Equitable mootness is a judicially created doctrine often applied in appeals from orders of bankruptcy courts confirming chapter 11 plans of reorganization. In instances where granting relief on appeal would result in overturning the confirmation order and therefore unravelling a substantially consummated chapter 11 plan, appellate courts have, in certain circumstances, abstained from deciding appeals in reliance on equitable mootness. The rationale is that undoing transactions consummated pursuant to a plan, such as the issuance of new securities or distributions of property to stakeholders, would be both unduly burdensome and inequitable to parties that have justifiably relied on the confirmation order and plan.
Recently, in In re Ocean Rig UDW Inc., the United States District Court for the Southern District of New York applied equitable mootness outside of the context of a chapter 11 confirmation order. After first finding that the appellant, a purported shareholder, did not have standing to pursue to her appeal from a bankruptcy court order enforcing a Cayman scheme of arrangement entered pursuant to chapter 15 of the Bankruptcy Code, the Court went on to hold that the appeal was also equitably moot. This appears to be the first decision applying equitable mootness in the chapter 15 context.
Background
The chapter 15 debtors, Ocean Rig UDW Inc. (UWD) and three of its subsidiaries, are holding companies that, through a group of non-debtor subsidiaries, engage in offshore oil rig ownership and drilling operations for exploration oil and gas companies. UDW’s subsidiaries incurred substantial funded debt that was guaranteed by UDW and secured by UDW’s equity interests in each respective subsidiary. Reduced demand for the debtors’ services during the oil industry downturn caused a reduction in the rates that the debtors could charge their customers. That, in addition to expiring contracts and the high cost of deactivating and maintaining unused oil rigs, sapped the debtors’ liquidity, resulting in the inability to make interest payments or pay off debt maturing in 2017. As a result, the debtors filed winding up petitions in the Cayman Islands and sought the appointment of Joint Provisional Liquidators (“JPLs”). Three days later, the appointed JPLs filed a petition with the New York bankruptcy court seeking recognition of the Cayman proceedings as foreign main proceedings under chapter 15 of the Bankruptcy Code. While consideration of that verified petition was pending, the debtors commenced Cayman scheme of arrangement proceedings and proposed a Cayman scheme of arrangement that provided for the substantial deleveraging of the debtors through the exchange of more than $3.8 billion of existing debt for new equity in UDW, cash payments of about $288 million, and new secured debt of $450 million. At the Cayman creditors’ meeting, the debtors obtained overwhelming acceptance of the scheme from affected creditors.
The bankruptcy court held a hearing on the JPLs petition for recognition, at which the lone objector, an individual who asserted that she was a shareholder of UDW, presented evidence and cross-examined witnesses. Although the bankruptcy court found that the objector did not adequately prove that she actually owned shares, it nevertheless addressed and overruled her objections and entered an order recognizing the Cayman proceedings as foreign main proceedings.
The JPLs then filed a motion seeking an order from the bankruptcy court enforcing the Cayman scheme of arrangement, such that it would have full force and effect in the United States. No objections were filed to that motion, and the bankruptcy court entered the enforcement order on September 20, 2017.
The purported shareholder filed a notice of appeal of both the order recognizing the Cayman proceedings as foreign main proceedings and the order enforcing the plan in the United States.
Appellate Decision
The debtors moved to dismiss the appeal on the grounds that the appellant did not have standing to appeal and that the appeal was equitably moot because the Cayman scheme of arrangement had been substantially consummated.
Standing
To have standing to pursue a bankruptcy appeal, an appellant must be an “aggrieved person” whose pecuniary interests are directly affected by the order. The Court found that the appellant was not an “aggrieved person” because UDW was insolvent as of the initiation of the Cayman proceedings, i.e. there was no value to be distributed to existing shareholders, and the appellant did not contest UDW’s insolvency. Thus, the Court reasoned, existing shareholders “did not stand to lose anything from, and thus had to pecuniary interest in, UDW’s restructuring.”
Equitable Mootness
The Court then turned to the question of whether the appeal was equitably moot, citing chapter 11 case law holding that, where a plan of reorganization has been substantially consummated, there is a strong presumption in favor of equitable mootness that can only be overcome when five circumstances are present: (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.
The Court also noted that although seeking a stay pending appeal is not explicitly required, where an appellant fails to do so, with the result that the reorganization is substantially consummated, overcoming an equitable mootness argument is particularly difficult.
The Court was persuaded by the debtors’ arguments that the appellant did not seek a stay, and in the meantime the debtors’ and their creditors’ circumstances had comprehensively changed due to the substantial cash distributions to creditors and the issuance of new equity and secured debt. The Court was unpersuaded by appellant’s argument that the basis for application of equitable mootness in chapter 11 cases did not apply in chapter 15, finding that the inequity of unwinding a reorganization that has been substantially completed, and which the appellant failed to seek to stay, applies equally in the context of foreign reorganizations as it does to domestic ones. “Just as in domestic reorganizations, the principles of finality and fairness weigh heavily in favor of dismissing as moot the appeal of substantially consummated reorganization.”
Implications
The Ocean Rig decision is noteworthy because it is the first published decision extending the use of the equitable mootness doctrine to appeals of chapter 15 orders. While the decision relied heavily on the appellant’s failure to seek a stay pending appeal as well as on the consummation of the scheme of arrangement via the issuance of new equity, the incurrence of a new secured debt facility and distributions of cash payments to creditors, it did not analyze whether there was any narrowly tailored relief it could offer the appellant. Recently, several Circuit Courts of Appeal have advanced a more limited application of the doctrine, holding that appellate courts should, if warranted and possible, grant limited relief that would not unwind a consummated chapter 11 plan of reorganization.
This point could be of critical distinction between chapter 11 and 15 cases, as chapter 15 cases are merely ancillary in nature and designed to aid the main restructuring proceedings occurring in foreign countries. It is not necessarily obvious that in all cases that the reversal on appeal of a chapter 15 enforcement order would equate to the “unravelling” of the (foreign) plan with which courts applying equitable mootness in chapter 11 have traditionally been concerned. As case law is surely to further develop, we expect these issues to be explored.
The district court’s opinion is on appeal before the Second Circuit, which when issued, could be the first Circuit opinion on the issue.
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