The First Circuit expanded the boundaries of constitutional mootness in a chapter 13 case, and perhaps also in chapter 11.
Even if the bankruptcy court had incorrectly directed the chapter 13 trustee to distribute funds allegedly belonging to the debtor, the appeal was moot because the chapter 13 case had been dismissed on the debtor’s motion.
The outcome may have been colored by the fact that the debtor was not a sympathetic litigant. The debtor had been involved in questionable conduct and could have lost the appeal on other but more complex grounds. Is this an example of hard cases making bad law?
The Dispute over $60,000 in Insurance Proceeds
The debtor had personally guaranteed a $120,000 debt owing by the corporation she owned. She secured the loan with a mortgage on her home. Six months later, the lender declared a default.
A few months later, the home suffered water damage. The insurance company agreed to pay about $60,000 and issued a draft payable to the debtor, her lawyer, and the lender’s lawyer. The draft was never negotiated.
After the debtor filed a chapter 13 petition, the insurer paid the $60,000 to the chapter 13 trustee to be held in escrow pending order of the bankruptcy court. The lender filed a motion seeking payment of the $60,000, based on a provision in the mortgage calling for insurance proceeds to be paid to the lender if the loan was in default.
Without objection from the debtor, the trustee turned the $60,000 over to the lender on order of the bankruptcy court.
The debtor did not appeal the turnover order or seek a stay but filed a motion for reconsideration, claiming that the payment was improper because the lender was listed on the insurance policy as an “additional interest,” not as an “additional insured.”
While the motion for reconsideration was pending, the debtor filed a motion to dismiss the chapter 13 case. The bankruptcy court denied the motion for reconsideration and dismissed the chapter 13 case the next day.
The Bankruptcy Appellate Panel dismissed the debtor’s appeal as moot in an unpublished opinion. The debtor appealed again, but Circuit Judge Bruce M. Selya also dismissed the appeal as constitutionally moot in an August 13 opinion.
No Relief Possible After Dismissal, Circuit Says
Judge Selya explained that an appeal is jurisdictionally or constitutionally moot under Article III when the court cannot provide “any meaningful relief.” In the context of chapter 13 where the case was dismissed and the issue involved an attempted reorganization, he said that an appeal is moot because “the possibility of reorganization evaporates.”
The debtor relied on an exception to the general rule that an appeal is not moot if the issue “is merely ancillary” to the bankruptcy. Judge Selya said that the appeal was not ancillary because the $60,000 had been given to the chapter 13 trustee “in the course of the anticipated reorganization.”
Next, the debtor argued that the appeal involved an erroneous distribution of funds in violation of Sections 1326(a)(2) and 349(b)(3). Reading the sections together, the debtor contended that the trustee should have returned all funds to the debtor on dismissal.
The argument had “a patina of plausibility,” Judge Selya said. However, he said that the two sections only apply to funds physically in the possession of the trustee on dismissal.
In the case on appeal, the $60,000 had been distributed to the lender four days before the debtor filed her motion for dismissal. The distribution, Judge Selya said, made “a dispositive difference” and “rendered the present appeal moot.”
Judge Selya ended the opinion by holding:
[T]he revesting function of section 349 cannot reach out to grasp funds already distributed prior to the dismissal of a chapter 13 case. Given that limitation, the BAP was no longer able to offer any meaningful relief in connection with the appellant’s appeal. When the bankruptcy case was dismissed, the appeal became moot.
Observations
Assuming a debtor has not also appealed a dismissal order, the opinion seems to mean that an appeal from an interim distribution of property in a chapter 13 case becomes moot when the case is dismissed. Did the First Circuit intend for the same rule to apply in chapter 11?
The appeal involved the payment of money. Couldn’t the court grant effective relief by compelling the lender to return the $60,000 to the trustee or the debtor? Does the opinion mean that any erroneous payment of money in chapter 13 is beyond the reach of appeal once the chapter 13 has been dismissed? Is an erroneous payment of money in chapter 11 also moot after dismissal?
Judge Selya distinguished Mission Product Holdings Inc. v. Tempnology LLC, 139 S. Ct. 1652 (2019), by saying that the chapter 11 case had not been dismissed. He said that “the jurisdictional calculus changes once the underlying case is dismissed.” Respectfully, this writer is not persuaded. To read the ABI report on Mission Product and the discussion of mootness, click here.
The First Circuit’s opinion is at odds with Bullard v. Blue Hills Bank, 135 S. Ct. 1686 (2015), where the Supreme Court ruled that an order denying confirmation of a chapter 13 plan is not a final order conferring a right to appeal. To have a final order after Bullard, dismissing the chapter 13 case is an option for the debtor. But the First Circuit won’t permit the same tactic that Bullard ostensibly suggested.
The opinion puts the debtor between a rock and a hard place. To avoid a moot appeal, the debtor must continue in chapter 13, even if the objective of chapter 13 can’t be achieved in view of the interim distribution order. Let’s at least hope that appeals won’t be moot if the debtor also appeals dismissal.
The situation is similar to the dismissal of chapter 11 cases for equitable mootness. Often, it may be easier for the appellate court to reach the merits than to decide whether the appeal is moot. Mootness should not be a technique for avoiding tough questions.
A final question: Is the First Circuit’s opinion applicable only in chapter 13, and if so, why? Judge Selya referred to chapter 13 as “reorganization.” If there was an order in a chapter 11 case calling for the payment of money, is an appeal moot once the chapter 11 case is dismissed?
The First Circuit expanded the boundaries of constitutional mootness in a chapter 13 case, and perhaps also in chapter 11.
Even if the bankruptcy court had incorrectly directed the chapter 13 trustee to distribute funds allegedly belonging to the debtor, the appeal was moot because the chapter 13 case had been dismissed on the debtor’s motion.
The outcome may have been colored by the fact that the debtor was not a sympathetic litigant. The debtor had been involved in questionable conduct and could have lost the appeal on other but more complex grounds. Is this an example of hard cases making bad law?