A district judge in Virginia held that a debtor’s appeal from an order confirming the debtor’s chapter 13 plan was equitably moot.

In his December 11 opinion, District Judge Michael S. Nachmanoff of Alexandria, Va., said that the debtor should have sought or obtained a stay pending appeal to prevent the debtor’s appeal from becoming equitably moot after the chapter 13 trustee began making distributions. The judge evidently believed that the commencement of distributions in chapter 13 is equivalent to substantial consummation of a chapter 11 plan.

The chapter 13 debtor’s original plan called for $7,200 in payments over the three-year life of the plan. Judge Nachmanoff said that the bankruptcy court held a hearing and denied confirmation of the first plan based on the debtor’s “failure to meet his burden of proof on the liquidation and good faith tests.”

Over the debtor’s objection, the bankruptcy court eventually confirmed the debtor’s third amended plan, which would pay $20,550 over three years. The debtor appealed confirmation of the third amended plan, but Judge Nachmanoff dismissed the appeal as equitably moot.

Equitable Mootness

Quoting a Fourth Circuit decision from 2017, Judge Nachmanoff said,

“Equitable mootness is a pragmatic doctrine grounded in the notion that, with the passage of time after a judgment in equity and implementation of that judgment, effective relief on appeal becomes impractical, imprudent, and therefore inequitable.” In re Bate Land & Timber LLC, 877 F.3d 188, 195 (4th Cir. 2017) (internal quotations and citation omitted).

Citing an earlier decision from the Fourth Circuit, Judge Nachmanoff said that equitable mootness is “often invoked” in bankruptcy cases “because it may become ‘impractical and imprudent to upset the plan of reorganization at [a] late[r] date.’ Mac Panel Co. v. Virginia Panel Corp., 283 F.3d 622, 625 (4th Cir. 2002).”

A prudential doctrine not based on Article III’s requirement of a case or controversy, equitable mootness kills an appeal when (1) the appellant neither sought nor obtained a stay pending appeal; (2) the plan has been substantially consummated; (3) reversal would affect the success of the plan; and (4) third parties would be affected, Judge Nachmanoff said.

Judge Nachmanoff said that “all four factors weigh in favor of finding the appeal equitably moot.” The debtor did not seek a stay pending appeal, and the plan had been substantially consummated.

“[U]ndoubtedly,” Judge Nachmanoff said, reversal would “in effect nullify that plan . . . . under which claimants have already received payments.” He therefore concluded that the interests of creditors “would be substantially affected.”

Denying the appeal as equitably moot, Judge Nachmanoff quoted a district judge in Maryland who said in a chapter 11 case, “‘It would be inequitable for this Court … to disgorge third parties of funds already dispersed to them in accordance with the Confirmed Plan.’” Clark v. Council of Unit Owners of 100 Harborview Drive Condo., 2019 WL 4673434 at *6 (D. Md. Sept. 25, 2019).

Observations

The decision seems to mean that the commencement of payments in a three- or five-year chapter 13 plan can extinguish an appeal. Presumably, an appeal from a chapter 13 confirmation order would also be equitably moot were a creditor appealing.

In the case on appeal, the debtor would be continuing to make payments for another 18 months. Were there a reversal, the debtor could stop making payments or make payments in a lower amount without seeking disgorgement from creditors. Equitable mootness should not enable creditors to receive more than they would be paid under a properly confirmed plan, at least when reversal would not entail disgorgement.

The decision is an uncomfortable fit with Bullard v. Blue Hills Bank, 575 U.S. 496 (2015), where the Supreme Court held that denial of confirmation of a chapter 13 plan is not a final order subject to appeal. The unanimous opinion by Chief Justice John J. Roberts, Jr., said that a debtor, like the one in the case before Judge Nachmanoff, has two options: “to seek or accept dismissal of his case and then appeal, or to propose an amended plan and appeal its confirmation.” Id. at 507.

For the debtor before Judge Nachmanoff, dismissal was not an option, because the debtor would lose protection from the automatic stay.

When neither the debtor nor creditors would be adversely affected by the pendency of an appeal, it is unclear why seeking a stay pending appeal should be required. Indeed, it is unclear whether a bankruptcy court would even grant a stay. If there were a stay, the bankruptcy court likely would require the debtor to continue making payments at the rate specified in the confirmed plan, while directing the trustee to withhold distributions from creditors.

A stay pending appeal would neither benefit nor harm either the debtor or the creditors. With a stay having no practical value, it is unclear why a stay or an application for a stay should be required to maintain the vitality of an appeal.

And what if the court were to deny a stay pending appeal? Would the appeal become equitably moot, with the effect of never allowing a debtor or creditors to challenge a possibly defective confirmation order?

As the primary indicia of equitable mootness, substantial consummation of a chapter 11 plan and the commencement of distributions to creditors in chapter 13 are fundamentally inapposite. In chapter 11, most or all of the transactions take place on the effective date. In chapter 13, payments continue for three to five years, and the debtor does not receive a discharge until payments are completed.

The opinions are those of the writer, not ABI.