Third Circuit Court of Appeals Narrowly Construes Equitable Mootness Doctrine

August 28, 2013

Publication| Bankruptcy & Corporate Restructuring

Earlier this week, the Third Circuit Court of Appeals reaffirmed its narrow construction of the doctrine of equitable mootness in In re SemCrude, L.P., et al., Samson Energy Resources Company, et al. v. SemCrude, L.P., et al., Case No 12-2736 (3d Cir. Aug. 27, 2013) (Ambro, J.).  

In SemCrude, four Oklahoma producers (the “Appellants”) that supplied oil and gas to the Debtors/Appellees appealed the Delaware District Court’s order dismissing their appeal of the order confirming the Debtors’ plan of reorganization as equitably moot.  The Third Circuit reversed, directing that the appeal be heard on its merits.
The Appellants supplied oil and gas to the Debtors on credit prepetition.  In the chapter 11 cases, the Appellants and other producers argued that they were entitled to payment for the oil and gas supplied to the Debtors ahead of other creditors, including the secured lenders.  The Debtors and Appellants disagreed on the procedure for resolution of these “producer claims.”  The Debtors sought and obtained Bankruptcy Court approval of global procedures whereby a “representative adversary proceeding” would be commenced for each state in which producers supplied oil and gas to the Debtors.  All parties were permitted to participate in these representative proceedings, and all parties, regardless of participation, would be bound by the legal rulings from the applicable representative action.  Appellants objected to this global procedure, and instead advocated for permission to prosecute their own adversary proceeding, and to seek class certification to assert claims of similarly situated Oklahoma producers.  The Bankruptcy Court denied this approach and stayed the Appellants’ adversary proceeding pending resolution of the representative actions.
The representative proceedings were commenced and the Bankruptcy Court granted summary judgment against the Oklahoma (as well as Kansas and Texas) producers.  The Bankruptcy Court certified direct appeals of these decisions to the Third Circuit Court of Appeals.  However, before these appeals were heard, the Debtors, their secured lenders and an Official Producers Committee reached a settlement to resolve the claims of all producers.  The terms of this settlement were embodied in a plan of reorganization.  Producer claimants, including the Appellants, were entitled to vote on the plan and the requisite majority of claimants accepted the plan.  Appellants objected to the plan, but following a hearing, the Bankruptcy Court overruled their objection and entered an order confirming the Debtors’ plan of reorganization.  
Appellants appealed to the District Court.  However, they did not seek a stay pending appeal.  On November 30, 2009, the Debtors’ plan became effective.  The Debtors moved to dismiss the appeal as equitably moot and the District Court granted the motion to dismiss.  Appellants appealed the District Court’s dismissal of the appeal.
The Third Circuit narrowly construed the doctrine of equitable mootness, reversing the District Court’s dismissal and remanding for the District Court to hear the appeal on the merits.  The Court held that dismissing an appeal as equitably moot should be “rare, occurring only where there is sufficient justification to override the statutory rights of the party seeking review.”  
Citing its decision in In re Continental Airlines, 91 F.3d 553 (3d Cir. 1996) (en banc), the Court of Appeals reviewed the District Court’s equitable mootness determination for abuse of discretion, but not without citing then-Judge Alito’s dissent in Continental.  That dissent criticized the abuse of discretion standard of review as inconsistent with the established standard that the circuit court exercises plenary review when the district court sits as an appellate court which, according to then-Judge Alito in Continental, is essentially the district court’s role in deciding a motion to dismiss an appeal.  The SemCrude opinion noted, “[W]e are inclined to agree with this criticism, but nonetheless are bound to review for abuse of discretion.”
For the first time, the Court explicitly addressed the burden of proof for equitable mootness.  The Court joined the Ninth, Tenth and Eleventh Circuits in placing that burden on the party seeking dismissal, holding that the burden does not shift back to the appellant once the plan has been substantially consummated.
Addressing the merits, the Court condensed the five-factor test articulated in Continental into “two analytical steps:  (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.”  Applying this test, the Court found that, while the plan had been substantially consummated, “the perceived harms [were] at best speculative.”  The Court agreed with then-Judge Alito’s dissent in Continental that the consequences of a successful appeal could be more appropriately dealt with by fashioning limited relief upon the success of such an appeal than by refusing to hear the appeal outright.

Additionally, the Court was not persuaded, on the record before it, that the Debtors’ lenders, equity investors, customers and suppliers or creditors would be harmed by a successful appeal.  The Court cited the reorganized Debtors’ public securities filings both from the period immediately prior to the District Court’s decision and subsequent periods and found that the reorganized Debtors’ financial future appeared stable and likely to remain so.  Thus, even if the Appellants on remand obtained a reversal and ultimately prevailed on their claims, there was no reason, according to the Court, that the reorganized Debtors could not pay such a judgment without upsetting the rest of the plan.

In weighing policy considerations, the Court held that “preserving the finality of plan confirmation to encourage parties to move forward with plan execution justifies forbearing the exercise of jurisdiction only where precluding the appeal will prevent a perverse outcome.” In fact, the Court repeatedly emphasized the “responsibility of federal courts to exercise their jurisdictional mandate” and the “‘virtually unflagging obligation’ of federal courts to exercise the [appellate] jurisdiction conferred upon them” over the application of a “judge-made” doctrine.  Citing its opinion in In re Philadelphia Newspapers, LLC, 690 F.3d 161 (3d Cir. 2012), the Court stated that “before there is a basis to forgo jurisdiction, granting relief on appeal must be almost certain to produce a ‘perverse’ outcome–‘chaos in the bankruptcy court’ from a plan in tatters and/or significant ‘injury to third parties.’”  Because it did not find that would be the case here, it reversed.

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