CHAPTER 8, E. Act Fast on Appeal of Confirmed Plan Before Equitable Mootness

• Jurisdiction: United States

E. Act Fast on Appeal of Confirmed Plan Before Equitable Mootness

ABI Journal

May 2019

Lisa Yonka Stevens

Yumkas, Vidmar, Sweeney & Mulrenin, LLC

Annapolis, Md.

James A. Vidmar¹

Yumkas, Vidmar, Sweeney & Mulrenin, LLC

Columbia, Md.

The doctrine of equitable mootness is alive and well, as a series of recent cases have demonstrated. The misnamed doctrine, applied where the issues are not moot at all, is showing considerable resiliency. The doctrine is applied as a practical matter where granting appellate relief would fatally "unscramble" a plan or work a significant hardship on those who have relied on the plan.

As such, a party seeking to appeal a confirmed plan must act quickly to obtain a stay pending appeal to ensure that substantial consummation of the plan does not occur. If consummation of the plan takes place, appeals are likely to be barred.

Equitable Mootness

Constitutional "mootness" is a doctrine that precludes a reviewing court from reaching the underlying merits of a controversy because the matter has been deprived of practical significance or rendered purely academic. On the other hand, "equitable mootness" is a judicial doctrine that allows courts to abstain from hearing an appeal when a comprehensive change of circumstances has occurred that would make it inequitable for a reviewing court to address the merits of the appeal.²

In the bankruptcy context, equitable mootness is generally invoked where a party has appealed a confirmation order that was entered over an objection. The purpose is to protect third-party interests arising from a substantial implementation of a reorganization plan pending appeal. Equitable mootness is not constitutional mootness. In a sense, the doctrine presents the opposite concern of Article III mootness. As such, "[a] case is not equitably moot because an appellate reversal would have no effect; it is equitably moot when a reversal might have too much effect."³

Standard for Equitable Mootness

Having no express basis in the Bankruptcy Code, equitable mootness can be considered controversial. However, every circuit to consider the issue has allowed dismissal of bankruptcy appeals as equitably moot. While the U.S. Supreme Court has never endorsed the doctrine, it is unlikely to grant certiorari because there does not appear to be a split among the circuits in its application, even though the circuits analyze different factors for equitable mootness.⁴

Circuit courts that have applied the equitable-mootness doctrine to determine whether to hear appeals of a confirmed plan have adopted various factor-based tests.⁵ The primary factors the courts consider include the following: (1) whether a stay has been obtained; (2) whether the plan has been substantially consummated; (3) whether the relief requested would affect the rights of parties not before the court; and (4) whether the bankruptcy court can fashion effective and equitable relief without completely undoing the plan.⁶ Some circuit courts have identified additional factors in determining whether equitable mootness applies, such as (5) whether the public policy need of affording finality to bankruptcy judgments would be undermined by reversal of the confirmation order⁷ and (6) whether the relief sought would affect the emergence of the debtor as a revitalized entity.⁸

Although no one factor is dispositive, recent cases have significantly emphasized the failure to seek a stay pending appeal as a key factor in denying appellate relief. Where significant plan terms are implemented immediately following approval of the plan, dismissal of an appeal is much more likely.

Recent Applications of the Equitable-Mootness Doctrine

The Fourth Circuit recently affirmed a district court decision finding that the doctrine of equitable mootness barred overturning a confirmed reorganization plan.⁹ In its per curiam opinion, the Fourth Circuit overruled arguments raised by an unsecured creditor, Mar-Bow Value Partners LLC, and affirmed "for reasons stated by the district court."¹⁰

Alpha Natural Resources and its subsidiaries are among the largest coal suppliers in the U.S. They filed for chapter 11 protection on Aug. 3, 2015, due to an industry downturn and quickly sought to retain a turnaround advisor, McKinsey Recovery & Transformation Services US LLC. The bankruptcy court approved McKinsey's retention on Sept. 17, 2015.¹¹

In March 2016, Mar-Bow filed a proof of claim for $1,250,000. The record lacks clarity about the precise nature of Mar-Bow's business, but Mar-Bow is beneficially owned and funded by Jay Alix, the founder of AlixPartners LLP, a consulting firm that competes with McKinsey in the turnaround consulting business.¹²

In May 2016, Mar-Bow entered its appearance and for the first time raised the issue of McKinsey's Rule 2014 disclosures, which were approved by the court at least seven months prior. Throughout the bankruptcy proceeding, Mar-Bow raised the issue of McKinsey's Rule 2014...