In Beeman v. BGI Creditors' Liquidating Trust (In re
BGI, Inc.), 772 F.3d 102 (2d Cir. 2014), the U.S. Court of
Appeals for the Second Circuit considered whether the doctrine of
"equitable mootness" applied to the appeal of a
confirmation order approving a liquidating chapter 11 plan. In a
matter of first impression, the court ruled that the standards
governing equitable mootness in an appeal of an order confirming a
chapter 11 plan of reorganization also apply in the context of a
chapter 11 liquidation. The Second Circuit affirmed a district
court ruling dismissing an appeal because the appellants failed to
overcome the presumption of mootness triggered by "substantial
consummation" of a liquidating chapter 11 plan.
Mootness
"Mootness" is a doctrine that precludes a reviewing
court from reaching the underlying merits of a controversy. In
federal courts, an appeal can be either constitutionally or
equitably moot. Constitutional mootness is derived from Article III
of the U.S. Constitution, which limits the jurisdiction of federal
courts to actual cases or controversies and, in furtherance of the
goal of conserving judicial resources, precludes adjudication of
cases that are hypothetical or merely advisory. In contrast, the
judge-fashioned remedy of "equitable mootness" bars
adjudication of an appeal when a comprehensive change of
circumstances occurs such that it would be inequitable for a
reviewing court to address the merits of the appeal.
In bankruptcy cases, appellees often invoke equitable mootness as a
basis to preclude appellate review of an order confirming a chapter
11 plan. Protecting legitimate expectations of innocent
stakeholders and the difficulty of "unscrambling the
eggs" following the completion of complex restructuring
transactions are issues that a court considers when confronted with
any challenge to a plan confirmation order. Courts sometimes reject
such a challenge (if in the form of an appeal of the confirmation
order) as equitably moot because it is simply too late or too
difficult to undo transactions consummated under the plan. A court
also will dismiss an appeal of a confirmation order as equitably
moot if effective relief, even if arguably possible, would be
inequitable under the circumstances, given the difficulty of
restoring the status quo ante and the impact on all
parties involved.
Before deciding whether relief may be granted and what impact that
relief may have on the various stakeholders in a chapter 11 case,
however, courts often conduct a threshold inquiry as to whether a
chapter 11 plan has been "substantially consummated."
Section 1101(2) of the Bankruptcy Code provides that substantial
consummation occurs when substantially all property transfers
proposed by the plan have been completed, the reorganized debtor or
its successor has assumed control of the debtor's business and
property, and plan distributions have commenced.
Several circuit courts of appeal have formally adopted the doctrine
of equitable mootness in considering whether to hear appeals of
plan confirmation orders. For example, in Search Market Direct,
Inc. v. Jubber (In re Paige), 584 F.3d 1327 (10th Cir. 2009),
the Tenth Circuit considered six factors in determining whether the
doctrine should moot appellate review of a confirmation order: (1)
whether the appellant sought and/or obtained a stay pending appeal;
(2) whether the plan has been substantially consummated; (3)
whether the rights of innocent third parties would be adversely
affected by reversal of the confirmation order; (4) whether the
public-policy need for reliance on confirmed bankruptcy
plans—and the need for creditors generally to be able to rely
on bankruptcy court decisions—would be undermined by reversal
of the confirmation order; (5) the likely impact upon a successful
reorganization of the debtor if the appellant's challenge is
successful; and (6) whether, on the basis of a brief examination of
the merits of the appeal, the appellant's challenge is legally
meritorious or equitably compelling.
Substantially similar tests have been adopted by the Second, Third,
Fifth, and Ninth Circuits. See Frito-Lay, Inc. v. LTV Steel Co.
(In re Chateaugay Corp.), 10 F.3d 944 (2d Cir. 1993);
Nordhoff Invs., Inc. v. Zenith Elecs. Corp., 258 F.3d 180
(3d Cir. 2001); TNB Fin., Inc. v. James F. Parker Interests (In
re Grimland, Inc.), 243 F.3d 228 (5th Cir. 2001); Motor
Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation
Co.), 671 F.3d 980 (9th Cir. 2012), amended and superseded
on denial of rehearing en banc, 677 F.3d 869 (9th Cir. 2012).
In In re Philadelphia Newspapers, LLC, 690 F.3d 161,
168–69 (3d Cir. 2012), however, a panel of the Third Circuit
adopted a more nuanced approach, holding that the foremost
consideration is "whether allowing an appeal to go forward
will undermine the plan, and not merely whether the plan has been
substantially consummated."
The Second Circuit reaffirmed the doctrine of equitable mootness in
In re Charter Communications, Inc., 691 F.3d 476 (2d Cir.
2012), but its ruling deepened a split among the circuits with
respect to the standard of review and burden of proof to be
applied. In Charter, the Second Circuit held that once a
chapter 11 plan has been substantially consummated, an appeal is
presumed to be equitably moot unless the appellant can demonstrate
that it has met all five of the criteria delineated in its previous
ruling in Chateaugay. To avoid dismissal on the basis of
equitable mootness under Chateaugay, an appellant must
demonstrate that:
1. The court can still order some
effective relief;
2. Such relief will not affect the
re-emergence of the debtor as a revitalized corporate entity;
3. Such relief will not unravel
intricate transactions so as to knock the props out from under the
authorization for every transaction that has taken place and create
an unmanageable, uncontrollable situation for the Bankruptcy
Court;
4. The parties who would be adversely
affected by the modification have notice of the appeal and an
opportunity to participate in the proceedings; and
5. The appellant pursued with
diligence all available remedies to obtain a stay of execution of
the objectionable order if the failure to do so creates a situation
rendering it inequitable to reverse the orders appealed from.
Chateaugay, 10 F.3d at 952–53 (internal quotation
marks omitted). By appearing to abandon the balancing approach
employed by other circuits in this context, the Second Circuit
stands alone in presuming that an appeal is equitably moot
following substantial consummation of a chapter 11 plan.
Prior to Charter, circuit courts uniformly required the
party asserting equitable mootness to bear the burden of proof on
appeal. See Thorpe Insulation, 677 F.3d at 880; Search
Market Direct, Inc. v. Jubber (In re Paige), 584 F.3d 1327,
1339–40 (10th Cir. 2009); accord Ala. Dep't of Econ.
& Cmty. Affairs v. Ball Healthcare-Dallas, LLC (In re
Lett), 632 F.3d 1216, 1226 (11th Cir. 2011); Gillman v.
Cont'l Airlines (In re Cont'l Airlines), 203 F.3d 203,
210 (3d Cir. 2000).
With respect to the standard applied in reviewing a mootness ruling
by a district court or bankruptcy appellate panel, however, the
circuits have been split between applying a de novo or
abuse-of-discretion standard. Compare Curreys of Neb., Inc. v.
United Producers, Inc. (In re United Producers, Inc.), 526
F.3d 942, 946–47 (6th Cir. 2008) (de novo standard);
Thorpe Insulation, 677 F.3d at 880 (same); Liquidity
Solutions, Inc. v. Winn-Dixie Stores, Inc. (In re Winn-Dixie
Stores, Inc.), 286 Fed. App'x 619, 622 & n.2 (11th
Cir. 2008) (same); United States v. GWI PCS 1 Inc. (In re GWI
PCS 1 Inc.), 230 F.3d 788, 799–800 (5th Cir. 2000)
(same), with Charter, 691 F.3d at 483 (abuse-of-discretion
standard); Paige, 584 F.3d at 1339–40 (same); and
Cont'l Airlines, 203 F.3d at 210 (same).
In BGI, the Second Circuit revisited equitable mootness to
consider, as a matter of first impression, whether the doctrine can
preclude appeals impacting orders confirming chapter 11 plans that
provide for a debtor's liquidation.
BGI
Retail bookstore chain BGI, Inc., f.k.a. Borders Group, Inc.
("Borders"), filed for chapter 11 protection in February
2011 in the Southern District of New York. Borders abandoned its
efforts to reorganize shortly afterward. In July 2011, the
bankruptcy court authorized Borders to liquidate substantially all
of its assets. Borders closed the last of its retail branches on
September 20, 2011, and stopped accepting gift cards and conducting
e-commerce on its website one week later. Gift card redemptions
constituted nearly all of Borders' net sales during the last
month of the company's operations.
Borders filed a chapter 11 plan of liquidation in November 2011. In
addition to providing notice by mail to all known creditors of the
claims bar date (June 1, 2011) and the plan confirmation hearing,
Borders published notice of the bar date and the confirmation
hearing in The New York Times. The bankruptcy court
confirmed Borders' plan of liquidation on December 21,
directing in its order that the plan would be effective on January
12, 2012.
Certain holders of unredeemed gift cards (the "GC
Claimants") filed a motion on January 4, 2012, for authority
to file untimely proofs of claim, arguing that they had not
received adequate notice of the bankruptcy case or the bar date.
They later moved the court to certify a class of all holders of
Borders gift cards issued prepetition, but they never sought a stay
of the effective date of the chapter 11 plan of liquidation.
The bankruptcy court denied both motions in August 2012. The court
held that: (i) the GC Claimants were "unknown" creditors
because their "status as possible creditors was not known or
reasonably ascertainable" by Borders; (ii) as
"unknown" creditors, the GC Claimants were entitled only
to publication, rather than actual, notice of the bar date; and
(iii) the GC Claimants' failure to file timely proofs of claim
was not "excusable neglect" under Rule 9006(b)(1) of the
Federal Rules of Bankruptcy Procedure. The court also denied as
moot the motion for class certification.
In so ruling, the court found that Borders' chapter 11 plan had
been substantially consummated because the liquidating trust
established under the plan had already distributed approximately
$17 million to holders of administrative and priority claims.
According to the court, "[A]llowing [the GC Claimants] to file
late claims and certifying a class of Gift Card holders would have
a disastrous effect on the remainder of [Borders' estate] and
the final distributions of the Plan." The GC Claimants
appealed the bankruptcy court's rulings to the district
court.
In October 2012—more than 10 months after confirmation of the
plan—the GC Claimants sought a stay of interim distributions
to creditors pending the district court's adjudication of their
appeal. The bankruptcy court denied the motion. The district court
later dismissed the GC Claimants' appeal of the bankruptcy
court's previous rulings denying late-filed claims and class
certification as being equitably moot. Among other things, the
district court noted that "[e]ven though Appellants did not
appeal confirmation of the Distribution Plan, their requested
relief is tantamount to a collateral attack because of the drastic
changes to the distributions that would be implicated."
See Beeman v. BGI Creditors' Liquidating Trust (In re BGI,
Inc.), 2013 BL 165932, *12 n.12 (S.D.N.Y. May 22, 2013). The
GC Claimants then appealed to the Second Circuit.
The Second Circuit's Ruling
A three-judge panel of the Second Circuit affirmed. Initially,
the court ruled, as a matter of first impression, that the doctrine
of equitable mootness applies to appeals arising from chapter 11
liquidations as well as reorganizations:
We see no principled reason, in a Chapter 11 liquidation proceeding, for denying a court discretion to apply the doctrine of equitable mootness and the corresponding Chateaugay analysis. In such a liquidation, affected parties may have devoted months of time and resources toward developing an acceptable plan; creditors with urgent needs may have been stayed from accessing assets and funds to which they are entitled; and extensive judicial resources may have been consumed. In liquidation as in reorganization, substantial interests may counsel in favor of preventing tardy disruption of a duly developed, confirmed, and substantially consummated plan.
The Second Circuit found support for its conclusion in several
published and unpublished rulings from other circuits.
See, e.g., Schaefer v. Superior Offshore
Int'l, Inc. (In re Superior Offshore Int'l, Inc.), 591
F.3d 350 (5th Cir. 2009); Zegeer v. President Casinos, Inc. (In
re President Casinos, Inc.), 409 Fed. App'x 31 (8th Cir.
2010); Sutton v. Weinman (In re Centrix Fin. LLC), 355
Fed. App'x 199 (10th Cir. 2009); Drawbridge Special
Opportunities Fund, L.P. v. Shawnee Hills, Inc. (In re Shawnee
Hills, Inc.), 125 Fed. App'x 466 (4th Cir. 2005);
Hicks, Muse & Co. v. Brandt (In re Healthco Int'l,
Inc.), 136 F.3d 45 (1st Cir. 1998); Fitzgerald v. Ninn
Worx SR, Inc. (In re Fitzgerald), 428 B.R. 872 (9th Cir.
B.A.P. 2010).
The Second Circuit then ruled that the district court did not abuse
its discretion in dismissing the GC Claimants' appeals as
equitably moot. According to the Second Circuit: (i) the bankruptcy
court's finding that the chapter 11 plan had been substantially
consummated was not clear error, because, as of the effective date,
Borders had transferred its property to the liquidating trust and
the trust had distributed $17 million to creditors; and (ii) the
district court did not abuse its discretion in finding that the GC
Claimants failed to satisfy at least two of the Chateaugay
factors—i.e., ensuring adequate process for parties who would
be adversely affected (factor 4) and demonstrating their own
diligence in obtaining a stay pending appeal (factor 5).
The Second Circuit explained that the GC Claimants failed to
establish that general unsecured creditors, who could be stripped
of their recovery if the class were certified, received notice of
the appeal. Moreover, the court emphasized, having failed to
participate in the plan confirmation proceedings or to appeal or
seek a stay of the confirmation order, the GC Claimants did not
"pursue their claims with all due diligence." Notably,
the record reflected that at least one of the GC Claimants
consulted counsel regarding his or her claims more than two weeks
prior to the confirmation hearing but did not participate in the
proceedings.
Outlook
To the extent that any ambiguity existed in the Second Circuit
regarding application of the doctrine of equitable mootness to
appeals arising from chapter 11 liquidation proceedings,
BGI definitively dispels it. Interestingly, the court
expressly left for "a future panel of our Court the question
of whether a district court may also invoke equitable mootness in
the context of a Chapter 7 liquidation."
The principal thrust of the ruling, however, is directed more
toward the consequences of failing to take appropriate and timely
action—a strategic blunder on the part of the GC Claimants
that could readily have been avoided. The GC Claimants could have
participated in the plan confirmation proceedings or sought a stay
of the effective date of the plan, yet chose to do neither.
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