The Bottom Line:
At times, a decision needs to be made to proceed with a transaction or take other action in the face of uncertainty of an appeal relating to the matter. One option (in the absence of a stay pending appeal) has been to proceed despite the appeal and, thereafter, seek to have the appeal dismissed as “equitably moot”. In In re Samson Energy Res. Co. v. SemCrude, L.P. (In re SemCrude, L.P.), Case No. 12-2736, 2013 U.S. App. LEXIS 17903 (3d Cir. Aug. 27, 2013), the Third Circuit Court of Appeals narrowly construed the doctrine of equitable mootness, holding that (i) the burden of establishing that an appeal is equitably moot is on the party seeking dismissal of the appeal and (ii) dismissal of an appeal based upon equitable mootness should be “rare”. Id. at *30. This decision further distinguishes the application of the equitable mootness doctrine in the Third Circuit from the treatment of the doctrine in the Second Circuit – making it more difficult for appellees in the Third Circuit to successfully dismiss appeals on equitable mootness grounds.
Equitable mootness is a judge-made abstention doctrine that allows a court to avoid hearing the merits of a bankruptcy appeal to avoid the perceived disruption and harm that granting the requested relief would cause. Id. at *1. If the debtors (or others) believe that granting the relief sought on appeal would undermine a transaction or a chapter 11 plan or otherwise harm the interests of third parties, they may seek to dismiss the appeal as equitably moot.
SemCrude L.P. and certain of its affiliates (the “Debtors”) were an oil and gas business when they commenced chapter 11 bankruptcy proceedings in July 2008. After the bankruptcy filing, disputes arose among numerous oil and gas producers who supplied the Debtors with oil and gas on credit.
After litigating with certain producers, the Debtors reached a settlement that purported to resolve the claims of all of the producers. The terms of the settlement were incorporated into a plan of reorganization filed with the Court. Four Oklahoma producers (the “Appellants”), who were not involved in negotiating the settlement and did not expressly agree to its terms, objected to the plan on the grounds that they should be permitted to litigate their individual claims. Following a hearing, the Bankruptcy Court overruled the Appellants’ objections, approved the plan and entered a confirmation order in October 2009. The plan went effective on November 30, 2009.
Appellants appealed to the District Court who dismissed the appeal under the equitable mootness doctrine, finding, among other things, that the plan was substantially consummated, that Appellants had failed to seek or obtain a stay and that granting the relief would undermine the reorganization plan and harm third parties. Appellants appealed the decision of the District Court and asked the Third Circuit Court of Appeals to (i) vacate the District Court order and (ii) remand with instructions to hear the merits of their appeal.
As an initial matter, the Third Circuit noted that it had never explicitly addressed which party bears the burden of establishing that an appeal should be dismissed as equitably moot. However, because it believed that dismissing an appeal “should be the rare exception and not the rule,” the Third Circuit joined the Ninth, Tenth and Eleventh Circuits in holding that the party seeking dismissal bears the burden of proof, which should “be based on an evidentiary record, and not speculation.” Id. at 15 (citations omitted). In so holding, the Third Circuit expressly rejected the approach taken by the Second Circuit which shifts the burden to the appellant after a plan has been substantially consummated. Id. at 16 (citation omitted).
Against that backdrop, the Third Circuit held that the record did not support a finding that granting relief to the Appellants would undermine the confirmed chapter 11 plan and harm third parties (namely, the exit lenders, equity investors, reorganized debtors, customers and suppliers). Specifically, the Third Circuit found that the amounts sought by the Appellants were immaterial and would not cause the plan to collapse. Specifically, the Appellants were only seeking an additional $200,000 out of the estate, which is de minimis when compared to (i) the over $160 million designated for distribution to the other producers under the plan and (ii) the over $2 billion contemplated for the entire reorganization plan.Id. at *22-23.
Moreover, although the Debtors also asserted that the Appellants’ adversary proceeding is a putative class action that, if certified, could, according to Debtors, cost the Debtors’ estates approximately $80 million, the Third Circuit found that such perceived harms “are at best speculative.” Id. at *25. The Third Circuit noted that (i) no class had yet been certified and (ii) the claims of such a class are unknown as many claims may be precluded due to the settlement. Id. at *24.
Accordingly, the Third Circuit reversed the District Court’s dismissal and remanded the matter to the District Court for a hearing on the merits of the appeal.
Why the Case is Interesting:
This case confirms the Third Circuit’s narrow application of the equitable mootness doctrine; highlighting a clear split in authority between the Third Circuit and the Second Circuit with regards to the application of the doctrine. Additionally, this opinion will make it more difficult for a party to evoke the equitable mootness doctrine in the Third Circuit – putting parties on notice that they must create a strong evidentiary record if they seek to dismiss an appeal on equitable mootness grounds.