Opinion ID: 1038460
Heading Depth: 1
Heading Rank: 5

Heading: Application of the Equitable Mootness Factors

Text: With that backdrop, we turn to this appeal. Based largely on a non-precedential decision of this Court, see In re SemCrude, L.P., 456 F. App’x 167 (3d Cir. 2012), the District Court found that the plan was substantially consummated. It also observed that Appellants had failed to seek or obtain a stay. We have no qualms with those determinations. However, it also found that granting relief to Appellants would undermine the reorganization plan confirmed by the Bankruptcy Court and harm third parties. Because the record does not support these latter, and crucial, findings, we hold that the Court abused its discretion in dismissing Appellants’ appeal.
The parties do not dispute, and we know no reason to disagree, that the reorganization plan has been substantially consummated, due in part to Appellants’ failure to obtain a stay. Distributions have been made to creditors, financial transactions were put in place, and the Reorganized Debtors have emerged from bankruptcy as a financially sound, indeed thriving, oil and gas business. Though Appellants would have been wise to seek a stay to stop the prospect of equitable mootness in its tracks, their statutory right to appeal, as noted, is not premised on their doing so. We thus turn to whether granting them relief will have the feared outcomes— collapsing the plan and significantly injuring third parties who reasonably relied on its implementation—with which equitable mootness is ultimately concerned. 16
Debtors make the all-or-nothing assertion that [p]roviding even a modicum of relief to [Appellants] would upset the delicate balance of the [Producer] Settlement embodied in the Plan. . . . The rulings of the Bankruptcy Court in the [representative proceedings] created the basis of the intense negotiations that led to the Settlement and eventually resulted in the overwhelming majority of the Producers supporting the Plan. Affording the Appellants the relief they seek would necessitate unraveling the entire Plan. Debtors’ Br. at 42–43 (emphases added). These conclusions are unsupported by the evidence. It is important to understand Appellants’ requested relief. They do not assert that the central compromise of the Producer Settlement is impermissible. They simply seek a ruling that the plan did not discharge their claims, and ask for the opportunity to assert them in an adversary proceeding.9 We 9 Debtors rely on In re U.S. Brass Corp., 169 F.3d 957 (5th Cir. 1999). There, the confirmed reorganization plan incorporated a settlement between a group of creditors and the debtor that entitled the settling creditors to 80% of the debtor’s insurance recoveries. Id. at 958–59. The remaining 20% of recoveries were designated for the other creditors in the class. Id. The latter creditors asserted on appeal that this 17 have no indication—other than Debtors’ “Chicken Little” statements—that this would upset the Producer Settlement or that doing so would cause the remainder of the plan to collapse. Even if Appellants are successful on their claims—far from a certain result—the amounts involved will not require a sufficient redistribution of assets to destabilize the financial basis of the settlement. Appellants have already received $210,445.83 under the current plan. They claim that they are entitled to an additional $207,300.62. This is a relatively minor amount, less than 0.15% of the over $160 million designated for distribution to the Producers. It pales even more in the context of the entire reorganization plan, which involved over $2 billion. The amount sought by Appellants is roughly one-tenth of one percent of that sum. We also fail to see any indication that allowing Appellants to proceed with their claims would result in a deluge of other Producers filing their own adversary proceedings. Unlike with Appellants, we are unaware of any evidence in the record showing that other Producers objected to the discharge of their claims or asserted the right to an adversary proceeding. In return for distributions they received under the plan, other Producers were required to dismiss with prejudice any adversary proceedings they had filed. Absent their objecting at the time of plan confirmation provision violated 11 U.S.C. § 1123(a)(4), which requires a confirmed plan to treat the same all creditors within a class. Id. at 958. The Court dismissed the appeal as equitably moot rather than reaching its merits primarily because a successful appeal would have required it to excise the entire settlement, and thus destabilize the remainder of the plan. Id. at 962. Those spectors are not before us. 18 to this dismissal requirement (as well as to the discharge of their claims), they cannot now attempt to restart those actions. Debtors’ best argument is that Appellants’ adversary proceeding is a putative class action that theoretically could be financially significant enough to disrupt the litigation peace achieved by the settlement. The parties disagree as to the potential damages that could result from a successful class action. Debtors assert that it could require them to make payments of up to $81.7 million. Debtors’ Letter at 2–3 (Mar. 8, 2013). Appellants counter that the payments would only approach around $40 million. Appellants’ Letter at 2–3 (Mar. 20, 2013). Regardless of the amount involved, the most we can say of Debtors’ argument is that it asserts the finish without the steps to get there. No class has been certified. And assuming one is certified, we have little information about what it would look like. The claims of many putative class members, for example, may be precluded if they acquiesced to a representative proceeding in lieu of individual adversary proceedings, explicitly agreed to the Producer Settlement, or failed to object to the plan as impermissibly discharging their claims without an adversary proceeding. We cannot assume that allowing Appellants to seek class certification will risk unraveling the plan in the absence of more detailed information about the potential class claims. As then-Judge Alito explained, the feared consequences of a successful appeal are often more appropriately dealt with by fashioning limited relief at the remedial stage than by refusing to hear the merits of an appeal at its outset. See Continental I, 91 F.3d at 571–72 (Alito, J., dissenting). This is particularly true where, as here, the perceived harms are at best speculative. 19
Debtors also assert that a successful appeal will harm third parties. In particular they have identified four groups they claim would be adversely affected: (1) lenders; (2) equity investors; (3) customers and suppliers; and (4) creditor constituencies. Debtors’ Br. at 53–55. These groups entered into a variety of transactions and agreements in connection with the reorganization plan. Granting Appellants the relief they request, in Debtors’ view, would harm these third parties by upsetting their expectation that plan confirmation was final. We address each group in turn. We begin with the lenders, who provided exit financing for the Reorganized Debtors. According to Debtors, [t]he Exit Financing Participants and those other third party entities relying on the Exit Facility would be severely harmed should the Confirmation Order be reversed; if there is no longer a Confirmation Order, the new lenders under the Exit Facility would likely attempt to terminate the Exit Facility and the Reorganized Debtors would be unable to continue their business, which would likely lead to the inability of the Reorganized Debtors to repay the borrowed funds. Debtors’ Br. at 54. This argument is counterintuitive. Why would these lenders terminate the credit facility if doing so 20 would cause harm to themselves? Moreover, we have no evidence supporting the inference that they would take this action. Debtors’ rely on an affidavit by Robert Fitzgerald— the Chief Financial Officer of the Reorganized Debtors’ parent company, SemGroup Corporation (“SemGroup”)—to support this argument. Appellants’ App. at 627–28. That affidavit merely describes the credit facilities into which the Reorganized Debtors and the lenders entered. It says nothing about whether the lenders would seek to invalidate the loan agreements if Appellants are granted relief, let alone that they would have the legal right to do so. We are also not persuaded that the equity investors will be materially harmed. As discussed, the amounts of Appellants’ individual claims are relatively insignificant, and it is premature to assume that the putative class action will result in significantly greater financial exposure. Regardless of the potential amount, moreover, there is little reason to think that the Reorganized Debtors’ financial well-being— and thus the prospects of their equity investors—would be threatened by granting Appellants relief. SemGroup has emerged from bankruptcy in robust financial health. According to its public securities filings, in March 2012 (shortly before the District Court dismissed Appellants’ appeal as equitably moot), SemGroup had over $73 million in cash or cash equivalents, substantially more than the $50 million it was provided under the plan when it emerged from bankruptcy.10 It also had in excess of $140 million in 10 In their briefing, Debtors referred to this $50 million figure as “working capital,” which is commonly calculated as total current assets less total current liabilities. Following our request for clarification, they informed us that the $50 million figure actually refers to the cash or cash equivalents that, under the reorganization plan, SemGroup was permitted to 21 working capital.11 Moreover, as the Fitzgerald affidavit attests, the Reorganized Debtors have a variety of credit sources available to fund their operations. Appellants’ App. at 628–29. With this positive backdrop, it is not self-evident that Appellants’ claims pose any significant risk, and we have not been provided any testimony or other evidence to the contrary. Harm to the final two groups—the Reorganized Debtors’ customers and suppliers and the Debtors’ have on hand immediately following confirmation. Appellants’ Letter at 1 (Mar. 8, 2013). 11 These cash (or cash equivalent) and working capital figures are drawn from SemGroup’s Securities and Exchange Commission Quarterly Report for the period ended on March 31, 2012. SemGroup Corp., Quarterly Report (Form 10-Q) (May 9, 2012). We take judicial notice of this publicly filed report. See Fed. R. Evid. 201(c)(1); Fed. R. Evid. 201 advisory committee’s note (“In accord with the usual view, judicial notice may be taken at any stage of the proceedings, whether in the trial court or on appeal.”). Looking further out, SemGroup’s financial future appears likely to remain stable. According to its Securities and Exchange Commission Quarterly Report for the period ended on March 31, 2013, by that time SemGroup’s cash and cash equivalents exceeded $77 million and its working capital topped $142 million. SemGroup Corp., Quarterly Report (Form 10-Q) (May 9, 2013). And all this, of course, says nothing of liability insurance that the Reorganized Debtors may have to offset any future losses they do incur if Appellants ultimately win their adversary proceeding. 22 creditors—appears lacking as well. According to Debtors, the customers and suppliers will be hurt because the Reorganized Debtors have assumed a variety of executory contracts and unexpired leases in an attempt to solidify these business relationships. However, they have not explained why granting Appellants relief would require them now to reject those agreements. Debtors contend the creditor constituencies will be harmed because granting relief would destabilize a series of settlements they have made with those constituencies. But the only settlement identified by Debtors is the Producer Settlement, and (as discussed) it does not appear that settlement will be imperiled.
Preserving the finality of plan confirmation to encourage parties to move forward with plan execution justifies forbearing the exercise of jurisdiction only where precluding the appeal will prevent a perverse outcome. As the Supreme Court has instructed on numerous occasions, “federal courts have a strict duty to exercise the jurisdiction that is conferred upon them by Congress.” Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716 (1996) (collecting cases). The presumptive position remains that federal courts should hear and decide on the merits cases properly before them. When equitable mootness is used as a sword rather than a shield, this presumption is upended. Appellants have repeatedly advanced the contention that they are entitled to an adversary proceeding. They filed a complaint to begin such a proceeding, objected to the rulings of the Bankruptcy Court disallowing it, and sought interlocutory appellate review in the District Court. Denying them review now—based on speculation of future harms—would be distinctly inequitable, the antithesis of the equity required for “mootness.” 23