Opinion ID: 1321157
Heading Depth: 2
Heading Rank: 1

Heading: Subject Matter Jurisdiction and Mootness

Text: In In re RTI (the adversary proceeding), we begin and end with federal subject matter jurisdiction and, specifically, the issue of mootness. Article III of the Constitution restricts federal courts to hearing cases or controversies, a restriction that subsists through all stages of review. Davis v. Fed. Election Comm'n, ___ U.S. ___, 128 S.Ct. 2759, 2768, 171 L.Ed.2d 737 (2008). In order to maintain federal jurisdiction during an appeal, the parties must continue to have a personal stake in the outcome. Lewis v. Cont'l Bank Corp., 494 U.S. 472, 478, 110 S.Ct. 1249, 108 L.Ed.2d 400 (1990) (citation omitted). If, by virtue of an intervening event, the appellate court cannot grant any effectual relief whatever for the appellant, the court must dismiss the case as moot. Calderon v. Moore, 518 U.S. 149, 150, 116 S.Ct. 2066, 135 L.Ed.2d 453 (1996) (per curiam) (citation omitted). We conclude that the sale of RTI's business assets following the dismissal of its bankruptcy proceeding mooted any actual controversy in this case. The issue in these appeals is whether the bankruptcy court should have recharacterized Nelson's $1.74 million in loans as equity. That issue was only relevant, however, to RTI's ability to reorganize under Chapter 11. As detailed in the reorganization plan that RTI filed with the bankruptcy court, the complete recharacterization and equitable subordination of Nelson's debt was necessary in order for RTI to put forth a confirmable plan in which none of the creditors' claims were impaired. See 11 U.S.C. § 1129(a)(8). Consequently, after refusing to fully subordinate Nelson's loans, the bankruptcy court dismissed the bankruptcy case based on RTI's inability to effectuate a reorganization plan. Yet now that RTI has lost all of its assets at Nelson's U.C.C. sale, it cannot effectuate a reorganization plan regardless of how much (if any) of Nelson's debt the bankruptcy court should have recharacterized; RTI no longer has any business to reorganize. Since the recharacterization issue was so intertwined with RTI's Chapter 11 reorganization, the impossibility of reorganization following the sale of RTI's assets moots this case. See Bevan v. Socal Cmmc'ns Sites, LLC (In re Bevan), 327 F.3d 994, 996 (9th Cir.2003) ([I]f an issue is closely connected to the reorganization process itself, it will be mooted when the proceeding is dismissed.); cf. Belda v. Marshall, 416 F.3d 618, 620 (7th Cir.2005) (finding moot an appeal from the denial of a reorganization plan based on the dismissal of the reorganization proceeding). Even viewing the recharacterization issue presented by this case apart from RTI's reorganization proceeding, we still conclude that the parties no longer retain the required personal interest in the issue so as to avoid mootness. Davis, 128 S.Ct. at 2768. In his appeal, Nelson argues that the bankruptcy court erred in recharacterizing $240,000 of his $1.74 million in loans as equity. Given the results of Nelson's U.C.C. sale of RTI's assets, this partial recharacterization was entirely inconsequential. After the sale of all of RTI's assets, Nelson recovered only $475,000, a fraction of his $1.8 million secured debt claim against RTI recognized by the bankruptcy court. Moreover, not only has RTI lost all of its assets as a result of the sale, but it also has completely terminated its business operations, meaning that RTI has no prospects of future earnings that might further satisfy Nelson's debt. RTI's corporate existence may be intact, but it is a shell corporation with nothing but a debt owed to Nelson to its name. Should RTI's shareholders wish to reenter the software business, the likelihood that they would do so through RTI is less than remote, as their first nearly $1.8 million in new assets would be subject to Nelson's claim. Indeed, Nelson's counsel acknowledged at oral argument that RTI has no realistic possibility of reconstituting its business, making his case economically moot. The upshot is that any opinion by this court addressing the bankruptcy court's $240,000 partial recharacterization of Nelson's debt would have no practical impact. Stotts v. Cmty. Unit Sch. Dist. No. I, 230 F.3d 989, 991 (7th Cir.2000). RTI makes a slightly stronger effort than Nelson to avoid mootness, asserting its interest in recovering the business assets and customer contracts lost at Nelson's U.C.C. sale. RTI suggests that, if this court were to reverse the bankruptcy court and completely wipe out Nelson's debt, RTI could retrieve the assets sold at Nelson's U.C.C. sale and reinstate its business operations. The problem with RTI's suggested relief of undoing Nelson's sale is that we have no power to grant it. The sale occurred during the district court proceedings before Judge Coar, a separate case that RTI did not appeal and that is therefore beyond our review. See York Ctr. Park Dist. v. Krilich, 40 F.3d 205, 207 (7th Cir.1994). Further, nothing in the record indicates that RTI sought a stay from the sale pending this appeal, and the failure to obtain such a stay generally moots an appeal challenging a judicial sale. See FDIC v. Meyer, 781 F.2d 1260, 1264 (7th Cir.1986). In light of the unstayed, unappealed sale of RTI's assets, our review of the bankruptcy court's recharacterization decision could not result in any meaningful relief for the parties. Dorel Juvenile Group, Inc. v. DiMartinis, 495 F.3d 500, 503 (7th Cir.2007). The inability to provide such relief makes this case moot.