The court-fashioned doctrine of "equitable mootness" has frequently been applied to bar appeals of bankruptcy court orders under circumstances where reversal or modification of an order could jeopardize, for example, the implementation of a negotiated chapter 11 plan or related agreements and upset the expectations of third parties who have relied on the order. The doctrine has figured prominently in recent bankruptcy headlines because it arguably contravenes the principle that federal courts have an obligation to address the merits of controversies that fall within their appellate jurisdiction.
The U.S. Court of Appeals for the Sixth Circuit recently weighed in on one aspect of the equitable mootness debate. In In re Kramer, 71 F.4th 428 (6th Cir. 2023), a divided Sixth Circuit panel ruled that equitable mootness does not apply in a chapter 7 liquidation. The panel accordingly reversed a district court decision finding that appeals of bankruptcy court orders approving the fees of chapter 7 trustees and their attorneys were constitutionally or equitably moot and must be dismissed because the appellant failed to obtain a stay pending appeal.
"Mootness" is a doctrine that precludes a reviewing court from reaching the underlying merits of a controversy. An appeal can be either constitutionally, statutorily, 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.
An appeal can also be rendered moot (or otherwise foreclosed) by statute. For example, section 363(m) of the Bankruptcy Code provides that, absent a stay pending appeal, "[t]he reversal or modification on appeal of an authorization … of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith."
The court-fashioned remedy of "equitable mootness" bars adjudication of an appeal when a comprehensive change of circumstances has occurred 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 for precluding appellate review of an order confirming a chapter 11 plan.
The doctrine of equitable mootness is sometimes criticized as an abrogation of federal courts' "virtually unflagging obligation" to hear appeals within their jurisdiction. See In re One2One Commc'ns, LLC, 805 F.3d 428, 433 (3d Cir. 2015); In re Charter Commc'ns, Inc., 691 F.3d 476, 481 (2d Cir. 2012). According to this view, dismissing an appeal on equitable mootness grounds "should be the rare exception." In re Tribune Media Co., 799 F.3d 272, 288 (3d Cir. 2015); accord In re Pac. Lumber Co., 584 F.3d 229, 240 (5th Cir. 2009) (equitable mootness should be applied "with a scalpel rather than an axe").
Moreover, although the U.S. Supreme Court has declined on several occasions to weigh in on the propriety of the equitable mootness doctrine, it recently expressed skepticism regarding the concept of mootness generally as a bar to a federal court's consideration of the merits of any appeal. See MOAC Mall Holdings LLC v. Transform Holdco LLC, 143 S. Ct. 927, 935 (2023) (in ruling that an order approving a lease assignment as a part of a bankruptcy sale transaction was not statutorily moot under section 363(m) of the Bankruptcy Code, the Court noted that "[o]ur cases disfavor these kinds of mootness arguments").
Substantially similar tests have been applied by most circuit courts in assessing whether an appeal of a chapter 11 confirmation order should be dismissed under equitable mootness. Those tests generally focus on whether the appellate court can fashion effective and equitable relief. See, e.g., PPUC Pa. Pub. Util. Comm'n v. Gangi, 874 F.3d 33, 37 (1st Cir. 2017) (considering whether: (i) the appellant diligently pursued all available remedies to obtain a stay of the confirmation order; (ii) the challenged chapter 11 plan had progressed "to a point well beyond any practicable appellate annulment"; and (iii) providing relief would harm innocent third parties); JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props., Inc. (In re Transwest Resort Props., Inc.), 801 F.3d 1161, 1167–68 (9th Cir. 2015) (applying a four-factor test, including whether the court "can fashion effective and equitable relief without completely knocking the props out from under the plan and thereby creating an uncontrollable situation for the bankruptcy court"); In re Tribune Media Co., 799 F.3d 272, 278 (3d Cir. 2015) (considering "(1) whether a confirmed plan has been substantially consummated; and (2) if so, whether granting the relief requested in the appeal will (a) fatally scramble the plan and/or (b) significantly harm third parties who have justifiably relied on plan confirmation"); Search Market Direct, Inc. v. Jubber (In re Paige), 584 F.3d 1327, 1339 (10th Cir. 2009) (applying a six-factor test, including the likely impact upon a successful reorganization of the debtor if the appellant's challenge is successful); In re United Producers, Inc., 526 F.3d 942, 947–48 (6th Cir. 2008) (three-factor test); TNB Fin., Inc. v. James F. Parker Interests (In re Grimland, Inc.), 243 F.3d 228, 231 (5th Cir. 2001) (considering "(1) whether the complaining party has failed to obtain a stay, (2) whether the plan (here, the liquidation) has been substantially consummated, and (3) whether the relief requested would affect the rights of parties not before the court or the success of the plan").
A common element of almost all of these tests is whether the chapter 11 plan has been substantially consummated. Section 1101(2) of the Bankruptcy Code provides that "substantial consummation" of a chapter 11 plan occurs when substantially all property transfers proposed by the plan have been completed, the debtor or its successor has assumed control of the business and property dealt with by the plan, and plan distributions have commenced.
Does Equitable Mootness Apply in Chapter 7 Cases?
The doctrine of equitable mootness has generally been applied to bar appeals in complex chapter 11 reorganization cases, in keeping with its underlying purpose in preventing disruption to confirmed and substantially consummated chapter 11 plans involving agreements entered into with the debtor by third parties in reliance on the finality of the debtor's emergence from bankruptcy and continued operation. See generally Collier on Bankruptcy ¶ 1129.09[a] (16th ed. 2023) (citing and discussing cases).
Some courts, however, have ruled that the doctrine of equitable mootness applies in chapter 7 cases, even though the rationales warranting its application in a chapter 11 reorganization are not present. See, e.g., Hoa Dao v. Sommers, 2018 WL 1139157, *2 (S.D. Tex. Mar. 1, 2018) (noting that although "[c]ourts do not normally apply equitable mootness to Chapter 7 proceedings," the court was persuaded that it should apply in a chapter 7 case); ANR Co. v. Rushton, 2012 WL 1556236, *4 (D. Utah May 2, 2012) ("After thorough review of the relevant case law, the Court is persuaded that equitable mootness should apply…. In keeping with those circuits that have applied equitable mootness to Chapter 7 proceedings, the Court will adopt the same approach taken when applying equitable mootness to Chapter 11 proceedings."), aff'd, 740 F.3d 548 (10th Cir. 2014); In re Carr, 321 B.R. 702, 707 (E.D. Va. 2005) (holding that "the equitable mootness doctrine's principles counseling pragmatism in the exercise of equity apply with equal force to the Chapter 7 liquidation of a bankruptcy estate").
Other courts, including several circuits courts of appeals, have either assumed that the doctrine applies in chapter 7 cases or avoided deciding the issue based on the facts. See, e.g., Ordonez v. ABM Aviation, Inc., 787 F. App'x 533, 539–40 (10th Cir. 2019) (assuming that equitable mootness applies in chapter 7 and holding that appeals from a bankruptcy court order relating to a chapter 7 trustee's settlement of the debtor's employment discrimination claims were equitably moot under the factors traditionally applied to the analysis); Myers v. Offit Kurman, P.A., 773 F. App'x 161, 162 (4th Cir. 2019) (finding that an appeal from a bankruptcy court order granting a chapter 7 trustee's motion for approval of a settlement agreement was equitably moot given that the agreement had been fully consummated and funds had been distributed accordingly); In re JMC Memphis, LLC, 655 F. App'x 802, 805 (11th Cir. 2016) (assuming that equitable mootness applies in chapter 7 and dismissing as equitably moot an appeal from an unstayed order approving a settlement between the chapter 7 trustee and the debtor's property insurer); In re Nica Holdings, Inc., 810 F.3d 781, 786 (11th Cir. 2015) ("We assume without deciding that equitable mootness applies in the Chapter 7 context, because even if it does, the Appellees have not shown this appeal is equitably moot."); In re BGI, Inc., 772 F.3d 102, 109 n.13 (2d Cir. 2014) ("As noted above, the instant appeal arises in the context of a Chapter 11 liquidation. Consequently, we leave to a future panel of our Court the question whether a district court may also invoke equitable mootness in the context of a Chapter 7 liquidation."); Stokes v. Gardner, 483 F. App'x 345, 346 (9th Cir. 2012) (assuming that equitable mootness applies in a chapter 7 case and finding that an appeal of an order approving a settlement agreement in a chapter 7 case was equitably moot); Tech. Lending Partners, LLC v. San Patricio Cnty. Cmty. Action Agency (In re San Patricio Cnty. Cmty. Action Agency), 575 F.3d 553, 558 (5th Cir. 2009) ("It is certainly arguable that equitable mootness has no application to an appeal in a Chapter 7 liquidation. Yet, there is no reason to make such a comprehensive statement here. Instead, we find that under traditional equitable mootness analysis, this case is not moot."); Drawbridge Special Opportunities Fund, L.P. v. Shawnee Hills, Inc. (In re Shawnee Hills, Inc.), 125 F. App'x 466, 469–70 (4th Cir. 2005) (holding, without discussing whether equitable mootness applies in a chapter 7 case, that a district court's ruling on appeal that a bank was obligated to honor a chapter 7 debtor-employer's prepetition payroll checks was equitably moot); In re Grimland, Inc., 243 F.3d 228, 231 n.4 (5th Cir. 2001) ("Equitable mootness normally arises where a Chapter 11 reorganization plan is at issue. Because we find the doctrine inapplicable on other grounds, we need not resolve whether or not the doctrine may be applied in a liquidation under Chapter 7."); Hicks, Muse & Co., Inc. v. Brandt (In re Healthco Int'l, Inc.), 136 F.3d 45, 48–49 (1st Cir. 1998) (without discussing whether equitable mootness applies in a chapter 7 case, holding that an appeal from a district court's affirmance of a bankruptcy court order approving a settlement between a chapter 7 trustee and a codefendant was not equitably moot); Fitzgerald v. Ninn Worx Sr., Inc. (In re Fitzgerald), 428 B.R. 872, 881–82 (B.A.P. 9th Cir. 2010) (assuming that equitable mootness applies in a chapter 7 case but ruling that an appeal of a bankruptcy court order approving a chapter 7 asset sale was not equitably moot).
In March 2015, Said Taleb ("Taleb") received an arbitration award imposing joint and several liability on both his former employer—a real estate business named Kay Bee Kay Properties ("KBK")—and KBK's owner Keith B. Kramer ("Kramer") in the amount of nearly $800,000. A state court confirmed the arbitration award in April 2015. However, before Taleb could collect on the judgment, Kramer and KBK separately filed for chapter 11 protection in the Eastern District of Michigan. The bankruptcy court converted both cases to chapter 7 liquidations in August 2015.
Taleb filed an unsecured claim in Kramer's chapter 7 case based on the arbitration judgment. Two law firms that had represented Taleb in the arbitration, the state court litigation, and the chapter 7 cases filed attorneys' liens after Taleb refused to pay their fees. They also obtained a state court order directing that any distributions made to Taleb from the chapter 7 estates were to be paid directly to the law firms until their fee claims were paid in full.
In accordance with that order, the chapter 7 trustees for Kramer and KBK distributed the approximately $240,000 that would otherwise have been paid to Taleb directly to the law firms. Taleb later objected to the both the chapter 7 trustees' final reports and the fee applications of both trustees and their lawyers. However, the bankruptcy court overruled his objections and approved in separate orders the trustees' final reports and fee applications as well as the distributions to the law firms.
Taleb appealed these orders to the district court but did not obtain a stay pending appeal. While the appeals were pending, the bankruptcy court discharged the trustees and closed the chapter 7 cases. The district court dismissed the appeals, ruling that they were either constitutionally or equitably moot because Taleb failed to obtain a stay pending the appeals.
Taleb appealed to the Sixth Circuit.
The Sixth Circuit's Ruling
A three-judge panel of the Sixth Circuit reversed and remanded the case below.
Two judges wrote separate opinions, in which both majorities concluded that the appeals were not moot, but for different reasons.
In the first majority opinion, U.S. Circuit Judge John B. Nalbandian made separate determinations regarding constitutional and equitable mootness. First, he determined that the appeal of the orders approving the KBK chapter 7 trustee's final report and fees as well as the fees of his counsel was not constitutionally moot, even though Taleb had not obtained a stay pending appeal, because the district court could have fashioned a remedy by granting Taleb's requested relief. Kramer, 71 F.4th at 440–41.
In reaching his second determination on equitable mootness, Judge Nalbandian acknowledged that the Sixth Circuit had previously expanded the scope of equitable mootness beyond chapter 11 plan confirmation orders to an appeal of an order confirming a chapter 9 municipal debt adjustment plan in In re City of Detroit, Michigan, 838 F.3d 792 (6th Cir. 2016). Moreover, he noted that "[o]ur sister circuits who have opined on this issue have universally extended equitable mootness to Chapter 7 cases." Kramer, 71 F.4th at 443. Judge Nalbandian concluded that, even if equitable mootness applies in a chapter 7 case, Taleb's appeal of the bankruptcy court's fee orders in Kramer's chapter 7 case was not equitably moot because: (i) other circuits applying the equitable mootness test "have invariably found that, regardless of the type of bankruptcy at issue, challenges to professional fees are not equitably moot on appeal," id.; and (ii) the appeal did not satisfy the three-factor equitable mootness test applied in the Fifth Circuit and elsewhere because "any redistribution of [the Kramer chapter 7 trustee's] fee award could only help and not hurt the other creditors in the bankruptcy case." Id. at 444.
Judge Moore wrote the second opinion, in which she was joined by Judge Clay regarding the issue of equitable mootness.
After examining the equitable mootness doctrine at length, Judge Moore concluded that it simply does not apply in a chapter 7 case.
Judge Moore explained that courts have been reluctant to expand the scope of the doctrine beyond appeals of chapter 11 plan confirmation orders, which "makes sense given the different concerns that arise" in connection with appeals from a bankruptcy court's orders in a chapter 7 liquidation. Id. at 450. She noted that chapter 7 cases almost always entail the simple liquidation of estate assets and the distribution of proceeds to creditors, rather than "intricate transactions that need to be unraveled." Id. at 451 (citation omitted). Judge Moore further observed that, in a simple chapter 7 liquidation, the debtor does not emerge from bankruptcy as a reorganized entity conducting business and triggering the reliance of third parties.
According to Judge Moore, "no other circuit court has affirmatively embraced the equitable-mootness doctrine in Chapter 7 liquidations." Id. at 452. Instead, she explained, in the handful of cases in which sister circuits have addressed the doctrine in connection with chapter 7 appeals, the courts have skirted the threshold issue by ruling that the doctrine did not apply on the facts of the case.
Judge Moore noted that, "consistent with the doctrine's underlying purpose and its aims," the Sixth Circuit's previous rulings confined the doctrine of equitable mootness to appeals of plan confirmation orders (albeit in the context of both chapter 9 and chapter 11). Id. at 448. Judge Moore saw no reason to depart from those precedents or their rationale:
Ultimately, we must decline the request to expand broadly an already questionable doctrine. Having started with the presumption that we "should hear and decide on the merits cases properly before [us]," … and finding the characteristics of a Chapter 7 liquidation far too distinct from the doctrine's rationale and its scope as delineated by our precedent, we hold that the doctrine of equitable mootness has no place in Chapter 7 liquidations.
Id. at 452 (citations omitted).
The Sixth Circuit accordingly reversed the district court's ruling that Taleb's appeal of the bankruptcy court's fee orders was constitutionally or equitably moot and remanded the case below for the district court to consider the merits of Taleb's claims.
Because it involved appeals of several orders in two separate but related bankruptcy cases, Kramer's facts are relatively confusing. Moreover, the message sent by the Sixth Circuit was muddied somewhat by two separate majority opinions. One of those opinions, however, very clearly concludes that the doctrine of equitable mootness should be applied sparingly to bar consideration of the merits of an appeal and simply does not apply in a chapter 7 case. It remains to be seen whether other courts will embrace this rationale.
Meanwhile, having addressed statutory mootness under section 363(m) of the Bankruptcy Code in Transform HoldCo, the Supreme Court may now have an opportunity to weigh in on the doctrine of equitable mootness, including the role that a stay pending appeal plays in the analysis and the burden of proof. In a petition for certiorari filed on March 24, 2023, the indenture trustee for unsecured noteholders of Windstream Holdings, Inc. ("Windstream") asked the Court to review an October 2022 decision by the U.S. Court of Appeals for the Second Circuit dismissing on equitable mootness grounds the indenture trustee's appeal of an order confirming Windstream's chapter 11 plan and a related settlement. See U.S. Bank. Nat'l Assoc. v. Windstream Holdings, Inc., No. 22-926 (U.S. Mar. 24, 2023). According to the indenture trustee, the doctrine is a "scourge on the proper functioning of the constitutionally mandated court system in bankruptcy cases," it "wrongfully and unevenly deprives bankruptcy litigants of their constitutional and statutory rights to Article III court review," and lacks a basis in the Bankruptcy Code or the U.S. Constitution. That petition was distributed for conference scheduled for September 26, 2023. The Court has recently denied other petitions seeking review of lower court rulings applying the doctrine. See, e.g., KK-PB Financial LLC v. 160 Royal Palm LLC, 142 S. Ct. 2778 (2022); GLM DFW, Inc. v. Windstream Holdings, Inc., 142 S. Ct. 226 (2021).
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