The Third Circuit, in In re Tribune Media Company, recently applied the doctrine of equitable mootness in a case demonstrating circumstances where an appeal is equitably moot and where it is not. The court held that the appeal of Aurelius Capital Management, which sought to undo a global settlement integral to the consummated Chapter 11 plan, was equitably moot. In contrast, the court held that the appeal of certain trustees of structurally senior notes, which sought to enforce a subordination agreement against a different class of creditors under the Chapter 11 plan, was not equitably moot. The Third Circuit opinion thoroughly discusses the parameters of the equitable mootness doctrine, and it is required reading for all bankruptcy practitioners. This decision makes clear that the doctrine of equitable mootness remains alive and well in the Third Circuit.
October 06, 2015 Articles
Equitable Mootness Is Alive and Well
A recent Third Circuit decision makes it clear.
By Daniel J. DeFranceschi
Equitable mootness is a doctrine recognized by all circuit courts of appeals (other than the Federal Circuit, which does not hear bankruptcy appeals) in some form or another. It is essentially “a narrow doctrine by which an appellate court deems it prudent for practical reasons to forbear deciding an appeal when the relief requested will undermine the finality and reliability of consummated plans of reorganization.” Tribune, Nos. 14-3332, 14-3333, slip op. at 10 (3d Cir. Aug. 19, 2015). In the Third Circuit, the current state of the doctrine “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.” Id. at 12. In Tribune, the court focused on the second step of the analysis and offered examples of the types of third parties “equitable mootness is meant to protect.” Id. Among those third parties discussed by the court were “investors” in the reorganized entity; “lenders, customers, and suppliers”; and “other creditors.” Id. According to the court, “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.” Id. at 13 (internal quotations omitted). Certain third parties may have interests “more worthy than others” in this context. Id. For example, the court expressed a policy of “want[ing] to encourage behavior (like investment in a reorganized entity) that contributes to a successful reorganization.” Id. Further, the court supported the policy of promoting 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.” Id. Equitable mootness helps to assure these third parties, as well as the reorganized entity, that the confirmation order “is reliable” and financial decisions may be made post-consummation “without fear that an appellate court will wipe out or interfere with their deal.” Id. at 14–15.
The court determined that the Aurelius appeal was equitably moot, even assuming (as the court must when considering equitable mootness) that Aurelius would prevail on the merits. Id. at 23. Aurelius’s appeal sought to undo a global settlement of substantial causes of action, which settlement was an integral part of the Chapter 11 plan. Allowing such a result, according to the court, would “knock the props out from under the authorization for every transaction that has taken place, thus scrambling this substantially consummated plan and upsetting third parties’ reliance on it.” Id. at 17. Further, the court relied on “Aurelius’s failure to post a bond to obtain a stay pending appeal.” Id. at 18. The bankruptcy court had calculated that a bond of $1.5 billion was necessary to indemnify the debtors against the likely cost resulting from staying the confirmation order for the expected time to appeal it. Id. at 7. Aurelius had been unsuccessful in its efforts to vacate the bond requirement and argued that it was prohibitively high, but never argued to any court that a lower amount would be reasonable. Because Aurelius did not post a bond or attempt to reduce the amount of the bond, the court concluded that Aurelius “chose to risk a finding of equitable mootness and implicitly decided that an appeal with a stay conditioned on any reasonable bond was not worth it. This risk-adjusted choice by such a rational actor makes the finding of mootness not unfair. . . .” Id. at 19.
As for the trustees, the court reached a different result, finding their appeal was not equitably moot. Id. at 23. The relief sought by the trustees derived from their contractual rights as beneficiaries of a subordination agreement, which, if enforced, would result in recoveries under the Chapter 11 plan being distributed to holders of such notes rather than to a class of trade and other creditors that the Chapter 11 plan put in front of them. This dispute, which was a $30 million dispute in the context of a $7.5 billion reorganization, had “no chance” to unravel the Chapter 11 plan. Id. at 20. Here, the dispute was simply over whether one of two classes of creditors was entitled to the $30 million. Id. Further, if the subordination agreement provides the trustees with the rights they argue, then the other parties affected by allowing the appeal to go forward could not have justifiably relied on the confirmation order being final with respect to this $30 million issue. “It would be unfortunate from the perspective of the [affected class of creditors] to require disgorgement, but, if they were never entitled to that money in the first place, it is not unfair, and mootness must be fair (equitable in legalese) to be invoked.” Id. at 22.
The opinion, written by Judge Ambro, is important to practitioners as it further defines the parameters of the doctrine of equitable mootness. It is also important because Judge Ambro (joined by Judge Vanaskie) penned a scholarly rebuke of the recent concurring opinion by Third Circuit Judge Krause, who had called for the reconsideration of the viability of the equitable mootness doctrine in a recent opinion on One2One Communications, LLC. Judge Ambro addressed each of the challenges to the viability of the equitable mootness doctrine: constitutional, statutory and prudential challenges. In declining to “discard this tool of equity,” Judge Ambro wrote:
Federal courts have ample equitable authority to decide when no remedy is appropriate, and thus, though we should always presume that appeal merits be reached and act with utmost care when we turn aside an appeal, equitable mootness remains a last-ditch discretionary device for protecting the finality of an unstayed plan that has been consummated.
Tribune, slip op. at 11 (Ambro, J., concurring).
Thus, the doctrine of equitable mootness continues to live well within the confines of its intended purpose.
Keywords: bankruptcy and insolvency litigation, appeal, equitable mootness