Complexity as the Gatekeeper to Equitable Mootness

JurisdictionUnited States,Federal
Publication year2016
CitationVol. 33 No. 1

Complexity As the Gatekeeper to Equitable Mootness

R. Jake Jumbeck

"COMPLEXITY" AS THE GATEKEEPER TO EQUITABLE

MOOTNESS


Abstract

When confronted with appeals from chapter 11 plan confirmation orders, appellate courts face a delicate balancing of interests. On the one hand, a court must consider the interests of the reorganized debtor and innocent third parties that relied on the order. On the other hand, the court must consider a claim or interest holder that feels the plan treated them unfairly. These jilted parties often want the plan undone to accommodate their interests. By the time an appellate court finally hears an appeal, however, the reorganized entity often has already entered into various transactions—e.g., closed stores, contracted with vendors, issued publicly traded securities, or merged into a different entity. Unwinding the plan at such a late date is no longer feasible because a court cannot "unscramble the egg."

Appellate courts created the doctrine of equitable mootness for this situation. The underlying basis for the doctrine is the reliance of innocent third parties on the finality of the plan confirmation order. Despite equitable mootness's express limitation to "complex reorganizations," courts have bastardized the doctrine. Courts have found appeals from relatively simple reorganization, liquidation, and chapter 9 plans equitably moot. Recent criticisms have centered on the doctrine's appropriateness in light of constitutional, efficacy, and statutory challenges. These attacks, however, ultimately stemmed from equitable mootness's misapplication.

This Comment will argue that when a party asserts an appeal is equitably moot, appellate courts must formally determine whether a complex reorganization occurred as a threshold matter. If a court concludes a complex reorganization occurred, only then should it proceed to an equitable mootness analysis. Through a four-part test, courts can keep this super-finality doctrine the exception, not the rule.

[Page 172]

Introduction

The goal of a chapter 11 case is to achieve the debtor's financial reorganization that will avoid the need for further bankruptcy relief in the future.1 Bankruptcy courts attempt to accomplish this goal by moving the chapter 11 debtor through bankruptcy with "speed . . . consistent with [the] orderly and efficient administration of the case."2 Failing to reorganize and rehabilitate results in liquidation, meaning a loss of jobs and "potential misuse of economic resources."3

The speed and efficiency of the system is evident when looking at chapter 11 emergences of large, publicly traded companies with assets over $100 million. In 2007 and 2008, in the midst of the economic crisis, these companies, respectively, spent an average of 691 and 447 days in bankruptcy.4 For chapter 11 debtors that filed for relief in 2016, the average number of days spent "in bankruptcy" has decreased to 158.5 Minimizing the time that chapter 11 debtors spend in bankruptcy is vital because bankruptcy inhibits a business's ability to operate normally. As the Third Circuit explained in Tribune Media Co. v. Aurelius Capital Mgmt., L.P. (In re Tribune Media Co.), each day a business spends in bankruptcy is "a day when it will have a hard time attracting the investors, employees, and, in some industries, customers that it needs to exist and prosper."6

The bankruptcy appellate process not only reflects an emphasis on speed,7 but it also reflects another goal of bankruptcy: the finality of confirmation orders.8 This principle facilitates a debtor's chance at successful reorganization

[Page 173]

by "fostering confidence in the finality of confirmed plans,"9 which encourages investors and other third parties to rely on confirmation orders.10 It also helps serve the two underlying policies of chapter 11: (1) preserving the business as a going concern; and (2) maximizing property available to satisfy creditors.11

Appellate courts face a difficult task, however, with appeals from confirmation orders. They have to "strik[e] the proper balance between the equitable considerations of finality and good faith reliance on a judgment and the competing interests that underlie the right of a party to seek review of a bankruptcy court order adversely affecting him."12

To balance these considerations, appellate courts fashioned and now employ the doctrine of equitable mootness for chapter 11 appeals.13 Courts developed this doctrine14 in the context of appeals from plan confirmation orders advanced by claim or interest holders that argue the plan treated them unfairly. The specific relief sought by an appellant varies from case to case.15 Granting such relief often means that the court would have to unwind some, or even all, of the actions taken to implement the plan in an effort to return the estate to the status quo as it existed before the debtor's plan was confirmed. In certain instances, however, courts determined that the debtor's reorganization plan had been substantially consummated and was so complex that reversing the plan's implementation would be impractical and inequitable.16 Rewinding

[Page 174]

the clock would have a detrimental effect on third parties not related to the bankruptcy proceeding that relied on the plan. Courts found it no longer equitable to upset the plan of reorganization and therefore refused to consider the merits of the appeal.17 In these instances, "equitable considerations make it unfair . . . to intervene."18

The doctrine is "grounded in the notion that, with the passage of time after a judgment . . . effective relief on appeal becomes impracticable, imprudent, and therefore inequitable."19 Courts and commentators have explained the problem with a useful, if unconventional, ovoid metaphor: asking the court to unscramble an egg.20 Asking courts to unwind certain chapter 11 plans is asking courts to undo what cannot feasibly be undone. It would be a waste of judicial resources, in such a situation, to consider each party's arguments that actions taken under the plan should or should not be undone; the result will inevitably be the same—once "[t]he eggs are thoroughly scrambled," there is nothing more that can be done.21 The merits of the appellant's case are irrelevant; the appeal is equitably moot.

Equitable mootness occupies an interesting space in bankruptcy law, an area driven by statutory interpretation.22 This judicially created doctrine seems to favor finality over appellate review for equitable or prudential reasons, for "it is one thing for a plan to be binding on the parties, and something else for it

[Page 175]

to bind an appellate court tasked with reviewing its validity."23 Equitable mootness is a powerful tool in an appellate court's arsenal and raises constitutional, statutory, and efficacy issues in the bankruptcy appeals process.24

Although appellate courts intended to apply the doctrine only to complex reorganizations involving intricate transactions, "with a scalpel rather than an axe,"25 they have not done so.26 This misapplication resulted in preventable appellate litigation involving relatively simple bankruptcies.27 Appellate courts limited and criticized the doctrine over the past several years to rein it back in from its misuse.28

The doctrine's controversy resulted in three decisions within ten weeks of each other: One2One Communications, LLC v. Quad/Graphics, Inc. (In re One2One Communications, LLC),29 In re Tribune Media Co.,30 and JPMCC

[Page 176]

2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Properties (In re Transwest Resort Properties).31 Each appeal involved "efforts by plan proponents to dismiss potentially meritorious appeals on [equitable mootness] grounds."32 Each decision, fascinating in its own right, is accompanied by impassioned, separate concurring or dissenting opinions providing alternative analyses of the equitable mootness concerns at issue in the case. These opinions, read together, illustrate the concerns that have called the doctrine's legitimacy into question and the ongoing efforts to limit its scope.33 Despite these concerns, however, appellate courts have already articulated an applicable standard for equitable mootness: complex reorganizations.

This Comment argues that to apply equitable mootness as intended, to complex reorganizations, appellate courts should be required to determine, as a threshold matter, whether a complex reorganization occurred. only after a court finds that a complex reorganization occurred should it proceed to an equitable mootness analysis. Through a four-part analysis,34 "complexity" will serve as the gatekeeper to the doctrine.

If appellate courts adopt this approach, they will eliminate the doctrine's unwarranted application to the relatively simple appeals that courts should hear on their merits. Too much of the circuits' current equitable mootness analyses focuses on when equitable mootness should apply; it is more effective to look at when it should not apply.

This Comment proceeds as follows. First, this Comment will begin by providing a brief overview of the chapter 11 plan process and discuss the doctrine's origin, along with its varying application in the circuits. Throughout this discussion, this Comment will highlight the lack of a "complexity"

[Page 177]

determination in the circuits' various analyses. Next, this Comment will analyze the Third Circuit's decision in In re One2One and will offer a positive list of factors that constitute a complex reorganization. Finally, this Comment will use these factors to provide a normative approach to "complexity" that will determine whether a complex reorganization occurred, thus warranting the doctrine's analysis.

I. Background

The chapter 11 plan process allows claim and interest holders to have a say in how they are treated in bankruptcy proceedings.35 Understanding this process is useful when considering how a claim or interest holder would think it had its rights trampled during the voting...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT