In In re Tribune Co., 2014 WL 2797042 (D. Del. June 18, 2014), the U.S. District Court for the District of Delaware upheld Tribune Company’s plan of reorganization, dismissing a series of appeals as equitably moot. The court’s decision is of particular interest because it comes on the heels of a significant decision by the U.S. Court of Appeals for the Third Circuit in In re SemCrude L.P., 728 F.3d 314 (3d Cir. 2013), which articulated a narrow construction of the doctrine of equitable mootness.
Equitable mootness is a judicially created doctrine under which appellate courts refrain from hearing bankruptcy appeals relating to plan confirmation, even though redress may be possible, because it would be inequitable to overturn a confirmed reorganization plan. As one circuit court noted, equitable mootness is “a kind of appellate abstention that favors finality of reorganizations and protects the interrelated multi-party expectations on which they rest.”[1] Despite the articulated policy of promoting finality, the Third Circuit in SemCrude reaffirmed that “[d]ismissing an appeal as equitably moot should be rare, occurring only where there is sufficient justification to override the statutory appellate rights of the party seeking review.”[2] In reversing the district court’s finding of equitable mootness, the Third Circuit broke ranks with, among others, the influential Second Circuit and held that the burden of establishing equitable mootness lies with the party seeking dismissal of the appeal. Placing this heavy burden on the appellee, the result in Semcrude raised some questions about the future viability of equitable mootness in the Third Circuit and whether plans of reorganization would now be more susceptible to attack on appeal. That concern, however, appears to have been somewhat allayed by the ruling in Tribune, which dismissed an appeal as equitably moot notwithstanding SemCrude.
Tribune Company and its affiliates (collectively, “Tribune”) sought chapter 11 relief in late 2008, one year after Tribune and certain of its subsidiaries completed a leveraged buyout (LBO). In July 2012, the bankruptcy court confirmed a joint plan of reorganization proposed by Tribune, the committee and certain senior lenders. The cornerstone of the plan was the global settlement reached among key constituents that resolved certain LBO-related causes of action against certain lenders in exchange for immediate distributions of settlement funds. The plan assigned the remaining non-settled LBO-related causes of action to a litigation trust for the benefit of creditors. After more than 10 days of confirmation hearings, the court confirmed the plan over the objections of several different bondholder groups. Some of the objectors appealed the confirmation of the plan, arguing, among other things, that the settlement embodied in the plan did not provide them with enough value. Tribune filed a motion to dismiss the appeal as equitably moot.
Applying the equitable mootness standard articulated in SemCrude, the Tribune court stated that the burden lies with the party seeking dismissal on equitable mootness grounds. The court further explained that while courts in the Third Circuit consider five prudential factors[3] in determining whether an appeal is equitably moot, as a practical matter the determination proceeds in two analytical steps:
(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.[4]
The parties all agreed that the plan had been substantially consummated[5] — indeed, among other things, the reorganized debtor had already distributed more than $8 billion in cash and securities to thousands of creditors, issued 100 million new shares of stock and warrants, and incurred $1.1 billion in new debt.
In proceeding to the second step of the analysis, the appellants argued that notwithstanding substantial consummation, the reorganized debtor failed to satisfy its burden to show that the respective appeals were moot because the appeals did not seek to unravel the plan, nor would granting the requested relief have had a significant impact on third parties.
The largest pre-LBO bondholder argued that the settlement should be modified because the lucrative LBO-related claims were released in the settlement for inadequate consideration. The bondholder proposed several remedies that it believed the court could implement without plunging the plan into chaos. Those remedies included (1) requiring Tribune — a restructured $7 billion company — to fund any liability resulting from the LBO-related claims, (2) allowing the litigation trust set up by the plan to pursue litigation against certain LBO lenders that received releases under the settlement, and (3) altering the litigation trust waterfall to provide more favorable treatment for the pre-LBO bondholders. Lenders in other classes also sought class-specific modifications based on intercreditor and subordination issues. Those proposed remedies included requiring Tribune to make a further $29 million payment and modifying the litigation trust waterfall to increase the recovery to certain bondholders.
The court addressed each proposed remedy and determined that if implemented, they “would have the feared outcome of collapsing the Plan.” Specifically, the court noted that each aspect of the settlement and plan was heavily negotiated and that the respective modifications proposed by the various bondholder groups would materially alter either the settlement or the plan or both. The court reasoned that it would be inequitable to make reorganized Tribune and its new creditors and interest-holders liable for pre-bankruptcy claims that were purportedly resolved through the plan and that if revived could have the effect of crippling the reorganized company. The court also rejected those proposed remedies that, even if they would not unravel the plan, would adversely affect numerous smaller creditors who were not before the court and who relied on the finality of the plan. Finally, the court considered the important public policy favoring finality of the bankruptcy court’s judgments and concluded that it was appropriate to apply equitable mootness to this particular case, given the size and complexity of the reorganization and the developed factual record supporting that determination.
While SemCrude might have made it more challenging to dismiss an appeal as equitably moot in the Third Circuit, the doctrine still appears to be intact and viable. Instead of making generic assertions about how granting relief on the merits of an appeal would unravel the plan, a party appealing a confirmation order will now have to provide supported assertions that granting appellate relief would wreak havoc on the debtor’s reorganization or significantly harm third parties who have justifiably relied on plan confirmation. Following the Tribune case, it is clear that equitable mootness is still a powerful appellate tool that courts in the Third Circuit are not yet willing to relinquish.
[1] In re Pacific Lumber Co., 584 F.3d 229, 240 (5th Cir. 2009).
[2] 728 F.3d 314, 326–27.
[3] (1) whether the reorganization plan has been substantially consummated, (2) whether a stay has been obtained, (3) whether the relief requested would affect the rights of parties not before the court, (4) whether the relief requested would affect the success of the plan, and (5) the public policy of affording finality to bankruptcy judgments. Tribune, 2014 WL 2797042 at *2 (quoting In re Continental Airlines, 91 F.3d 553, 560 (3d Cir. 1996)).
[4] In re Tribune Co., 2014 WL 2797042 at *2 (quoting SemCrude, 728 F.3d at 321).
[5] Some of the appellants requested a stay of the confirmation order pending appeal. The bankruptcy court granted that request, but conditioned the stay on the posting of a supersedeas bond in the amount of $1.5 billion. None of the appellants posted the bond, which contributed to the substantial consummation of the plan.