The Equitable Mootness Doctrine
The entry of an order confirming a plan of reorganization is probably the most significant event in a bankruptcy case. Shortly after a confirmation order enters, parties to the case often invest funds, alter operations, sell assets, and otherwise implement the reorganization. Accordingly, courts have developed a doctrine called “equitable mootness” to protect the finality of confirmation orders. See, e.g., Rev. Op. Grp. v. ML Manager LLC (In re Mortgs. Ltd.), 771 F.3d 1211, 1215 (9th Cir. 2014) (“An appeal is equitably moot if the case presents transactions that are so complex or difficult to unwind that debtors, creditors, and third parties are entitled to rely on the final bankruptcy court order.”).
The Ninth Circuit has developed four factors to determine whether an appeal is equitably moot. They are: (1) whether the appealing party sought a stay of the confirmation order; (2) whether the plan has been substantially consummated; (3) whether the remedy sought will affect third parties unfairly; (4) whether the court can fashion effective and equitable relief without significantly upsetting the confirmed plan. See In re Thorpe Insulation Co., 677 F.3d 869, 881 (9th Cir. 2012).
The Transwest Decision
The Ninth Circuit recently held that a confirmed bankruptcy plan could be reconsidered on appeal although the plan had been substantially consummated. This was because, in the Court’s view, the other three factors weighed in favor of appellate review and against application of the equitable mootness doctrine. See In re Transwest Resort Props., Inc., 2015 WL 3972917 (9th Cir. July 1, 2015). Link to Transwest Decision The Transwest decision calls into question the finality of confirmation orders in the Ninth Circuit. It should be of particular interest to third party investors in bankruptcy estate assets, as well as to parties seeking to appeal confirmation of a plan of reorganization.
In Transwest, the debtors proposed a plan of reorganization by which a private equity fund (“Investor”) would invest at least $30 million and become the sole owner of two hotels. The plan was opposed by the secured creditor (“Creditor”), who had purchased $260 million of secured claims before and during the bankruptcy. The debtor’s plan was confirmed by the bankruptcy court. Creditor appealed the confirmation and moved to stay the implementation of the plan. Debtor and Investor successfully opposed the stay at the bankruptcy and district court levels and the plan was substantially consummated—the Investor assumed operating contracts and began running the hotels.
Creditor appealed to the Ninth Circuit. Despite substantial consummation of the plan, the Ninth Circuit held that the Creditor’s appeal was not equitably moot. Id. at *1. It noted that in other circuits, including the First and Second Circuits, substantial consummation creates a presumption of equitable mootness. Id. at *5. In the Ninth Circuit, however, substantial consummation is just one of four factors courts must consider. Analyzing the other factors, the Court held that each one disfavored application of the equitable mootness doctrine.
The critical lynchpin of the Court’s analysis—and the portion that makes the case most notable—is the Court’s coinclusion that “[Investor’s] involvement in the reorganization process means it is not the type of innocent third party . . . equitable mootness . . . is intended to protect.” Id. at *6. After it became seriously engaged in the process of buying the hotels from the estate through the plan, Investor did what most investors in its position would do: it weighed in on the terms of the confirmation order, filed briefs supporting the plan and opposing Creditor’s attempts to defeat confirmation, and then opposed Creditor’s request for a stay. Because Investor participated in the case in this manner, the Court held that Investor’s reliance interests could not be considered in the equitable mootness analysis. In other words, to be equitably moot, the appeal would have to unfairly upset the interest of some otherthird party. Because any amendment to the plan would impact only the monetary distribution between Investor and Lender, the appeal was not equitably moot. Id.
As noted by the dissent, the Ninth Circuit’s Transwestholding may have the effect of discouraging parties from investing in bankruptcy estate assets. Potential investors should be aware that even after they obtain a bankruptcy court order memorializing the terms of their transaction with the estate, that order could be subject to revision until all appeals are concluded. Accordingly, investors may want to consider phasing their investments over time or eliminating their performance obligations (and unwinding prior investments) if the terms of the confirmed plan are amended on appeal.
On the other hand, the Transwest decision holds promise for parties who have unsuccessfully opposed confirmation of a reorganization plan. The Ninth Circuit’s narrow construction of the equitable mootness doctrine means that parties enjoy a greater likelihood of having their confirmation objections heard on appeal.