The Needs of the Many: Equitable Mootness' Pernicious Effects.

Date22 September 2019
AuthorMarvell, Bruce A.
  1. Introduction II. Equitable Mootness A. The History and Background of Equitable Mootness 1. The Ninth Circuit and Roberts Farms 2. The Third Circuit and Continental Airlines B. The Factors 1. Lack of a Stay Pending Appeal 2. The Effect of Substantial Consummation, the Transfer of Assets or the Issuance of Securities 3. Effect on Third-Party Reliance and Expectations 4. Contribution to Plan Success 5. Public Policy C. Circuit Conflicts 1. Differences over Statement of the Doctrine 2. Differences over Role of Seeking or Obtaining Stay Pending Appeal 3. Differences over Degree of Reliance 4. Differences over Use of Presumption of Mootness upon Substantial Consummation 5. Differences over Standard of Review III. The Pernicious Effects A. Undermining the Fact/Law Distinction B. Perverting Appellate Jurisdiction C. Unfairly Burdening the Right of Appeal D. Erosion of Exceptional Nature of Statutory Mootness Provisions E. Improperly Discounting Courts' Ability to Fashion Remedies F. Subversion of the Reliance on Contracts Generally G. Diluting Sources of Interpretation and Perceptions of Justice H. Constitutional Issues? 1. Judge Krause and One2One 2. Waivable Right to Adjudication by an Article III Court 3. NomWaivable Structural Concerns. 4. Rejection of One2One: Tribune IV. Reconceptualizing Equitable Mootness A. Summary of the Issues B. Radical Proposals 1. Reforms Regarding Stays a. Presumptive Grant of Stay If Appeal Turns on Substantial Question of Law. b. Stays of Confirmation Orders Should Be Directed Initially to the Reviewing Court c. Eliminate Bonds 2. Reforms to Type of Review 3. Reforms Regarding Procedure--Withdrawal of the Reference 4. Even More Radical Reforms V. Conclusion. I. INTRODUCTION

    Business bankruptcies typically move fast. In many cases, this is desirable. (1) Fragile finances deteriorate quickly, reducing recoveries for creditors and eliminating value for owners. Congress thus intended chapter 11, the primary vehicle for business reorganizations, to process distressed entities quickly and decisively. Compared to routine civil litigation, chapter 11 procedures are speedy. This results from estate representatives being statutorily empowered to resuscitate the debtor by means entirely foreign to nonbankruptcy law. (2)

    The reorganization process centers around a chapter 11 plan of reorganization, a document that adjusts and alters the rights of creditors and owners. Instead of a statutory form, Congress largely left the structure and content of such plans to the parties. As a result, creditors will enthusiastically endorse some plans and strenuously scorn others. One issue, then, is how to handle a feasible and sensible plan opposed by a minority of creditors.

    Congress answered this question in part by arming plan proponents with "cramdown" powers; (3) that is, an otherwise appropriate plan that is opposed by one or more classes may be confirmed so long as it is fair and equitable and does not discriminate against a dissenting class. (4) As Congress placed the bankruptcy power in a court system rather than in an administrative process, judges rather than administrators apply the rules of cramdown. That is, judges apply the law to the facts, and in theory confirm and approve only those plans that conform to Congress' cramdown and other confirmation requirements.

    Judges, however, can and do make mistakes. Congress realized as much and authorized appeals of bankruptcy court final orders. (5) These appeals correct errors in discrete cases; but they also assure the uniform implementation of bankruptcy law. (6)

    A disturbing trend in bankruptcy litigation, however, challenges this notion of the proper role of appeals. The judge-made doctrine of equitable mootness allows appellate courts to dismiss meritorious appeals in order to preserve the expectations of the other participants in the reorganization. (7)

    In other words, the needs of the many justify running roughshod over the rights of the few, a perverted implementation of utilitarianism. (8) Not surprisingly, especially given the previous sentence, I believe that appellate courts have used equitable mootness too broadly and in ways that undermine tenets central to our jurisprudential and bankruptcy systems.

    This article explores the contours of equitable mootness to illustrate the untenable position in which it places meritorious appellants. It will then demonstrate how this process is corrosive to the role of our courts and how it can undermine the very principles it purports to protect. The article closes with some radical suggestions for reform.


    As Judge Posner has put it, equitable mootness "is perhaps best described as merely an application of the age-old principle that in formulating equitable relief a court must consider the effects of the relief on innocent third parties." (10) The main consideration inherent in equitable mootness is the effect of the implementation of an order confirming a plan of reorganization on those not directly involved in any appeal of that order. (11)

    When equitable mootness is invoked, appellate courts often reach an extraordinary conclusion: even if the appellant has a meritorious case, the court will decline to hear the appeal. (12) This leaves aggrieved appellants with no recourse for even profound errors made during the confirmation process. Especially given the Supreme Court's broad interpretation of the preclusive effect of confirmation orders, (13) this doctrine can work significant hardship on innocent creditors.


      A legitimate question is how such a doctrine originated. As doctrines go, equitable mootness in bankruptcy is relatively new, originating in 1981. Most trace its origins to Trone v. Roberts Farms, Inc. (In re Roberts Farms, Inc.). (14)

      1. The Tfinth Circuit and Roberts Farms

        In Roberts Farms, the bankruptcy court had confirmed a plan of arrangement under Chapter XI of the 1898 Bankruptcy Act. Trone, a creditor, objected. Before noticing his appeal of the confirmation order, Trone sought a writ of mandamus from the district court barring the bankruptcy judge from implementing the plan. (15) The request for a writ was denied. (16) The appellees then moved to dismiss the appeal as moot. The district court granted the motion. Trone appealed that order and, inadvisedly, sought the writ anew.

        As a consequence, the only issue on appeal to the circuit court was the propriety of the mootness dismissal. The appellees again moved to dismiss the appeal on mootness grounds. After discussing cases involving sales from bankruptcy estates, and the adoption of former Rule 805 of the Federal Rules of Bankruptcy Procedure (a precursor to section 363(m) of the Bankruptcy Code), (17) the circuit court said this:

        Here the many intricate and involved transactions ... were contemplated by the plan of arrangement (even to and including liquidation and reorganization of the debtor corporation) and stand solely upon the order confirming the plan of arrangement for court approval and confirmation of the transactions. Were we to deny the motion to dismiss for mootness and on consideration of the merits reverse the order of the District Court, what would be the result? Are we not quite patently faced with a situation where the plan of arrangement has been so far implemented that it is impossible to fashion effective relief for all concerned? Certainly, re* versal of the order confirming the plan of arrangement, which would knock the props out from under the authorisation for every transaction that has taken place, would do nothing other than create an unmanageable, uncontrollable situation for the Bankruptcy Court. (18) Interestingly, the Ninth Circuit dealt with Trone's failure to seek a stay as a separate ground for dismissal. (19) On this ground, the Ninth Circuit said:

        [I]t is obligatory upon appellant in a situation like the one with which we are faced to pursue with diligence all available remedies to obtain a stay of execution of the objectionable order (even to the extent of applying to the Circuit Justice for relief (Rule 51, Supreme Court Rules)) if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from. (20) Thus, there were two grounds in Roberts Farms for dismissal: one founded upon futility of remedy and the other founded upon an equity-based analysis arising from a lack of diligence and a change of circumstances.

        As authority for the first proposition, the court relied on Mills v. Green, (21) an 1895 Supreme Court decision in which the Justices dismissed an appeal seeking to enjoin the selection of a committee to attend a constitutional convention that had already occurred by the time the Court heard the appeal. This was odd; Mills dealt with deprivation of a political right, something that is not ordinarily compensated for with monetary damages. In contrast, reorganizations are all about money and the allocation of value. Even when property rights change or are eliminated, the reason is the allocation of value in line with the reorganization's new capital structure. Within the closed universe of participants to a reorganization, value is not lost as were political rights in Mills; that value is simply reallocated among the participants. The issue on appeal then becomes the difficulty in reallocating those rights, not with restoring a lost right.

      2. The Third Circuit and Continental Airlines

        Roberts Farms and the doctrine of equitable mootness gained slow acceptance after 1981. (22) In 1996, the Third Circuit gave the doctrine a boost in In re Continental Airlines. (23) There, the full court by a narrow majority of 7-6 explicitly embraced equitable mootness but without explicitly defining it. Instead, the majority opinion noted five factors that courts had considered:

        Factors that have been considered by courts in determining whether it would be equitable or prudential to...

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