Declining “the request to expand broadly an already questionable doctrine,” the majority on a Sixth Circuit panel held “that the doctrine of equitable mootness has no place in Chapter 7 liquidations.”

Short of a categorical holding, the language in the majority’s opinion by Circuit Judge Karen Nelson Moore has enough daylight to apply equitable mootness in an extraordinary chapter 7 case, perhaps on appeal from a highly complex settlement with hundreds of creditors who benefit from the settlement but are not before the appeals court.

Concurring in the judgment, Circuit Judge John B. Nalbandian would have ruled that the requirements of equitable mootness would not have been satisfied, even were the doctrine suitable for chapter 7. His opinion suggests that prior Sixth Circuit precedent would not have foreclosed the use of equitable mootness in chapter 7.

Complex Appeal – Simple Facts

Missteps by the creditor in the bankruptcy court and the district court’s misapprehension of the operative notice of appeal resulted in a procedural hash once the case reached the Sixth Circuit. For discussion of equitable mootness, the operative facts are simple.

The bankruptcy court granted a final allowance of compensation to a chapter 7 trustee. In the absence of a stay pending appeal, the trustee distributed the allowance to the trustee, and the bankruptcy court closed the case. The creditor appealed the closing of the case and the grant of compensation.

The district court dismissed the appeal on the grounds of both constitutional and equitable mootness. All three circuit judges agreed that the appeal was not constitutionally moot.

Constitutional Mootness

The district court found the appeal constitutionally moot for lack of a stay pending appeal. Writing for all three judges, Judge Nalbandian said, “Failing to seek a stay does not render an issue constitutionally moot,” because cases are reopened routinely.

Even absent a stay, Judge Nalbandian said that the bankruptcy court could have reopened the case and reconsidered the grant of compensation. Because the district court could have granted “effective relief,” the appeal was not constitutionally moot.

Equitable Mootness

For the majority, Judge Moore defined the question on appeal as “whether a court of review can decline to consider the merits and bar the appeal of an order issued in a Chapter 7 liquidation bankruptcy.”

Judge Moore said that equitable mootness does not flow from Article III standing principles but instead is a prudential doctrine. The three factors leading to a finding of equitable mootness are the lack of a stay pending appeal, substantial consummation and the effect on parties not before the court on appeal.

Equitable mootness first appeared in the Ninth Circuit in 1981 and later in the Seventh Circuit, Judge Moore said. The focus, she said, “remained on reorganization plans.”

The Sixth Circuit first applied equitable mootness in 1995. In the succeeding 20 years, Judge Moore said that Sixth Circuit “continued to apply equitable mootness to bar appeals only of confirmation orders of reorganization plans in Chapter 11 reorganizations.” In 2005 and 2008, she said that her appeals court again invoked the doctrine in chapter 11 reorganizations.

In Detroit’s municipal debt-adjustment in 2016, Judge Moore said that the Sixth Circuit applied the doctrine “specifically because of the complex nature of the reorganization before the panel.” She said there are “plenty of other courts and scholars” who say “that the complexity of the reorganization is a central tenet of the equitable-mootness doctrine.”

Judge Moore described equitable mootness as invoking “third-party reliance interests” and serving as a tool to ensure success of the reorganization.

“[I]n every instance in which this court has contemplated applying equitable mootness to bar review of the merits of an appeal,” Judge Moore said that “this court has remained committed to applying it narrowly — only contemplating barring appeals of confirmation orders of reorganization plans and inquiring into the complexity of the plan.”

“[T]hese concerns and rationales are not implicated in Chapter 7 liquidations,” Judge Moore said, because chapter 7 deals with simple liquidations where “ ‘there are rarely intricate transactions that need to be unraveled,’ ” quoting a commentator.

Observing that “no other circuit court has affirmatively embraced the equitable-mootness doctrine in Chapter 7 liquidations,” Judge Moore reversed and remanded with instructions for the district court to consider the merits of the appeal.

The Concurrence

Concurring in the judgment, Judge Nalbandian saw no reason to ban equitable mootness from chapter 7 cases because, even if applied, “the claim would not be equitably moot.”

Judge Nalbandian said that the Sixth Circuit had not ruled on the applicability of the doctrine in chapter 7. Contrary to the interpretation of the appeals court’s precedents by the majority, he referred to the finding of equitable mootness in Detroit’s municipal bankruptcy as showing “our circuit’s momentum is moving in favor of equitable mootness’s broad application.”

“[A]ny reversal of a Chapter 7 liquidation,” Judge Nalbandian said, “would likely be less difficult than the undoing of a Chapter 9 or 11 plan from the get-go.”

Even if applicable, equitable mootness would not kill the appeal, in Judge Nalbandian’s view, because “only professional fees are in dispute.” In the event of reversal, other creditors would benefit by returning more to the estate for distribution to creditors generally.

Like the majority, Judge Nalbandian would reverse and remand to consider the merits of the appeal from the grant of compensation.