By: Donald L Swanson
The subject is “equitable mootness” of an order confirming a Chapter 11 plan—when viewed from a distance, through Article III of the U.S. Constitution. The opinion is In re VeroBlue Farms USA, Inc. [Fn. 1]
Here are three conclusions from the opinion:
- “‘equitable,’ ‘prudential,’ or ‘pragmatic’ considerations can render an appeal of a bankruptcy court decision moot”; but
- Article III courts have a “virtually unflagging obligation” to exercise subject matter jurisdiction when “meaningful relief can be awarded”; and
- “the district court did not apply a sufficiently rigorous test” in determining when equities and pragmatics justify foregoing Article III judicial review of a plan confirmation order.
“Accordingly, we remand for further district court proceedings.”
Debtor’s controlling owner sponsors debtor’s Chapter 11 plan. Upon confirmation of that plan, the owner:
- Funds the Plan with $13.5 million, distributing $294,700 to one class of claimants, $620,000 to another class, and $6,000,000 to the senior secured lender;
- Defers its commitment to invest $21,400,000 in the reorganized debtor;
- Releases its claims against debtor; and
- Becomes 100% owner of the reorganized debtor.
Whereupon, the bankruptcy court closes the case.
A party who feels cheated by the plan appeals, and the owner urges dismissal of the appeal because of equitable mootness. The U.S. District Court sides with the owner on appeal, and the case goes to the Eighth Circuit Court of Appeals on further appeal.
Equitable Mootness & Article III
An important element of bankruptcy court jurisdiction is this: a bankruptcy court decision is subject to meaningful appellate oversight by Article III courts (i.e., a U.S. district court, a U.S. circuit court of appeals, and the U.S. Supreme Court).
Unfortunately, the doctrine of equitable mootness has become commonplace. It is frequently used on appeal to prevent a merits review of plan confirmation orders—even when effective relief can be granted. This is an Article III problem.
What follows is a summary of how the Eighth Circuit Court of Appeals addresses the problem in its In re VeraBlue opinion.
The name, “doctrine of equitable mootness,” is misleading.
A case is moot, that is, beyond a federal court’s Article III jurisdiction, only if “it is impossible for a court to grant any effectual relief whatsoever.”
There is a big difference between inability to alter the outcome (real mootness) and unwillingness to alter the outcome (‘equitable mootness’). Using one word for two different concepts breeds confusion.
Accordingly, we banish ‘equitable mootness’ from the (local) lexicon. But the name lives on elsewhere.
The equitable mootness doctrine is based on a recognition that “even when the moving party is not entitled to dismissal on Article III grounds, common sense or equitable considerations may justify a decision not to decide a case on the merits.”
“If limited in scope and cautiously applied, this doctrine provides a vehicle whereby the court can prevent substantial harm to numerous parties.” But many Chapter 11 plan confirmation appeals have been dismissed because of “equitable mootness”—even when effective relief could conceivably be fashioned
As with any equitable determination, a variety of factors may be relevant in a particular case. Our sister circuits have fashioned many different routes to answer the ultimate question.
We decline the parties’ invitation to adopt a specific multi-factor test. “The ultimate question to be decided is whether the Court can grant relief without undermining the plan and, thereby, affecting third parties.”
“The most important factors are whether the confirmed plan has been substantially consummated and, if so, what effects reversal of the plan would likely have on third parties.” Whether appellant sought or obtained a stay pending appeal is relevant but not determinative.
“The equitable mootness doctrine as frequently applied has been thoughtfully criticized by many circuit judges.” One such criticism is this:
- The doctrine was intended to promote finality, but it has proven far more likely to promote uncertainty and delay;
- Ironically, a motion to dismiss an appeal as equitably moot has become “part of the Plan”—plan proponents rush to implement the plan’s provisions so they may raise the equitable mootness defense, much like Appellees did here;
- Rather than litigate the merits of an appeal, parties then litigate equitable mootness; and
- Even if an appeal is dismissed as equitably moot by a district court, that dismissal is appealed to our Court, often resulting, in turn, in a remand and further proceedings.
It appears that this case may have followed the above-described pattern:
- A large portion of the money paid under the confirmed plan to creditors went to the owner and to the senior secured lender—these parties are not the types of third parties the equitable mootness doctrine is intended to protect; and
- The only action that did not take place was owner’s commitment to invest additional funds.
If the confirmed plan must be set aside on the merits, the district court may be able to fashion effective relief for those whose rights were impaired by the plan.
“We do not assume how these factual inquiries may be resolved. We decide only that the inquiry must be made.” This means that, on remand, the district court must make at least a preliminary review of the merits of the appeal to determine:
- the strength of Appellant’s claims;
- the amount of time that would likely be required to resolve the merits of those claims on an expedited basis; and
- the equitable remedies available — including possible dismissal — to avoid undermining the plan and thereby harming third parties.
On a “somewhat analogous issue,” the Supreme Court said, in its Wellness opinion, that “allowing Article I adjudicators to decide claims submitted to them by consent does not offend the separation of powers so long as Article III courts retain supervisory authority over the process.”
When a district court (or a court of appeals reviewing a BAP decision) is asked to invoke equitable mootness to stop a merits review by an Article III court, the request should be granted only in extremely rare circumstances.
The presumptive position is this: federal courts should hear and decide the merits cases properly before them.
One of the problems with equitable mootness is this: it imposes a result on dissenting creditors, without the right to a merits appeal. The concept of a consensual arrangement is out the window, and there is no amount of negotiation or mediation that can resolve the dispute. Accordingly, the Eighth Circuit’s focus on the equitable mootness remedy being rarely used, and only in exceptional circumstances, appears to be helpful.
The Eighth Circuit’s primer on equitable mootness, and its relationship to Article III of the U.S. Constitution, is a helpful contribution to the existing body of case law on this subject.
Footnote 1: FishDish, LLP, v. VeroBlue Farms USA, Inc. (In re VeroBlue Farms USA, Inc.), Case No. 19-3413, Eighth Circuit Court of Appeals (issued August 5, 2021).
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