In the bankruptcy context, effectively appealing an order confirming a debtor’s plan of reorganization is not always a sure bet, as a court may refuse to entertain the appeal in the name of equitable mootness.  Equitable mootness – “a judge-made abstention doctrine that allows a court to avoid hearing the merits of a bankruptcy appeal because implementing the requested relief would cause havoc”[1] – empowers a court to decline to hear the merits of an appeal.  The doctrine addresses not whether it is judicially possible to fashion an effective remedy, but whether granting such relief is prudent.[2]

In In re One2One Communications, LLC,[3] the United States Court of Appeals for the Third Circuit recently considered the contours of the equitable mootness doctrine and made clear that its application is to be restricted. 

The One2One appeal arose out of the March 2013 confirmation of the Fourth Amended Plan of Reorganization (the “Plan”) of debtor One2One Communications, LLC.  Appellant Quad/Graphics, Inc. (“Appellant”) was the sole objector to the Plan, contending that, among other things, the Plan violated the absolute priority rule by allowing equity holders to retain property without paying unsecured creditors in full.[4]  Appellant timely filed a noticed of appeal and moved for a stay pending appeal, which request was denied.  The parties briefed the merits of the appeal but the District Court declined jurisdiction and dismissed the appeal as equitably moot in June 2013. 

As an initial matter, the Third Circuit rejected Appellant’s argument that the equitable mootness doctrine was unconstitutional, noting that absent en banc reconsideration, it was bound by its 1996 decision in In re Continental Airlines, in which it affirmed dismissal of an appeal as equitably moot and articulated the factors to be considered by lower courts.[5]  However, the Third Circuit determined that the debtor did not satisfy the Continental Airlines factors, reversed the District Court and remanded the case so that the appeal could be considered on its merits.  Specifically, the Third Circuit found that the District Court erred because (1) the case did not involve a sufficiently complex bankruptcy reorganization, (2) the Plan did not contemplate intricate – or otherwise – transactions that went beyond ordinary post-confirmation activity and the debtor presented no evidence that the Plan would be difficult to unravel, (3) it improperly faulted the Appellant for failing to demonstrate alternatives to allow the court to grant relief “without unscrambling the Plan entirely,” and (4) reliance on the Plan by third parties was limited.  The Third Circuit emphasized that equitable mootness should be construed narrowly and reaffirmed its position that courts have a “virtually unflagging obligation” to exercise their jurisdiction and decide bankruptcy appeals cases on their merits.[6]

With this guidance in hand, a debtor hoping to make a successful equitable mootness argument in the Third Circuit will need to navigate the boundaries established by One2One and consider the following factors: 

  • Is the Debtor a “major corporation”?  The equitable mootness doctrine should only be asserted in truly complex bankruptcy reorganizations where, for example, there are multiple related debtors, there are hundreds of millions (or billions) in assets, liabilities and claims, requires merger of debtors, involves the exchange of millions in bonds and/or the debtor issues new stock. 
  • Can the plan truly be unwound?  After One2One, it will be more difficult to prove that reversing the implementation of a plan will “fatally scramble the plan” and cause more trouble than it’s worth.  A finding of equitable mootness will be more likely where the reorganized debtor issued publically traded debt or securities. 
  • Who has relied on the plan and what is the harm to them in light of that reliance?  A debtor will need to articulate specific harm to third parties from the open market, beyond ordinary post-confirmation conduct.  Routine plan-related activity – making plan distributions, hiring new employees, entering into contracts with new and existing customers – gives rise only to a minimal level of reliance by third parties, and should not support a finding of equitable mootness.  
  • Has the appellant sought a stay pending appeal?  Equitable mootness will be applied, however sparingly, where the appealing party acted “before the plan became extremely difficult to retract.” 

While many of these factors are subjective, debtors and creditors alike should understand that the availability of the equitable mootness doctrine in the Third Circuit remains limited.  And it is worth noting that the panel’s decision in One2One may not be the final word:  in a concurring decision, Judge Krause criticized the equitable mootness doctrine in its entirety, noting that there is no constitutional or statutory basis for its use, and calling for the Third Circuit “to consider eliminating, or at the very least, reforming, equitable mootness.”  Stay tuned – perhaps the issue is ripe for the Court of Appeals en banc or the Supreme Court to address the equitable mootness doctrine.