Over dissent, the Third Circuit held that an appeal from confirmation of a chapter 11 plan is equitably moot even if the appellant is only asking the appellate court to pay one relatively small claim and no others.
The case involved horizontal gifting. In a nonprecedential opinion on January 6, Circuit Judge Kent A. Jordan dismissed the appeal as equitably moot and did not reach the question of gifting. Concurring in the result but dissenting on equitable mootness, Circuit Judge Cheryl Ann Krause did not believe the appeal was moot but said she would have affirmed on the merits.
One Creditor Appeals Confirmation
The debtor had $500 million in secured debt and a business worth about $300 million. The prepackaged chapter 11 plan called for converting secured debt to equity, amounting to a recovery of perhaps 55% on the secured claims.
The secured creditors made what is known as a gift to unsecured creditors in the form of cash and stock to holders of unsecured notes whose recovery amounted to no more than 6% of the claims in the class. Trade and some other unsecured creditors were to be paid in full.
The noteholder class voted against the plan, but Bankruptcy Judge Kevin J. Carey of Delaware employed cramdown to confirm the plan. A holder of about $500,000 in unsecured notes appealed from the confirmation order and unsuccessfully sought a stay pending appeal.
On appeal in district court, the noteholder argued that the appeal was not equitably moot because the appellate court could order payment of its $500,000 claim in full without upsetting the plan as a whole and without paying the entire class and its $40.5 million in claims.
In August 2018, District Judge Richard G. Andrews upheld confirmation. He reached the merits of gifting after ruling that the appeal from confirmation was equitably moot because the plan had been substantially consummated. Hargreaves v. Nuverra Environmental Solutions Inc. (In re Nuverra Environmental Solutions Inc.), 590 B.R. 75 (D. Del. Aug. 21, 2018). To read ABI’s report, click here.
Judge Andrews rejected the idea of paying one creditor, saying there was no method under the Bankruptcy Code to permit paying the appellant in full without paying all other noteholders in full. Paying one creditor in the noteholder class, he said, would offend Section 1123(a)(4) and its requirement of making identical payments to all creditors in a class.
Despite ruling that the appeal was moot, Judge Andrews analyzed the merits and upheld confirmation. The noteholder appealed.
Majority Finds the Appeal to Be Equitably Moot
The noteholder argued in the circuit court that the appeal was not moot because the appeals court could order payment of his $500,000 claim without upsetting the debtor’s finances or upsetting the plan.
Judge Jordan rejected the argument. Paying only one claim in the class, he said, “would violate the Code’s restriction [in Section 1123(a)(4)] on preferring certain individuals over others in the same class.” He went on to say that ordering payment of one claim would also “contravene the . . . unfair discrimination provision” in Section 1129(b)(1).
In other words, “an individual payout to one member of a class is not permitted by the Code,” Judge Jordan said. To the contrary, “the sole relief an objecting party can pursue when alleging unfair discrimination is relief for the class of creditors unfairly discriminated against, consistent with 11 U.S.C. § 1123(a)(4).”
Judge Jordan dismissed the appeal as equitably moot.
Concurrence Rails Against Equitable Mootness
Quoting one of her prior concurring opinions, Judge Krause said that “our equitable mootness doctrine is ‘legally ungrounded and practically unadministrable,’ and I have urged my colleagues to ‘reconsider whether it should exist at all.’”
The case on appeal, Judge Krause said, exemplified “the consequences of our ill-advised expansion of the doctrine.”
In her view, Judge Krause said that the appeal would neither harm the interests of third parties nor “endanger the reorganized debtors’ solvency or unwind other aspects of the Plan.” Those considerations alone, she said, “should end our equitable mootness inquiry and require us, in the normal course, to analyze the merits of [the noteholder’s] claims.”
Judge Krause listed several issues that the circuit court should examine. For instance, she said that the appellant had a “colorable claim” that the remaining members of the class waived the unfair discrimination claim. She wanted to know whether Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), foreclosed the notion of horizontal gifting. She also asked, “what are the limits on a plan’s ability to divide creditors into classes?”
Without addressing the merits, she said, in substance, that the doctrine of equitable mootness will preclude the Third Circuit from ever ruling on the propriety of gifting.
Judge Krause dissented on equitable mootness but concurred in affirming the district court. On the merits regarding unfair discrimination, she limited her comment to saying that she would “ultimately resolve this appeal in favor of the reorganized debtors.”
Over dissent, the Third Circuit held that an appeal from confirmation of a chapter 11 plan is equitably moot even if the appellant is only asking the appellate court to pay one relatively small claim and no others.
The case involved horizontal gifting. In a nonprecedential opinion on January 6, Circuit Judge Kent A. Jordan dismissed the appeal as equitably moot and did not reach the question of gifting. Concurring in the result but dissenting on equitable mootness, Circuit Judge Cheryl Ann Krause did not believe the appeal was moot but said she would have affirmed on the merits.
One Creditor Appeals Confirmation
The debtor had $500 million in secured debt and a business worth about $300 million. The prepackaged chapter 11 plan called for converting secured debt to equity, amounting to a recovery of perhaps 55% on the secured claims.
The secured creditors made what is known as a gift to unsecured creditors in the form of cash and stock to holders of unsecured notes whose recovery amounted to no more than 6% of the claims in the class. Trade and some other unsecured creditors were to be paid in full.
The noteholder class voted against the plan, but Bankruptcy Judge Kevin J. Carey of Delaware employed cramdown to confirm the plan. A holder of about $500,000 in unsecured notes appealed from the confirmation order and unsuccessfully sought a stay pending appeal.