A district court in Arizona expanded the concept of equitable mootness to dismissing an appeal from an order compelling the Small Business Administration to issue a so-called PPP “loan” to a company in chapter 11 reorganization.
District Judge Diane J. Humetewa invoked equitable mootness because the SBA had not sought a stay from the district court; the loan had been disbursed, and the debtor had spent everything. The ability of the bankruptcy court “to fashion some sort of relief on remand” was a “neutral” factor, the judge said.
The debtor had applied for but was initially denied a “loan” under the Paycheck Protection Program, or PPP. The program was part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act that became law in March 2020. Although denominated as a loan, it will be forgiven if the proceeds are spent on eligible expenses like payroll and rent.
The debtor filed an adversary proceeding against the SBA. The bankruptcy court ruled that regulations barring bankrupt companies from the program were arbitrary and capricious. In compliance with the bankruptcy court’s direction, the SBA granted a “loan” of almost $850,000.
The SBA sought a stay from the bankruptcy court, which was denied. The SBA appealed but did not seek a stay from the district court. While the appeal was pending, the debtor spent the entire $850,000.
The debtor filed a motion to dismiss the appeal as equitably moot. Judge Humetewa granted the dismissal motion in an opinion on September 7.
Judge Humetewa laid out the Ninth Circuit’s four-part test for equitable mootness. Although the doctrine is ordinarily applied to appeals from confirmed and consummated chapter 11 plans, she noted that courts around the country have invoked equitable mootness on appeals from cash collateral orders, debtor in possession financing, and settlement agreements.
Judge Humetewa addressed the first test, whether the appellant had sought a stay. In the absence of an application for a stay, an appeal is generally presumed to be equitably moot.
The SBA had sought a stay from the bankruptcy court but not from the district court. While the appeal was pending absent a stay, the loan was disbursed and spent by the debtor.
The SBA’s failure to seek a stay from the district court “weighs in favor of a finding of equitable mootness,” Judge Humetewa said.
The second factor, substantial consummation, also weighed in favor of equitable mootness, because the “bankruptcy court’s order allowing the use of PPP funds has been fully consummated,” Judge Humetewa said.
The third factor considers the effect on third parties not before the court. Judge Humetewa said that recipients of the loan proceeds — such as employees, utilities and landlords — were not before the court. She presumed they had all spent the money and said that recovering “those funds from these individuals and entities is not practicable.”
The SBA argued that reversal would not necessarily require clawing back the loan proceeds from third parties. The government said that requiring the debtor to repay the loan would be a typical occurrence in bankruptcy.
Judge Humetewa cited cases where courts have invoked equitable mootness where the money was spent in the absence of an appeal.
Judge Humetewa said that the third factor favored dismissal because “it would be impracticable to unwind the payments made to third parties.”
The fourth test considers whether the court could fashion effective and equitable relief that would not create “a difficult situation for the bankruptcy court to unravel,” Judge Humetewa said.
“While the bankruptcy court may be able to fashion some sort of relief on remand,” Judge Humetewa said, “it is also certain that the issues are certainly much more complicated now that the money has been paid out to numerous third parties.”
Judge Humetewa found the fourth factor to be “neutral” because the debtor “has not established that the bankruptcy court would be completely unable to fashion an effective and equitable remedy.”
With three of four factors favoring equitable mootness, Judge Humetewa dismissed the appeal without reaching the merits.
Observations
Equitable mootness is a hot topic currently before the Supreme Court in two petitions for certiorari, and the Eighth Circuit came just short of abolishing the doctrine in FishDish LLP v. VeroBlue Farms USA Inc. (In re VeroBlue Farms USA Inc.), 19-3413, 2021 BL 294741, 2021 US App Lexis 23164 (8th Cir. Aug. 5, 2021). To read ABI’s report on VeroBlue, click here.
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.). To read ABI’s latest report, click here.
It has been this writer’s view that appellate courts should abandon equitable mootness and address cases on the merits, because there almost always will be Article III or constitutional jurisdiction underpinning the appeal. In the event of reversal on the merits, the appellate court could remand to the bankruptcy court with instructions to consider whether some form of relief is available. After all, the bankruptcy court is in a far better position to formulate relief that would not overturn the apple cart entirely.
The case on appeal is an example for how review on the merits could have left everyone unscathed, except the SBA.
Section 364(c) says that reversal of an order approving a loan “does not affect the validity of any debt so incurred.”
In other words, it is at least arguable that the SBA loan would remain valid even if it were reversed on appeal. If the loan was valid, wouldn’t the debtor be entitled to rely on provisions in the loan program requiring the SBA to forgive the loan?
A district court in Arizona expanded the concept of equitable mootness to dismissing an appeal from an order compelling the Small Business Administration to issue a so-called PPP “loan” to a company in chapter 11 reorganization.
District Judge Diane J. Humetewa invoked equitable mootness because the SBA had not sought a stay from the district court; the loan had been disbursed, and the debtor had spent everything. The ability of the bankruptcy court “to fashion some sort of relief on remand” was a “neutral” factor, the judge said.
The debtor had applied for but was initially denied a “loan” under the Paycheck Protection Program, or PPP. The program was part of the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act that became law in March 2020. Although denominated as a loan, it will be forgiven if the proceeds are spent on eligible expenses like payroll and rent.
The debtor filed an adversary proceeding against the SBA. The bankruptcy court ruled that regulations barring bankrupt companies from the program were arbitrary and capricious. In compliance with the bankruptcy court’s direction, the SBA granted a “loan” of almost $850,000.
The SBA sought a stay from the bankruptcy court, which was denied. The SBA appealed but did not seek a stay from the district court. While the appeal was pending, the debtor spent the entire $850,000.