Absent a Stay, Making Plan Payments for Two Years Renders an Appeal Equitably Moot

Without making new law, and sidestepping two circuit splits, the First Circuit emphasized the importance of pursuing an appeal and seeking a stay expeditiously to avoid having an appeal from confirmation ruled equitably moot.

Evidently, making plan payments in the First Circuit results in equitable mootness even if there were no major transfers of the business or assets.

The debtor slogged through chapter 11 for five years before confirming a reorganization plan. The chief adversary was an unsecured creditor with a $2.7 million claim. The confirmed plan would pay the creditor less than 10% in total over several years.

The creditor filed an appeal from the confirmation order but did not seek a stay.

Four months after confirmation, the debtor filed a motion for entry of a final decree. In the meantime, the debtor had been paying creditors and making transfers contemplated by the plan.

The creditor objected to a final decree and sought a stay of further distributions, but the bankruptcy court overruled the objection and entered a final decree about six months after confirmation. The final decree declared that the plan had been substantially consummated. The bankruptcy court also denied a stay.

The creditor filed an appeal from the final decree, but the Bankruptcy Appellate Panel dismissed the appeal from the confirmation order as equitably moot.

In a December 21 opinion, Circuit Judge O. Rogeriee Thompson upheld dismissal of the appeal as equitably moot.

Judge Thompson noted that the circuits are split on the standard for review of orders dismissing appeals as equitably moot. Some apply the de novo standard, while others review for abuse of discretion.

Judge Thompson saw no reason to take sides because the appeal was moot under both standards.

Turning to the merits, Judge Thompson cited the Third Circuit for saying that equitable mootness is “seemingly unique to bankruptcy proceedings.” In the First Circuit, she said, three factors come into play: (1) Did the appellant diligently pursue a stay with all available remedies; (2) has the plan gone well beyond a point allowing for practicable appellate annulment; and (3) would relief harm innocent third parties?

On the first question, Judge Thompson said the creditor “clearly failed to diligently pursue” a stay by having waited four months before asking for a stay. And then, the creditor failed to appeal denial of a stay. Furthermore, the creditor never sought an expedited appeal from the confirmation order.

“This is not the course of one diligently pursuing all available remedies,” Judge Thompson said.

On the second and third factors, Judge Thompson said that the bankruptcy court had declared the plan substantially consummated 16 months before the appeal was heard in the circuit court. Substantial consummation, she said, raises a strong presumption of an inability to fashion an equitable and effective appellate remedy.

Other circuits, Judge Thompson said, have evolved different tests for equitable mootness, but “all agree that this is a fact-intensive inquiry.”

Weighing the facts, Judge Thompson held that the appeal was equitably moot.

“The substantially-consummated reorganization plan has continued in place for an extended period of time while [the creditor] has not pursued its available remedies to obtain a stay. At this point, over seven years after [the debtor] filed for bankruptcy and over two years after [the debtor] began making payments to creditors under the approved reorganization plan, we decline to disrupt the status quo,” Judge Thompson said.