Opinion ID: 2828653
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Heading Rank: 1

Heading: The Doctrine of Equitable Mootness

Text: “Equitable mootness” is a narrow doctrine by which an appellate court deems it prudent for practical reasons to forbear deciding an appeal when to grant the relief requested will undermine the finality and reliability of consummated plans of reorganization.3 The party seeking to invoke the doctrine bears the burden of overcoming the strong presumption that appeals from confirmation orders of reorganization plans—even those not only approved by confirmation but implemented thereafter (called “substantial consummation” or simply “consummation”)—need to be decided. In re SemCrude, L.P., 728 F.3d 314, 321 (3d Cir. 2013). Unless we can readily resolve the merits of an appeal against the appealing party, our starting point is the relief an appellant specifically asks for. And even “when a court applies the doctrine of equitable mootness, it does so with a scalpel rather than an axe. To that end, a court may fashion discretion standard of review remains the law of our Circuit. Cont’l Airlines, 91 F.3d at 560. 3 “Equitably moot” bankruptcy appeals are not necessarily “moot” in the constitutional sense: they may persist in very live dispute between adverse parties. Thus, in the Seventh Circuit, Judge Easterbrook “banish[ed] ‘equitable mootness’ from the (local) lexicon.” In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir. 1994). In SemCrude, 728 F.3d at 317 n.2, we noted that the term “prudential forbearance” more accurately reflects the decision to decline hearing the merits of an appeal because of its feared consequences should a bankruptcy court’s decision approving plan confirmation be reversed. 10 whatever relief is practicable instead of declining review simply because full relief is not available.” In re Blast Energy Servs., Inc., 593 F.3d 418, 425 (5th Cir. 2010) (internal quotation marks omitted) (citations omitted). We first recognized the doctrine of equitable mootness in In re Continental Airlines, 91 F.3d 553 (3d Cir. 1996) (en banc). The case closely divided our Court, with seven judges voting to recognize the doctrine over the dissent of six. We explicitly held that it was the law of our Circuit but did not lay down any particularly clear guidance on how to decide whether an appeal was moot. Instead, the majority opinion noted certain factors theretofore considered in making a mootness call: Factors that have been considered by courts in determining whether it would be equitable or prudential to reach the merits of a bankruptcy appeal include (1) whether the reorganization plan has been substantially consummated, (2) whether a stay has been obtained, (3) whether the relief requested would affect the rights of parties not before the court, (4) whether the relief requested would affect the success of the plan, and (5) the public policy of affording finality to bankruptcy judgments. Id. at 560 (citation omitted). This statement reveals that the doctrine was then, as far as our Court was concerned, in its infancy. Note, for example, that we listed “[f]actors that have been considered by courts” without specifying whether those factors are entitled to equal weight or whether any is necessary or sufficient. Id. Over the years, our precedential opinions have refined the doctrine to its current, more determinate state. As we recently put it, 11 equitable mootness . . . proceed[s] in two analytical steps: (1) whether a confirmed plan has been substantially consummated; and (2) if so, whether granting the relief requested in the appeal will (a) fatally scramble the plan and/or (b) significantly harm third parties who have justifiably relied on plan confirmation. SemCrude, 728 F.3d at 321. This two-step inquiry reduces uncertainty from the factors of Continental, and this appeal reflects the importance of SemCrude’s step (2): in cases where relief would neither fatally scramble the plan nor significantly harm the interests of third parties who have justifiably relied on plan confirmation, there is no reason to dismiss as equitably moot an appeal of a confirmation order for a plan now substantially consummated. For example, reliance on consummation of a plan would not be justified if a third party obtained a benefit that was inconsistent with a contract, statute, or judgment, as any benefit from such an error would result in “ill-gotten gains.” See In re Charter Commc’ns, Inc., 691 F.3d 476, 484 (2d Cir. 2012) (“[I]t would not be inequitable to require the parties to [an illegal] agreement to disgorge their ill-gotten gains, participation in the appeal or not.”). While courts and counsel readily understand when granting relief on appeal would unravel a plan both confirmed and consummated, who are the “third parties” that equitable mootness is meant to protect? Continental singled out investors as the “particular” beneficiaries of equitable mootness, 91 F.3d at 562, while SemCrude discussed the interests of lenders, customers, and suppliers. 728 F.3d at 325. Likewise, Philadelphia Newspapers considered the interests of “other creditors” who were not equity investors. 690 F.3d 161, 171 (3d Cir. 2012). These cases teach that, 12 although parties other than equity investors may rely on plan consummation and thus claim protection in the form of equitable mootness, they may not “merit the same ‘outside investor’ status as” those who make equity investments in a reorganized entity. In re Zenith Elecs. Corp., 250 B.R. 207, 217 (D. Del. 2000), aff’d sub nom. Nordhoff Investments, Inc. v. Zenith Elecs. Corp., 258 F.3d 180 (3d Cir. 2001). One reason some third parties have reliance interests more worthy of protection than others is that we want to encourage behavior (like investment in a reorganized entity) that contributes to a successful reorganization. See Continental, 91 F.3d at 564 (“[T]here was an integral nexus between the investment [by the parties urging mootness] and the success of the Plan.”); see also id. at 563 (“[T]he Eastern claims were crucial to the willingness of the Investors to consummate the Financing Transaction.” (internal quotation marks omitted)). Also, in appropriate circumstances we further the free flow of commerce—a chief concern of commercial bankruptcy—when we decline to disturb “complex transactions undertaken after the Plan was consummated” that would be most difficult to unravel. Charter, 691 F.3d at 485 (“The Allen Settlement was the product of an intense multiparty negotiation, and removing a critical piece of the Allen Settlement—such as Allen’s compensation and the third-party releases—would impact other terms of the agreement and throw into doubt the viability of the entire Plan.”); see also id. at 486 (“[T]he third-party releases were critical to the bargain that allowed Charter to successfully restructure[,] and . . . undoing them, as the plaintiffs urge, would cut the heart out of the reorganization.”). At the same time, if funds can be recovered from third parties without a plan coming apart, it weighs heavily against 13 barring an appeal as equitably moot, both in our Court and other circuits. See In re PWS Holding Corp., 228 F.3d 224, 236–37 (3d Cir. 2000) (appeal not moot where appellant “seeks to invalidate releases that affect the rights and liabilities of third parties [and t]he plan has been substantially consummated, but . . . the plan could go forward even if the releases were struck”); In re Paige, 584 F.3d 1327, 1342 (10th Cir. 2009) (“The substantial consummation of a bankruptcy plan may make providing relief difficult, and may raise concerns about fairness to third parties, but ‘[c]ourts can and do order divestiture or damages in’ situations where business deals or bankruptcy plans have been wrongly consummated.” (quoting In re Res. Tech. Corp., 430 F.3d 884, 886–87 (7th Cir. 2005) (alteration in Paige))). We agree with the Second Circuit that the disgorgement of “ill-gotten gains” is proper assuming that the disgorgement otherwise leaves a plan of reorganization not in tatters. Charter, 691 F.3d at 484. In addition to the third parties (particularly investors) identified in our cases, equitable mootness properly applied benefits the estate, In re Zenith Elecs. Corp., 329 F.3d 338, 346 (3d Cir. 2003), and the reorganized entity, id. at 344. All these players have a common interest in the finality of a plan: the estate because it can wind up; the reorganized entity because it can begin to do business without court supervision and can seek funding in the capital markets without the cloud of bankruptcy; investors because a reorganized entity will command a higher and more stable market value outside of bankruptcy; lenders because they can collect interest and principal; customers in certain industries who need parts or services; and other constituents for different context-specific reasons that may boil down to it is easier to do business with an entity outside of bankruptcy. Equitable mootness assures these stakeholders that a plan confirmation order is reliable and that they may make financial decisions based on a 14 reorganized entity’s exit from Chapter 11 without fear that an appellate court will wipe out or interfere with their deal. The theme is that the third parties with interests protected by equitable mootness generally rely on the emergence of a reorganized entity from court supervision. When a successful appeal would not fatally scramble a confirmed and consummated plan, this specific reliance interest most often is not implicated, as the plan stays in place (with manageable modifications possible) and the reorganized entity remains a going concern. For example, the remedy of taking from one class of stakeholders the amount given to them in excess of what the law allows is not apt to be inequitable, as there is little likelihood it will have damaging ripple effects beyond the classes that the redistribution immediately affects. Consistent with our conclusion in PWS, 228 F.3d at 236–37, and as the Second Circuit reasoned in Charter, 691 F.3d at 484, when taking a payment to which one class is not contractually entitled, and giving it to the party contractually entitled to those funds, would not undermine the basis for other parties’ reliance on the finality of confirmation, it makes little sense to deem an appeal equitably moot.