Last Fall, the United States Court of Appeals for the Second Circuit issued a decision in the Charter Communications bankruptcy case which will create additional significant challenges for those seeking to appeal confirmation of plans of reorganization that have been implemented. See 691 F.3d 476. Upon implementation (or “substantial consummation”) of the plan, the Second Circuit presumes that the appeal of such plan is equitably moot. Appellants bear the burden of overcoming that presumption. This is good news for plan proponents but makes challenging implemented plans even more difficult.
In 2008, Charter was one of the largest cable companies in the nation. It also had a very large debt load — almost $22 billion — resulting in part from the cost of numerous acquisitions it made over the years. After the collapse of Lehman Brothers in the Fall of 2008, Charter found itself unable to service this debt and began considering restructuring options.
Charter looked to one of its major investors, Paul Allen, and a group of junior bondholders to negotiate a restructuring of Charter’s debt load. One of Charter’s main goals in restructuring was to reinstate in full the senior credit facility it had with JPMorgan so as to avoid needing to renegotiate that facility when the credit markets were unfavorable. To do this, Charter had to convince Mr. Allen, who held 35% of the ordinary voting rights of the Charter entity obliged under the JPMorgan facility, to retain such voting rights, even though most of his investment would be eliminated as part of the restructuring. A second goal of Charter was to preserve approximately $2.85 billion of net operating losses. Again, to meet this goal, Charter needed Mr. Allen’s assistance. Charter asked Mr. Allen to forgo exercising certain contractual exchange rights and to maintain a 1% ownership interest in a Charter holding company.
As part of a settlement and restructuring, Mr. Allen agreed to Charter’s requests, retaining his voting rights and ownership interest. In exchange, Mr. Allen received $375 million, $180 million of which was deemed settlement value. In addition, Mr. Allen was granted a third party release. As part of the settlement, Charter would be able to raise $1.6 billion from an equity rights offering and exchange $1.7 billion of debt for new notes. As Charter wished, JPMorgan’s facility was reinstated.
The settlement between Charter, Mr. Allen and the junior bondholders called for Charter to file a prenegotiated chapter 11 bankruptcy case to effectuate the terms of the settlement. Charter filed for bankruptcy in March of 2009. Its plan of reorganization was confirmed eight months later.
Not everyone liked the settlement or the plan which was predicated on it. An indenture trustee for certain notes issued by Charter as well as a shareholder objected to the plan. When their objections were overruled by the bankruptcy court and the plan was confirmed, the objectors filed an appeal and also sought a stay of the plan’s implementation pending the resolution of the appeal. The bankruptcy court denied the request for a stay. Accordingly, immediately upon confirmation, Charter implemented its plan and, among other things, made appropriate cash payments (including to Mr. Allen), cancelled equity issued by the prepetition Charter, issued shares in the reorganized Charter, converted notes and issued warrants to Charter’s prepetition noteholders.
In their appeal to the district court, the indenture trustee and shareholder raised objections with the terms of the settlement with Mr. Allen, the bankruptcy court’s valuation of Charter and the plan’s proposed distributions. However, and as noted above, by the time the objectors’ appeal was heard by the district court, the plan had been “substantially consummated.” The district court held that the appellants were unable to demonstrate that factors were such that the appeal should go forward, and the court dismissed the appeal as equitably moot. The objectors appealed the district court’s ruling to the Court of Appeals for the Second Circuit.
Doctrine of Equitable Mootness
In the Second Circuit, an appeal of a confirmed plan of reorganization is presumed to be equitably moot (and thus should be dismissed) if the plan has been “substantially consummated.” Substantial consummation essentially means that the successor company has assumed the debtor’s business and commenced making distributions under the plan. In this case, those steps had occurred, so the Charter plan was substantially consummated. However, this does not end the analysis. Appellants have the ability to overcome a presumption of equitable mootness if they can satisfy all five factors established in an earlier decision from the Second Circuit. See Chateaugay, 10 F.3d 944 (2d Cir. 1993). Citing Chateaugay, the Second Circuit identified the five factors as:
- “the court can still order some effective relief;”
- “such relief will not affect the reemergence 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.” Id. at 952-53.
Second Circuit Decision
In this instance, the Second Circuit explained that a modification of the settlement with Mr. Allen, “including striking the releases, would be no ministerial task. The Allen Settlement was the product of an intense multi-party mediation, and removing a critical piece of the Allen Settlement — such as Allen’s compensation and the third-party releases — would impact other terms of the agreement and throw into debt the viability of the entire Plan.” Ultimately, the Second Circuit held that the relief sought by the appellants — invalidating the third party release, revaluing Charter and reconsidering the scheme of distributions under the plan — could not be granted without “threatening Charter’s ability to re-emerge successfully from bankruptcy” or “without knocking the props out from under completed transactions or affecting the reemergence of the debtor from bankruptcy.” Accordingly, the Second Circuit affirmed the district court, finding that the objectors’ appeal was equitably moot and should be dismissed.
In reviewing the district court’s decision in the Charter case, the Second Circuit determined that it should review the district court’s decision for an “abuse of discretion.” In so ruling, it joined the Third and Tenth Circuits, which have held that the “abuse of discretion” standard is the appropriate standard of review for considering decisions of equitable mootness. An “abuse of discretion” review of a case means that the appellant court will not reverse the lower court’s decision absent a definite and firm conviction that the court committed a clear error of judgment in the conclusion it reached.
In contrast, the Fifth, Sixth, Ninth and Eleventh Circuits instead review equitable mootness issues using a “de novo” standard of review. A “de novo” review of a case means that the appellate court considers the case anew, as if the lower court had not issued any decision on the issue. The review is independent, with no deference to the lower court given. The “abuse of discretion” standard is clearly more challenging for appellants than a “de novo” standard.
By adopting an “abuse of discretion” standard, the Second Circuit’s review of appeals of decisions based on equitable mootness will be more challenging for appellants. Keeping in mind the Second Circuit starts with a presumption of equitable mootness if a plan is substantially consummated, appellants will have an uphill battle in challenging plans once they are implemented. For plan proponents, including plan proponents who seek to incorporate important settlements into their plan of reorganization, this is good news. For parties seeking to overturn confirmation decisions, the opinion demonstrates the importance of seeking a stay of the plan’s implementation pending appeal.