The Supreme Court has petitions for certiorari raising important questions of bankruptcy law affecting cases nationwide. Both are worthy of review by the high court.
In two cases, the Supreme Court is being asked to rule on whether the judge-made doctrine of equitable mootness allows federal appellate courts to refuse to review the merits of orders confirming chapter 11 plans.
In a third case, the New York Court of Appeals held in a 4/3 decision that there is no federal preemption of a non-debtor third party’s tortious interference claims against other non-debtor third parties. Innocuous though the issue appears on first reading, the rule could mean that lawyers or financial advisors who help a client to file bankruptcy could be liable to the lender if the loan agreement says that filing bankruptcy is breach of contract.
When the Petitions Are Up for Review
The three certiorari petitions are scheduled for consideration by the justices at their so-called long conference to be held at the end of the summer recess on September 27. The new term begins the following Monday, October 4.
If the Court agrees to review one or both of the questions, orders to that effect might be entered as soon as the next day, September 28. If the Court won’t tackle the issues, orders denying certiorari could be filed on October 4.
When a question has some merit but the justices are undecided about granting certiorari, there may be no announcement on October 4. In that event, an order likely will be entered later scheduling the petition for another conference. Indeed, every time a case is “relisted” for conference, the odds rise that the Court will eventually grant certiorari.
Equitable Mootness
The certiorari petitions regarding equitable mootness come from the Second and Third Circuits. See GLM DWF Inc. v. Windstream Holdings Inc., 21-78 (Sup. Ct.); and Hargreaves v. Nuverra Environmental Solutions Inc., 21-17 (Sup. Ct.).
Over dissent in a case involving so-called horizontal gifting, 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. 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.
For ABI’s report on Hargreaves v. Nuverra Environmental Solutions Inc. (In re Nuverra Environmental Solutions Inc.), 834 Fed. Appx. 729 (3d Cir. Jan. 6, 20921), click here.
In the Windstream nonprecedential, per curiam opinion, the Second Circuit used equitable mootness to make a critical vendor order virtually unreviewable after confirmation of a chapter 11 plan. For ABI’s report on GLM DWF Inc. v. Windstream Holdings Inc. (In re Windstream Holdings Inc.), 838 Fed. Appx. 634 (2d Cir. Feb. 18, 2021), click here.
Equitable mootness is a question of importance in chapter 11 cases throughout the country. While the doctrine endures, appellate courts are not tackling some of the most controversial and consequential issues in chapter 11 practice, such as gifting and its end run on absolute priority.
The circuits are beginning to diverge. In years past, appellate courts reflexively dismissed appeals as equitably moot once the chapter 11 plan had been substantially consummated. Starting in the Third Circuit, courts are beginning to examine whether any relief could be granted if the case were reversed on the merits.
On a theoretical level, the certiorari petitions deal with the ability of a federal appellate courts to deflect mandatory jurisdiction.
On a practical level, this writer believes, respectfully, that some appellate courts view equitable mootness as a safety valve to avoid ruling on tough chapter 11 questions, especially those that are popular tools employed by debtors’ counsel to squelch opposition to chapter 11 plans.
When a confirmed and consummated plan hits an appellate court, there surely is a case or controversy and thus Article III, constitutional jurisdiction. Why can’t the appellate court rule on the merits and remand to the bankruptcy court for consideration of whatever relief might be available? If nothing more, the bankruptcy court could award counsel fees for making a substantial contribution under Section 503(b)(3)(D).
On August 5, the Eighth Circuit went further than any court of appeals in the direction of banning equitable mootness altogether. See FishDish LLP v. VeroBlue Farms USA Inc. (In re VeroBlue Farms USA Inc.), 19-3413 (8th Cir. Aug. 5, 2021). We will report FishDish in this column tomorrow.
Federal Preemption
In Pilevsky v. Sutton 58 Associates LLC, 20-1483 (Sup. Ct.), the justices are being asked to rule on whether one of several iterations of federal preemption bars a non-debtor third party’s tortious interference claims against other non-debtor third parties for actions taken in preparation for a debtor’s bankruptcy filing.
In Pilvesky, the plaintiff in state court had provided almost $150 million in financing for a housing project that was structured as a special-purpose, bankruptcy-remote entity designed to remain forever as a single-asset real estate debtor. The project’s advisors importuned the debtor to take actions, allegedly in violation of the loan agreement, that no longer pigeon-holed the debtor as a single-asset real estate debtor.
After confirmation of a chapter 11 plan, the lender sued the advisors, alleging that their actions amounted to tortious interference with contract by causing the project’s owner to breach its agreements with the lender.
The state trial court denied the third parties’ motions for summary judgment based on federal preemption, but the intermediate state appellate court reversed, holding that the lender’s claims were preempted by federal law. The lender appealed as of right to the New York Court of Appeals, the highest court in the New York State court system.
In a 4/3 opinion in Sutton 58 Associates LLC v. Pilevsky, 36 N.Y.3d 297, 140 N.Y.S.3d 897, 164 N.E.3d 984 (N.Y. Nov. 24, 2020), New York’s highest court decided there was no federal preemption. To read ABI’s report, click here.
In the certiorari petition, the defendants stated the question presented to the Supreme Court as follows:
Does the federal Bankruptcy Code preempt state-law tort claims that are premised on an alleged misuse of bankruptcy proceedings or that seek to impose liability based on the very fact of bankruptcy?
The certiorari petition does not call for the Supreme Court to make pronouncements on state tort law. Rather, the question resides in the Supreme Court’s powerhouse: federal preemption.
The implications of the New York decision are important. The dissenters expressed “fear [that] state litigation may disincentivize lawyers and potential secondary lenders from assisting debtors who wish to file for bankruptcy but need legal counsel and financial assistance to do so.” Id., 36 N.Y.3d at 339.
In an amicus brief urging the Court to grant certiorari, a long list of law professors and retired judges said:
Litigants should not be allowed to employ state tort law to judge the legitimacy of a bankruptcy case, and state courts should not be allowed to entertain state law tort claims against those who assist in the filing of a bankruptcy.
The certiorari petitions are GLM DWF Inc. v. Windstream Holdings Inc., 21-78 (Sup. Ct.); Hargreaves v. Nuverra Environmental Solutions Inc., 21-17 (Sup. Ct.); and Pilevsky v. Sutton 58 Associates LLC, 20-1483 (Sup. Ct.).
The Supreme Court has petitions for certiorari raising important questions of bankruptcy law affecting cases nationwide. Both are worthy of review by the high court.
In two cases, the Supreme Court is being asked to rule on whether the judge-made doctrine of equitable mootness allows federal appellate courts to refuse to review the merits of orders confirming chapter 11 plans.
In a third case, the New York Court of Appeals held in a 4/3 decision that there is no federal preemption of a non-debtor third party’s tortious interference claims against other non-debtor third parties. Innocuous though the issue appears on first reading, the rule could mean that lawyers or financial advisors who help a client to file bankruptcy could be liable to the lender if the loan agreement says that filing bankruptcy is breach of contract.