United States: Ninth Circuit Rulings On Equitable Mootness In Transwest And Sunnyslope Impact Third Party Investors

The doctrine of equitable mootness provides that Chapter 11 reorganization plans will be deemed moot, and therefore not subject to appellate review, if a plan has been substantially consummated and granting appellate relief would impair the rights of innocent third parties relying on the confirmation order.  Since the development of the court-created mootness doctrine nearly a quarter century ago, courts have grappled with applying it in such a way as to strike an adequate balance between the need for finality, and the need to exercise the court's jurisdiction and preserve the right to appellate review.  The standard interpretation in bankruptcy was that once the debtor took definitive steps to put the Chapter 11 plan in place (i.e., "substantial consummation"), and the objecting creditor neglected to gain a stay of the plan confirmation order pending appeal, then any appeal was presumed to be "equitably moot" and therefore subject to dismissal by the appellate court.

However, in the recent case of JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props. Inc. (In re Transwest Resort Props., Inc.), 801 F.3d 1161 (9th Cir. 2015), a divided panel of the U.S. Court of Appeals for the Ninth Circuit (the "Ninth Circuit") ruled that, despite substantial consummation of the subject plan, a creditor's appeal of a Chapter 11 plan confirmation order should not be dismissed on equitable mootness grounds.  In so holding, the Ninth Circuit applied a four-part test to determine that the creditor's appeal was not equitably moot: (1) whether the appellant sought a stay pending appeal; (2) whether substantial consummation of the plan occurred; (3) whether the relief sought would affect third parties not before the court; and (4) whether the relief sought would entirely unravel the plan.  The Ninth Circuit held that, although substantial consummation is a factor that weighs in favor of equitable mootness, the law requires that the court still examine the third and fourth prongs of the equitable mootness test.

In reversing the district court's dismissal of an appeal and remanding to the district court for disposition of the merits, the Ninth Circuit held that review of the creditor's appeal would not unfairly affect third parties or completely unwind the plan.  Specifically, regarding the issue of third party rights, the court determined that the third party at hand was not the type of innocent party that was meant to be protected.  Rather, the third party was a sophisticated investor that funded the plan, and was vocal and active throughout the bankruptcy case, and should have known that appellate review was possible.  Finally, reasoned the majority, the bankruptcy court could devise equitable relief without entirely unraveling the plan.  Even the opportunity for partial relief would render the appeal not moot.

In a dissenting opinion, Judge Milan D. Smith, Jr. argued that the court's ruling was grossly inequitable to the third-party plan sponsor.  According to Judge Smith, the majority's decision will deter future investment in reorganizing debtors, thereby diminishing the value of bankruptcy estates, disadvantaging creditors and hindering reorganization efforts.  Judge Smith instead maintained that considerable weight should be rendered to substantial consummation of a plan and further advocated that the court place greater weight on promoting finality in the bankruptcy process.

More recently, on April 8, 2016, the Ninth Circuit issued its opinion in First Southern Ntl. Bank v. Sunnyslope Housing Ltd. Partnership (In the Matter of: Sunnyslope Housing Ltd. Partnership), No. 12-17241 (9th Cir. 2016), which further extended its holding in Transwest.  Reversing the district court's judgment affirming the bankruptcy court's confirmation of a Chapter 11 plan, the Ninth Circuit held that the creditor's appeal was not equitably moot despite the fact that funding for the reorganization plan had been furnished by an equity investment from a third-party investor, and the plan had been substantially consummated.  The court concluded that the plan was based on an improper valuation of a creditor's secured interest in real property and that the debtor had improperly been permitted to exercise the cram down provisions of section 506(a) of the Bankruptcy Code and retained the property at issue in exchange for a new payment plan that permitted the debtor to pay the creditor an amount equal to the present value of the secured claim at the time of bankruptcy.  The debtor argued that the value of the creditor's secured interest should be determined with certain affordable housing restrictions in place, but the Ninth Circuit disagreed.  Instead, the panel held that all of the restrictive covenants and provisions that the debtor sought to invoke to restrict the project to affordable housing and to the decreased rental income that would consequently be collected, resulted from positions that were junior and expressly subordinated to the creditor's interest.

As in Transwest, the panel in Sunnyslope was unconvinced that the third-party investor was the type of innocent third party intended to be protected by the doctrine of equitable mootness.  Rather, the court found that the third party was a sophisticated investor intimately involved in the development of the plan and was aware that the creditor had filed notices of appeal.  Furthermore, according to the court, the creditor's failure to seek a stay from the Ninth Circuit could not have given the third party reasonable cause to conclude that the creditor had abandoned its challenge, yet the third party made a conscious decision to proceed nonetheless.  The Ninth Circuit ultimately held that the unraveling of the plan would not have a negative impact on parties intended to be protected by the doctrine.  Accordingly, it reversed and remanded to the district court for further proceedings.

The Ninth Circuit's holdings in Transwest and Sunnyslope indicate that an equitable mootness analysis continues to be both circuit-driven and fact-dependent.  Ultimately, the Transwest and Sunnyslope decisions confirm that under the law of the Ninth Circuit, a plan's substantial consummation does not establish a presumption of equitable mootness.  Therefore, even where a Chapter 11 reorganization plan has been substantially consummated (regardless of whether or not the appellant sought a stay of the plan's consummation pending appeal), a court may consider an appeal of the confirmation order on its merits if a remedy could be fashioned that would not entirely unravel the plan or detrimentally impact "innocent" third parties.  Furthermore, the majority in Transwest acknowledges the great discretion that bankruptcy courts have in formulating such a remedy.  Whether that remedy is equitable, however, is contingent upon the structure of the plan, the timing of implementation, and the bankruptcy court's capacity to fashion relief in such a way as to address the appellant's justifiable objections without unwinding the plan.

In the U.S. Court of Appeals of the Third Circuit (the "Third Circuit"), however, the scope and applicability of the equitable mootness doctrine is entirely different than in the Ninth Circuit.  On January 11, 2016, Aurelius Capital Management, LP ("Aurelius") filed its petition for a writ of certiorari in the Supreme Court of the United States.  Aurelius' petition was in response to a decision arising out of the Third Circuit affirming the dismissal of Aurelius' appeal of a plan confirmation order entered in a Chapter 11 proceeding despite Aurelius' objections.  See In re Tribune Media Co., 700 F.3d 272 (3d Cir. 2015).  Remarking that the Supreme Court has never reviewed the equitable mootness doctrine, Aurelius contended that the Supreme Court's review was necessary to achieve uniformity and a certain measure of restraint to the interpretation and application of the doctrine.  Aurelius' petition for certiorari, however, was denied.  As a result, the holdings and analyses in Transwest and Sunnyslope should guide the actions of those contemplating an appeal of a confirmation order in the Ninth Circuit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
14 Aug 2018, Seminar, Los Angeles, United States

August 14, 2018 - Orange County
Embassy Suites Anaheim Hotel - Garden Grove

August 21, 2018 - Pasadena Area
DoubleTree by Hilton Hotel - Monrovia

September 20, 2018 - Los Angeles
Sheraton Gateway Hotel - LAX

13 Sep 2018, Other, Los Angeles, United States

Liisa will be giving opening remarks and presenting, "Big Data and Online Behavioral Advertising (OBA): An Advertiser’s Perspective Origins of big data and how to legally acquire data."

20 Sep 2018, Seminar, Los Angeles, United States

The annual seminar addressing changes and developments in state and federal wage and hour laws is a unique one-day program and hundreds of California employers, personnel managers, controllers, attorneys, payroll managers, and supervisors attend each year.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions