Equitable Mootness Doctrine At U.S. Supreme Court (U.S. Bank v Windstream)

By: Donald L Swanson

The equitable mootness doctrine is before the U.S. Supreme Court on a Petition for writ of certiorari.  The case is U.S. Bank National Association v. Windstream Holdings, Inc.[Fn. 1]

All who’ve seen an effort to abuse equitable mootness, from a creditor’s view, will appreciate the following information from U.S. Bank’s Petition and from a supporting Amicus Brief of law professors in U.S. Bank v. Windstream.

Facts

The Petition in U.S. Bank v. Windstream provides these facts.

• Debtor obtains an order confirming its plan of reorganization;
• Bank (i) appeals the confirmation order to District Court, and (ii) requests a stay pending appeal from Bankruptcy Court;
• Bankruptcy Court promptly denies the stay request, so Bank requests a stay pending appeal from District Court;
• Everyone believes the plan cannot be consummated for several months because of regulatory approvals required—but District Court does not act promptly on Bank’s stay request;
• District Court waits until more than a month after the plan’s consummation to deny Bank’s stay request as moot—but retains jurisdiction to fashion a remedy and reserves the equitable mootness issue;
• Nearly a year after the appeal is filed, District Court dismisses the appeal as equitably moot:
  • without a full briefing on equitable mootness issues;
  • without taking any evidence on whether a reversal would “knock the props out from under” the confirmed plan; and
  • without considering the merits of Bank’s appeal.

Constitutional v. Equitable Mootness

An Amicus Brief of eight law professors, supporting Bank’s Petition, provides this explanation of the difference between constitutional mootness and equitable mootness (emphases are in original):

• “Constitutional mootness is characterized by an ‘inability to alter the outcome’”; and
• “By contrast, equitable mootness involves an ‘unwillingness to alter the outcome.’”

Put another way:

• constitutional mootness applies “only when it is impossible for a court to grant any effective relief”; but
• a bankruptcy appeal is equitably moot, “even though effective relief could conceivably be granted,” if such relief is deemed “inequitable.”

Origins and History of Equitable Mootness Doctrine

The Petition in U.S. Bank v. Windstream provides this history and argument.

The equitable mootness doctrine has “enigmatic origins”: as courts and litigants have struggled to identify a statutory basis for the doctrine, it has become painfully apparent that there is none.

Then-Judge Alito, dissenting in the Third Circuit’s 1996 In re Continental Airlines case, identifies two separate theories for the doctrine’s origins:

1. former Bankruptcy Rule 805; and
2. filling “interstices of the Code” with the policy reflected in § 363(m) and § 1127(b).

[Note: “interstices” means “intervening spaces, especially very small ones.”]

Neither theory can bear the weight placed upon it by courts’ modern embrace of the equitable mootness doctrine.

–Former Rule 805

Back in 1981, the Ninth Circuit’s In re Roberts Farms opinion focuses on appellants’ procedural ineptitude and failure to seek a stay pending appeal, citing former Bankruptcy Rule 805 (now reflected in § 363(m) and § 364(e)), which said:

• “Unless an order approving a sale of property or issuance of a certificate of indebtedness is stayed pending appeal, the sale to a good faith purchaser or the issuance of a certificate to a good faith holder shall not be affected by the reversal or modification of such order on appeal, whether or not the purchaser or holder knows of the pendency of the appeal.”

In re Roberts Farms creates a “policy of the law” that “a stay be obtained if review on appeal is not to be foreclosed because of mootness.” This broad new rule:

• has no basis in common law precedent;
• is based on precedents dealing with appeals from sale orders under former Rule 805—not from confirmation orders; and
• such precedents hold, incorrectly, that appeals from sale orders are constitutionally moot.

Over time, other courts pick up the In re Roberts Farms ruling and extend it even further.  For example:

• one circuit court declares that the appeal of a plan confirmation order should be dismissed where, “even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable”; and
• another appeal is dismissed as equitably moot even though appellants had done everything in their power to properly preserve the appeal, including the seeking of a stay.

–§ 363(m) & § 1127(b)

A Seventh Circuit opinion cites to:

• § 363(m) as signifying “courts should keep their hands off consummated transactions”; and
• § 1127(b) as a provision that “dramatically curtails the power of a bankruptcy court to modify a plan of reorganization after its confirmation and ‘substantial consummation.’”

According to the Seventh Circuit opinion, reasons animating these sections—preserving reliance interests and avoiding the pain of undoing a consummated transaction—are “so plain and so compelling that courts fill the interstices of the Code with the same approach.”

Other jurists disagree.  As then-Judge Alito observed in 1996, with respect to § 363(m) and § 364(e) as a source of equitable mootness:

• from these “narrow provisions” which “merely prevent the upsetting of certain specific transactions if stays are not obtained,”
• “I do not see how one can derive the broad doctrine of ‘equitable mootness.’”

And § 1127(b) is no more availing.  It keeps a debtor or plan proponent from modifying a plan after confirmation and before substantial consummation—but says nothing about a reviewing court’s ability to do so.

The “Real Error”

The “real error” of equitable mootness, according to Bank’s Petition in U.S. Bank v. Windstream, is this:

• it authorizes courts to disregard explicit instructions in a comprehensive statutory scheme, based solely on the courts’ preference to apply a different rule.

Equitable mootness assumes a sweeping delegation of authority from Congress to the courts.  This is the height of judicial activism.

Though every circuit court has now endorsed the equitable mootness doctrine—none has cited a statutory basis for it.

Conclusion

It will be interesting to see what the U.S. Supreme Court does with U.S. Bank v. Windstream.

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Footnote 1.  This Supreme Court case is identified as No. 22-926, and the latest entry on the Supreme Court’s docket (dated June 14, 2023) says: “DISTRIBUTED for Conference of 9/26/2023.”

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