Equitable mootness is a doctrine grounded in equity pursuant to which an appeals court will dismiss an appeal of a bankruptcy order — even if effective relief could conceivably have been granted — because the implementation of such relief (e.g., the reversal of a bankruptcy court order) would be inequitable to third parties. This doctrine may be applied to achieve the necessary finality of bankruptcy orders and decisions that is required to effectuate the successful, expedient reorganization of debtors in bankruptcy.2
Given the doctrine’s focus on the rights of third parties affected by the exercise of appellate jurisdiction, the issue of equitable mootness often arises when a party appeals an order confirming a Chapter 11 reorganization plan. This occurs not only because such a confirmation order often affects the individual rights of literally thousands of parties who are otherwise unrelated to one another (except with respect to the Chapter 11 case at hand), but also because of the relative speed of the bankruptcy process—in most situations, distributions under a confirmed Chapter 11 plan will begin far before the appellate court has an opportunity to address the merits of the Appeal.
This article examines a recent decision of the United States District Court for the Southern District of New York applying the doctrine of equitable mootness in dismissing the appeal of a confirmation order that was contested by a small, but well-organized minority of creditors.
A. Background of the Adelphia Appeal
The entry of an order confirming the Chapter 11 plan of reorganization (the “Plan”) of Adelphia Communications Corporation (“Adelphia”) and its affiliates on January 3, 2007,3 marked the beginning of the last chapter of one of the largest and most complex bankruptcy cases in history. A group of bondholders, known as the ACC Bondholder Group, unsuccessfully attempted to prevent consummation of the Plan by filing an expedited Appeal and seeking a stay of the order pending the outcome of the Appeal.
After the bankruptcy court refused to grant the ACC Bondholders Group a stay pending an appeal,4 Appellants sought a stay pending their expedited appeal of the confirmation order from the district court.5 Appellants argued, among other things, that a stay was necessary because their appeal would be rendered equitably moot if the Plan were permitted to be consummated immediately, resulting in irreparable harm.6 After hearing some argument on Appellants’ request, on January 16, 2007, the district judge issued (orally from the bench) a temporary stay of the confirmation order for the limited purpose of permitting the district court to dispose of the motion.7 On January 24, 2007, the district court granted the request for a stay.8 This relief, however, was conditioned on Appellants’ posting a bond sufficient to protect all other parties from the potential harm that the other parties might suffer from delay of consummation of the Plan pending resolution of the appeal.9
Prior to granting the stay, the district court requested that the parties submit letters to her chambers detailing what size of bond was necessary to protect against the harms of delay. Appellants offered to post a bond of only $10 million, subject to several material conditions. After considering the facts, however, the district court estimated the potential harm to be as much as $1.3 billion and ordered the Appellants to post a bond (in cash, a bond or a combination of both) equal to ten percent of that amount within twenty-four hours of the issuance of her decision and the remaining 90 percent of that amount within forty-eight hours thereafter.10
Instead of posting the bond, Appellants immediately Appealed to the United States Court of Appeals for the Second Circuit, arguing that the enormous amount of the bond required was an effective denial of their request for a stay pending appeal and the bond requirement should be either eliminated or reduced.11 On January 25, 2007, the Second Circuit granted an interim stay of the order granting a stay pending appeal, for the purpose of maintaining the status quo, pending a hearing before a panel to consider this further appeal, effectively further staying the confirmation order.12 The Second Circuit ultimately determined that Appellants’ request had not been effectively denied because there had been no showing before the district court that Appellants (many of whom were large, multibillion-dollar financial institutions) were unable to post the $1.3 billion bond. In its February 9, 2007, decision, however, the Second Circuit did not foreclose Appellants from seeking reconsideration of the bond amount from the district court.13
Immediately thereafter, the Appellants filed a motion with the district court seeking reconsideration of the requirement that a $1.3 billion bond be posted as a condition to a further stay of the Confirmation Order. On February 12, 2007, at the hearing in respect of the reconsideration motion, the district court provided Appellants with another opportunity to submit a proposal for a smaller bond sufficient to protect the parties against potential damages for the further delay of consummation of the Plan.14 In their proposal, Appellants again refused to post any bond in excess of $10 million (with material conditions) and even suggested that no bond was necessary to protect the parties’ interests. Again rejecting Appellants’ proposal, the district court refused to modify her previous decision, and, on February 12, 2007, vacated the stay of the Confirmation Order.15 Immediately after the court vacated the stay, on February, 12, 2007 the Plan became effective and the Adelphia debtors, among other actions, commenced making distributions to creditors under its terms, thereby substantially consummating the Plan. Despite substantial consummation of the Plan, Appellants pressed their Appeal from the confirmation order and submitted their opening brief on February 23, 2007.16 Notably, Appellants’ opening brief failed to address the threshold issue of equitable mootness. Shortly thereafter, the district court held a status conference and ordered that Appellants and Appellees file papers addressing whether the Appeal should be dismissed as equitably moot now that the Plan had been substantially consummated or whether the merits of the Appeal should be heard by the district court. Appellees argued that there could not be consummation of some, but not all, of the material terms of the Plan, and there was no practical means of unwinding the consummation process.17 After considering the parties’ positions, the district court dismissed the appeal as equitably moot, applying the Second Circuit standard that “when, during the pendency of an appeal, events occur that would prevent the appellate court from fashioning effective relief, the appeal should be dismissed as moot.”18
B. Equitable Mootness
In beginning its mootness analysis, the district court (the “Court”) first determined that equitable mootness of an Appeal of a bankruptcy court order confirming a Chapter 11 plan of reorganization is presumed when the plan has been substantially consummated.19 Appellants did not dispute that Adelphia’s plan had been substantially consummated but instead argued that their appeal was not moot under the circumstances of this case.20 As the court recognized, the presumption of mootness may only be rebutted upon a showing of all the following so-called Chateaugay factors:
(a) the Court can still order some effective relief
(b) such relief will not affect the re-emergence of the debtor as a revitalized corporate entity
(c) 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
(d) the parties who would be adversely affected by the modification have notice of the appeal and an opportunity to participate in the proceedings and
(e) 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.21
Addressing each of the above factors, Appellants argued that a balancing of the five requirements weighed in favor of a finding that the Appeal remained justiciable and had not been equitably mooted. As the Court determined, however, in rebutting the presumption, an appellant has the burden of proof in demonstrating that each of the five Chateaugay factors supports permitting the appeal to be heard on the merits.22 Applying this test, the Court found that the Appellants failed to meet four of the five Chateaugay factors and, thus, failed to overcome the presumption that substantial consummation of the Plan had equitably mooted their appeal.23
1. Whether Effective Relief Can Be Granted
In their original motion seeking a stay, Appellants previously had argued that disgorgement of distributions under the Plan would be “workable with protections,” citing to a single case where a bankruptcy court had permitted $213 million to be distributed to creditors under a Plan, subject to disgorgement.24 Appellees, in contrast, maintained that disgorgement would be impossible given the Plan’s contemplated distribution of huge amounts of freely tradable stock, “CVV Interests,”25 and cash.26 In their papers in opposition to equitable mootness, however, Appellants now claimed effective relief could be granted either through allowing certain litigation to continue and requiring disgorgement of excess amounts from creditors ex post or, in the alternative, requiring disgorgement ex ante only from the creditors whose distributions were “seriously contested.”27 Although the Appellants had suggested several rationales for why disgorgement would be feasible, the Court was not persuaded that disgorgement would be an effective remedy that could be granted.28
2. Whether Such Relief Will Negatively Affect Reemergence of the Debtor
The fact that the debtors had been liquidated was not disputed by the parties, and the Court found the question of whether disgorgement would prevent reemergence of the debtors to be inapposite.29
3. Whether Such Relief Will Unravel Intricate Transactions
The Court additionally held that, even if disgorgement were an available effective remedy, such relief would be inequitable because it would “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.”30 In the Adelphia cases, a Global Settlement settling over $20 billion in claims had been reached and implemented, and billions of dollars were distributed in cash, shares of Class A Common Stock in Time Warner Cable, and interests in a valuable litigation trust.31 Such transactions were intricate and dependent on one another and, thus, could not have been unraveled after consummation of the Plan; nor would it have been equitable to do so.32 Moreover, the Court was not persuaded that disgorgement from only select creditors was at all equitable.33 Rather, the Court recognized that such selective disgorgement was impossible, given that the amounts of distributions for all Adelphia creditors under the Plan were the result of a highly negotiated settlement agreement that had been proposed and adopted by the requisite majorities when Adelphia’s creditors voted on the Plan. Accordingly, the Court found that disgorgement would be inequitable because the only way to permit disgorgement would have been to dissolve the entire Global Settlement and, thus, reverse all transactions under the Plan.34
4. Whether Parties Adversely Affected Have Had Notice and Opportunity to Participate in the Appeal
Appellants had argued that they notified all parties of potential disgorgement by making all the large, ad hoc creditor groups and their members, along with the Creditors’ Committee, parties to the appeal.35 The Court disagreed, finding that all relevant parties were not “before the Court.”36 Rather, it found that, under the scenario proposed by the Appellants, all creditors would be at risk for disgorgement—not just the selected creditors named by the Appellees. The Court appeared to hold that unless all creditors had been notified (e.g., by making all of the Debtors’ stakeholders parties to the Appeal), which they were not, then there would not have been sufficient notice.37
5. Whether Appellants Pursued a Stay with Diligence
Although Appellants sought a stay from the district Court pending Appeal of the confirmation order, the stay granted was conditioned upon the posting of a $1.3 billion bond. Appellants, however, refused to put that much money at risk. Despite being given the opportunity of offering an alternative, reasonable bond in an amount representative of the grave potential harm to the Adelphia creditors, Appellants would only offer a bond of $10 million, with substantial “strings” attached to its payment. The Court found this to be a “refusal to post a reasonable bond.”38 Further, the Court determined that this refusal to post a reasonable bond meant Appellants failed to seek a stay diligently under the fifth Chateaugay factor. As the Court noted, Appellants failed to post a bond, not because they could not come up with the money, but rather, because they were unwilling to post any reasonable amount of money at risk pending the outcome of the Appeal.
C. Judicial Estoppel
In addition, the Court also found that Appellants would be barred from continuing their Appeal based on the doctrine of judicial estoppel.39 Judicial estoppel prevents a party from asserting a certain position in a lawsuit after it has already assumed a contrary position, simply because its interests have changed.40 For Appellees to persuade the Court that Appellants were precluded by reason of judicial estoppel, they needed to prove:
(1) the party against whom judicial estoppel is being asserted advanced an inconsistent factual position in a prior proceeding and
(2) the prior inconsistent position was adopted by the Court in some manner.41
Appellants originally had argued that a stay was necessary to preserve their appellate rights due to the grave risk of equitable mootness resulting from consummation of the Plan, and, in fact, the risk of mootness weighed most heavily in the Court’s granting of the stay.42 Now, after refusing to post the bond to preserve the stay that the Court had granted because of the risk of equitable mootness, and after substantial consummation of the Plan, Appellants argued the appeal was not equitably moot. Their argument, according to the Court, only changed as a result of the changed circumstances, i.e., the Appellants’ not posting the bond and allowing the Plan to be consummated. The Court thus found that the elements of judicial estoppel were satisfied: 1) Appellants had previously advanced the position that the appeal would be equitably moot in the absence of a stay pending appeal, 2) the Court granted a stay based in part on that potential harm, 3) Appellants were now seeking to take the contrary position that the appeal was not equitably moot.
D. Conclusion and Commentary
Ultimately, the Court dismissed the Appeal as being equitably moot after finding that Appellants failed to meet four of the five Chateaugay factors (with the one other factor being inapposite to the case). Moreover, independent from its Chateaugay analysis, the Court determined that Appellants were judicially estopped from arguing that the Appeal was not equitably moot after having been successful in obtaining a stay on those very grounds.
The result in this case exemplifies the inherent delicacies of appealing a bankruptcy court’s confirmation order in a large Chapter 11 case.
In the majority of cases, the only potential irreparable harm that the appellant likely will be able to demonstrate to the district court in an application for a stay pending appeal is the possibility that the appeal—however, meritorious and timely—will never be heard on the merits because it will be mooted by the substantial consummation of the Chapter 11 plan.43 Thus, to establish that the requisite “irreparable harm” justifying a stay pending appeal of a confirmation order exists,44 and to prevent equitable mootness, the appellant essentially has to concede—notwithstanding the five-part exception announced in Chateaugay—that the appeal will be rendered equitably moot upon substantial consummation of the plan. As a result, in many cases, the appellant of a confirmation order will face a “do-or-die” scenario and must succeed in obtaining a stay pending appeal (including by posting any required bond) or lose its appellate rights.
Adelphia illustrates why an appellant seeking reversal of a Chapter 11 confirmation order must exercise the utmost care in strategizing how it pursues its Appeal. For example, had Appellants in the Adelphia cases been willing to post a bond less than $1.3 billion, but which was large enough to reasonably protect parties against the harm of delay, it is altogether possible that the district Court would have granted a stay pending appeal on that condition. Moreover, had Appellants offered to risk at least part of the substantial distributions that they were to receive under the Plan, the district court might have granted a stay without requiring a bond. By taking either of these approaches at the outset of their appeal, Appellants may have been able to avoid the situation in which they found themselves after the Second Circuit refused to reverse the bond condition to the stay.