If a debtor does not raise equitable mootness on appeal and if the appellate court reverses confirmation of the debtor’s chapter 11 plan, the debtor cannot raise equitable mootness on remand when the bankruptcy court looks for a remedy to fix the plan, as explained by Bankruptcy Judge Laurel M. Isicoff of Miami.
In a case with highly complex facts, the Eleventh Circuit had reversed confirmation of a chapter 11 plan early last year because out-of-the-money shareholders weren’t allowed to vote on an amendment to the plan that took away stock they were to receive in the reorganized debtor. Braun v. America-CV Station Group Inc. (In re America-CV Station Group Inc.), 56 F.4th 1302 (11th Cir. Jan. 5, 2023). To read ABI’s report, click here.
The Eleventh Circuit reversed and remanded “to the bankruptcy court to fashion an equitable remedy.” The appeals court left “the exact contours of that relief to the bankruptcy court in the first instance.” Id. at 1313.
On the intermediate appeal, the district court had decided that the appeal was not equitably moot. On the next appeal, the Eleventh Circuit assumed that the appeal was not equitably moot because the debtor did not raise equitable mootness in the Court of Appeals.
Equitable Mootness
Equitable mootness is a topic the Supreme Court has ducked as recently as last term. As we have been reporting in this space, the contours of equitable mootness have been changing among the circuits.
After remand from the Eleventh Circuit, Judge Isicoff inherited the case from a bankruptcy judge who retired. In her 37-page opinion on February 13, she said that the debtor argued “that resolution is impossible due to equitable mootness.” However, she said, “Both the District Court and the Eleventh Circuit have held otherwise.”
Consequently, Judge Isicoff said that the argument about equitable mootness “is closed . . . for the purposes of this case.”
Beyond equitable mootness, Judge Isicoff was still required to identify an appropriate remedy, given that the plan had been consummated years before and creditors had been paid. Essentially, she was charged with deciding how to distribute the new equity and how to compensate the shareholders who took over the new equity after confirmation but before reversal in the Eleventh Circuit.
The debtor argued that partial reversal of confirmation was contrary to the Bankruptcy Code. Judge Isicoff dismissed the contention, saying, “[T]he Eleventh Circuit has already partially reversed the Confirmation Order. That ruling is the law of the case.” She added that modification of the plan would not “impact” creditors because the remainder of the plan was left “intact.”
Judge Isicoff went on to rule that the reorganized debtor must rescind the award of new equity to the shareholders who took the new stock under the amended plan that was improperly confirmed. The appellants must pay for the stock under the terms of the original plan, and the debtor must refund what the shareholders paid for the stock under the reversed plan.
Observation
The opinion seems to mean that reversal of a plan can bestow ownership on someone who was improperly deprived of taking control of a reorganized debtor, as long as creditors are not affected. The opinion also seems to mean that paying for new stock is no bar to having the stock taken away.
If a debtor does not raise equitable mootness on appeal and if the appellate court reverses confirmation of the debtor’s chapter 11 plan, the debtor cannot raise equitable mootness on remand when the bankruptcy court looks for a remedy to fix the plan, as explained by Bankruptcy Judge Laurel M. Isicoff of Miami.
In a case with highly complex facts, the Eleventh Circuit had reversed confirmation of a chapter 11 plan early last year because out-of-the-money shareholders weren’t allowed to vote on an amendment to the plan that took away stock they were to receive in the reorganized debtor. Braun v. America-CV Station Group Inc. (In re America-CV Station Group Inc.), 56 F.4th 1302 (11th Cir. Jan. 5, 2023).
The Eleventh Circuit reversed and remanded “to the bankruptcy court to fashion an equitable remedy.” The appeals court left “the exact contours of that relief to the bankruptcy court in the first instance.