In Beem v. Ferguson (In re Ferguson), 2017 BL 101650 (11th Cir. Mar. 30, 2017), the U.S. Court of Appeals for the Eleventh Circuit addressed the distinction between constitutional mootness (a jurisdictional issue that precludes court review of an appeal) and equitable mootness (which allows a court to exercise its discretion to refuse to hear an appeal under certain circumstances). The Eleventh Circuit ruled that an appeal from an order confirming a chapter 11 plan was not constitutionally moot because an "actual case or controversy" existed. Although the court declined to dismiss the appeal under the doctrine of equitable mootness, it ultimately held on the merits that the district court did not err in dismissing the appeal.
"Mootness" is a doctrine that precludes a reviewing court from reaching the underlying merits of a controversy. In federal courts, an appeal can be either constitutionally, equitably, or statutorily 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. A case is moot "when the issues presented are no longer 'live' or the parties lack a legally cognizable interest in the outcome." Fla. Pub. Interest Research Grp. Citizen Lobby, Inc. v. EPA, 386 F.3d 1070, 1086 (11th Cir. 2004). A case generally becomes constitutionally moot "only when it is impossible for a court to grant any effectual relief whatever to the prevailing party." Cook v. Bennett, 792 F.3d 1294, 1299 (11th Cir. 2015) (internal quotation marks and citation omitted).
In contrast, the judge-fashioned remedy of "equitable mootness" bars adjudication of an appeal when a comprehensive change of circumstances occurs 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. See, e.g., In re LCI Holding Company, Inc., 802 F.3d 547, 554 (3d Cir. 2015) (stating that the doctrine "comes into play in bankruptcy (so far as we know, its only playground) after a plan of reorganization is approved" and ruling that equitable mootness would not cut off the authority to hear an appeal outside the plan context).
Several circuit courts of appeal have formally adopted the doctrine of equitable mootness in considering whether to hear appeals of plan confirmation orders. For example, in Search Market Direct, Inc. v. Jubber (In re Paige), 584 F.3d 1327 (10th Cir. 2009), the Tenth Circuit considered six factors in determining whether the doctrine should moot appellate review of a confirmation order: (i) whether the appellant sought and/or obtained a stay pending appeal; (ii) whether the plan has been "substantially consummated"; (iii) whether the rights of innocent third parties would be adversely affected by reversal of the confirmation order; (iv) whether the public policy need for reliance on confirmed bankruptcy plans—and the need for creditors generally to be able to rely on bankruptcy court decisions—would be undermined by reversal of the confirmation order; (v) the likely impact upon a successful reorganization of the debtor if the appellant's challenge is successful; and (vi) whether, on the basis of a brief examination of the merits of the appeal, the appellant's challenge is legally meritorious or equitably compelling.
Substantially similar tests for equitable mootness have been adopted by the Second, Third, Fifth, Sixth, Ninth, and Eleventh Circuits. See Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944 (2d Cir. 1993); Nordhoff Invs., Inc. v. Zenith Elecs. Corp., 258 F.3d 180 (3d Cir. 2001); TNB Fin., Inc. v. James F. Parker Interests (In re Grimland, Inc.), 243 F.3d 228 (5th Cir. 2001); Ochadleus v. City of Detroit (In re City of Detroit), 838 F.3d 792 (6th Cir. 2016) (applying the doctrine in a chapter 9 case); JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props. Inc. (In re Transwest Resort Props., Inc.), 801 F.3d 1161 (9th Cir. 2015); JMC Memphis, LLC v. Kapila (In re JMC Memphis, LLC), 655 Fed. Appx. 802, 2016 BL 234000 (11th Cir. 2016). In In re Philadelphia Newspapers, LLC, 690 F.3d 161, 168–69 (3d Cir. 2012), however, a panel of the Third Circuit adopted a more nuanced approach, holding that the foremost consideration is "whether allowing an appeal to go forward will undermine the plan, and not merely whether the 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 reorganized debtor or its successor has assumed control of the debtor's business and property, and plan distributions have commenced.
The Second Circuit reaffirmed the doctrine of equitable mootness in In re Charter Commc'ns, Inc., 691 F.3d 476 (2d Cir. 2012), but its ruling deepened a split among the circuits with respect to the standard of review and the burden of proof to be applied. In Charter, the Second Circuit held that once a chapter 11 plan has been substantially consummated, an appeal is presumed to be equitably moot unless the appellant can demonstrate that it has met all of the criteria delineated in its previous ruling in Chateaugay—which are substantially similar to the Tenth Circuit's Paige factors. By appearing to abandon the balancing approach employed by other circuits in this context, the Second Circuit stands alone in presuming that an appeal is equitably moot following substantial consummation of a chapter 11 plan. Accord Ahuja v. LightSquared, Inc., 644 Fed. Appx. 24, 2016 BL 86807 (2d Cir. 2016) (holding that the appellant overcame the presumption of equitable mootness following substantial consummation of a plan by satisfying factors under Chateaugay in that: (1) the court could still order some effective relief in the form of monetary damages "without disturbing the Plan or affecting the reorganized [debtor's] fresh start"; (2) the parties which would be adversely affected were parties to the appeal and participated in the bankruptcy proceedings; and (3) the appellant diligently pursued a stay in the bankruptcy court, in the district court, and on appeal), cert. denied, 137 S. Ct. 335 (2016).
An appeal can also be rendered moot by statute. For example, in bankruptcy cases, sections 363(m) and 364(e) of the Bankruptcy Code provide that the reversal or modification on appeal of an order authorizing a sale of assets or financing does not affect the validity of the sale or the enforceability of any debt or lien created as part of the financing if the purchaser or lender acted in "good faith" and no stay of the order was obtained. See In re One2One Commc'ns, LLC, 805 F.3d 428, 443 (3d Cir. 2015) (noting that, by their terms, sections 363(m) and 364(e) do not prevent an appellate court from hearing an appeal but simply prevent the appellate court's remedy from affecting certain transactions); In re LCI Holding Co., 802 F.3d 547, 554 (3d Cir. 2015) (if a party fails to obtain a stay of the sale order, appellate review is not limited by section 363(m) to the narrow issue of whether the property was sold to a good-faith purchaser but can include any sale challenge that does not "affect the validity of the sale").
In Ferguson, the Eleventh Circuit addressed the distinction between constitutional and equitable mootness in the chapter 11 plan context.
Gary Ferguson (the "debtor") filed for chapter 11 protection in the Southern District of Florida in May 2012. David Beem ("Beem"), a creditor asserting a claim in the amount of $385,000, filed an objection to the debtor's chapter 11 plan and a ballot rejecting it one day after the objection deadline. The debtor moved to strike the objection and the ballot, contending that the objection was untimely and that Beem was not entitled to vote on the plan because he did not have an allowed claim. Beem hired a suspended attorney to assist him in preparing the ballot. The bankruptcy court granted the motion and denied Beem's request for reconsideration.
Beem appealed the bankruptcy court's orders to the district court, once again relying on the assistance of the suspended attorney, and ultimately failed to timely file a memorandum of law supporting the appeal. The district court dismissed the appeal, noting that a suspended lawyer may not assist pro se litigants, and denied Beem's request for reconsideration. Beem appealed the bankruptcy and district court orders to the Eleventh Circuit. The debtor moved to dismiss the appeal, arguing that it was equitably and constitutionally moot because the chapter 11 plan had been substantially consummated, thereby precluding the court from granting any effective relief.
The Eleventh Circuit's Ruling
A three-judge panel of the Eleventh Circuit affirmed the district court's orders—but not due to mootness. Quoting the Fourth Circuit's ruling in Mac Panel Co. v. Va. Panel Corp., 283 F.3d 622, 625 (4th Cir. 2002), the Eleventh Circuit explained the difference between equitable and constitutional mootness:
Unlike the constitutional doctrine of mootness, which bars consideration of appeals because no Article III case or controversy remains, the doctrine of equitable mootness is a pragmatic principle, grounded in the notion that, with the passage of time after a judgment in equity and implementation of that judgment, effective relief on appeal becomes impractical, imprudent, and therefore inequitable (quotation marks omitted).
The Eleventh Circuit declined to apply the traditional balancing test for equitable mootness, observing that "we will not undertake such an analysis here because the doctrine is discretionary and does not divest us of jurisdiction." Equitable mootness, the court wrote, "bears only upon the proper remedy, and does not raise a threshold question of our power to rule" (internal quotation marks and citation omitted).
The Eleventh Circuit rejected the debtor's argument that the appeal was constitutionally moot because the plan had already been substantially consummated and it would be cumbersome to unwind each transaction—mortgages would have to be modified, liens released, and sums of money returned. According to the court:
The very fact that it could be so imprudent to disturb the Plan is a testament to the fact that there is indeed a live controversy; the pragmatic doctrine of equitable mootness exists precisely because the vindication of a party's rights must be balanced against the chaos that could result from rescinding a plan of confirmation in large and complex bankruptcy cases. . . . Beem challenges the confirmation of the Plan; presumably, if the Plan were unlawful as he claims, a different plan could have resulted in more favorable treatment. Beem's claims may or may not be valid, but they are not constitutionally moot.
Having concluded that the appeal was not moot, however, the Eleventh Circuit ruled that the district court did not err in dismissing it due to Beem's failure to comply with the court's orders.
Ferguson's significance is twofold. First, the decision provides guidance concerning the difference between constitutional and equitable mootness. The former precludes a court from hearing an appeal because the absence of any "case or controversy" means that the court lacks constitutional jurisdiction over the appeal. The latter is not jurisdictional. Rather, equitable mootness is a discretionary doctrine that permits an appellate court, in exercising its equitable powers, to refuse to hear an appeal because relief, although not impossible, would knock the props out from under a confirmed and substantially consummated chapter 11 plan and thwart the legitimate expectations of stakeholders.
Second, although the Eleventh Circuit did not expressly say so in its opinion, Ferguson could be viewed as emblematic of the growing concern among courts regarding overbroad application of the equitable mootness doctrine, with recent calls to limit the doctrine and, in some cases, eliminate it altogether, particularly where the parties affected by the appeal are well aware of the potential for reversal. See, e.g., First S. Nat'l Bank v. Sunnyslope Hous. LP (In re Sunnyslope Hous. LP), 818 F.3d 937 (9th Cir. 2016) (refusing to dismiss the appeal of an order confirming a chapter 13 plan under the doctrine despite the substantial consummation of the plan where the appellant unsuccessfully sought a stay pending an appeal from the bankruptcy and district courts and where the unraveling of the plan would not have a negative effect on innocent third parties not before the court); JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props. Inc. (In re Transwest Resort Props., Inc.), 801 F.3d 1161 (9th Cir. 2015) (refusing to apply the doctrine where the appellant took all reasonable steps to seek a stay of the confirmation order and where the plan was not so complex that uninvolved third parties would be harmed); JPMCC 2006-LDP7 Miami Beach Lodging, LLC v. Sagamore Partners, Ltd. (In re Sagamore Partners, Ltd.), 610 Fed. Appx. 922, 2015 BL 280922, *7 (11th Cir. Aug. 31, 2015) (stating that equitable mootness applies only when "effective relief is no longer available" and ruling that requiring the debtor to pay default-rate interest under a substantially consummated plan was effective relief); One2One Commc'ns, LLC, 805 F.3d at 432 (declining to hold that the doctrine is unconstitutional or "contrary to the Bankruptcy Code," but ruling that the doctrine must be construed narrowly and should be applied only in complex reorganizations when the appellant should have acted before the plan became "extremely difficult to retract" (quoting In re Phila. Newspapers, LLC, 690 F.3d 161, 169 (3d Cir. 2012)); United States v. Buchman, 646 F.3d 409, 411 (7th Cir. 2011) (noting that the Seventh Circuit does not follow the doctrine of equitable mootness in bankruptcy law); Bank of N.Y. Trust Co. v. Official Unsecured Creditors' Comm. (In re Pac. Lumber Co.), 584 F.3d 229, 240 (5th Cir. 2009) (a court should apply doctrine "with a scalpel rather than an axe" and may "fashion whatever relief is practicable" instead of declining review simply because full relief is not available).