Equitable Mootness: Unjustly Preventing Appeals of Chapter 11 Bankruptcy Plans

Eli Gordon – While bankruptcy can take many forms, Chapter 11 bankruptcy is the most well-known. Chapter 11 of the United States Code allows insolvent companies to start fresh and reenter the marketplace as a reorganized entity. Proceedings under Chapter 11 adjudicate the rights of numerous parties at once. This collective proceeding entails intense negotiations and requires nearly all parties to make compromises.

Over the past few decades, these compromises have unfairly included relinquishing the right to appeal a Chapter 11 Plan.  Labeled as ‘Equitable Mootness,’ appellate courts often decline to hear appeals of Chapter 11 Plans when the interests of finality outweigh the interests of the individual appealing party. Different from constitutional mootness, which is about the inability to grant relief, equitable mootness is about the court’s unwillingness to grant relief. Courts reason that because a myriad of parties reasonably rely on confirmed Chapter 11 Plans, even hearing an appeal would be impractical, imprudent, and inequitable. In complex bankruptcy reorganizations, so many transactions take place as part of a confirmed Plan (such as the issuance of stock and bonds), that reversing a Plan would create chaos and an otherwise unmanageable situation for courts to deal with.

However, the right to an appeal is a constitutional right. Does the complexity and uniqueness of bankruptcy justify stripping a litigant of such a basic and fundamental constitutional right? What is the harm in allowing the merits of an appeal to be heard? Why can’t the concerns that motivate equitable mootness be dealt with at the remedy stage?

Despite not explicitly provided for by any statute, nearly all Federal Circuit Court of Appeals have adopted Equitable Mootness. When tracing the authority for the doctrine, judges point to other sections of the Bankruptcy Code that demonstrate an overwhelming preference for finality of Bankruptcy Orders. These sections include 11 U.S.C. 363(m) and 11 U.S.C. 364(e). Section 363(m) deals with the sale or lease of assets and Section 364(e) deals with post-petition financing. These narrow provisions protecting specific transactions cannot support a broad doctrine protecting an entire Plan.

To the contrary, the basic canon of statutory construction, expressio unius est exclusion alterius, dictates that “where Congress includes particular language in one section of a statute but omits it in another . . . it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.” Kucana v. Holder, 558 U.S. 233, 249 (2010). Therefore, because Congress deliberately omitted such a provision in its careful construction of the Bankruptcy Code, it is presumably clear that Congress did not intend for review of Chapter 11 Plans to be immune from appellate review.

While the judge-made doctrine does have many practical uses, the doctrine can unfortunately lead to abuse of the bankruptcy process. While sitting on the Third Circuit, then-Judge Alito warned that equitable mootness could be used as a weapon to prevent appellate review. Nordhoff Invs. Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 192 (3d Cir. 2001) (Alito, J., concurring). Accordingly, plan proponents have little incentive to lawfully structure plans that would survive ordinary appellate scrutiny. Rather, equitable mootness encourages the creation of legally deficient Plans, immunized from reversal on appeal.

Some judges and practitioners fear that disallowing a bankruptcy court from exercising the doctrine equitable mootness would have a chilling effect on future Chapter 11 reorganization efforts. However, such a conclusion is not warranted. Bankruptcy judges understand the equities involved in the bankruptcy process and when tailoring a remedy, he or she will always take into account the effect the relief requested will have on innocent third parties. If the equitable discretion of judges alone proves to be ineffective to adequately protect good faith reliance interests and finality, then Congress must act. Congress could codify language similar to Sections 363(m) and 364(e) that expressly provides that when certain factors constituting “extraordinary circumstances” are met, equitable mootness may be imposed. However, absent action by Congress, courts should not be allowed to rely on the doctrine of equitable mootness—and litigants should always be entitled to their constitutional right to an appeal.

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