The Supreme Court’s Tempnology decision did not undercut the validity of the doctrine of equitable mootness used to dismiss appeals from chapter 11 confirmation orders, according to the First Circuit. See Mission Product Holdings Inc. v. Tempnology LLC, 139 S. Ct. 1652 (2019). The Boston-based appeals court did say that equitable mootness is more accurately characterized as equitable laches.
The First Circuit’s February 8 opinion also held that equitable mootness applies in arrangement proceedings to restructure the debt of Puerto Rico and its instrumentalities under the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.).
On the same day, a district court in Oakland, Calif., invoked equitable mootness to dismiss an appeal from the order confirming the chapter 11 plan for giant electric utility PG&E Corp.
The Cofina Plan
In his opinion for the Boston-based appeals court, Circuit Judge William J. Kayatta, Jr. explained how Puerto Rico created an entity known as Cofina to issue bonds to cover budget shortfalls. The 2006 law granted a statutory lien carving out a portion of sales tax revenue exclusively for Cofino bondholders.
With Puerto Rico, Cofina and the island commonwealth’s instrumentalities in PROMESA proceedings, a dispute broke out between the Cofina bondholders and the holders of general obligation bonds. A settlement evolved in mediation that was incorporated into Cofina’s plan. The settlement and the plan gave about 54% of sales tax revenue to Cofina bondholders.
Several junior Cofina bondholders objected to the plan and appealed when the plan was confirmed over their objections. The appealing bondholders did not seek a stay, and the plan was consummated. As a result of consummation, Judge Kayatta said that Cofina distributed $322 million to creditors plus $1 billion in sales tax revenues to the commonwealth and Cofina. Newly issued Cofina bonds traded tens of thousands of times, and lawsuits were dismissed with prejudice.
Puerto Rico’s Financial Oversight Management Board and others filed a motion to dismiss the appeal as equitably moot.
Equitable Mootness Defined
Like all other circuits, the First Circuit adopted a form of equitable mootness.
The appealing bondholders argued that Tempnology made the doctrine invalid, because the Supreme Court decided that the appeal was not moot even though the debtor had distributed all its cash. To read ABI’s report on Tempnology, click here.
Judge Kayatta dismissed the argument, saying that the Supreme Court decided that the appeal was not moot under Article III because the impossibility of granting any effectual relief had not been shown. Cofina’s appeal, he said, did not involve Article III mootness. He conceded there was a “live controversy.”
Contrasted to constitutional mootness, Judge Kayatta said that equitable mootness deals with how the court decides a controversy, “not whether we have jurisdiction to decide it.” He went on to say that equitable mootness “is perhaps a misnomer.”
“The doctrine might better be viewed as akin to equitable laches, the notion that the passage of time and inaction by a party can render relief inequitable,” Judge Kayatta said. He went on to justify equitable mootness as a reflection of the bankruptcy court’s inherently equitable powers, as shown in venerable Supreme Court decisions such as Pepper v. Litton, 308 U.S. 295, 304 (1939).
Having established the viability of equitable mootness, Judge Kayatta needed little more than two pages to rule that the doctrine applies in PROMESA cases. “Nothing in PROMESA undercuts the inherently equitable nature of a proceeding to approve a plan of adjustment,” he said.
‘They Sat on Their Hands’
With equitable mootness alive and well, Judge Kayatta applied the facts to the law. The appellants, he said, “sat on their hands” by never seeking a stay pending appeal. Their “complete and repeated lack of diligence . . . cuts sharply against them,” he said.
Regarding the feasibility of granting the appellants any relief, Judge Kayatta said they “offer no practical way to undo all of this and return to the pre-confirmation status quo.”
Judge Kayatta recognized “that, in some cases, it might be possible to modify a stand-alone component of a plan to satisfy an idiosyncratic claim without upsetting the interests of third parties.” However, he said that the appellants offered “no relevant stand-alone component [of the plan] that might be modified.”
Judge Kayatta dismissed the appeal as equitably moot.
The PG&E Appeal
PG&E, a California utility, confirmed and immediately consummated a chapter 11 plan in July 2020. Among other things, effectuating the plan entailed establishing a $13.5 billion fund for fire victims, creating an $11 billion trust, making $42 billion in disbursements, and issuing new stock plus billions of dollars in debt.
Some creditors objected to the plan and appealed. They objected to provisions in the plan requiring them to exhaust their own insurance coverage before turning to the plan for payment.
The plan had been consummated, District Judge Haywood S. Gilliam, Jr. said, and the appellants offered no “adequate explanation” for failing to pursue a stay pending appeal.
Judge Gilliam could fathom no relief he might grant were he to reverse. Other creditors would be harmed, he said, because they would receive less if the appellants were no longer required to exhaust their own insurance coverage.
Judge Gilliam dismissed the appeal as equitably moot on February 8.
The opinions are Pinto-Lugo v. Financial Oversight and Management Board for Puerto Rico (In re Financial Oversight and Management Board for Puerto Rico), 19-1181 (1st Cir. Feb. 8, 2021); and Paradise Unified School District v. Fire Victim Trust, 20-05414 (N.D. Cal. Feb. 8, 2021).
The Supreme Court’s Tempnology decision did not undercut the validity of the doctrine of equitable mootness used to dismiss appeals from chapter 11 confirmation orders, according to the First Circuit. See Mission Product Holdings Inc. v. Tempnology LLC, 139 S. Ct. 1652 (2019). The Boston-based appeals court did say that equitable mootness is more accurately characterized as equitable laches.
The First Circuit’s February 8 opinion also held that equitable mootness applies in arrangement proceedings to restructure the debt of Puerto Rico and its instrumentalities under the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.).
On the same day, a district court in Oakland, Calif., invoked equitable mootness to dismiss an appeal from the order confirming the chapter 11 plan for giant electric utility PG&E Corp.