Equitable Mootness and Substantial Consummation Are You Losing Your Appeal

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Feb 2001

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Upon the entry of a final order that confirms a plan of reorganization over a creditor's objection, an appeal
becomes ripe. Indeed, a creditor may immediately appeal the confirmation order. Despite the ripeness of the
appeal, certain actions, if not stayed, may occur that moot an otherwise valid appeal. An appeal is moot in
the constitutional sense only if events have taken place during the pendency of the appeal that make it
"impossible for the court to grant 'any effective relief whatsoever.'" <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Scientology v. United States,
506 U.S. 9, 12, 113 S.Ct. 447, 449, 121 L.Ed.2d 313 (1992)</a> (quoting Mills v. Green, 159 U.S. 651,653, 16
S.Ct. 132, 133, 40 L.Ed. 293 (1895)). Thus, when a court can fashion some form of relief, even if it only
partially redresses the grievances of the prevailing party, the appeal is not moot. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… of Scientology, 506
U.S. at 12-14, 113 S.Ct. at 450</a>.

The doctrine of equitable mootness, however, states that an appeal should be dismissed as moot when,
even though effective relief could conceivably be fashioned, implementation of that relief would be
inequitable.<a href="#1" name="1a">1</a> Consequently, practitioners must be aware of the doctrine of equitable mootness, and should
consider the necessary strategy to prevent its application. Preventing its application, after all, will prevent
the loss of an otherwise valid appeal.

<h3>The Equitable Mootness Doctrine</h3>

The doctrine of equitable mootness "is a recognition by the appellate courts that there is a point beyond
which they cannot order fundamental changes in reorganization actions." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 29 F.3d at 1038-39</a>.
"Consequently...when there has been substantial consummation of a plan ...effective judicial relief is no
longer available—even though there may still be a viable dispute between the parties on appeal." In re GWI
PSC 1 Inc., et al, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… F.3d 788, 800 (5th Cir. 2000)</a>.

When evaluating whether an appeal of a plan of reorganization is moot, courts examine whether (1) a
stay has been obtained, (2) the plan has been substantially consummated, and (3) the relief requested would
affect either the rights of parties not before the court or the success of the plan. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…;; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Continental
Airlines, 91 F.3d 553, 560 (3d Cir. 1996)</a> (citing Manges, 29 F.3d at 1039). Certain courts also list the
public policy of affording finality to bankruptcy judgments as a factor. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Airlines, 91 F.3d
at 560</a>. This factor is actually the underlying consideration for the equitable mootness doctrine.

1. Obtaining a Stay. The first step in preventing the loss of an appeal to the doctrine of equitable mootness
is obtaining a stay of consummation. Specifically, an appellant should move the bankruptcy court for a stay
of consummation, since the stay set forth in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Rules of Bankruptcy Procedure 7062</a> lasts only 10 days.
The procedural basis for a motion for stay pending appeal is <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Rules of Bankruptcy Procedure 8005</a>,
which provides a procedure to preserve the status quo. Since Rule 8005 set forth the procedure for obtaining
this relief, "[t]he party who appeals without seeking to avail himself of that protection does so at his own risk."
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Committee of Unsecured Creditors of LTV Aerospace & Defense Co. v. Official Committee of
Unsecured Creditors of LTV Steel Co. (In re Chateaugay Corp.), 988 F.2d 322, 326 (2d Cir. 1993)</a>. This
motion is in addition, of course, to a timely notice of appeal, as well as compliance with the Federal Rules
of Bankruptcy Procedure's other appellate rules. See Fed. R. Bankr. P. 8001-8020.

If the bankruptcy court declines to issue such a stay, the appellant must then seek a stay of
consummation from the district court, or bankruptcy appellate panel (BAP) where appropriate. The
appellant cannot rest on its laurels with the act of merely seeking relief from the bankruptcy court.
Furthermore, if the district court or BAP refuses to issue such a stay, the appellant must then seek to
mandamus the district court from the appropriate circuit court of appeals.

Not only must the appellant seek this relief, it must do so immediately. After all, the appellees, who are
now aware of the appeal, will attempt to consummate the plan of reorganization as quickly as possible. See
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Zenith Electronics Corp., 250 B.R. 207, 215 (D. Del. 2000)</a>. In addition, any delay in seeking a stay
may result in the consummation, or substantial consummation, of the plan of reorganization. Simply stated,
"[a] stay not sought, and a stay sought and denied, lead equally to the implementation of the plan of
reorganization." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re UNR Industries Inc., 20 F.3d 766, 770 (7th Cir. 1994)</a>.

2. Acting Prior to Substantial Consummation. Notwithstanding the importance of obtaining a stay,
substantial consummation is considered by some courts to be "the foremost consideration," particularly
"where the reorganization involves intricate transactions." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Airlines, 91 F.3d at 560</a> (citing
Rochman v. Northeast Utilities Service Group (In re Public Serv. Co.), 963 F.2d 469, 473-74 (1st Cir.),

cert. denied, 506 U.S. 908, 113 S.Ct. 304, 121 L.Ed.2d 226 (1992)). "'Substantial consummation' is the
statutory measure for determining whether a reorganization plan may be amended or modified by the
bankruptcy court." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 230 F.3d at 800</a>. Substantial consummation is specifically defined in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… U.S.C.
§1101(2)</a> as the:

<ul>
<li>a. transfer of all or substantially all of the property proposed by the plan to be transferred,

</li><li>b. assumption by the debtor or by the successor to the debtor under the plan of the business or of the
management of all or substantially all of the property dealt with by the plan, and

</li><li>c. commencement of distribution under the plan.</li></ul>

More specifically, substantial consummation may include such acts as the infusion of cash into the
post-confirmation estate and/or completion of all elements of the plan, without considering the pay-out of
unsecured creditors. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Airlines, 91 F.3d at 561</a>. Thus, time is of the essence for both parties as
plan proponents will seek to consummate at the earliest opportunity, and appellants will seek to prevent,
or act prior to, substantial consummation.

Once such actions occur, and a plan of reorganization is substantially consummated, a court may
"decline to consider the merits of confirmation...[if] effective judicial relief is no longer available—even
though the parties may have a viable dispute on appeal." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re U.S. Brass Corp., 169 F.3d 957, 960 (5th
Cir. 1999)</a> (citing Berryman, 159 F.3d at 944).

3. The Effect Upon Third Parties, and the Success of the Plan. The final question in the equitable
mootness inquiry focuses on either (a) the effect upon third parties and/or (b) the success of the plan. See
<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. Brass, 169 U.S. at 961</a>. "High on the list of prudential considerations taken into account by courts
considering whether to allow an appeal following a consummated reorganization is the reliance by third
parties, particularly investors, on the finality of the transaction." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Airlines, 91 F.3d at 562</a> (citing
Manges, 29 F.3d at 1039).

After all, strong public policy exists in favor of maximizing debtors' estates and facilitating successful
reorganization. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Airlines, 91 F.3d at 565</a>. Furthermore, courts have recently recognized that
mootness of a plan of reorganization, where the third parties to whom harm would occur are insiders, is
also a consideration. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 230 F.3d at 802</a>. In holding that the insiders' status was inconsequential, the
Fifth Circuit held that "it [is] natural for many, if not a majority, of the transactions set forth in a
reorganization plan to involve the participants of the chapter 11 proceedings." <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…;

Thus, the harm to third parties' consideration is not limited to parties otherwise unrelated to the
reorganization. Other courts, however, have distinguished between non-adverse third parties, i.e., outside
investors, and non-outside investors such as bondholders, lenders, retailers, distributors and suppliers. See

<a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 250 B.R. at 217</a>.

Additional harm may come to third parties because the reversal of the plan would prohibit its success.
When considering the harm to the success of the plan, courts consider whether any alternate plan
provisions, or even a new plan, is offered. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; 250 B.R. at 218</a>. Thus, it is apparent that an
appellant arguing against equitable mootness must be prepared to demonstrate alternatives to the
complained of plan, as mere reversal and possible conversion is insufficient. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…;

For appellee/plan proponents, this last factor may prove to be a lifeline, since reorganization is
favored over liquidation. When competing plans are at issue, however, this factor may quickly fall aside
as an alternative plan is already in existence.

<h3>Conclusion</h3>

Practitioners must remember above all else that the doctrine of equitable mootness is founded in equity.
Consequently, this determination is very fact-intensive, and the parties' actions control. Considering the
equitable nature of this doctrine, appellants and appellees alike are wise to act expediently, but equitably,
in the furtherance of their interests.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Committee of Unsecured Creditors of LTV Aerospace & Defense Co. v. Official Committee of Unsecured Creditors of LTV
Steel Co. (In re Chateaugay Corp.), 988 F.2d 322, 325 (2d Cir. 1993)</a>. Indeed, virtually every circuit court of
appeals has recognized this doctrine. See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Seattle-First National Bank (In re Manges), 29 F.3d 1034, 1038-39
(5th Cir. 1994), cert. denied, 513 U.S. 1152, 115 S.Ct. 1105, 130 L.Ed.2d 1071 (1995)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re
Specialty Equipment Cos., 3 F.3d 1043, 1048 (7th Cir. 1993)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Northeast Utilities Service Group (In re
Public Serv. Co.), 963 F.2d 469, 471-72 (1st Cir.), cert. denied, 506 U.S. 908, 113 S.Ct. 304,
121 L.Ed.2d 226 (1992)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Union Real Estate Equity & Mortgage Investment v. Club Associates (In re Club
Associates), 956 F.2d 1065, 1069 (11th Cir. 1992)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… States, Southeast and Southwest Areas Pension Fund v.
Central Transportation Inc., 841 F.2d 92, 95-6 (4th Cir. 1988)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re AOV Industries, 792 F.2d 1140,
1147 (D.C. Cir. 1986)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Roberts Farms Inc. (In re Roberts Farms Inc.), 652 F.2d 793, 796-97
(9th Cir. 1981)</a>. <a href="#1a">Return to article</a>

Journal Authors

Bruce H. White

William L. Medford

Journal Date

Thursday, February 1, 2001 - 12:00

Bankruptcy Rule

2001