As many lenders have learned the hard way, an appeal of a confirmed Chapter 11 plan is often met with strong resistance by the debtor. Often a strong arm tactic used by debtors to encourage courts to deny appellate review of confirmed reorganization plans, the doctrine of “Equitable Mootness” has recently come under fire.
Because Chapter 11 reorganizations are effective so quickly after confirmation, appeals of such decisions are often not able to be heard until after the plan has been substantially consummated. As a general rule, therefore, appellate courts were historically unwilling to allow an appeal if it would be fatal to the substantially consummated plan.
In deciding whether an appeal is equitably moot, courts generally consider (1) whether the reorganization plan has been substantially consummated; (2) whether a stay has been obtained; (3) whether the relief requested would affect the rights of parties not before the court; (4) whether the relief requested would affect the success of the plan; and (5) the public policy of affording finality to bankruptcy judgments.
Historically courts have been unwilling to allow appeal of confirmed plans. Recently, however, courts within the Third, Fifth and Tenth Circuits have noted that equitable mootness should not foreclose the appeal of a legitimate claim, even if such claims arise in a plan which has been substantially consummated.
These decisions illustrate a shifting ideology which finds that equitable mootness is more properly viewed as an appellate court’s balancing test between the rights of an appellant to be heard, and the expectation interests of all other interested parties to a confirmed bankruptcy plan. Where an appeal would significantly undermine these expectations, thus undermining the plan, the appellate court will generally be unwilling to allow such an appeal. Where, on the other hand, the appeal only affects a minor interest in the bankruptcy estate, the circuit courts, which have addressed this issue in recent years, have demonstrated a willingness to forego the historical preference of denying post-confirmation appeals.
Although the shift in ideology is not yet sweeping, the result is entirely positive to creditors whose appeals would historically have been categorically denied after the consummation of a Chapter 11 plan. Now at least, equity provides such a creditor with a leg to stand on when arguing that dismissal of such an appeal was improper.