Banning “Equitable Mootness” From The Eighth Circuit’s Lexicon (FishDish v. Vero Blue, Part 2)

By: Donald L Swanson

The U.S. Eighth Circuit Court of Appeals takes a minority view on “equitable mootness” in FishDish, LLP v. Vero Blue Farms USA, Inc. (In re Veroblue Farms USA, Inc.), 6 F.4th 880 (8th Cir. 2021).

In such opinion, the Eighth Circuit rules that the term “equitable mootness”:

• is “misleading”;
• “breeds confusion”; and
• is banished from the local lexicon.

Here’s a summary of such opinion, as it relates to the “equitable mootness” issue.

Facts

Debtor operates an aquaculture business: a fish farm that sells the fish it produces through wholesalers to restaurants and grocery chains.

After a corporate takeover that ousts Debtor’s founder, Debtor files a voluntary Chapter 11 bankruptcy petition. In the bankruptcy, Debtor obtains a post-petition financing order authorizing Debtor to borrow $2 million from an insider, supported by a “first priority priming lien” under § 364(d).

Then, Debtor achieves confirmation of its Chapter 11 plan.

Preferred Shareholder appeals the confirmation order to the District Court. But the District Court declines to address the merits of Preferred Shareholder’s appeal, invoking the “doctrine of equitable mootness.”

Preferred Shareholder then appeals to the Eighth Circuit Court of Appeals, which reverses and remands. What follows is a summary of the Eighth Circuit’s analysis and ruling.

The Doctrine Explained

The doctrine’s name 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.

Application

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.

Numerous Chapter 11 plan confirmation appeals have been dismissed when, even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable.

If limited in scope and cautiously applied, this doctrine provides a vehicle for the court to prevent substantial harm to numerous parties.

Factors

As with any equitable determination, a variety of factors may be relevant in a particular case.

Sister circuits have fashioned many different routes to answer the ultimate question. Most have adopted either a two-factor analysis or a variation of a five-factor analysis adopted by the Eighth Circuit BAP.

We decline the parties’ invitation to adopt a specific multifactor test.

The ultimate question is whether a 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.

Criticism

The equitable mootness doctrine has been criticized by many circuit courts.  The Third Circuit explains:

• the equitable mootness 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”—i.e., plan proponents now rush to implement the plan to utilize an equitable mootness defense, much like Appellees did here;
• rather than litigate the merits of an appeal, parties litigate equitable mootness; and
• even when an appeal is dismissed as equitably moot, that dismissal is appealed to our Court, often resulting, in turn, in a remand and further proceedings.

Merits

Without the equitable mootness doctrine, the District Court would have ruled on the merits long ago. But the District Court made no inquiry on the merits.

As to the merits:

• of the $12 million paid under the Plan to creditors, one half was paid to a senior secured creditor (one of the appellees);
• a co-debtor/plan sponsor (also an appellee) assumed management of the reorganized Debtors;
• these appellees are not third parties that the equitable mootness doctrine is intended to protect;
• the only transfer that did not take place was a co-debtor/plan sponsor’s commitment to invest substantial working capital;
• 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; and
• the Eighth Circuit does not assume how factual inquiries might be resolved—it decides only that the inquiry must be made.

Writing on a clean Eighth Circuit slate, the Eighth Circuit concludes that an inquiry into the merits must be made before equitable mootness may be invoked in this case. This means that, on remand, the District Court must make at least a preliminary review of the merits 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.

In many cases, district courts may conclude that all or substantially all of the relief requested is feasible despite the plan’s consummation.

A quick look at the merits of an appellant’s challenge is particularly important for complex questions, like:

• whether a plan comports with the Bankruptcy Code’s cram down provisions, an issue that often cries out for appellate review; or
• claims involving conflicts of interest or preferential treatment, that go to the very integrity of the bankruptcy process.

Those are precisely the kinds of issues Preferred Shareholder raises in this appeal.

Supreme Court Holding

As the U.S. Supreme Court holds:

• “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” (Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. 665 (2015)).

When a district court (or a court of appeals reviewing a BAP decision) is asked to invoke equitable mootness against a party impaired by a Chapter 11 confirmation order, such request should be granted only in extremely rare circumstances.  That’s because:

• an Article III court that has an “unflagging obligation” to exercise its appellate jurisdiction; and
• the presumptive position is that federal courts should hear and decide, on the merits, cases properly before them.

If equitable mootness becomes, instead, the rule of appellate bankruptcy jurisprudence, the Eighth Circuit predicts the Supreme Court, having up to now denied petitions for certiorari to review the doctrine, will step in and severely curtail (perhaps even abolish) its use.

So, the Eighth Circuit reverses and remands the District Court’s dismissal of Preferred Shareholder’s appeal of the plan confirmation order.

Conclusion

Very interesting.

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