Equitable Mootness Doctrine Will Continue to Generate Controversy After Supreme Court Declines to Hear Appeal on the Issue

October 28, 2021Herrick Restructuring Review

The Herrick Restructuring Review provides insights and information related to restructuring and finance litigation. The Herrick team regularly represents official and ad hoc creditor committees, hedge funds, distressed debt investors, bondholders, and other parties in interest, and often serve as conflicts or special counsel for large-scale complex litigation matters.

The Supreme Court declined to take up a case this month concerning the doctrine of equitable mootness, a topic that continues to rile bankruptcy courts and generate controversy amongst practitioners and scholars. The Eighth Circuit Court of Appeals recently described the doctrine as one that is “misleadingly” labeled, but which allows courts to dismiss an appeal from a bankruptcy court’s ruling because the appeal has been rendered moot due to “equitable, prudential, or pragmatic considerations.” In most situations, the appeal is “equitably” moot because the bankruptcy court’s order has already been implemented by the debtor by the time the appeal is heard. Meanwhile, in bankruptcy cases big and small, appeals primarily from confirmation plans are focused on the issue. With Courts of Appeals divided on the issue, it will continue to generate objections, expedited appeals, and uncertainty going forward.

The facts of the case the Supreme Court declined to hear present a good example of the issues surrounding the use of the equitable mootness doctrine. The debtors in the underlying bankruptcy case were Nuverra Environmental Solutions, Inc. and affiliates. In the bankruptcy court, an objection was made to the debtors’ plan of reorganization which included “horizontal gifting” amongst creditors. The debtors’ plan divided unsecured creditors into two distinct classes. One, comprised of noteholders, would receive 5 cents on the dollar under the plan. The other, comprised of all other unsecured creditors (which included trade creditors, potential litigation claimants, and others), would receive full recovery on their claims. One noteholder objected to the plans’ treatment. He argued that the plan discriminated against his class of noteholders in violation of Section 1129(b)(1) of the bankruptcy code. The bankruptcy court denied the objection, and then declined to halt implementation of the plan pending the noteholder’s appeal. The district court also declined to grant a stay pending appeal.

After the Nuverra debtors completed the reorganization, they moved to dismiss the noteholders’ appeal on the grounds of equitable mootness. Relying on that doctrine, the district court dismissed the appeal and ruled on the merits in support of the horizontal gifting scheme under the plan.

The Nuverra noteholder appealed to the Third Circuit. In a divided 2-1 opinion, the appellate court affirmed the dismissal on the grounds of equitable mootness but declined to rule on the merits. Circuit Judge Krause dissented from the equitable mootness holding and argued the panel should address the merits.

Before the Supreme Court, the Nuverra noteholder argued that there is “no foundation” for the equitable mootness doctrine. Based on his reading of prior Supreme Court rulings, which “hammered home the core judicial command that the federal courts have a ‘virtually unflagging’ responsibility to exercise the jurisdiction Congress conferred on them” by ruling on the merits, the noteholder sought the Supreme Court’s ruling that the doctrine is inconsistent with the federal courts’ responsibility to decide cases on the merits. The petition also detailed the varying tests and burdens of proof being applied across the country when invoking equitable mootness. On October 12, 2021, however, the Supreme Court denied the noteholder’s petition for a writ of certiorari, meaning the path to appeal and overturn the confirmation plan reached its end.

In an opinion issued in August, the Eighth Circuit Court of Appeals joined the list of appellate courts that found the doctrine in need of a more “rigorous” application by lower courts. In FishDish LLP v. VeroBlue Farms USA Inc., No. 19-3413, No. 19-3487, 2021 WL 3411834 at *7 (8th Cir. Aug. 5, 2021), the Eighth Circuit reversed the district court’s decision to deny an appeal by one of the debtor’s preferred shareholders from the confirmation plan. The lower court had found that the plan’s substantial consummation meant that any relief granted through the appeal would impermissibly affect third parties to the plan. The Eighth Circuit found this analysis too meager, and remanded for further consideration of “the strength of [the shareholder’s] claims, the amount of time that would likely be required to resolve the merits of those claims on an expedited basis, and the equitable remedies available — including possible dismissal — to avoid undermining the plan and thereby harming third parties.” Id. at *7 (emphasis in original). Although the doctrine survived the appeal, and no multi-pronged standard was adopted, the Eighth Circuit’s directives may serve as a warning for future reliance on equitable mootness.

The issue is currently being considered on appeal in a number of high-profile cases, such as the Highland Capital Management, L.P. bankruptcy case (in which the bankruptcy court granted a direct appeal to the Fifth Circuit), the Ascena Retail Group bankruptcy case (in which the U.S. Trustee is appealing third-party releases contained in the confirmation plan), and the Purdue Pharma bankruptcy case (with the S.D.N.Y. District Judge actively managing the timing of the appeal through its self-described “rocket docket” intended to have the appeal considered before the plan is implemented). As these cases demonstrate, the need for certainty and speed is often critical in bankruptcy cases. The equitable mootness doctrine can help honor those goals. But whether, and when, it can or should be invoked is an issue that will continue to generate complexities for all stakeholders in bankruptcy cases going forward.

For more information on this alert or other restructuring & finance litigation matters please contact:

Kyle J. Kolb at +1 212 592 1514 or [email protected]

© 2021 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.