Mootness Muted? – Eighth Circuit Circumscribes Use of Equitable Mootness Doctrine to Bar Bankruptcy Plan Appeals
In its August 5th, 2021 VeroBlue Farms decision,[1] the Eighth Circuit lent its voice to a growing body of criticism of the equitable mootness doctrine contending that its use to bar challenges to confirmed reorganization plans should be circumscribed. Laying out a new investigation that must be undertaken before using the doctrine to bar confirmation order appeals, the Eighth Circuit emphasized that reviewing courts must: (1) make “at least a preliminary review of the merits” of an appeal to determine the strength of the claims at issue; (2) assess the “amount of time that would likely be required” to resolve the merits of such claims on an expedited basis; and (3) consider the potential equitable remedies that might still be available even after a plan’s implementation, should the appeal prove successful, which would not undermine the plan or harm third parties.
While it remains to be seen what impact the Eighth Circuit’s test will have, and whether other courts will adopt or build off of it, the Eighth Circuit is not the first court to raise concerns with the increased use of the equitable mootness doctrine to deny otherwise legitimate appeals of already-approved reorganization plans without any additional substantive review.[2] Indeed, the Eighth Circuit itself suggests that, absent increased scrutiny around the application of the doctrine, the Supreme Court is likely to step in and restore what might otherwise be considered an abdication of subject matter jurisdiction from Article III district courts to Article I bankruptcy courts.
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In VeroBlue, the debtors and their affiliates were in the aquaculture business – i.e., farming and selling fish to wholesalers, restaurants and grocery chains. In September 2018, the debtors filed for chapter 11 relief, listing an undisputed, $54 million obligation under their prepetition credit facility which was “well in excess” of the debtors’ assets. Over the objection of FishDish – one of the debtors’ early shareholders – the bankruptcy court confirmed a plan of reorganization in April 2019 centered around an equity infusion by an entity affiliated with the debtors’ prepetition lenders and certain equity investors. FishDish appealed from the confirmation order arguing, among other things, that the plan unfairly discriminated between members of the same class of shareholders, violated the absolute priority rule, was proposed in bad faith, was not in the best interests of creditors, and was not feasible. Without reaching the merits, however, the district court denied FishDish’s appeal as equitably moot finding that the plan had already been substantially consummated and could not be unwound.[3]
The doctrine of “equitable mootness” allows courts to dismiss matters on appeal without a review of the merits – even when the court has jurisdiction to grant the relief requested – when “implementation of that relief would be inequitable” because a confirmed plan of reorganization would be at risk of unraveling as a result.[4] In deciding whether to invoke the doctrine, courts balance “the importance of finality in bankruptcy against the appellant’s right to review and relief.”[5] Among other factors, in that regard, courts consider (1) whether the moving party obtained a stay; (2) whether the plan has been substantially consummated; (3) whether the relief would negatively affect the rights of third parties; (4) the impact of relief on the reorganization plan’s success; and (5) public policy concerns.[6]
Although courts have applied equitable mootness in the bankruptcy context for years, its use has recently come under criticism, with some scholars calling for an end to the doctrine’s application altogether.[7] The crux of such opposition is that, in applying the doctrine, litigants are essentially deprived of their constitutionally guaranteed right to be heard.[8] This has the potential to be particularly problematic in the bankruptcy context where the Supreme Court has emphasized that bankruptcy judges are only allowed to adjudicate claims under the Article I powers given to them by the U.S. Constitution because they are subject to the “supervisory authority” of Article III courts.[9] In refusing to hear an appeal on the merits then, based on the equitable mootness doctrine, an Article III court is arguably abdicating such “supervisory authority” and leaving it to Article I bankruptcy courts to get it right the first time since, effectively, no appeal will be possible.
In VeroBlue, the Eighth Circuit echoed these concerns emphasizing that a case can only truly be deemed moot “if it is impossible for a court to grant any effectual relief whatsoever.”[10] The “inability to alter the outcome” of a case however (i.e., “real” mootness) should not be confused with an “unwillingness” to alter the outcome (i.e., “equitable” mootness.) Real mootness justifies the immediate dismissal of an appeal as a decision on appeal cannot have any real-world effect. Equitable mootness on the other hand is something short of real mootness and is merely an instance in which fashioning a remedy that can have real-world effect may be difficult, but not impossible. “Common sense” or “equitable considerations,” the Eighth Circuit emphasized, could justify a decision not to hear a challenge to a confirmed plan on the merits, based on equitable mootness grounds in the event that such considerations lead to the conclusion that no relief was possible. But reviewing courts should first be required to determine whether relief can be fashioned in a way that will not undermine a confirmed plan and thereby adversely impact innocent third parties. Only when such relief is not possible, should the equitable mootness doctrine be considered and in no other circumstances.
In the case before it, the Eighth Circuit emphasized that the lower court “made no such inquiry” with respect to VeroBlue’s confirmed plan. In particular, the court noted that much of the plan’s distributions had gone to the plan sponsor, or other insiders or lenders who remained active in the management of the reorganized debtors. These entities, the court emphasized were “not third parties that the equitable mootness doctrine is intended to protect.” Instead, if, as a result of successful appeal, the plan had to be set aside on the merits, the Eighth Circuit suggested that the district court may have been able “to fashion effective relief.” While the Eighth Circuit did not assume how an inquiry into such possible relief “may be resolved” it did hold that an “inquiry must be made.” It thus reversed the district court’s decision and remanded the case back to the district court for further review.
In concluding remarks, the Eighth Circuit emphasized that, while it was not opposed to the doctrine of equitable mootness in appropriate circumstances, its use needed to be rare with the strong presumption that federal courts should hear the merits of a case properly brought before it.[11] The court further warned that if the doctrine continued to be a feature of, rather than exception to, bankruptcy appellate jurisprudence, the Supreme Court is likely to “step in and severely curtail and perhaps even abolish its use.”[12]
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It remains to be seen whether the equitable mootness doctrine will continue to face increased criticism, as other areas of bankruptcy jurisprudence recently have including venue shopping and third-party releases. What is clear is that Congress and, at times, even the public writ large, appears to be take notice of what could arguably be seen as some gaps in the bankruptcy system.[13] And the use of the equitable mootness doctrine to bar challenges to confirmed plans may become one of them. More to come…
[1] Opinion, ECF No. 53 p.3, In re VeroBlue Farms USA, Inc., No. 3:19-cv-03026-CJW-KEM (8th Cir. Aug. 5, 2021).
[2] See In re Paige, 584 F.3d 1327, 1337 (10th Cir. 2009); see also In re Semcrude, L.P., 728 F.3d 314, 320 (3d Cir. 2013); In re One2One, 805 F.3d 428 (3d Cir. 2015).
[3] See FishDish, LLC v. VeroBlue Farms USA, Inc., No. 19-CV-3026 CJW, 2019 WL 4918758, at *6 (N.D. Iowa Oct. 4, 2019) (finding[ that “Plan was substantially consummated because most of the property to be transferred by the Plan has already been transferred to creditors” and the “effect of reversal” would “have a significant impact on the parties and would affect the success of the Plan”).
[4] In re Philadelphia Newspapers, LLC, 690 F.3d 161, 168 (3d Cir. 2012).
[5] Momentive Performance Materials Inc. v. BOKF, N.A., 874 F. 3d 787, 804 (2d Cir. 2017).
[6] See Ochadleus v. City of Detroit, 838 F.3d 792, 798 (6th Cir. 2016).
[7] See One2One Communes., LLC v. Quad/Graphics, Inc., 805 F.3d 428, 438 (3d Cir. 2015); Ochadleus v. City of Detroit, 838 F.3d 792, 806.
[8] Katelyn Knight, Equitable Mootness in Bankruptcy Appeals, 49 Santa Clara L. Rev 253, 254 (2009).
[9] Supra note 1 at 15-16 (citing Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1944 (2015).
[10] Supra note 1 at 11 (quoting Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S.Ct. 1652, 1660 (2019)).
[11] Supra note 1 at 16 (citing In re Semcrude, L.P., 728 F.3d 314, 326 (3d Cir. 2001)).
[12] Id.
[13] See, e.g. Bankruptcy reform debate targets bad corporate actors, popular judges; House Judiciary Committee Announces Series of Hearings on Bankruptcy Reforms; Purdue Pharma Bankruptcy Spotlights Venue Shopping Battle.
