The Bankruptcy Protector

On January 3rd, the United States Court of Appeals for the Tenth Circuit issued an opinion in U.S. v. Parish Chemical Company, in which it addressed the issue of equitable mootness in a non-bankruptcy appeal.

Facts of the Case

As a result of expenses incurred in cleaning up contamination of a portion of real property, the United States government obtained a $2.5 million lien on the real property under the provisions of CERCLA. Two years later, an adjoining landowner paid $50,000 to purchase an easement on the property that was subject to the CERCLA lien.

The owner of the contaminated land signed a consent decree conveying the land to a trust and authorizing the trustee to sell the property.

Over objection from the holder of the easement, the district court authorized the sale of the land to a third party free and clear of all liens, claims and encumbrances, with the proceeds to be distributed in accordance with interests in the property. Because the proceeds did not fully pay the $2.5 million owing to the United States government, the adjoining landowner received nothing, although the easement was extinguished by the sale “free and clear.”

The adjoining landowner appealed and the trustee and the government moved to dismiss the appeal, arguing that it was constitutionally or equitably moot.

The Tenth Circuit’s Ruling

With respect to the portion of the landowner’s appeal seeking to set aside the transfer to the third party free and clear of the easement, the Tenth Circuit ruled that the appeal was constitutionally moot, inasmuch as courts lack jurisdiction to alter a sale to a third party.

In so doing, the court noted: “Although many of the cases stating this rule are grounded in former Bankruptcy Rule 805 or section 363(m) of the Bankruptcy Code, the rule has also been recognized and applied outside of the bankruptcy context. The general application of this rule is also consistent with our recognition that we ‘may lack jurisdiction over an appeal where the impact of reversal would fall most heavily on parties not before the court.’ ”

With respect to the portion of the appeal challenging the district court’s decision on the priority of interest in the property, the Tenth Circuit found this issue to be subject to a different analysis. The Tenth Circuit held that this aspect of the appeal was not constitutionally moot inasmuch as the proceeds of the sale were “disbursed to a single entity, the United States, which is a party to this action. As a result, the party receiving the available sale proceeds is within the district court’s jurisdiction and had notice of [the landowner’s] claim that its easement interest had priority over the United States’ interest in these proceeds.”

The trustee and United States further contended that even if the appeal was not constitutionally moot in its entirety, the appeal should nonetheless be dismissed under the equitable mootness doctrine because granting the relief sought by the landowner would be inequitable. The landowner responded by arguing that the equitable mootness doctrine is not available outside of the bankruptcy context. In response, the Tenth Circuit stated: “we choose not to decide these questions, because we can readily resolve on the merits the priority-of-interest issue over which we have jurisdiction.”

In sum, although the Tenth Circuit relied on cases interpreting section 363(m) of the Bankruptcy Code in dismissing a portion of the appeal, the Tenth Circuit stopped short of expressly holding that the doctrine of equitable mootness applies outside of bankruptcy.

As one commentator aptly observed:

The Tenth Circuit’s approach to equitable mootness should be imported to bankruptcy appeals. As it was with the Denver-based appeals court, reaching the merits of the appeal was easier than applying the murky doctrine of equitable mootness.

Because statutes grant rights of appeal from final orders, this writer believes that appellate courts should always reach the merits in bankruptcy cases. If there was error, the appellate court in most cases should remand to determine whether any relief is feasible.

As it is today, many important issues in bankruptcy cases routinely become moot. For example, chapter 11 confirmation issues are often rendered moot. There would be more clarity in bankruptcy law without the doctrine of equitable mootness.