Supreme Court Update: Equitable Mootness Not Ready for Prime Time

With two petitions for certiorari denied this month and a third withdrawn last month, there are no “pure” bankruptcy cases already on the Supreme Court’s calendar for the term that began on October 4.

One certiorari petition still pending is an odds-on favorite for a “grant”: The justices are being asked to resolve a circuit split on the constitutionality of the 2018 increase in fees for the U.S. Trustee system.

There is an arbitration case to be argued in November in the Supreme Court. Depending on what the decision says, the outcome might affect how lower courts treat arbitration agreements arising in bankruptcy cases.

No High Court Ruling Yet on Equitable Mootness

In the justices’ first two conferences this term, they denied certiorari petitions from the Second and Third Circuits asking the Court to decide the validity of the judge-made doctrine of equitable mootness. See GLM DWF Inc. v. Windstream Holdings Inc., 21-78 (Sup. Ct. cert. den. Oct. 4, 2021); and Hargreaves v. Nuverra Environmental Solutions Inc., 21-17 (Sup. Ct. cert. den. Oct. 12, 2021). To read ABI’s latest report on the certiorari petitions, click here.

As is customary, the Court gave no reason for declining to rule on the validity of a doctrine that allows federal appellate courts to refuse to review the merits of orders confirming chapter 11 plans. On occasion, the doctrine has been invoked to dismiss appeals from other bankruptcy court orders.

Equitable mootness is arguably impermissible in view of appellate courts’ mandatory jurisdiction. The doctrine is also questionable when appeals are dismissed even though there is constitutional jurisdiction under Article III, given the continued existence of a case or controversy.

The attempted appeals coming from the Second and Third Circuits were both attractive candidates for high court review.

In the Windstream nonprecedential, per curiam opinion, the Second Circuit used equitable mootness to make a critical vendor order virtually unreviewable after confirmation of a chapter 11 plan.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.

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 was only asking the appellate court to pay one relatively small claim and no others. 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, 2021), click here.

The Court’s disinclination to tackle the issue does not bode well for a “grant” when equitable mootness comes up again in new cases. Notably, the Eighth Circuit came near to banning equitable mootness altogether. See FishDish LLP v. VeroBlue Farms USA Inc. (In re VeroBlue Farms USA Inc.), 6 F.4th 880 (8th Cir. Aug. 5, 2021). To read ABI’s report, click here.

A Likely ‘Grant’

Frankly, the Supreme Court would be remiss if it does not grant certiorari and decide this term whether the 2018 increase in fees paid by chapter 11 debtors to the U.S. Trustee Program violated the Bankruptcy Clause of the U.S. Constitution. There is a stark, 2/2 circuit split.

A petition for certiorari hit the Supreme Court on September 20.

The Second and Tenth Circuits found violations of the Bankruptcy Clause because the increase did not apply immediately to chapter 11 debtors in two states with bankruptcy administrators rather than U.S. Trustees. See Clinton Nurseries Inc. v. Harrington (In re Clinton Nurseries Inc.), 998 F.3d 56 (2d Cir. May 24, 2021), and John Q. Hammons Fall 2006 LLC v. U.S. Trustee (In re John Q. Hammons Fall 2006 LLC), 20-3203, 2021 BL 380406 (10th Cir. Oct. 5, 2021). To read ABI’s reports on Clinton Nurseries and Hammons Fall, click here and here.

On the other side of the fence, the Fourth and Fifth Circuits found no constitutional infirmity. See Siegel v. Fitzgerald (In re Circuit City Stores Inc.), 996 F.3d 156 (4th Cir. April 29, 2021), and Hobbs v. Buffets LLC (In re Buffets LLC), 979 F.3d 366 (5th Cir. Nov. 3, 2020). To read ABI’s discussions of Circuit City and Buffets, click here and here.

The Fourth Circuit debtor filed a certiorari petition on September 20. See Siegel v. Fitzgerald, 21-441 (Sup. Ct.). On behalf of the government, the U.S. Solicitor General filed a request this week for an extension of time to respond to the petition until November 22.

Assuming no further delays, the justices should be holding a conference to consider the certiorari petition early in the New Year, still giving time for argument and a decision late this term.

An Important Case Settled

The New York Court of Appeals held in a 4/3 decision that there is no federal preemption of a nondebtor third party’s tortious interference claims against other nondebtor third parties. At least in New York, the decision could mean that lawyers or financial advisors who help a client file bankruptcy could be liable to the lender if the loan agreement says that filing bankruptcy is a breach of contract. See 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). To read ABI’s report, click here.

A group of retired bankruptcy judges and law professors filed an amicus brief urging the Supreme Court to grant certiorari and reverse. Perhaps because the parties settled, the petition was withdrawn on September 24. See Pilevsky v. Sutton 58 Associates LLC, 20-1483 (Sup. Ct. pet. withdrawn Sept. 24, 2021).

Another Arbitration Case

In recent terms, the Supreme Court has been adamant about enforcing arbitration agreements. See, e.g., Epic Systems Corp. v. Lewis, 200 L. Ed. 2d 889 (Sup. Ct. May 21, 2018).

Of late, the Supreme Court has taken up no case to decide whether or not arbitration agreements are generally enforceable in bankruptcy cases. For instance, must a debtor arbitrate the allowance of a claim? Is the result different if the debtor is suing to make a recovery from a creditor armed with an arbitration agreement?

If arbitration is generally enforceable in bankruptcy, the effect will be dramatic. The process will slow, costs will increase for the debtor, and many critical decisions will be taken out of the hands of bankruptcy judges.

Historically speaking, the leading authority in the Supreme Court on the enforceability of arbitration agreements is or has been Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987). Years later in Epic, the Supreme Court compelled employees to arbitrate wages and hours claims governed by the Fair Labor Standards Act. The Court said that a statute like the FLSA did not manifest a clear intention to override the Federal Arbitration Act.

Some circuits still interpret McMahon liberally by overriding arbitration agreements in bankruptcy cases, even though the Bankruptcy Code contains no express language barring enforcement of the FAA. See, e.g., Credit One Bank NA v. Anderson (In re Anderson), 884 F.3d 382 (2d Cir. March 7, 2018), cert. denied, 139 S. Ct. 144 (2018). To read ABI’s report, click here.

Epic raised the question of whether McMahon is still good law. Does the Bankruptcy Code manifest a clear intention to override arbitration agreements, or is bankruptcy for some reason an exception to Epic’s exacting standard?

That’s why we watch any arbitration case in the Supreme Court. On November 2, the Court will hear argument in Badgerow v. Walters, 20-1143 (Sup. Ct.). The case presents the question of whether a federal court has subject matter jurisdiction to confirm an arbitration award when the only basis for federal jurisdiction is that the underlying dispute involved a federal question.

The question before the Court does not seem to bear on bankruptcy, but the opinion may contain language that informs lower courts about arbitration in the bankruptcy context.