Crystal

Oi l , this co urt declined to i mpose a dditio nal , more onerous payment terms for notes issued pursuant to a substantiallyconsummate d plan. Th e court observe d th at awardingsuch reli ef o n appeal would h arm the first lienhol der who had made significant conc ession s, to the ben efit of the junior lienhol der who wa s theapp ell ant . 854F .2d 79, 81-8 2 (5thC ir. 1 988). S imilarly , in Inre Brass C orporat ion , this co urt declined to perform the “propo sed day surgery” on a consummate d C hapt er 1 1 pl an because such reli ef “wo uldexci separtsto whichoth ervital[] [p art s] o f th e pl a nareatt ach ed .” 169F .3d 9 57, 962 (5th Cir. 199 9). Th ese decisions were roote d in determination s that any relief w ou ldei ther har m third-parti es orthreat en the reorgani zation . 16 i m p a ct on the reor ga n i za ti on sch em e a s a w h ole. ” I n reA O V

I n d u st ri es Inc. , 7 9 2 F .2d 1 1 4 0 , 1 1 4 8 (D .C . C ir. 1 9 8 6 ). 17 To t he s e c aut i o ns r e ga r di ng e qui t ab l e m o o t ne s s m us tf i nal l y be a dde d t he im p a c t o f th e n e w s ta tu to r yp r o v is io n fo rce r tific a tio n o f b a n k r u p tc ya p p e a ls di r e c t l y t o t he c o ur t s o f a ppe al s . 28 U . S. C. § 15 8( d) ( 2) . The t w i n pu r po s e s o f t he pr o vi s i o n w e r e t o e xp e di t e ap pe al s i n s i gni f i c ant c as e s a nd t o g e ne r at e b i ndi ng appel l at e pr ec ede nt i n bankrupt c y, w hos e c as el aw has bee n pl agu ed by i nd e t e r m i nacy. H .R . R e p . N o . 1 0 9 -3 1 p t. I, a t 1 4 8 (2 0 0 5 ), a s r ep rin ted in 2005 U . S. C . C . A . N . 88, 206. C o n g r e s s ’ s p u r p o s e m a yb e th w a r te d if e q u ita b le
m o o tn e s s is u s e d to d e p r iv e th e a p p e lla te co u r t o f j u r i s d ic tio n o v e ra p r o p e r ly
c e r tifie d a p p e a l. A l lof t h ese fact ors b ear on the i n st an tapp eal . B ecau se t h e ban kru ptcy
c our tdeni ed a st ay pe ndi ng appeal , t hi s c our tfac ed a fa it ac co mp li , a pl an t hat
w as s ubst ant i al l y c ons um m at ed w i t hi n w eek s of c onf i r m at i on. As w e haveN o. 08- 40746

17 n o te d , p la n c o n s u m m a tio n m a yo fte n b e d is p o s itiv e o f th e q u e s tio n o f e q u ita b le
m o o tn e s s . In reManges , 2 9 F. 3d at1040 ( quot i ng In reU N R I n d u st ri es Inc. , 2 0 F . 3 d a t 7 7 0 (“Astay n ot sou gh t, an d stay sou gh t an d de n i ed , l ea d eq u a l l y to t h e i m pl em en t ati on of t h e pl an of

reor gan i zati on . ” ) . U n der t h e B an kru ptcy C od e, con su m m a ti on i n cl u d es tra n sferri n g al lors ubsta n ti a l l y a l lof th e p rop erty
c o ve r e d b y t he pl an, t he as s um pt i o n o f bus i ne s s byt he de bt o r s ’s uc c e s s o r s , a nd th e co m m e n c e m e n t o f p la n d is tr ib u tio n s . 1 1 U .S .C . § 1 1 4 1 ; In reManges , 29 F . 3d at 104 1, n. 10. W i t h i n few er than si xty d ays f ol l ow i n g t h e conf

i rm ati on order, Scop ac an d P al co w ere d iss o lved an d thei r ass et s t ran sferred t o new en ti ti es, N ew co an d T ow n co, n ow n a m ed H u m b oldt R ed w oo d C om p a n y (“H R C ”)
a n d th e to w n o f S c o tia , re s p e c tiv e ly . T h e n e w e n tit ie s ra is e d $ 3 2 5 m illio n in e x it f i nanc i ng s e c ur e d b y H RC a nd g uar ant e e d b y M R C . C redi t o r s o t he rt han t he N oteh olde rs h a ve be en pa i d ov er $ 5 0 m i l l i on . H R C h i red n ew m a n a g e m en t, cha n ged i t s m an agem en tst ructure, eng aged bu si n ess co n sul t an t s and l eased
n ew off i ce sp a ce a n d a d i strib u ti on ce n ter. H R C h a s si gn ed n ew con tracts w i th
r e - m anu f

a c t u r e r s a nd won bus i ne s s f r o m a na t i o nalho m e pr o duc t s r e t ai l e r . The t ow n of Sco t i a i nves t ed i n co stl y c api t ali m pro vem ent s. I n addi t i on, H R C has
suc c es sf ul l y navi gat ed t he r egul a tory l a b yr i n th an d secur ed unani m ous appr oval t o o pe r at e f

r o m t he st at e and fe de r alage nc i e s . A l lo f t he s e e ve nt s c r e at e d t hi r dpa rt y rel i an ce and expectat i on s t h at w ou l d be d i sl odg e d if th e N ot eh ol dersN o. 08- 40746

18 s u c c e e d in e n tir e lyre v e r s in gth e co n fir m a tio n o r d e r . In reManges , 29 F. 3d at 104 3. W e w i l lf

u rt h er bal an ce t h ese fact s as w e an al yze t h e speci f i c i ssues rai sed
o n a p p e a l. B ut t he i nco ngrui t y o f t he bankr upt c y c our t ’ s ac t i ons — i n bot h denyi ng a s ta yp e n d in ga p p e a l a n d ce r tify in gits o r d e r s fo rd ir e c t a p p e a l t o th is
cou rt— req u i res i m m ed i a te c om m en t. F a ci a l l y, th e tw o d ecisi on s d o n ot con fl i ct. The c o ur tb r i s kl y di s pa t c he d t he l e ga li s s ue s r ai s e d b y t he N o t e ho l de r s a s h a v i ng no l i ke l i ho o d o f

suc c e s s on a ppe al . I te m pha s i z e d t he e c o no m i c c al am i t y fac i ng P al co and Scop ac. Th e court dou bted t h e f easi bi l i t y of

an y al t erna t e pl an , gi ven t he c o m pl e x and c o ns t r i c t i ve r e gul at o r y e nvi r o nm e nti n w hi c h r e dwoo d l o gg i ng e xi s t s . The c o ur tf

o und tha ta di r e c ta ppe alw o ul d m at e r i al l y ad va nc e t he p r o g r e s s o f th e d e b to r s ’ca s e s . S ee28 U . S. C . § 158( d) ( 2) ( i i i) . Cert i f i c at i on w as al so dri ven by the prom i n en ce of t h i s c ase t o t h e ci tize n s o f C al i f orni a, of H u m bol dt C ou n t y, an d of t h e t ow n of S cot i a an d by t h e pl an ’ s ef fecton “one of th e n a tio n ’ s m o s t e c o lo g ic a llyd iv e r s e fo r e s ts . . . .” B a s e d s o le lyo n th is
r eas oni ng, t he c our t ’ s c er t i f i c at i on dec i si on c om pl em ent s t he deni alof t he s t ay by speed i n g t h e case t o the f i n ald i sposi t i on the court desi red. I t s r ati on al e f or c e r tific a tio n is ce r ta in lys u ffic ie n t u n d e r2 8 U .S .C . § 1 5 8 (d )(2 )(i). An al t e r nat i ve b as i s f o rc e r t i f i c at i o n al s o e xi s t e d, ho w e ve r , b e c aus e o f t he
n o v e li s s u e s r a i s e d i n t h e c o n f i r ma t i o n p r o c e s s . T h e c o u r ta u t h o r i z e d c r a md o wnN o. 08- 40746

19 of sec u red d e b t p rem i sed sol el y on i t s j u di ci alval u ati on of a 200 , 000
- acre red w oo d f

or es t , and i tdeni ed t he N ot ehol der s’r i ght t o c r edi tbi d t hei rdebt agai nstt he val ue o f

t he c ol l at er al . Th e nat ure of t hi s c r am dow n and t he r ef usal t o a ppl y § 1 12 9(b) ( 2) (A) ( i i) t o a ut h ori ze a c r e di tb i d a r e unus ual , pe r hap s
u n preceden t ed d eci sion s. Su ch i ssues an d others m en t i on ed l ater , w h en c o ns i de r e d i n t he c o nt e xt o f r e o r ga ni z i ng ne ar l y a bi l l i o n do l l ar s t o t alde bta nd
ove r$700 m i l l i on o f t he N ot ehol der s’ se c ure d debt , des er ved c er t i f i c at i on and an
o p p o r tu n ity fo rd ir e c t a p p e a l. S ee2 8 U .S .C . § 1 5 8 (d )(2 )(ii). Al t ho ugh t he e xi ge nc i e s o f t he c as e a ppe ar e d t o de m and p r o m pta c t i o n, si m pl y den yi n g a st ay seem s t o ha ve been , an d of t en w i l lbe, t oo si m pl i st i c a response. Apl an m ay be d esi gn ed t o t ak e ef fect , as i t w as h ere, af t er a l ap se of suff i ci en tt i m e t o i n i t i ate appell ate r evi ew . As u persedea s bon d m ay be tai l ored t o t h e sc ope of

t h e app eal . A n a p p ealm ay be exp edi t ed. A s w i t h al lfacet s of ban kru ptcy practi ce, m yri ad possibi l i t i es exi st . T h u s, sub st an t i al l egal i ssues c a n a n d o u g h t t o b e p r e s e r v e d fo rre v ie w . C ompare In r e Fi rs tSout h Sa vi ngs A s s 'n , 82 0 F. 2d 70 0, 70 9 & n. 10 ( 5t h C i r . 19 87) .N o. 08- 40746

See, e.g. , Lou isville J

ointSto ck Lan d Bank v. Radfo rd , 295 U.S. 555, 589 -90, 55S. Ct. 18 8 5 4 , 8 6 3 ( 1935) (takin g s clau se); Wrightv. Vin to n Bran ch of the Moun tainTrustBank , 3 0 0 U. S. 4 4 0 , 4 7 0 , 5 7 S. C t. 5 5 6 , 5 6 5( 1 9 3 7) (du e proc es s clau se); Dew sn u p v. T imm , 50 2 U .S. 410, 418-19, 112 S. Ct. 773, 779 (199 2) (c itin g Radfo rdwithapp rov al) . 20 B . T h e I n d e n t u r e T r u s t e e ’ s C l a i ms 1 . I s s u e s P e r t a i n i n gt o S e c u r e d C l a i m. T hr e e o f

t he I nde nt ur e Tr us t e e ’ s i s s ue s c hal l e nge w hatt he N o t eh ol ders
rece i ve d f

or th eir coll a tera l

— a p p rox i m a tel y $5 1 3 m i l l i on i n cas h

— p u rsu a n t t o t he b ank rup t cy court ’ s det erm i n ati on of t h e val u e of

t h e T i m berl an ds. Ac c o r di ng to the N oteh olde rs, the plan viol a tes th eir ri gh ts i m b ed d ed i n the ab solu te pri ori t y rul e an d the fa ir a n d equ i t able st an da rd govern i n g t h e t reat m en tof
c la im s in ch a p te r1 1 re o r g a n iz a tio n s . S ee g en e ra lly 1 1 U .S .C . § 1 1 2 9 (a ), (b). A l t erna t i vel y, t h e N ot eh ol ders chal l en ge t h e m et h odol ogy an d am ou n treached i n t h e court ’ s val u ati on of t h e T i m berl an ds. W e h o ld th e s e is s u e s ju s tic ia b le n o tw ith s ta n d in gth e tu go f e q u ita b le
m oot n e s s . Se c ur e d c r e di tr e pr e s e nt s pr o pe r t y r i ght s t hatul t i m at e l y f i nd a
m i ni m um l evel of pro t e c t i o n i n t he t ak i ngs a nd d ue pr o c e s s c l aus e s o f t he C on st i t u t i on . Th e B an kru ptcy C ode’ s r e o rg an i zati on provi si on s i n fact 18 “p r e s e r v e th e e s s e n c e ” o f th e b o u n d a r ie s o f s e c u r e d cr e d ito r s ’rig h ts la id o u t in
c o n s tit u tio n a l ca s e s . S eeK en n et h N . K l ee, B an kru ptcy and t h e Su prem e C ou rt 13 9 ( 20 08 ) . Fe de r alc o urt s s ho ul d p r o c e e d wi t h c aut i o n b e f o r e de c l i ni ngN o. 08- 40746

21 ap pel l ate r evi ew of

t h e adj u di ca tion o f t h ese r i gh t s un der a j u dg e- creat ed abstenti on doct ri n e. M oreover, w h i l e w e h a v e f ou n d n o case t h at appli ed
e q u it a b le m o o t n e s s to d e c li n e r e v ie w o f t h e tr e a t m e n to f a s e c u r e d c r e d it o r ’s
c l a i m , a tl e a s tt wo c a s e s i n t hi s c o ur th a v e r ul e d o n s uc h a p p e a l s d e s p i t e p l an p rop on en ts’ p l ea s for eq u i tab l e m oo tn e s s . I n r e G r i m l and , 243 F. 3d 228, 232 (5 th C ir . 2 0 0 1 ); In re S u n Cou n t ry D ev. I n c. , 7 6 4 F .2d 4 0 6 , 4 0 9 (5 th C ir. 1 9 8 5 ). O n l y a year befor e Manges i ssued , w e re v iew e d al li ssues pert ai n i n g t o a c r am do w n r e o r ga ni z at i o n pl an w i t ho uta ny c o nc e r ns b e i ng vo i c e d a bo ut
e q u ita b le m o o tn e s s . Ma tt er of B riscoe E n terp. L td., II, 994 F . 2d 1 160 (5t h C i r. 1 9 9 3 ). N o ri s i t i nc o ns i s t e ntw i t h In reManges t o revi ew t h e N ot eh ol ders’
c hal l e nge s r e ga r di ng t he t r e at m e nto f t he i rs e c ur e d c l ai m s . Des pi t e t he
su b stan ti a lcon su m m a ti on of th e M R C /M a ra th on p l a n , or ra th er, b eca u se o f i t,
ov er $ 5 0 0 m i l l i on i n cas h w a s e s c r o w e d t o p a y th e N oteh olde rs. If w e w ere to
reverse t h e ban kru ptcy c ou rt ’ s deci si on , t h e cash w ou l d r evertt o som e ot h er use for t h e b en efi t of

the re org a n i ze d co m p a n y. W e n ee d n ot in ve n t h yp oth eti ca l s to
s u g g e s t t h a t t h e e x p e c ta tio n s o f th ir d p a r tie s o th e r th a n M R C /M a r a th o n co u ld l arge l y be pr e s e r ve d d e s pi t e a de c i s i o n r e i ns t at i ng o rr e - e va l uat i ng t he N o t e ho l de r s ’l i e ns . Al t e r nat i ve l y, s o m e o t he r , m o r e l i m i t e d f o r m o f r e l i e f m i ghtN o. 08- 40746

E quitab le mootn ess should protect l egitimate expe ctations of parties to b ankruptcy 19 cases butsho uld not be a shiel d for sharp or unauthoriz edp r ac t ic es . Applyingequitable mo otn es s toob ro a dlyt o di sf avorapp ealsch all en gin gth e tr eatm ent of se cure d deb t carrie s a price . It maypro mote the confirmatio n of re organi zationplans, b ut it also destab ili zes the credit market forfin anciallytro ub le dcompanie s. Lenders willbereluctant to work with debtors who mayu nil ater ally decide t o f il e bankruptcy , propo se aplan that a ggressively und ervalu es th e coll at er al , an dm ay th e nthwart appellatereview b y rotely inc anting equitable mootn ess. On the whole, it is preferab le to createan environ ment in whichfir ms canavoid bankruptcyratherth an oneinwhich bankruptcylitigiou sness will thrive . 22 b e a ffo r d e d th e N o te h o ld e r s . S ee I n r e Chat e aug ay , 10 F . 3d at 954 . T h at t h ere
m i gh tbe adv erse consequ en ces t o M R C /M arathon i s not on l y a n aturalres u l tof
a n y o rd i n a ry ap p ea l

— on e si d e goe s a w a y disap p oin ted

— b u t ad ve rse a p p ell a te
con seq u en ces w ere f ore see a b l e to th em as so p h i sti ca ted i n ve stors w h o op ted to pr e s s t he l i m i t s o f

b ank r upt c y c o nf

i r m at i o n a nd va l uat i o n r ul e s . Fi nal l y, t he 19
c o m p le x ity o f c r a m d o w n o fte n cr ie s o u t fo ra p p e lla te re v ie w , a n d th is “s h o u ld
e nc o ur ag e t he de bt o rt o b ar ga i n w i t h c r e di t o r s t o ga i n ac c e pt anc e o f a pl an i n t he
m aj or i t y o f

c as es . ” K ennet h N . K l ee , A l lYou E verW ant ed t o K now A boutC r am D o w n U n d e r th e N e w B a n k ru p tcy C o d e , 5 3 A m . B a n k r. L .J. 1 3 3 , 1 7 1 (19 7 9 ). T u rn i n g to th e m erits, the B a n k ru p tcy C ode r equi r es a r eo r gani zat i on pl an ei t h er t o res ton the agreem en tof each cl ass of

cr e d itor s ort o prot ectcr edi t or c l as s e s ac c o r di ng t o t he abs o l ut e pr i o r i t y r ul e , w hi c h enf o r c e s a s t r i c thi e r ar c hy of t hei rr i ght s def

i ned by st at e a nd fede r all aw . The abs ol ut e pr i or i t y r ul e has l on g been a feature of A m eri can ban kru ptcy l aw . It i s codi f i ed i n t h e st an da rd t h at a pl an be “ fai r and eq u i t able, w i t h respect t o ea ch cl ass of cl ai m s of

i n t erestN o. 08- 40746

The absolutepriorityrule provides that “aplan of re organ iz at ion maynot allo cate 20 anypro pertywhatsoever to any junior class on acco untof their inter ests orcl aims in a debtor unl ess suchsenior classes receivepro pertyequalinvalu e to the fullamo untof their allo wed clai ms. . . .” 7 Lawrence P. King et al., Collier on Bankruptcy ¶ 112 9.04 [4][ a] , at119 2-93 (1 5 the d. r ev . 2 0 0 8). 23 th a t is im p a ire d u n d e r, a n d h a s n o t a cc e p te d , th e p la n .” 1 1 U .S .C . § 1 1 2 9 (b ). 20 Th e a bs ol ut e pr i or i t y r ul e a nd t he fai rand eq u i tabl e s t andard m ustbo t h be
s at i s f i e d b e f o r e a c o ur tm ay“ c r am down” a r e o r ga ni z at i o n pl an o ve rt he obj ect i on of

a di ssenti n g credi t or c l ass. T h e N ot eh ol ders i n i t i al l y contend t h at t h e M R C /M arathon pl an vi ol ates absol u t e pri ori t y by di rect i n g som e of t h e capi t ali nj ect ed by M R C an d M arathon t o p a yc l a i ms j u n i o rt o t h e No t e h o l d e r s ’s e c u r e d c l a i m. T h i s a r g u me n th a s t wo com pon en t s. Th e f

i rsti s r oot ed i n valuati on . If t h e ban kru ptcy c ou rt ’ s val u ati on o f th e N o te h o ld e r s ’co lla te r a l a lig n e d w ith th e irv a lu a tio n , a n d if th e p la n p a id t h em t h at am ou n t , t h e N ot eh ol ders w ou l d n otcom pl ai n . I ti s onl y becau se t h ey pe r c e i ve a v al uat i o n s ho r t fal lt hatt he y c o nt e nd m o r e of t he pur c has e pr i c e of t he
as se t s sho ul d h ave bee n pai d forthei rcol l at er alan d w as i m pro per l y us ed t o pay j u n i o rc r e d i t o r s . T h i s v a l u a t i o n i s s u e wi l lb e a d d r e s s e d f u r t h e rb e l o w. T h e s e c o n d co m p o n e n t o f th e N o te h o ld e r s ’a b s o lu te p r io r ity o b je c tio n is bas ed on t he fai ran d equi t abl e st andard as appl i ed t o s ec ure d c r edi t or s. To be fai r an d equi t able w i t h respect t o a di ssenti n g cl ass, a pl an m u st “i n cl u de” cert ai n requi rem en t s. 11 U . S . C . § 1129 (b) ( 2) (A ) . Th ree m i n i m u m al t erna t i vesN o. 08- 40746

24 ar e pr ovi ded f

ors ec ure d c r edi t or s. U ndert he f i r st al t er nat i ve, t he hol der s m ay
r e ta i n the i r l i en s ac com p a n i ed by the ri gh t t o rec eive d eferre d cas h pa ym en ts h a v i n ga p r e s e n tv a l u e e q u a lt o t h e val ue o f t h e c o l l a t e r a l . 1 1 U. S . C. § 112 9(b) ( 2) (A ) ( i) ( “ C l a u se (i) ” ) . Secon d, t h e sec u red property m ay be sol d f ree an d cl ear of

l i en s, w i t h the l i en s att ach i n g t o t h e proceeds, as l on g as t h e cr edi t or h a s t h e r i g h tt o c r e d i tb i d p u r s u a n tt o 1 1 U. S . C . § 3 6 3 ( k ) . 1 1 U. S . C. § 112 9(b) ( 2) (A ) ( i i) ( “ C l au se (i i) ” ) . T h i rd, the pl an m ay all ow f or t h e “ real i zati on b ys u c h h o l d e r s o f

t h e i n d u b i t ab l e e q u i v a l e n to f s u c h c l a i m s . ” 1 1 U. S . C. § 1 1 2 9 (b )(2)(A )(i ii) ( “C la u se (i ii)”). In t h i s c ase, t h e ban kru ptcy c ou rth e ld th at C l au se (i i) , governing sal es f ree and cl ear, i s i n ap pl i cabl e becau se t h e reor gan i zati on pl an const i t u t es a “t r a n s fe r ” r a th e rt h a n a “ s a le ” o f a s s e ts . S ee 1 1 U .S .C . § 1 1 2 3 (a )(5)(B ) a n d (D ). W e a gree w i t h the N ot eh ol ders tha tthis ru l i n g w as w rong. M R C , a com peti t or of Pal c o, j oi ned w i t h P al c o’ s c r edi t orM ar at hon t o o f ferc as h and co nver tdebt in to e q u ity in re tu r n fo rta k in go v e rb o th P a lc o a n d S c o p a c . N e w e n tit ie s w h o lly
o w n e d b yM R C a n d M a r a th o n re c e iv e d tit le to th e a s s e ts in e x c h a n g e fo rth is p u r c h a s e . T h a t t h e tr a n s a c tio n is co m p le x d o e s n o t fu n d a m e n ta llya lte rth a t it in v o lv e d a “s a le ” o f th e N o te h o ld e r s ’co lla te r a l. S ee B l ack’ s La w D i ct i on ary 1337 ( 7th ed. 199 9) . S ect i on 112 3( a) ( 5) , ci t ed by t h e court , l i st s “ t ran sfers” an d “s al es”
am o ng va r i o us de vi c e s a de bt o rm aye m pl o y t o a c c o m pl i s h r e o r ga ni z at i o n, a ndN o. 08- 40746

25 “ t ran sfer” i s def

i n ed broad l y i n 11 U . S . C . § 101(54) . Th e t erm s used i n t h ese provi si on s are descri pti ve an d h ave n o i n dep en den tl egal si gn i f i can ce. Fu rt h er, as t h e N ot eh ol ders poi n tout, every sal e of property i n vol ves a t ran sfer, bu tnot
e ve r y t r ans fe ri s a s al e . H e r e , a s al e o c c ur r e d. Cl aus e (i i) c o ul d ha ve a ppl i e d. T h e N oteh olde rs, h ow ev er, m u st do m ore tha n sh ow tha t C l a u se (i i) t heor et i c al l y appl i ed t o t hi s t r ansac t i on. They have t o dem ons t r at e i t s exc l usi ve appl i c abi l i t y. They o bs erve t hat C l ause (i i) al one c onc er ns s al es of c ol l at er al unde ra pl an and s pe c i f i c al l y al l o w s t he di s s e nt i ng c r e di t o r t o c r e di t bi d f o rt he
c o l l at e r al . Con s e que nt l y, t he y c o nt en d, C l aus e (i i) s ho ul d p r e va i lund e rt he
c ano n o f s t at ut o r y c o ns t r uc t i o n t hatt he m o r e sp e c i f i c pr o vi s i o n c o nt r o l s o ve rt he gen erali n du bi t able equ i valent al t erna tiv e o f C l au se (i i i) . A l l ow i n g sal es of
c o l l a t e r a lf

r e e a n d c l e a ro f

l i e n s und e rC l a u s e (i i i) wo u l d a l s o , i n t h e i rv i e w, rend er C l au se (i i) sup erf l u ou s. F o r s e v e r a l r e a s o n s , th e N o te h o ld e r s ’ a r g u m e n ts c a n n o t b e a c c e p te d . T h is court h as su bscribed t o t h e obvi ou s proposi t i on t h at because t h e t h ree sub sect i on s of

§ 1129 (b) ( 2) (A ) are j oi n ed by t h e di sj u n ctive “ or, ” t h ey are a lte r n a tiv e s . B r is c o e , 99 4 F. 2d a t1 16 8. I n B ri scoe , t he c our t added t hat i thad “n ot tra n sform ed the ‘ or’ i n 11 2 9 (b)( 2 )(A ) i n to an ‘ a n d . ’” I d. A s al t erna t i ves, t h ese provi si on s are n ot even exh au st i ve. Th e i n t rodu ct i on t o § 1129 (b) ( 2) st ates t h at t h e “ cond i t i on t h at a pl an be fa ir a n d equ i t able i n cl u d es t he f o l l o w i ngN o. 08- 40746

Section50 6(a) bifurcate s secured debt intoanallowed secure d cl aim equ alingth e 21 valueof the und erlying collateral and a gen eralunsecured clai m for anydeficiency. A cre ditor mayel ect in certain circu mstance s to treat an entir e debt as secured in connectionw ith a plan of r eorga niz ation . See11 U.S.C . § 111 1(b). The Noteholde rs madeno such electionh ere. 26 r e qui r e m e nt s . . . . ” ( e m pha s i s adde d) . The Bankr upt c y Code s pe c i f i e s t hatt he t e r m “ i nc l ude s ” “ i s no tl i m i t i ng. ” 11 U . S. C. § 1 02 ( 3) . Eve n a pl an c o m pl i ant
w i t h t h ese al t erna t ive m i n i m u m st an da rds i s n otnecessari l y fai r and equ i t able. Mat t e rof

Sandy Ri dgeD e v . Cor p. , 881 F. 2d 1346, 1352 reh' g d enie d , 889 F. 2d 6 6 3 (5 th C ir . 1 9 8 9 ). T h e n o n -e x h a u s tiv e n a tu r e o f th e th r e e s u b s e c tio n s is i nco nsi st entw i t h t r eat i ng t hem as c om par t m ent al i ze d al t er nat i ves . Fi nal l y, Cl aus e (i i i) do e s no tr e nde rCl aus e (i i) s upe r f l uo us fac i al l y o ra s a ppl i e d t o t he M R C /M a r a th o n p la n . A lth o u g h a cr e d i t b i d o p tio n m ig h t r e n d e rC la u s e (ii) i m perati ve i n som e cases , i ti s u n n ecess ary h ere becau se t h e pl an of fered a cash pa ym en tt o th e N ot eh ol ders. C l au se (i i i) t h u s af f ords a di st i n ctbasi s f or c o nf i r m i ng a pl an if

ito f fe r e d t he N o t e ho l de r s t he “ r e al i z at i o n . . . o f t he in d u b ita b le e q u iv a le n t o f s u c h cla im s .” The que s t i o n t he n b e c o m e s ho w t o de f i ne Cl aus e ( i i i) a nd whet he rt he M RC /M ar at ho n pl an s at i s f i e s t he de f

i ni t i o n. To b e gi n, “ s uc h c l ai m s ” a r e t he
c r e di t o r s ’a l l o w e d s e c ur e d c l ai m s , w hi c h, a c c ordi n g t o t he s t at ut e , e qua lt he
v a lu e o f

t h e c o l l a te r a l. 1 1 U .S .C . § 5 0 6 (a ); seealso , Mat t e rof San dy R i dge , 88 1 F. 2d a t1 35 0. W hatm e as ur e s c o ns t i t ut e t he i ndub i t ab l e e quiva l e nto f t he 21N o. 08- 40746

27 value of t h e N ot eh ol ders’col l ater alare r ar e l y e xp l ai ne d i n c as e l aw , becau se m ost
c o nt e s t e d r e o r ga ni z at i o n pl ans f o l l o w fam i l i arpa t hs o ut l i ne d i n Cl aus e s (i) a nd ( i i) . O ne e m i nent aut horc onc l uded f r om t he l egi sl at i ve hi st or y t hat A b a n d o n m e n t of th e co ll a te r a l to th e cla ss w o u ld sa tisfy [ i ndu bi t abl e e qu i val ent ] , as w oul d a r epl ac em entl i en o n si m i l ar c o l l at e r al . Butpr e s e ntc as h pa ym e nt s to t he c l as s l e s s t han t he amo u n to f

t h e a l l o we d s e c u r e d c l a i m s wo u l d n o ts a t i s f yt he stan d a rd . N or a re u n secu red n otes o r eq u i ty sec u ri ti es su ff i ci en t t o consti t u t e t h e “ i n du bi t able equ i valent” of sec u red cl ai m s. K e nne t h N . K l e e , Al lYou Eve rW ant ed t o K n o w Abo utCr am D o w n und e rt he B a n k r u p tc yC o d e , sup raa t 1 5 6 . S ee als o Mat t e rof San dy R i dge , 881 F . 2d 1352 ( af f i rm i n g “ di rtf

or debt” pl an o ffer in g ret u rn of col l ater ali n sat i sfact i on of le n d e r ’ s s e c u r e d cla im a s a p o s s ib le C l a u s e (iii) p la n ). L ik e w is e in s u ffic ie n t is a deb t or’ s of

fer to repay the balance of a sec u red deb ti n a bal l oon pay m en tt en ye a rs a ft er co n fi rm a ti on w i th i n terim i n teres t p a ym en ts b u t no req u i rem en ts t o p r o te c t t h e co lla te r a l. In re Mu relHol d i ng C o. , 7 5 F .2d 9 4 1 , 9 4 2 (2 d C ir. 1 9 3 5 ). Jud ge Le ar n ed H an d coi n ed the t erm “ i n du bi t able equ i valent” i n expl ai n i n g w hy t h e reor ga ni z at i o n pl an i n Mu relc o ul d no tb e c o nf i r m e d o ve rt he s e c ur ed
c r e di t o r s ’o bj e c t i o n: [A ] cred i tor w ho f

ear s t he s afet y o f

hi s pri nci palw i l ls c ar c el y be content w i t h [i n t erestp aym en t s alone] ; h e w i shes t o g ethi s m on ey o ra tl e as tt he pr o pert y. W e s e e no r e as o n t o s upp o s e t hatt he st at ut e w as i nt ended t o de prive hi m of t hat . . . unl es s by a sub st i t u t e of

t h e m osti n du bi t able equ i valence.N o. 08- 40746

28 I d. S ee als o I

n reS u n Cou n t ry , 764 F. 2d at409 ( r ul i ng t hat 21 no t es s ec ure d by 2 1 d iff e re n t lots w a s in d u b ita b le e q u iva len t of v a lu e li e n on th e en tire p a rc e l). Bas e d o n t he s e e xa m pl e s , Cong r e s s di d no t ad o pt i ndub i t ab l e e quiva l e nt as a capa ci ou s but em pty sem an t i c vessel . Q u i t e t h e contr ary, t h ese exam pl es f o c us o n whati s r e al l y ats t ak e i n s e c ur e d c r e di t : r e pa ym e nto f pr i nc i pa la nd t he t i m e v a l u e o f

mo n e y . Cl a u s e s (i) a n d (i i) e x p l i c i t l yp r o t e c tr e p a y m e n tt o t he
e xt e nto f

t he s e c ur e d c r e di t o r s ’co l l at e r alv al ue a nd t he t i m e v al ue c o m pe ns at i ng f or t h e ri sk an d del ay of rep aym en t . Ind u bi t able equ i valent i s t h eref ore no l ess d e m a n d in ga s ta n d a r d th a n its co m p a n io n s . T h e M R C /M a r a th o n C la u s e (iii) p l a n ob viated bo th of th e ba ses for p rotection b y off erin g cash all eg ed l y e q u a lto th e v a l u e of th e T i m b erlan d s. N o ne ed a rose to aff ord coll a tera lor com p en sa te fo rd e la yin re p a y m e n t. W h a te v e ru n c e r ta in tie s e x is t a b o u t in d u b ita b le
e quiva l e nt , p ayin g o f f s e c ur e d c r e di t o r s i n c as h c an har dl y be i m pr o pe ri f t he p la n a c c u r a te lyre fle c te d th e v a lu e o f th e N o te h o ld e r s ’co lla te r a l. T h e N ot eh ol ders n evert h el ess protes t t h at t h e pl an , by dep ri vi n g t h em of th e r ig h t to c red i t bid a n d pr esu m a b l y forec l ose on the T i m b erlan d s, fa i l ed to af f ord t h em t h e i n du bi t able equ i valent becau se t h ey f orf ei t ed t h e possibi l i t y of l ateri n creases i n t h e col l ater al ’ s va l u e. T h e B an kru ptcy C ode, how ever, does
n otprot ecta sec u red cr edi t or’ s up si de p ot en t i al ; i tp rot ect s the “ al l ow ed secured
c l ai m . ” I f

a c r edi t orw er e o ver - se c ure d, i tc oul d n otdem and t o keep i t s c ol l at er alN o. 08- 40746

The Noteholde rs parry this point with the assertion that if the plan had rested on a 22 Cl ause(i) payment stream, theycould h ave insisted, with a § 11 11(b)(2) election, that th e total payments equ al their total debt of over $ 700millio n. This i s tru e, but the present valueof the payment stream is still capped byC lau se (i) atth e collateral valu e a ssessed byth e court. 29 rat h er t h an be p a id in f u l lsi m pl y t o prot ectt h e “ u psi de p ot en t i al . ” Fu rt h er, i ndub i t ab l e e quiva l e nc e d o e s no tr e qui r e m o r e pr o t e c t i o n t han i s a f f o r de d b y t he p r e c e d in gcla u s e s in § 1 1 2 9 (b )(2 )(A ). In th is co n n e c tio n , M R C /M a r a th o n co u ld h a ve con fi rm ed a plan u n d er C l a u se (i) th a t of fered a strea m of futu re p a ym en ts to th e N o te h o ld e rs y ield in gth e p re se n t v a lu e of th e ir c o ll a te ra l a n d th e n p a id off th e n o te o n e d a y a fte r th e p la n w a s c o n fir m e d . J u s t a s th e N o te h o ld e r s w o u ld h a ve n o sta tu tory com p l a i n t a ga i n st th a t trea tm en t, so th ey can n ot su p p ort a 22 sta tu to ry a rg u m e n t th a t t h e ya re e n titled to b e tte r tre a tm e n t u n d e r C la u se (i ii). T h e N ot ehol der s’c l ai m ed r i ght t o c r edi tbi d em br ac es t hei raddi t i onal di s ag r e e m e ntw i t h t he b ank r upt c y c o ur t ’ s de c i s i o n t o v al ue the Ti m be r l and s j u d i ci a l l y ra th er th a n thro u gh a p u b l i c au cti on . T h ey attem p t t o ex trap olate
s upp o r tf

r o m t he Supr e m e Cour t ’ s de c i s i o n i n B a n k of A m er ic a Na t’l Tru st & S a v ings A ss ’

n v. 2 0 3N. L a S a lle S tre et P ’ sh ip , 526 U . S . 4 3 4 , 119 S. C t . 1411 ( 19 98 ) . I n L aS alle Str eet , t h e C ou rthel d t h e a bsol u t e p ri ori t y rul e w as vi ol ated
w h en a ban kru ptcy c ou rtconf i rm e d a pl an perm i t t i n g a deb t or’ s s h areh ol ders t o ret ai n contr ol“ on accoun tof” “new v al u e” cap i t alcontr ibu t i on s t o t h e debtor. T h e C ou rthel d t h at “ som e f orm of m arket valuati on ” i s n ecess ary bef ore f orm erN o. 08- 40746

30 sh a reh olde rs m a y circu m ve n t t h e a b solu te p ri ority ru l e. W e a gr ee tha t L a S a lle S t ree tenc our ages bankrupt c y c our t s t o b e w ar y o f t he s hor t c om i ngs of j udi c i al valuati on proceedi n gs, bu tt h e case i s fact u al l y di st i n gu i sha bl e f rom t h i s one. W e need n ott ak e a po s i t i o n o n L aS alle Str eet , ho w e ve r , b e c aus e t he pro c edur alhi st or y o f t hi s c as e co nt r adi c t s t he N ot ehol der s’posi t i on. Th ey have
no t ch al l e nge d o n a ppe alt he c o ur t ’ s f i ndi ng t hatt he y w i l lr e c e i ve m o r e v al ue unde rt he M RC /M ar at ho n pl an t han t he y c o ul d ha ve r e c e i ve d i n a l i qui da t i o n,
w h ic h w o u ld h a v e le d t o a fo r e c lo s u r e a u c t io n . T h e yd o n o tc h a ll e n g e th e c o u r t ’s f i ndi ng t hatt he Ti m be r l and s w e r e m ar ke t e d t ho r o ugh l y t o t he pub l i c b e f o r e a nd d u ri n g th e b a n k ru p tcy ca se. T h e N oteh olde rs com p l a i n tha t ad eq u a te
m ar ke t i ng w as i m po s s ibl e b e c aus e o f t he s pe e d o f

t he c o nf

i r m at i o n pr o c e s s a nd t h e court ’ s deci si on t o l i f texcl u si vi t y on l y f

or t h e sake of speci f

i c pa rt i es, yett h ey a sse n ted to bo th ord ers. S i x m on th s e la p s e d b etw ee n the l i ft i n g o f ex cl u sivi ty
an d confi rm ati on o f

t he pl an, w hi l e t he c o n f i rm ati on hea ri n g i t sel f span n ed three
m o n th s . T h e fa c t is th a t m a n ye n tit ie s fe lt c a lle d t o e x p r e s s a n in te r e s t in pur c has i ng t he Ti m be r l and s , b utno ne w as w i l l i ng t o s ubm i ta f i r m o f fe r . The N ot eh ol ders ha ve n otest abli shed a predi c at e f o rt he i rau ct i on com pl ai n t

— ei t h er by p reser vi n g a ti m el y obj ect i on t o t h e court ’ s procedu re s or by a show i n g of prej u di ce.N o. 08- 40746

One expert value d onlysixparcels of l and call ed th e Marble d Murrelet C onservation 23 Are as (MMCAs). These approximately6,6 00 acre s were part of th e Hea dwaters Agreement, a n d ti mb erh arves tin gi s e sse nti allyf orb id de no nth emf

orth e n ext 4 0years . 31 T h e fin a l s ta g e in th e N o te h o ld e r s ’o b je c tio n to th e tr e a tm e n t o f th e ir secured cl ai m i s t h e court ’ s val u ati o n deci si on , w h i ch yi el ded t h em net c ash of ap proxi m atel y $51 3. 6 m i l l i on . Th ei r bri ef i n g, odd l y, dw el l s m ore on t h e al l eged in h e r e n t s h o r t c o m in g s o f th e v a lu a t io n p r o c e s s t h a n o n t h e b a n k r u p t c yc o u r t ’s f i nalr e s ul t . W i t h t he e xc e pt i o n o f c o l l at e r alt hat m ay hav e be e n l e f t o uto f t he val uat i o n, t he c o ur t ’ s r e s ul t i s no t c l e a r l y wr o ng . The v a l ua t i o n he a r i ngw as extensi ve. Th e courthea rd t est i m on y f rom ei gh tval u ati on experts . Th ree of t he s e e xp e r t s pr o vi de d t e s t i m o ny o n t he c har ac t e r i s t i c s o f t he Ti m be r l and s , a nd f ou r provi ded u l t i m ate es t i m ates of t h e val u e of

t h e app roxi m atel y 200 , 000
- acre stan d of ti m b erlan d . M R C /M a ra th on ’ s ex p ert i s a tim b erlan d ap p ra i ser w i th 23
e x t e n s i v e e x p e r i e n c e . U s i n gt w o s t a n d a r d a p p r a i s a lme t h o d s , t h e i n c o me ap proach an d the com pa rabl e sal es app roach, he tes t i f i ed the T i m berl an ds w ere
w ort h $43 0 m i l l i on or $42 5 m i l l i on , res pectivel y. G i ven t h e expert’ s experi en ce a n d h i s m eth od , the ba n k ru p tcy cou rt ga ve h i s testi m on y sign i fi ca n t w eigh t. T h e I n den t u re Tru st ee t en dered tw o val u ati on experts . Th e f i rstval u ed t h e t i m berl an ds at $60 5 m i l l i on an d t h e second at $57 5- $60 5 m i l l i on . Th e court f o und t he f

i r s ta nal ys i s ha d s i gni f i c antf l aws i nc l udi ng t he c ho s e n s t ar tda t e , t heN o. 08- 40746

32 va l uat i o n m et h od, t he fai l ur e t o a c c o untf o rr e c e ntde c l i ne s i n r e dwoo d a nd D o ugl as f

i rpr i c e s , a nd t h e lack of s pe c i f i c i t y i n t he a nal ys i s . The s e c o nd ap prai salw as al so s u spect . Th e w i t n ess’ s t est i m on y con tra di ct ed earl i er t e s t i m o ny o f

fe r e d by ano t he r e xp e r t at hi s f i r m . The c o ur t al s o fou n d t he expe r t ’ s f

i r m pr epar ed t he r epo r tf orhi m and es se nt i al l y or der ed hi m t o t es t i f y. Fu r t her , w hen ques t i oned, t he expe r t und er m i ned hi s anal yt i c alm et hodol ogy by con cedi n g t h at he ha d n ever seen prel i m i n ary bi ds em pl oyed in a val u ati on an al ysi s ot h er t h an t h i s one. T h e I n den t u re Tru st ee’ s app ealrel i es heav i l y on several t h i rd- pa rt y of fers t o pur c ha se th e Ti m ber l ands f orm or e t han $510 m i l l i on. Thi s i s per suas i ve
m arket evi den ce, i t cl ai m s, t h at t h e ban kru ptcy c ou rt ’ s val u ati on w as cl earl y t oo l ow . T h e b a n k rup t cy courtf ou n d, how ever, t h at t h ese bi ds w ere ei t h er
u n r e l i a b l e o rt o o t e n t a t i v e t o c o n s i d e r . B yt h e I n d e n t u r e T r u s t e e ’ s o wn ad m i s s i o n, i tha d b e e n s o l i c i t i ng o f fe r s f o r t he Ti m be r l and s “ al la l o ng. ” Tha tno fi r m b id w a s s u b m it t e d d u r in gth i s p e r io d s h o w s th a tth e I n d e n t u r e T r u s t e e ’s pr o po s e d v al uat i o n was t o o hi gh. Sc o pa c a l s o t e nde r e d a n e xp e r tw ho v al ue d t he T im b e r la n d s a t a p p r o x i m a t e ly$ 9 4 0 m illio n , b u t t h e co u r t d is c o u n te d th is ap prai salbecau se t h e pri ci n g da t a an d ass u m pti on s on pri ce i n crease w ere t oo h i gh an d overl y opti m i st i c.N o. 08- 40746

The In dent ure Tru stee also asserts that th e b ankruptcycourt n ecessarilyfailed to 24 provide the Noteholde rs withth e indubitableequiv ale nt valueof property secure d byth eir lie n bec au s eitdi dno tvalu eth eno n - ti mb e rl a n dc o ll at e r al . Thi si sinc o rr e c t . Th eb a nkruptcy court expresslyvalu ed th e Noteholde rs non -timbe rlan d coll ater al at $48 .7 million, an amou nt represe ntin g cash and cash eq uiva lents inSco pac’s acco unt s onth e petitio n date. After subtr actingth e B ank of America’s pri ming lie n and the In denture Trustee ’s le gal fe es, th e n et valueof the non -timbe rlan d collateral was $3.6millio n. Th e court added this amou nt to its priorti mberl and valuationof $51 0 million, andt he sum re presented the totalvalu e of coll ater al secure d byth e Noteholders’ lie n. Again st th ese find in gs , th e I ndentureTrusteeasserts init s principal b rief that its security interests in “person al property covered byth e Uniform CommercialC ode” and “any go ods orany other person al property that may not or h ereafter beco me fixture s,” were left out of valu atio n. In its reply brief, it describ es the omitte d property as “plant and equipment, and non -timbe rlan d re al property.” These va gu e and contradictoryassertion s arein suffici ent to raiseanintelligibl e appell ate point. 33 U l t i m at e l y, t he c o ur ta dj us t e d M RC /M a r a t h o n ’ s a p p r a i s a lu p wa r da nd t he In d e n tu r e T r u s te e ’ s d o w n w a r d a n d a r r iv e d a t a v a lu a tio n o f $ 5 1 0 m illio n . T h is repre se n ts a re a so n a b le a cc o m m o d a tion of co m p lex a n d som et i m es c on t radi ct ory t es t i m ony. The N ot ehol der s have m ade l i t t l e e f f or tt o pr ove a cl earerr or . W hat
w e ha ve sai d bef

ore rem ai n s tr u e: “A l t h ou gh w e recogn i ze tha tv al u ati on i s not
a n e xa ct scien ce, i t re m a i n s a n in teg ra lp a rt o f th e b a n k ru p tcy p roce ss. ” Matt er of San dy R i dge , 881 F. 2d at1354. 24 W e c o nc l ude t hatt he M R C /M ar at ho n pl an, i ns o fara s i tpa i d t he N o t e ho l de r s t he a l l o w e d a m ou nto f t he i rs e c ur e d c l ai m , di d no tv i o l at e t he
a b s o l u t e p r i o r i t yr u l e , wa s fa i ra n d e q u i t a b l e , s a t i s f i e s 1 1 U. S . C. § 1 1 2 9 (b )(2 )(A )(iii), a n d y ie ld e d a fa irv a lu e o f th e N o te h o ld e r s ’s e c u r e d cla im .N o. 08- 40746

34 2. D e Fact o Subst ant i ve Con s ol i dat i on A l t h ou gh t h e ban kru ptcy court f ou n d t h at t h e M R C /M arathon pl an does
n o t e ffe c t a s u b s ta n tiv e co n s o lid a tio n , th e In d e n tu r e T r u s te e ch a lle n g e s th is h oldin g. S u b stan ti ve con soli d a ti on i s a n “extrem e a n d u n u su a lrem ed y.” In re G andy , 2 99 F. 3d 4 89 , 4 99 ( 5t h Ci r . 2 00 2) . Subs t ant i ve co ns o l i da t i o n m ayt ak e
m u ltip le fo r m s , b u t “ it u s u a l l y r e s u lts in , in tera lia , po o l i ng t he a s s e t s o f, a nd cl ai m s agai n st , t h e t w o enti t i es; sat i sf yi n g l i abil i t i es f

rom t h e res u l t an tcom m on f u n d ; e l i mi n a t i n gi n t e r c o mp a n yc l a i ms ; a n d c o mb i n i n gt h e c r e d i t o r s o f t h e t wo com p a n ies for th e p u rp ose s of voting on reor ga n i za ti on plan s. ” I n r e The B ab cock and Wi l cox Co. , 250 F. 3d 955, 958- 59 n. 5 ( 5t h C i r . 2001) ( quot i ng In re Aug i e / Re s t i v e o Ba k i ng Co . , Lt d. , 860 F . 2d 515 , 518 ( 2d C i r. 198 8) . Th ere are
s o m e ju s tific a tio n s fo rs u b s ta n tiv e co n s o lid a tio n , see2 L a w r e n c e P . K in g e t a l., C ol l i er on B an kru ptcy § 105 . 09[2] (15th ed. rev. 2 009 ) , b u th ere, t h e I n den t u re Tr us t e e c l ai m s t he c o nf i r m e d p l an r e s ul t e d i n sub s t ant i ve c o ns o l i da t i o n wi t ho ut t h e ban kru ptcy c ou rt ’ s provi di n g a n y ju st i f i cat i on or f

ol l ow i n g t h e proper p r o c e d u r e s . S ee In reT h e B ab cock and Wi lco x Co. , 250 F. 3d at958 (ch a ra cte riz in gd e fac to su b sta n tiv e co n so li d a tion ). W e are m in d fu lof

t h e I n den t u re Tru st ee’ s c on cerns, especi al l y i n a case i n vol vi n g securi t i zed l en di n g t h rough a ban kru ptcy- rem ot e speci alpu rposeN o. 08- 40746

S ub s t a ntivec o n s o li d ati o ni so f s p e c i alc o nc e rninc a s e sinvo lvi n gs p e c i alp urp os e 25 entiti eslik e Sc op ac. Sp ecial purp os e entiti esareo ft enu se d inse curitize d le n din gb ec au se theyar e b ankruptcy -remote, that i s, they decre a s eth elikelihood that th e originator’s financi al troub lewillaff

ect th e sp ecial purp os e entity’sa ssetsservin ga s c ollateral forth e n ot es . Neverth el es s, th er e isad a n ger thata court willsub st a ntivelyc on so li dateth e twoe ntiti es , usin g the valueof theinve stors’ collateral to satisfy theoriginator’s debts. If courts are not waryab out sub st a ntive co n so li dationo f sp ecial purp os e entiti es , inves to rswill gro w l es s c o nf i d e ntinth evalu eo f

th ec o ll at e r als e c uri n gth e irlo a n s ; th ep r ac tic eo f s e cu riti z a ti on , a powerfulen gi nef

or generatingcapital , willbe come less u seful; and the cost of capitalwill increase . 35 ent i t y l i ke S c opac . Th e I ndent ure T r ust ee ’ s ar gum entfai l s, how eve r , t o pr ove 25 th a t substan t i ve consol i da t i on occ u rred here. I t s al l egati on s t h at un secured P al co c l ai m s w ere pa i d w i t h S copac asset s s u bj ectt o i t s l i en ha ve been add ress ed
an d rej ect ed ab ove. It s on l y ot h er evi den ce of substanti ve consol i da t i on i s based
o n t he e r r o ne o us c o nt e nt i o n tha t t he pl an c o m m i ngl e d i nt e r - c o m pa ny ad m i n i st rat i ve cl ai m s. B ecau se t h ese c on t en t i on s are e as i l y di s po s e d o f, w e need
n ot con sider w h eth er th i s cl a i m i s eq u i tab l y m oo t. 3 . U n p a id In te r -c o m p a n y A d m in is tr a tiv e P r io r ity C la im D u r in gth e b a n k r u p tc ypr oce ed i n gs , the D e b to r s a g r e e d th a t S c o p a c w o u ld h ol d l ogs f

or P al co at t h ei r l og deck , subj ectt o cer t ai n condit i on s, becau se Pa l co di d not h ave t h e cash t o keep pu rchasi n g l ogs. T h e Inden t u re T ru ste e a rg u es th a t, on the con fi rm a ti on da te, S cop a c h a d an ap p rox i m a tel y $ 1 1 m i l l i on po stpeti t i on ad m i n i st rat i ve cl ai m aga i n st P al co f or u n pa i d l og del i veries . U n der 11 U . S. C . § 1129( a) ( 9) (A ) , t hi s a d m i ni st r at i ve expe nse m ustbe pai d i n ca sh atN o. 08- 40746

36 th e tim e o f c o n fir m a tio n . B e c a u s e a w a r d in gre lie f o n th e fu ll $ 1 1 m illio n w o u ld
seem not t o i m peri la reor gan i zati on in v ol vi n g h u n dreds of m i l l i on s of

dol l ars, t he b a n k ru pt c y c our tw oul d be abl e t o a w ar d ef fec t i ve r el i ef

ei t herw i t h an
a p p rop ri a te l i en i n th e N oteh olde rs’ fav or or a ca sh p a y m e n t. S ee In re Chat e aug ay , 10 F. 3d at954 ( r ul i ng t hat the pos sibi l i t y of f r ac t i onalrec ove r y w as s u ffic ie n t t o a v o id fin d in gth e a p p e a l o f a co n fir m a tio n p la n e n tir e lym o o t). T h is cl a i m i s n ot eq u i tab l y m oo t. The I nde nt ur e Tr us t e e f i r s ta s s e r t s t hatc e r t ai n p l an pr o vi s i o ns i m perm i ssibl y m erged the t reat m en tof pre- an d p ost - peti t i on cl ai m s and fai l ed t o prom i se f

u l l pa ym en t of al l ad m i n i st rat i ve cl ai m s, i n cl u di n g t h e $11 . 1 m i l l i on ac c o untr e c e i va bl e f

o rt he l o g i nve nt o r y. Thi s i s i nc o r r e c t ; t he pl an pr o vi s i o ns fac i al l y c o m pl y w i t h t he Bankr upt c y Code , a s t he c o ur tc o nc l ude d. It is n o t c e r ta in , h o w e v e r , w h e th e rth e co u r t a c c o u n t e d fo rth e $ 1 1 .1
m i l l i on accoun trec ei vab l e w h en i tval u ed th e N o t eh ol ders’post - peti t i on col l ater al . Th e ul t i m ate $513. 6 m i l li on val u ati on ref l ect s t h e N ot eh ol ders’
s e c ur i t y i nt e r e s ti n t he Ti m be r l and s a nd c as h a nd c as h e quiva l e nt s a s of t he peti t i on da t e. C on t rary t o t h e assert i on of M R C /M arathon , t h e exh ibi tt h e court
u sed t o arrive at t h e val u e of Scop ac’ s c ash on h an d on t h e peti t i on date i t em i zes t he $ 11 . 1 m i l l i o n i n ne ta c c o unt s r e c e i va bl e Sc o pac h ad i n M ay2 00 8 and segregates t h at am ou n tf rom th e cou rt ’ s s t art i n g poi n tof $48 . 7 m i l l i on . H owN o. 08- 40746

37 m uc h o f t he $ 11 . 1 m i l l i o n r e c e i va bl e c o ns i s t s o f unp ai d l o g de l i ve r i e s i s uns t at e d, buta not e t o t hi s e xhibi ti ndi c at e s t hata c c o unt s r e c e i va bl e a r e no l o nge rb e i ng c o l l e c t e d f

r o m Pal c o . The c o ur tm ay h ave m ad e a m at he m at i c ale r r o ra nd d e p r i v e d t h e N o t e h o l d e r s o f t h i s p o s t - p e t i t i o n a d mi n i s t r a t i v e p r i o r i t yc l a i m. T h e r e fo r e , w e re m a n d fo ra d e t e r m in a tio n o f th e v a lu e o f th is ad m i n i st rat i ve pri ori t y cl ai m an d t h e ex t en tto w h i ch ef fect i ve rel i ef

i s avai l able. 4 . Art i f

i c i alI m pai r m e nt of Cl as s 5 Cl ai m and G e r r ym ande r i ng of U ns e c ur e d Cl ai m s i n Cl as s e s 8 and 9 The N o t e ho l de r s r ai s e s i gni f i c ant o bj e c t i o ns t o t he pl an’ s t r e at m e nto f t he B a n k of A m erica’ s cl a i m i n C l a ss 5 an d i ts divisi on of u n s e c u r e d c l a i m s w i th equ all egal st atus i n t o t w o vot i n g cl asses, 8 a n d 9. A n af f i rm ative m aj ori t y vote, i n nu m ber an d am ou n t , of a tleaston e cl ass of “ i m pa i red” cl ai m s w as necessary to co n firm a cr a m d o w n p la n . 1 1 U .S .C . § 1 1 2 9 (a )(10 ). Th e N ot ehol der s obj ec tt hat t he B ank of A m er i c a seni ors ec ure d c l ai m w as art i f i ci al l y i m pa i red b ecau se t h e pl an need l essl y defer red pa ym en tof ap proxi m atel y $1 m i l l i on i n defau l ti n t erest in in st al l m en t s over t h e course of
a ye ar . Bec aus e i tw as re c e i vi ng t he bal anc e of i t s c l ai m i n c as h a tc o nf i r m at i o n, B an k of A m eri ca vot ed to confi rm t h e pl an . D espi t e t h e app aren tarbi t rari n ess of t h i s i m pa i rm en tf

rom a bu si n ess st an dp oi n t , t h e ban kru ptcy c ou rtapp roved t he c l as s i f

i c at i o n.N o. 08- 40746

38 T h e bi f u rcat i on of

un secured “tra d e” cl ai m s and t h e N ot eh ol ders’ d e fic ie n c ycla im is e v e n m o r e t r o u b lin g . C la s s 8 in c lu d e s , in tera lia , t r a d e c l a i ms of ve ndor s notpr evi ous l y de em ed “ c r i t i c al” and c l ai m s by f or m erSco pac em pl oyees. C l ass 9 i s th e N ot eh ol ders’def i ci en cy cl ai m . Leg al l y, t h ese unsec ure d c l ai m s ar e o n equalf oo t i ng. T h e b ankrupt c y c our t ’ s f i ndi ngs t hat Cl as s 8 c l ai m s a r e ne c e s s ar y t o s us t ai n t he r e o r ga ni z at i o n a r e o dd. U nde rt he Bankr upt c y Code , c l as s e s m us t c o nt ai n “ s ubs t ant i al l y s i m i l ar” c l ai m s, b ut si m i l ar cl ai m s c an be separated i n t o di f ferent c l asses f

or “ good bu si n ess rea son s. ” In re G reys t on e I II JointV enture , 9 9 5 F .2d 1 2 7 4 , 1 2 8 1 (5 th C ir. 1 9 9 1 ). P er m i s s ibl e j us t i f

i cat i on s vary w i t h ci rcum st an ces, bu t“ [ i ] n m an y ban kru ptci es, th e p r o ffe r e d r e a s o n s . . . w ill b e in s u ffic ie n t to w a r r a n t s e p a r a te cla s s ific a tio n .” Matt er of

B ri scoe , 9 9 4 F .2 d a t 1 1 6 7 . F a c ilita tin ga p la n ’ s co n fir m a tio n is d e fin itely n o t a v a li d ju stifica tion . A s th is co u rt h a s h e ld , “th o u sh a lt n o t cla ss ify si m i l ar cl ai m s di f

ferentl y i n order t o gerrym an der a n af f i rm ative vote on reo rg a n i za ti on . ” G r ey s t o ne , 995 F. 2d at1279. N on et h eles s, w e m u sthol d these i m pa i rm en tan d cl assi f i cat i on c o n te n tio n s e q u ita b lym o o t. B e c a u s e th e p la n h a s b e e n s u b s ta n tia lly
c o ns um m at e d, t he s m al l e runs e c ur e d c r e di t o r s — i r r e s pe c t i ve of t he i rs t at us vi s à vi s t h e reor gan i zed com pa n i es— h ave recei ved pay m en tf or t h ei r c l ai m s. Thi r d- pa r t y e xp e c t at i o ns c anno tr e as o nab l y be un don e, a nd n o r e m e dyf o rt heN o. 08- 40746

39 N ot eh ol ders’contenti on s i s pract i cabl e ot h er t h an u n w in d ing the plan. Th ese c o n te n tio n s a r e n o t r e m e d ia b le o n a p p e a l. 5. U nf

ai r D i s cr i m i nat i on agai nst N ot ehol der s ’U nse cur ed D e fic ie n c y C la im Ac r am dow n pl an m ustn otdi sc r i m i nat e un fai r l y bet w ee n c l ai m s of eq ual l eg a lpr io r ity . 1 1 U . S . C . § 11 2 9 (b)( 1 ). T h e M R C /M a ra th on P l a n treats
u n secured cl ai m s i n C l asses 8 and 9 radi cal l y di f ferentl y. T h e C l ass 8 cr edi t ors hav e r e c e i ve d a ppr o xi m at e l y 75
- 90 % o f t he i runs e c ur e d c l ai m s , w h i l e t he N ot eh ol ders’C l ass 9 def i ci e n cy c lai m , rel egated to speculat i ve ret u rns f rom pen di n g l i t i gati on , w i l lproba b ly recei ve n ot h i n g. Th e ban kru ptcy c ou rt pu rport ed to j u st i f

y t h e di f

ference ba se d o n t h e sup posed ess en t i alna t u re of C l as s 8 c r edi t or s’s er vi c es t o t he r eo r gani ze d c om pany. A s w ith th e p r e c e d in gco m p la in ts a b o u t c la im im p a ir m e n t a n d cla s s ificat i on , w e are boun d, i f equ i t able m oot n ess m ean s any t h i n g, f or t h e reasons j u st st ated t o decl i n e app el l ate r evi ew of t h i s i ssue. 6. L eg a l i ty o f

N o n - D eb tor E x cu l p a ti o n an d R elea se C l a u se T h e pl an rel eases M R C , M arathon , N ew co, T o w n co , an d the U n secured C redi to rs’C om m i t t ee ( an d thei r personn el) f rom l i abil i t y— ot h er t h an f or
w i l l f ul ne s s a nd g r o s s ne gl i ge nc e — r e l at e d t o pr o posi ng, i m pl e m e nt i ng, a nd ad m i n i st eri n g t h e pl an . Th e l aw st ates, how ever , th a t “ d isc h arge of a debt ofN o. 08- 40746

B ecau se th e Noteholders do not b rief why Newco and Townco (or their officers an d 26 directors) shoul d not b e relea sed, we do not analyz e th eir position. 40 th e d e b to rd o e s n o t a ffe c t t h e lia b ility o f a n yo th e re n tit y o n . . . s u c h d e b t.” 1 1 U .S .C . § 5 2 4 (e). P reli m i n a ri l y, t h i s cl a i m i s noteq ui t abl y m oo t . “ [ E ] qui t y s t r ongly su p p orts ap pe l l at e r e vi e w o f

i s s ue s co ns e que nt i alt o t he i nt e gr i t y and t r ans pa r e nc y o f t he C h a p ter 11 pr oce ss. ” I n r e H i l al , 5 3 4 F .3d 4 9 8 , 5 0 0 (5 t h C ir . 2 0 0 8 ). M RC /M ar at ho n i ns i s t t he r e l e as e c l aus e i s pa r to f t he i rb ar ga i n b e c aus e w i t ho ut t h e c la u s e n e it h e rc o m p a n yw o u ld h a v e b e e n w il li n gto p r o v id e th e p la n ’s f i n an ci n g. N ot h i n g i n t h e rec ord sug gest s t h at M R C /M arathon , t h e C om m i t t ee, or t h e D ebtor s’off

i cers a n d d i rect ors w ere c o- l i able f or t h e D ebtor s’pre- peti t i on d e b ts . In s te a d , th e b a r g a in th e p r o p o n e n ts cla im t o h a v e p u r c h a s e d is
e xc ul pa t i o n f

r o m a ny ne gl i ge n ce t hato c c ur r e d d ur i ng t he c o ur s e o f t he b a n k ru p tcy. A n y costs th e relea sed p a rti es m i gh t incu r d efen d i n g a ga i n st su i ts al l e gi ng s uc h ne gl i gence a re unl i ke l y t o s w am p e i t he rt he s e pa r t i e s o rt he
c o n s u m m a te d re o r g a n iz a tio n . In s h o r t, th e g o a l o f fin a lity s o u g h t in e q u ita b le 26
m o o t ne s s a nal ys i s do e s no to ut w e i gh a c o ur t ’ s dut y t o pr o t e c t t he i nt e gr i t y o f t he process. W e see l i t t l e eq u i t able abou tprot ect i n g t h e rel eased n on - deb t ors f rom
n e g lig e n c e s u its a r is in g o u t of th e r e o r g a n iz a tio n . In a v a r ie ty o f c o n te x ts , th is court h as held t h at Sect i on 524 ( e) onl y rel eases t h e debtor, not c o -l i able t h i rdN o. 08- 40746

Two ca ses ca st doubt on this cate gorical prohibition again st no n-deb tor rele ases, b ut 27 t hese cases are distin guishablebe cau se th eyconcernth e resjudica tae f f e c to f no n - d ebto r rele ases, not their l egality. I n Repu blic Su pply Com

p a ny v. Shoaf

, 81 5 F .2d 1 046(5th Cir. 198 7), this co urt rul ed th at resjudica tabarred a debtorfrom brin gingac la im t hatwas specifically and expresslyrel eas edb y a confirmed re organi zationplan because the debtor fail ed toobje ct to the relea se at co nfirmation . The curre nt case is di stinguish abl e b ecau se it presents an appeal of a confirmatio n order, not a separate action, barred byth e exculpation provision , collaterally attacking the legality of the rele ase. This court’s opinio n in Applewood Chair Co. v. Three Rivers Plannin g & Development District , 2 0 3F .3 d 9 1 4 , di stin guis h es Shoaf b yhol din gth at th e rele a seat is su e th er e wa s notsp ecif ic . A p p lewood d idnot find specific rele ases satisfy§ 524 (e), instea d ith eld that this co urt would only giveres ju dicata effect to sp ecif icclau se s. 41 p a r tie s . See , e . g. , In reCoh o R esource s, I n c. , 3 4 5 F .3d 3 3 8 , 3 4 2 (5t h C ir. 2 0 0 3 ); Hallv. Nati on al Gy p sum Co. , 1 0 5 F .3 d 2 2 5 , 2 2 9 (5 th C ir . 1 9 9 7 ); Matt er of E dg ew o rth , 9 9 3 F .2 d 5 1 , 5 3 -5 4 (5 th C ir . 1 9 9 3 ); Za le C o rp o ra tion v. F eld , 62 F. 3d 74 6 ( 5t h Ci r . 1 99 5) . The s e c as e s s e e m b r o ad l y t o f o r e c l o s e no n- c o ns e ns ualno ndeb t or r el eases and perm an en ti nj u n ct i on s. 27 M R C /M arathon sugg estw e adop ta m ore l en i en t ap proach t o non - deb t or
r e le a s e s ta k e n b y o th e r c o u r ts . S ee S E Cv. D r e x e lBur nham Lam be r tG r o up , 9 6 0 F .2 d 2 8 5 , 2 9 3 (2 d C ir . 1 9 9 2 ); I n r e A. H. Rob bi ns , 880 F . 2d 694 , 701 ( 4th C i r. 1991) . Bes i de s c o nf l i c t i ng w i t h Za le C o rp . v . F eld , t h ese c ases al lconcerned g lo b a l s e tt le m e n ts o f m a s s c la im s a g a in s t th e d e b to r s a n d co -lia b le p a r tie s . S ee In reCon t i n entalA i rl i n es , 2 03 F. 3d 2 03 , 2 12
- 21 3 ( 3d Ci r. 200 0) ( s ur ve yi ng ci rcu i t l a w on n on -deb tor relea ses ). In fa ct, the B a n k ru p tcy C od e n ow pe rm i ts b a n k r u p tc yco u r ts to e njo in th ir d -p a r ty a s b e s to s cla im s u n d e rce r t a inN o. 08- 40746

42 ci rcum st an ces, 1 1 U . S . C . § 524 ( g) , w h i ch sug gest s non - deb t or r el eases are m ost ap propri ate as a m et h od to cha n n el m ass cl ai m s t ow ard a speci f i c poolof

asset s. MacArt hurCo. v . Jo hns- Man v i l l e Cor p. , 837 F. 2d 89, 90 ( 2d C i r . 1988) (d e sc rib in gch a n n e li n gfu n ctio n ). T h e r e a r e n o a lle g a tio n s in th is r e c o r d th a t e ith e rM R C /M a r a th o n o rth e ir or t h e D ebtor s’of

f i cers or di rect ors w ere join tl y l i able f or any of

P al co’ s or S copac’ s pre- peti t i on d e bt. Th ey are not gua ran t ors or s u ret i es, nor are t h ey i n surers. Instead, the essenti alfun ct i on of the ex cul pa t i on cl au se p roposed h ere i s t o absol ve t h e rel eased p art i es f rom an y n egl i gen t c o n d u ct t h at oc curred du ri n g t h e course of

t h e ban kru ptcy. Th e f resh st art § 524 ( e) provi des t o debtors i s not i n t en ded t o ser ve t h i s pu rpose. W e a g re e , h o w e v e r , w it h c o u rts th a t h a v e h e ld th a t 1 1 U .S .C . § 1 1 0 3 (c),
w hi c h l i st s t he cr edi t or s’com m i t t ee ’ s pow er s, i m pl i es com m i t t ee m em ber s have q u a lifie d im m u n ity fo r a c tio n s w ith in th e s c o p e o f th e ird u tie s . S ee I n r e P WS Ho l di ng Cor

p. , 228 F. 3d 224, 246 ( 3d C i r . 2000) ( c i t i ng In re L .F. R o th sc h ild Hol d i ngs, I

n c. , 1 6 3 B .R . 4 5 , 4 9 (S .D .N .Y . 1 9 9 4 ); In reD rexe lB u rnh am L am bert G roup , I

n c. , 1 3 8 B .R . 7 1 7 , 7 2 2 (B a n k r . S .D .N .Y . 1 9 9 2 )). S ee als o 7 La wr e nc e P. K i ng e ta l . , Col l i e ro n Bankr upt c y ¶ 11 03 . 05 [ 4] [b] ( 15 t h e d. r e v. 20 08 ) ( “ [A] c t i o ns a ga i n st com m i ttee m em b ers i n th eir ca p a ci ty a s su ch sh ou l d be discou ra ge d . IfN o. 08- 40746

43 m e m b e r s o f t h e c o m m it t e e c a n b e s u e d b yp e r s o n s u n h a p p yw it h th e c o m m it t e e 's per f or m ance duri ng t he c as e or unh appy w i t h t he out c om e of t he c as e, i tw i l lbe
e xt rem el y di f

f i c ul tt o f

i nd m e m be r s t o s e r ve o n a n o f f i c i alc o m m i t t e e . ” ) . The C redi t ors’C om m i t t ee an d i t s m em bers are t h e onl y di si n t erest ed v o lun t eers am on g th e parti es s ou gh tt o be rel eased h ere. Th e sc ope of prot ect i on , w h i ch does n oti n sul ate t h em f rom w i l l f

u l n ess an d gross negl i gen ce, i s adequ ate. C on sequ en t l y, t h e non - deb t or rel eases m u stb e st ruck excep tw i t h res pect t o t h e C redi t ors C om m i t t ee an d i t s m em bers. CO NC L US I ON Fort he f

o r e go i ng r e as o ns , w e af f i r m i n pa r t , r e ve r s e i n pa r t , a nd r e m and f o rf ur t he rpr o c e e di ngs c o ns i s t e nthe r e w i t h.