The Second Circuit trimmed back the doctrine of equitable mootness used to dismiss appeals from chapter 11 plans that have been consummated.
The appeal was brought by an 8% shareholder from confirmation of the LightSquared Inc. reorganization plan. The unsigned, summary opinion on March 22 held that the appeal was “presumed equitably moot” because the plan had been substantially consummated.
The appeals court held that the shareholder satisfied all five tests required for overcoming the presumption of mootness. On the critical test, the circuit court said it could grant “at least some effective relief in the form of monetary damages in this case – even as little as one dollar – without knocking the props out from under the completed transaction.”
Avoiding dismissal ultimately failed to help the shareholder because the circuit court proceeded to rule on the merits by finding that LightSquared’s plan did not violate the “fair and equitable” rule. The bankruptcy judge made an adequately based finding that the reorganized company had no equity for “old” shareholders.
The Second Circuit opinion could be read as bringing that court more in line with other appeals courts that have been narrowing the doctrine of equitable mootness. The Second Circuit approvingly cited the Fifth Circuit’s 2013 decision in Texas Grand Prairie Hotel Realty LLC, where the New Orleans-based court took a “narrow view” of equitable mootness, “particularly where pleaded against a secured creditor.” Texas Grand Prairie said that equitable mootness only protects creditors who are not parties to the appeal.
The Second Circuit also approvingly cited the Ninth Circuit’s Transwest Resort Properties decision from 2015. In that case, the Ninth Circuit held, over a vigorous dissent, that a buyer who actively participates in reorganization is not protected by equitable mootness. The Ninth Circuit denied motions for rehearing en banc.
By citing the other two circuits, it is far from clear, however, that the Second Circuit is going equally far in trimming back equitable mootness. The significance of the opinion is also limited because it was a summary order intended to have limited precedential effect.