Yesterday, the Supreme Court declined to review a case from the Third Circuit raising two fundamental questions regarding chapter 11 reorganizations: (1) May a chapter 11 plan include third-party, nonconsensual releases, and (2) may appellate courts dismiss appeals from confirmation orders under the doctrine of equitable mootness?
Although there is a circuit split on third-party releases, the courts of appeals to consider the issue have all allowed dismissals of appeals from consummated chapter 11 plans under the doctrine of equitable mootness.
The petition for certiorari was filed by lenders who dissented from the chapter 11 plan of Millennium Lab Holdings II LLC. The Third Circuit had upheld the constitutional power of a bankruptcy court to grant nonconsensual, third-party releases, given the “exceptional facts” of the case. Opt-Out Lenders v. Millennium Lab Holdings II LLC (In re Millennium Lab Holdings II LLC), 945 F.3d 126 (3d Cir. Dec. 19, 2019).
The facts were indeed exceptional. The plan conferred nonconsensual releases on shareholder defendants in return for their $325 million contribution. Narrowing the availability of third-party releases in his December 19 opinion, Circuit Judge Kent A. Jordan said, “we are not broadly sanctioning the permissibility of nonconsensual third-party releases in bankruptcy reorganization plans.”
To read ABI’s report on the Third Circuit decision, click here.
Because the facts were “exceptional” and the holding was ostensibly narrow regarding releases, the case was not an ideal vehicle for certiorari. And because there is no circuit split on equitable mootness, the case was not a good candidate for Supreme Court review on that score, either.
The dissenting lenders filed their certiorari petition in March. In April, the debtor and other respondents waived their rights to file a response to the certiorari petition. The Court scheduled the petition for review by the justices at a conference on May 21. The Court denied the petition along with dozens of others on May 26.
Observations
Because the Court did not ask the debtor to file a response to the petition, the justices evidently had little interest in reviewing the Third Circuit’s decision on either issue.
In the last decade, the Supreme Court has been more inclined to grant review in cases involving consumer bankruptcy. Arguably, the high court has been reluctant to review chapter 11 issues for several reasons.
First and perhaps foremost, corporate reorganization is a system that “works” and doesn’t cost the federal government a dime. In fact, filing fees and Pacer charges cover all of the expenses of the bankruptcy courts and much of the cost in operating the entire federal judicial system.
Chapter 11 the U.S. is seen as being the most efficient corporate reorganization scheme anywhere in the world. The justices may fear that tinkering with the system might make it less successful.
The justices have little experience with bankruptcy because they take so few cases involving title 11. For example, Justice Stephen Breyer, who is perhaps the justice most fluent with bankruptcy, will inevitable comment in oral argument something like, “I don’t know much about bankruptcy, but . . . .”
Most of the major reorganizations come from courts in a few jurisdictions where the bankruptcy judges are highly sophisticated when it comes to chapter 11. The district and circuit courts in those regions therefore have far greater experience with title 11. If a case does not raise constitutional questions or issues of similar import, the justices may be content to leave the work to the lower courts.
In some respects, the split on third-party releases should be a prime target for Supreme Court review. The circuit split is deep and persistent, with appellate decisions restricting releases more often observed in theory than in practice. The better vehicle for Supreme Court review would be a circuit decision denying confirmation and categorially barring third-party releases.
But the Supreme Court itself has raised procedural barriers to appeals from denials of confirmation. In light of Bullard v. Blue Hills Bank, 575 U.S. 496 (2015), and Ritzen Group Inc. v. Jackson Masonry LLC, 140 S. Ct. 582, 205 L. Ed. 2d 419 (Sup. Ct. Jan. 14, 2020), the district and circuit courts would both be required to grant interlocutory appeals to reach the release question.
In other words, when it comes to a high court ruling on third-party releases and equitable mootness, don’t hold your breath.
Yesterday, the Supreme Court declined to review a case from the Third Circuit raising two fundamental questions regarding chapter 11 reorganizations: (1) May a chapter 11 plan include third-party, nonconsensual releases, and (2) may appellate courts dismiss appeals from confirmation orders under the doctrine of equitable mootness?
Although there is a circuit split on third-party releases, the courts of appeals to consider the issue have all allowed dismissals of appeals from consummated chapter 11 plans under the doctrine of equitable mootness.
The petition for certiorari was filed by lenders who dissented from the chapter 11 plan of Millennium Lab Holdings II LLC. The Third Circuit had upheld the constitutional power of a bankruptcy court to grant nonconsensual, third-party releases, given the “exceptional facts” of the case. Opt-Out Lenders v. Millennium Lab Holdings II LLC (In re Millennium Lab Holdings II LLC), 945 F.3d 126 (3d Cir. Dec. 19, 2019).
The facts were indeed exceptional. The plan conferred nonconsensual releases on shareholder defendants in return for their $325 million contribution. Narrowing the availability of third-party releases in his December 19 opinion, Circuit Judge Kent A. Jordan said, “we are not broadly sanctioning the permissibility of nonconsensual third-party releases in bankruptcy reorganization plans.”