On October 29, 2014, the United States Court of Appeals for the Second Circuit affirmed the decision of the District Court for the Southern District of New York dismissing as equitably moot appeals filed by three individuals (the “Appellants”) in the chapter 11 case of In re BGI Inc. f/k/a Borders Group, Inc. (the “Debtors”).1 In a case of first impression for the Second Circuit, the Court held that the doctrine of equitable mootness applies equally to appeals from orders confirming chapter 11 liquidation plans as it applies to appeals from orders confirming chapter 11 reorganization plans. The Second Circuit also reaffirmed that (i) a bankruptcy appeal is presumed equitably moot when a debtor’s chapter 11 plan has been substantially consummated and (ii) such presumption can be overcome by an appellant if the five factors set out in the Second Circuit’s decision in Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.)2 are satisfied. The Second Circuit found that the District Court did not abuse its discretion in finding that the Appellants failed to satisfy all five of the Chateaugay factors and affirmed the decision of the District Court dismissing the appeals.
Each Appellant holds an unused consumer gift card issued by the Debtors, a now-defunct retail bookstore chain. In February 2011, the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. The Bankruptcy Court entered an order establishing June 1, 2011 (the “Bar Date”) as the deadline for claims to be filed by creditors of the Debtors on debts arising before the Debtors filed their petitions for relief, and the Debtors published notice of the Bar Date in The New York Times. In July of 2011, after its efforts to reorganize as a going concern were unsuccessful, the Bankruptcy Court authorized the Debtors to proceed under chapter 11 to close all of their stores and liquidate substantially all of their assets. In September 2011, the Debtors stopped accepting their branded gift cards, and in November of 2011, the Debtors filed a chapter 11 liquidation plan. No Appellant filed an objection to the Plan before the confirmation hearing and none appeared at the confirmation hearing. Two weeks after confirmation of the Debtors’ Plan, the Appellants filed a motion for authorization to file untimely proofs of claim (the “Late Claims Motion”) and a motion to certify a class of all holders of Borders gift cards issued prepetition (the “Class Certification Motion”).
The Bankruptcy Court denied the Appellants’ Late Claims Motion and Class Certification Motion and rejected Appellants’ arguments that they had not received actual notice of the Bar Date. The Bankruptcy Court reasoned that under Bankruptcy Rule 2002, the gift card holders were not individually entitled to receive “actual notice” of the Bar Date because only “known” creditors of a chapter 11 debtor must be afforded “actual written notice of the bankruptcy filing and the bar date” and “unknown” creditors, whose identity is not reasonably ascertainable by a debtor, such as gift card holders, are entitled only to “constructive notice,” which the Debtors provided by publishing notice of the Bar Date.3
The Bankruptcy Court concluded that because the Appellants failed to establish any entitlement to actual notice of the Bar Date, their neglect in failing to timely file proofs of claim was not “excusable” under Bankruptcy Rule 9006(b)(1), which gives the court discretion to enlarge the time to file claims “where the failure to act was the result of excusable neglect.”
The Bankruptcy Court’s decision rested in part on its determination that (i) the Plan had been substantially consummated, as the liquidating trust distributing the Debtors’ assets to creditors had already made distributions of approximately $17 million to holders of allowed administrative and priority claims, and (ii) allowing Appellants to file late claims and certify a class of gift card holders “would have a disastrous effect on the remainder of the Debtors’ estates and the final distributions of the Plan.”4 The Bankruptcy Court did not reach a decision on the merits of the Class Certification Motion since its holding that the Appellants were not permitted to file untimely proofs of clams on account of their gift cards rendered the Class Certification Motion moot.
On appeal, the District Court dismissed all three appeals as equitably moot.5 The Appellants then appealed to the Second Circuit.
“Equitable Mootness” Analysis
The Appellants argued that the doctrine of equitable mootness should not apply in the context of a chapter 11 liquidation. In a case of first impression, however, the Second Circuit explained that there is no principled reason to deny a court discretion to apply the doctrine of equitable mootness in a chapter 11 liquidation case because in a liquidation, as in a reorganization, (i) affected parties may have devoted months of time and resources toward developing an acceptable plan, (ii) creditors with urgent needs may have been stayed from accessing assets and funds to which they are entitled, (iii) extensive judicial resources may have been consumed and (iv) substantial interests may counsel in favor of preventing tardy disruption of a duly developed, confirmed and substantially consummated plan. The Second Circuit also noted that the Appellants had not pointed to any persuasive precedent to support the contention that equitable mootness should not apply in the context of a chapter 11 liquidation case and, to the contrary, several sister circuits have applied the doctrine in the liquidation setting “and did so with no more than cursory discussion6
The Second Circuit also noted that equitable mootness is a “prudential” doctrine under which a district court may in its discretion dismiss a bankruptcy appeal “when, even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable.”7 The doctrine “requires the district court to carefully balance the importance of finality in bankruptcy proceedings against the appellant’s right to review and relief.”8
The Second Circuit also wrote that a bankruptcy appeal is presumed equitably moot when the debtor’s plan has been substantially consummated. “Substantial consummation,” as defined by section 1101(2) of the Bankruptcy Code, requires “(A) transfer of all or substantially all of the property proposed by the plan to be transferred; (B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and (C) commencement of distribution under the plan.” The Second Circuit further explained that the presumption of equitable mootness created by a plan’s substantial consummation can be overcome by an appellant if the following five Chateaugay factors are satisfied:
- the court can still order some effective relief;
- such relief will not affect the re-emergence of the debtor as a revitalized corporate entity;
- such relief will not unravel intricate transactions so as to knock the props out from under the authorization for every transaction that has taken place and create an unmanageable, uncontrollable situation for the Bankruptcy Court;
- the parties who would be adversely affected by the modification have notice of the appeal and an opportunity to participate in the proceedings; and
- the appellant pursued with diligence all available remedies to obtain a stay of execution of the objectionable order[,] if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from.9
After determining that the equitable mootness doctrine applied in the context of a chapter 11 liquidation, the Court then applied the Chateaugay factors to determine whether the District Court abused its discretion in dismissing Appellants’ appeals as equitably moot. The Court affirmed the District Court’s finding that the Appellants failed to satisfy at least the fourth and fifth Chateaugay factors. The Court found that the fourth Chateaugay factor was not satisfied because Appellants did not establish that the general unsecured creditors, who, as the District Court noted, “could be stripped of their entire recovery if the proposed class [was] certified, received notice of [the Appellants’] appeal to the District Court.” The Court also found that the fifth Chateaugay factor was not satisfied because Appellants “did not appear at the Plan confirmation hearing, filed no objections to the Plan, and neither appealed the Confirmation Order nor sought a stay of the Plan’s effective date.”10
The Second Circuit’s decision is significant because it establishes that the doctrine of equitable mootness applies to appeals from chapter 11 plan confirmation orders, regardless of whether the plan provides for the liquidation or the reorganization of the debtor. This decision also serves as an important reminder that an appeal from a confirmation order is presumed equitably moot when the debtor’s plan has been substantially consummated as set forth in section 1101(2) of the Bankruptcy Code, and that the relevant analysis for determining whether an objector has overcome this presumption is still satisfaction of the five factors outlined in the Second Circuit’s 1993 decision in In re Chateaugay Corp.