By: Donald L Swanson
Equitable mootness does not prevent the excising (i.e., the surgical removal), on appeal, of an indemnification provision from a confirmed Plan.
That’s the ruling of the U.S. Fifth Circuit Court of Appeals in Excluded Lenders v. Serta Simmons Bedding, L.L.C. (In re Serta Simmons Bedding, L.L.C.), Case No. 23-20181 (decided December 31, 2024).
Facts
A Chapter 11 plan is confirmed, in which certain lenders are indemnified—and other lenders aren’t. The excluded lenders argue that the indemnification provision of the Plan is improper and should be excised from the plan.
Excluded lenders lose before the Bankruptcy Court. And so they appeal directly to the Fifth Circuit.
Equitable mootness is raised by Appellees as a defense to the appeal. The Fifth Circuit rejects that defense, declares that the Plan’s indemnification provision is improper, and excises the indemnification provision from the Plan.
What follows is a summary of the Fifth Circuit’s reasoning on the equitable mootness issue.
Equitable Mootness Explained
First of all, the term “equitable mootness” is a bit of a misnomer—it’s much like “green pastel redness.”
The opinion differentiates between “inability to alter the outcome (real mootness)” and “unwillingness to alter the outcome (‘equitable mootness’)” like this:
- real mootness implicates Article III jurisdiction; but
- equitable mootness is a judicial anomaly—it:
- is a judge-created doctrine of pseudo-abstention that favors the finality of reorganizations; and
- constrains appellate review of plan confirmation orders.
The equitable mootness doctrine, (i) is not really about “mootness” at all in either the Article III or non-Article III sense, and (ii) is a constitutional doctrine that must not be manipulated to vindicate non-jurisdictional aims.
Three factors are used in assessing equitable mootness:
- whether a stay has been obtained;
- whether the plan has been substantially consummated; and
- whether the relief requested would affect either the rights of parties not before the court or the success of the plan.
In applying these factors, generally:
- the inquiry turns on whether the court can craft relief for the claim that will not have significant adverse consequences to the reorganization;
- equitable mootness must be viewed as a “scalpel, rather than an axe”;
- appellate courts have a “virtually unflagging obligation” to exercise the jurisdiction that “the Constitution and Congress have conferred on us”; and
- appellate courts must exercise “caution” in applying the equitable mootness doctrine.
The Three Factors Applied
Here is how the Plan’s indemnity provisions are not equitably moot in this case.
–A Summary
First, the excluded lenders sought a stay pending appeal on three separate occasions—but were denied each time. And the Plan has been substantially consummated.
That leaves the third factor: the effects of requested relief on rights of others and on the Plan’s success. This third factor, alone, prevents equitable mootness from applying in this case. That’s because:
- precedent—this court has exercised appellate review in prior cases when only the third factor weighs against equitable mootness; and
- in this case—”the requested relief of excision would not ‘affect either the rights of parties not before the court or the success of the plan.’”
–Further Explanation of Third Factor
Harm to Others. Excising the indemnity provision from the Plan would benefit some creditors but not others—and both groups are before the Court in this case.
Another group of creditors don’t need an indemnity, and the third factor protects only against negative impacts that are substantial—it does not protect against merely nominal impacts.
So, it is unclear which third-parties would be harmed by the proposed excision.
Success of the Plan. The Plan was intended to reorganize the Debtor for long-term financial success.
Plainly, the reorganized Debtor would face an easier future without a massive liability hanging over its head. So, it is also unclear how excision of the indemnity provision would threaten the success of the Plan.
Appellees argue that the indemnity provision cannot be excised without unwinding the entire Plan and triggering a whole new confirmation process.
We agree that an unraveling of the Plan would have substantial consequences, but our precedents do not indicate that the remedy of excision requires an unraveling. In fact, we have ruled “just the opposite” in prior cases: i.e.,
- a plan provision can be surgically excised, without unraveling the entire plan; and
- this court may “fashion whatever relief is practicable.”
Unfairness Argument
Beyond the three factors argument, Appellees add that the excise remedy would be unfair.
Their argument goes like this:
- the indemnified lenders agreed to support the Plan only because of the indemnity provision;
- had they known the indemnity provision would be excised later, they would not have supported the Plan—instead, they would have extracted some other consideration for their support; and
- so, it is unfair for this court to excise the indemnity provision now without letting them go back to the drawing board, which cannot be accomplished without upending the Plan—and the Court, therefore, “must do nothing.”
–Rejected
This argument, if adopted, would effectively abolish appellate review of even clearly unlawful provisions in a bankruptcy plan. The norms of appellate review clearly dictate otherwise.
–“Sharp or Unauthorized Practices” Rejected
Moreover, the doctrine of equitable mootness cannot be used as “a shield for sharp or unauthorized practices”:
- that there might be adverse consequences to the appellees is a natural result of any ordinary appeal—one side goes away disappointed; and
- adverse appellate consequences were foreseeable to appellees as sophisticated investors who opted to press the limits of bankruptcy confirmation rules.
In this case, from the moment the indemnified lenders agreed to a controversial indemnity provision, they could foresee the adverse consequences of an unfavorable appellate ruling.
We will not save such sophisticated parties from the consequences of their actions, and we decline to dismiss these appeals as equitably moot.
Conclusion
Here’s a “Thank you” to the U.S. Fifth Circuit Court of Appeals for this instructive opinion on the doctrine of equitable mootness.
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