Third Circuit Denies Appeal of Confirmation Order as Equitably Moot

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In In re Nuverra Environmental Solutions, Inc., Case No. 18-3084, the Third Circuit affirmed the opinion of the District Court for the District of Delaware denying the confirmation appeal of an unsecured noteholder as equitably moot. In doing so, the Third Circuit (i) refused to allow a full-class recovery, as it would unscramble the substantially consummated plan, and (ii) refused an individualized payout to the bondholder, as it would unfairly discriminate against other members of the class in contravention of the Bankruptcy Code.

Background

Section 1129(b)(1) of the Bankruptcy Code provides that a court may confirm a plan over the rejecting vote of a class only if the plan does not discriminate unfairly against that class. Unsecured noteholder David Hargreaves (“Hargreaves”) objected to the Chapter 11 plan (the “Plan”) of Nuverra Environmental Solutions, Inc. (the “Debtors”), arguing that “it engages in improper classification of claims and unfair discrimination among claims of equal rank.” Pursuant to the Plan, members of Class A6, which consisted of holders of unsecured 2018 notes (including Hargreaves), received securities and cash equal to 6% of the face value of their notes. Conversely, members of Class A7, which consisted of trade creditors, received payment in full due to a “horizontal gift” paid by the secured creditors. The Bankruptcy Court for the District of Delaware approved the Plan over Hargreaves’ objection, finding “that separate classification is necessary to maintain ongoing business relationships that the debtors need to ensure the continuance of operations.”

Hargreaves filed a notice of appeal to the District Court for the District of Delaware on the day the Plan was confirmed. One day later, Hargreaves filed a motion to stay the confirmation order, which the district court subsequently denied. After implementing the Plan, the reorganized Debtors filed a motion to dismiss Hargreaves’ appeal as equitably moot, arguing that the Plan was substantially consummated and could not be unwound. The district court agreed and dismissed the appeal.

As argued to the district court, Hargreaves maintained to the Third Circuit that although the Plan had been substantially consummated, he could still be granted full individual recovery while leaving the Plan in place. The Third Circuit agreed with the district court and rejected this theory because awarding Hargreaves payment in full while other members of his class who had not appealed the confirmation order would be stuck with their original 6% recoveries “would violate the [Bankruptcy] Code’s restriction on preferring certain individuals over others in the same class” and would also contravene the purpose of the unfair discrimination provision of Section 1129(b)(1). The Third Circuit rejected Hargreaves’ argument that his proposed relief would not result in disparate treatment because the remaining members of Class A6 had an equal opportunity to object to the Plan and appeal the confirmation order but chose not to. (A concurring opinion by Judge Cheryl Ann Krause questioned the majority’s reasoning on this point.) Thus, the Third Circuit held that the appeal was equitably moot.

Why This Case Is Interesting

The Third Circuit’s opinion illustrates that the mere size of the relief requested — which, in the context of the case, was relatively small — will not necessarily be determinative of whether the appeal is equitably moot. The case also suggests that the Third Circuit may be reluctant to grant relief on appeal of a substantially consummated plan if the relief itself, if granted, would have violated the Bankruptcy Code had it originally been proposed in the plan. The concurring opinion from Judge Krause illustrates her continuing discomfort with the notion of equitable mootness, however. As Judge Krause explains, if unfair discrimination claims must be brought as a class and if awarding classwide relief generally requires the unscrambling of the plan, then equitable mootness may prevent courts from ever addressing these questions. Thus, the doctrine of equitable mootness may, in some cases, deprive courts of the opportunity to answer merits questions and provide more guidance on important bankruptcy topics.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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