Opinion ID: 2818765
Heading Depth: 3
Heading Rank: 3

Heading: Application of the Equitable Mootness

Text: Doctrine Since this Court’s adoption of the equitable mootness doctrine in Continental, we have emphasized that the doctrine must be construed narrowly and applied in limited circumstances. In Philadelphia Newspapers, this Court emphasized “that a court only should apply the equitable mootness doctrine . . . ‘[in] complex bankruptcy reorganizations when the appealing party should have acted before the plan became extremely difficult to retract.’” 690 F.3d at 169 (quoting Nordhoff, 258 F.3d at 185). “The doctrine is quite rightly ‘limited in scope’ and ‘cautiously applied.’” Id. (quoting Continental, 91 F.3d at 559). Further, the doctrine’s “judge-made origin, coupled with the responsibility of federal courts to exercise their jurisdictional mandate, obliges us . . . to proceed most carefully before 13 dismissing an appeal as equitably moot.” Semcrude, 728 F.3d at 318. Our prior dismissals pursuant to the equitable mootness doctrine are inapposite here. Those prior applications of the doctrine involved complex bankruptcy reorganizations that included multiple related debtors, hundreds of millions of dollars in assets, liabilities and claims, and hundreds or thousands of creditors. For example, Continental involved the merger of fifty-three debtors with Continental, a $110 million investment in the reorganized debtor, the transfer by foreign governments of route authorities, and the assumption of leases and executory contracts worth over five billion dollars. 91 F.3d at 567. Similarly, in Nordhoff, the reorganization plan required eighteen months of preparation between several parties, the exchange of over $100 million in bonds, the issuance of new stock, the extension of a sixty million dollar credit facility, and the exchange and cancellation of over $100 million of debt. 258 F.3d at 182, 186. In contrast here, the Debtor’s reorganization involved a $200,000 investment in the reorganized debtor and only one secured creditor that held a blanket lien on the Debtor’s assets for less than $100,000. Further, the Debtor had only seventeen unsecured creditors, not including insiders. In addition, the Plan did not provide for new financing, mergers or dissolutions of entities, issuance of stock or bonds, name change, change of business location, change in management or any other significant transactions. The record illustrates that this case did not involve a sufficiently complex bankruptcy reorganization such that dismissal on the basis of equitable mootness would be appropriate. 14 Consideration of the prudential factors also demonstrates that the District Court abused its discretion. The District Court found that the Plan was substantially consummated. The Debtor transferred all property required to be transferred on or shortly after the effective date of the Plan, and the reorganized debtor commenced distributions under the Plan. See 11 U.S.C. § 1101(2)(C) (requiring only the “commencement of distribution under the plan”). The District Court observed that Appellant failed to obtain a stay. We do not dispute those determinations. However, the District Court also found that granting relief to Appellant would lead to a perverse outcome by causing the Plan to be fully unraveled, resulting in significant harm to third parties. We disagree. In our judgment, the proper application of the prudential factors does not permit dismissal on equitable mootness grounds. As noted, the first and fourth prudential factors require that a court consider whether allowing an appeal to go forward will undermine the plan. Semcrude, 728 F.3d at 321. In finding that these factors weigh in favor of equitable mootness, the District Court found that Appellant “offered no options which would allow the Court to grant it relief without [unscrambling the Plan] entirely.” In re One 2 One Commc’ns, LLC, No. 13-1675, 2013 WL 3864056, at  (D.N.J. July 24, 2013). In reaching this conclusion, the District Court erred in two fundamental respects: it placed the burden on Appellant to demonstrate that this factor weighed in its favor, and it concluded that because granting Appellant’s requested relief would reverse the Plan, this factor necessarily favored the Debtor. To the contrary, it was the Debtor’s burden, as the party seeking dismissal, to demonstrate that the prudential 15 factors weighed in its favor. See Semcrude, 728 F.3d at 321. Further, courts are obligated to consider not only whether granting the requested relief would require reversal of the plan, but also whether the plan could be retracted without great difficulty and inequity. See Nordhoff, 258 F.3d at 186. We have noted in prior cases that reversal of a confirmation order is more likely to lead to an inequitable result “where the reorganization involves intricate transactions or where outside investors have relied on the confirmation of the plan.” Continental, 91 F.3d at 560–61 (citations omitted); see also Nordhoff, 258 F.3d at 186 (finding that plan that involved hundreds of millions of dollars, the issuance of unretractable bonds, and restructuring the debt, assets, and management of a major corporation “could [not] be reversed without great difficulty and inequity”). We have most frequently found that a plan could not be retracted when the reorganized debtor issued publically traded debt or securities. See, e.g., Nordhoff, 258 F.3d at 186. Here, the Plan did not involve intricate transactions and the Debtor did not present sufficient evidence that the Plan would be difficult to unravel. Instead, the Debtor identified various post-confirmation transactions entered into in the ordinary course of the reorganized Debtor’s business. These routine transactions, including the investment by the Plan Sponsor, the commencement of distributions, the hiring of new employees and entering into various agreements with existing and new customers are likely to transpire in almost every bankruptcy reorganization where the appealing party is unsuccessful in obtaining (or fails to seek) a stay. Further, the Plan did not involve the issuance of any publicly traded securities, bonds, or other circumstances that would make it difficult to retract the Plan. Accordingly, the District Court 16 abused its discretion in finding that the first and fourth factors favored the Debtor. Furthermore, under the third factor, “the reliance by third parties, in particular investors, on the finality of the [Plan’s confirmation]” is minimal. Continental, 91 F.3d at 562. The District Court articulated no specific harm that would inure to the detriment of third parties and instead stated that, “One2One argues that the relief Appellant seeks would unravel the Plan in its entirety and call into question the continued viability of One2One to the detriment of third parties.” One 2 One Commc’ns, 2013 WL 3864056, at .9 However, as the District Court noted, “[t]his is not a case where a debtor issued publicly traded securities or debt pursuant to a plan that third parties to the bankruptcy case could have purchased on the open market.” Id. at  (alteration in original) (internal quotation marks omitted). Nevertheless, the Debtor now argues that allowing Appellant’s appeal to be heard on the merits would inevitably affect the rights of parties not before the court such as creditors, employees, and third-party workers. This type of minimal third-party reliance is present in nearly all bankruptcy reorganizations and cannot be characterized as almost certain to cause significant injury to 9 Indeed, the Debtor concedes on appeal that the risk of harm is speculative: “granting the Appellant’s requested relief would potentially jeopardize the Reorganized Debtor’s successful emergence from chapter 11 and seriously threaten the viability of its ongoing business.” Appellee’s Br. 42 (quoting App. 3161) (internal quotation marks omitted). 17 third parties. Cf. Continental, 91 F.3d at 556 (emphasizing that the record was replete with evidence that investing parties not before the court relied on the confirmation order in making decision to enter into a $450 million investment agreement under a complex arrangement). In light of the limited evidence of potential third-party injury, the District Court also abused its discretion in determining that this factor favored the Debtor. Finally, the prudential consideration of public policy weighs in favor of providing Appellant with appellate review of its bankruptcy appeal. “Though the finality of the Bankruptcy Court’s decision necessarily will be disturbed,” this Court has recognized an appealing party’s “statutory right to review of the [Bankruptcy] Court’s decision.” Phila. Newspapers, 690 F.3d at 171. Further, “[t]he presumptive position remains that federal courts should hear and decide on the merits cases properly before them.” Semcrude, 728 F.3d at 326. Here, Appellant has repeatedly advanced the contention that it is entitled to appellate review. Appellant objected to the Plan, applied for a stay, filed an appeal of the Confirmation Order and sought emergency appellate review. In light of the other prudential factors, denying Appellant review now would be distinctly inequitable.10 10 Appellant also argues on appeal that the District Court abused its discretion by dismissing its appeal of the third-party releases in the Plan. In light of our finding that the District Court abused its discretion in dismissing Appellant’s 18