Bankruptcy
| Jurisdiction | United States,Federal |
| Publication year | 2022 |
| Citation | Vol. 73 No. 4 |
Bankruptcy
John T. Laney III
Victoria Barbino Grantham
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Following the pandemic-related drop in bankruptcy filings during 2020,1 bankruptcy filings for both individuals and corporations continued to decline in 2021.2 Experts disagree about the cause of the decrease of filings during a period many believed would see a windfall.3 Some cite government stimulus programs for both individuals,4 and corporations,5 others low-lending rates which allowed companies to
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access capital more freely,6 and some believe court closures and backlogs have discouraged parties from formal judicial restructuring.7 No matter the cause, all experts expect filings to increase in 2022.8
The United States Court of Appeals for the Eleventh Circuit issued several notable published bankruptcy opinions this year.9 Along with a brief analysis of the most consequential opinions in the bankruptcy realm, this Article will include a brief legislative update about the COVID-19 Bankruptcy Relief Extension Act of 2021.10
A. In re Hazan: The Doctrine of Equitable Mootness
The equitable mootness doctrine is unique to bankruptcy proceedings. At its core, it is the decision by the court that unraveling an estate after a confirmed plan is implausible.11 Courts decide whether it would be inequitable to the parties in the bankruptcy case to allow an appeal of the confirmation of a bankruptcy plan or to "moot" the appeal for the sake of the disposition of the estate and its creditors.12 Typically, courts invoke the doctrine in rare circumstances where an appeal of a final order goes to the heart of the confirmed plan and would displace the agreed upon reorganization or asset distribution.13
The doctrine is not without its critics.14 While all circuits have adopted the doctrine in some respect, some courts have attempted to
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limit the doctrine to the most complex reorganizations.15 Yet, the Supreme Court of the United States has never issued a decision discussing the doctrine of equitable mootness or its bounds. On October 12, 2021, the Supreme Court denied certiorari to review a United States Court of Appeals for the Third Circuit case decided under the doctrine of equitable mootness.16
On September 1, 2021, the Eleventh Circuit published In re Hazan,17 an opinion discussing its standard of equitable mootness.18 The case began when Ms. Hazan purchased a property financed by NLG, LLC (NLG) and defaulted on her purchase money promissory note. Judge Robert N. Scola of the Eleventh Judicial Circuit of Florida in Miami-Dade County entered a judgment for NLG for roughly $1.6 million plus interest. In 2011, NLG sued to foreclose on the mortgage in the same court but was denied as NLG had already pursued and succeeded in receiving monetary damages for the breach. NLG appealed.19
During the litigation concerning Ms. Hazan's mortgage, 9197-5904 Quebec, Inc. (Quebec) obtained an unrelated $5 million judgment against NLG.20 Selective Advisors Group (Selective) acquired Quebec's judgment against NLG, and NLG's rights and claims against Hazan were assigned to Selective to satisfy the judgment.21
NLG won the appeal concerning Ms. Hazan's mortgage.22 On remand, the court entered a foreclosure judgment in favor of NLG for over $4.8 million and set the property for sale. One day before the foreclosure, Ms. Hazan filed a Chapter 11 bankruptcy case. NLG filed a proof of claim for the foreclosure judgment of $4.8 million. Selective filed an adversary proceeding which Ms. Hazan joined. Selective and Ms. Hazan requested the court determine the rights of Selective, Ms. Hazan, and NLG, claiming NLG had no claim against Ms. Hazan or the property because Selective was assigned all of NLG's rights and claims. At the time, Ms. Hazan had exercised her right of redemption to redeem the property. The bankruptcy court found NLG had no remaining rights in the property or claims against the estate, and NLG should be
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credited $4.8 million towards the satisfaction of the Quebec judgment. NLG appealed.23
The bankruptcy court held a confirmation hearing on Ms. Hazan's plan on May 30, 2018, with all other creditors with objections satisfied, withdrawn, or settled.24 NLG advised the court it had an appeal pending with the district court but confirmed there was no stay in place pending appeal.25 The bankruptcy court warned NLG that if the plan was confirmed and substantially consummated, it could "moot out the appeal."26 NLG raised no objection to confirmation and did not seek a stay. The bankruptcy court entered its order approving Ms. Hazan's plan on June 11, 2018, and Ms. Hazan began making payments. On August 8, 2018, NLG moved for stay pending appeal, which was denied. NLG appealed to the district court claiming the bankruptcy court violated the Rooker-Feldman doctrine and requested a stay pending appeal. The district court affirmed the bankruptcy court, and NLG appealed to the Eleventh Circuit.27
The Eleventh Circuit first addressed NLG's contention that the bankruptcy court violated the Rooker-Feldman doctrine in the adversary proceeding determining NLG's rights.28 The Rooker-Feldman doctrine prevents parties that have lost in state court from a de facto appellate review by claiming the state judgment violates the losing party's federal rights.29 The court quickly disposed of NLG's argument, highlighting that Selective was not a party in the state court proceedings and the adversary proceeding did not aim to overturn the state court judgments, but to determine the rights of the parties at that time in light of the state court judgments.30
The Eleventh Circuit then addressed whether NLG's appeal was properly dismissed for equitable mootness.31 NLG claimed that equitable mootness only applies in large corporate bankruptcies, and not individual bankruptcies, and added that no transactions would have to be rescinded if the bankruptcy court's judgment was reversed.32
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The court first reiterated its standard of equitable mootness, stating the "doctrine provides that reviewing courts will, under certain circumstances, reject bankruptcy appeals if rulings have gone into effect and would be extremely burdensome, especially to non-parties, to undo."33 The court added that bankruptcy plans are products of negotiations between parties and to allow an appeal of the plan would assign different rights than those for which the parties negotiated.34
The court then enumerated some factors courts should consider when dismissing an appeal for equitable mootness including "whether the appellant has obtained a stay pending appeal, whether the plan has been substantially consummated, and whether third parties' rights or the debtor's ability to successfully reorganize would be adversely affected by granting the relief sought by the appellant."35 The court added "whether a stay is in place and whether the plan has been substantially consummated are especially important."36 The court then addressed whether the dismissal of NLG's appeal was appropriate considering these factors.37
The court looked first as to whether a stay was in place pending appeal.38 The court noted that NLG not only failed to move for a stay pending appeal, but NLG's counsel confirmed there was no stay and the bankruptcy court warned NLG that having no stay could moot its appeal.39 NLG asked for a stay for the first time two months after the plan had been confirmed and moved again for a stay after the appeal was filed.40 The Eleventh Circuit ruled that NLG's delays were "unreasonable."41
The court then looked to whether the plan had been "substantially consummated."42 Substantial consummation is defined in 11 U.S.C. § 1101(2)43 as the:
(A) [T]ransfer of all or substantially all of the property proposed by the plan to be transferred;
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(B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and
(C) commencement of distribution under the plan.44
While NLG claimed that "no property was transferred[,]" the court reiterated the district court's findings that prepetition property of the estate revested in Ms. Hazan and she assumed management and distribution of the property.45 The Eleventh Circuit stated these facts demonstrated Ms. Hazan's plan had been substantially consummated.46
The court finally considered the adverse effect to third parties and the debtor's fresh start if the appeal was granted.47 The court disfavored how the plan would have to be reorganized and how reorganization could affect the plan's funding and the equity cushion for at least one creditor, but ultimately emphasized that the appeal could "deprive" the parties that had consented to the plan and supported its confirmation, "the bargain to which they consented."48 After addressing these three factors, the court affirmed the district court's dismissal of NLG's appeal under the doctrine of equitable mootness.49
Importantly, this case highlights the Eleventh Circuit's test for equitable mootness. Unlike some of its sister circuits that focus on the complexity of the transaction,50 it seems the Eleventh Circuit primarily examines whether the party appealing had the opportunity to prevent the consequences of substantial consummation. As the Supreme Court continues to stay silent on the doctrine, it is important for practitioners in this Circuit to be aware of the court's considerations in these cases.
B. Suvicmon and In re Le Centre: The Standards for Post-Discharge Nominal Suits
In Suvicmon Development, Inc. v. Morrison,51 the Eleventh Circuit found the discharge injunction for a Chapter 7 debtor prevented judgment creditors from bringing a related fraudulent transfer claim
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against the debtor post-discharge.52 In 2006, three creditors sued the debtor, Mr. Morrison, in...
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