On August 4, 2015, we posted: “Equitable Mootness In The Third Circuit: Dead Or Alive?”, which analyzed the Third Circuit’s opinion in In re One2One Communications. The post predicted that Judge Krause’s concurrence would likely result in further opinions on equitable mootness. Less than a month later we have such an opinion. In Aurelius v. Tribune, 14-3332 (3d Cir. August 19, 2015) (the “Tribune Opinion”), a different panel of the Third Circuit addresses equitable mootness, and in a concurring opinion replies to Judge Krause’s concurrence.
In December 2007, the Tribune Company (which published the Chicago Tribune) became the subject of a leveraged buy-out (“LBO”). The LBO failed, Chapter 11 followed, and a creditor committee promptly filed suit on account of “LBO-Related causes of action”.
The appeals arose out of a battle over competing Chapter 11 plans, one filed by Aurelius (the “Noteholder Plan”) and one sponsored by the Debtor, the Committee, and certain senior lenders, called the “DCL Plan” (for Debtor/Committee/Lender). The primary difference between the Noteholder Plan and the DCL Plan was that the proponents of the former wanted to litigate the LBO-Related Causes of Action while the DCL Plan proposed to settle them. The bankruptcy court held that the DCL Plan’s settlement was reasonable, and, it was confirmed. Aurelius appealed, challenging the merits of the settlement.
A second appeal was prosecuted by Trustees for other bonds, who contended that they are beneficiaries of a subordination agreement that guarantees that they will receive any recovery that goes to the holders of certain notes ahead of a class of trade and other creditors (Class 1F).
The District Court dismissed both appeals as equitably moot. Aurelius and the Trustees then appealed to the Third Circuit.
Restated Principles of Equitable Mootness
Generally “equitable mootness” is a judge-made rule by which an appellate court deems it prudent for practical reasons to forbear from deciding an appeal. According to the Tribune Opinion, in evaluating whether to dismiss an appeal, courts in the Third Circuit should assess: (1) whether a confirmed plan has been substantially consummated; and (2) if so, whether granting the relief requested in the appeal will (a) fatally scramble the plan and/or (b) significantly harm third parties who have justifiably relied on plan confirmation
Next focusing on who might qualify as a “third party” that may “justifiably rely” on plan confirmation, the Tribune Opinion explains that although parties other than new outside investors may claim equitable mootness protection, such parties may not merit the same ‘outside investor’ status as those who make equity investments in a reorganized entity. According to the Tribune Opinion, in cases where relief on the merits of the appeal would neither fatally scramble the plan nor significantly harm the interests of third parties who otherwise have justifiably relied on plan confirmation, there is no reason to dismiss as equitably moot an appeal of a confirmation order.
Furthermore, according to the Tribune Opinion, reliance would not be justified if a third party obtained a benefit under the plan that was inconsistent with a contract, statute, or judgment, as any benefit from such an error would result in “ill-gotten gains.” Therefore, allowing a remedy of taking recoveries from one class of stakeholders in an amount in excess of what the law allows generally will not be subject to equitable mootness, “as there is little likelihood it will have damaging ripple effects beyond the classes that the redistribution immediately affect.”
The Aurelius Appeal
After restating the Third Circuit’s standards, the Court dismissed the Aurelius Appeal based upon two key deficiencies. One was that Aurelius could have obtained a stay if it had posted a $1.5 billion bond, which it chose not to do (nor did it request the bond be reduced). Second, by accepting the Aurelius position, the Court would be essentially disregarding the votes of the other creditors. Aurelius proposed a Noteholder Plan that didn’t include a settlement of the LBO-Related Causes of Action, and the Aurelius Plan was overwhelmingly rejected by all but 3 of the 243 creditor classes. The Tribune Opinion observes that by reaching the merits and revoking the settlement would grant Aurelius by judicial fiat what it could not achieve by consensus within Chapter 11 proceedings.
To be sure, it appears that if the Court had instead reached the merits of whether the bankruptcy court’s approval of the settlement of the LBO-Related Causes of Action should be affirmed, that the Third Circuit could easily have affirmed. The Tribune Opinion cites ample testimony from the record in support of the settlement, and most creditors seem to have favored the settlement based upon the reported plan vote.
The Trustee’s Appeal
However, the Third Circuit also held a separate $30 million intercreditor dispute prosecuted by the Trustees was not equitably moot. The issue presented by the Trustees’ appeal presented was straightforward: does the Plan unfairly allocate Class 1E’s recovery to 1F? If the answer is yes, disgorgement could be ordered against those Class 1F holders who have received more than their fair share.
The Tribune Opinion concludes that members of Class 1F could not “justifiably rely” on the finality of the confirmation order with respect to the $30 million. While some of the money had been paid out to Class 1F, it had been paid to a readily identifiable set of creditors against whom disgorgement could be ordered.
The Concurring Opinion
Of particular interest to court watchers is the separate concurring opinion of Judge Ambro, joined in by Judge Vanaskie. By way of background, Judge Krause, who had served on the One2One panel, separately wrote a 37-page concurrence arguing that the time has come to revoke equitable mootness, which she found “legally ungrounded and practically unadministrable.” In the Tribune Opinion, Judge Ambro offer several policy arguments in reply to Krause’s concurrence. Ambro argues equitable mootness is proper to invoke in “those few situations where the practical harm caused by granting relief would greatly outweigh the benefit.” If there were no such doctrine, Ambro opined that virtually no major Chapter 11 reorganization could ever be implemented until all appeals were finished.
In the decades following the Third Circuit’s 1996 Continental Airlines decision, lower courts and litigants have attempted to navigate the treacherous waters of equitable mootness. It appears that the channel to equitable mootness relief has significantly narrowed with the passage of time. The respective concurring opinions found in One2One Communications and Tribune may set the stage for an en banc reevaluation of the legitimacy and scope of the doctrine.