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Equitable Mootness Applied Again: The Fifth Circuit Refuses to Hear an Appeal

The Fifth Circuit recently dismissed an appeal of a confirmation order as equitably moot.  The decision was based on three key factors: the appellant hadn’t obtained a stay pending appeal, the plan had been substantially consummated, and practical relief couldn’t be fashioned if the plan was unwound.  Talarico v. Ultra Petro. Corp. (In re Ultra Petro. Corp.), Case No. 21-20049, 2022 U.S. App. LEXIS 8941 (5th Cir. Apr. 1, 2022).  

The court said that allowing the appeal to proceed would “throw the reorganization into chaos,” adding that “[i]f the doctrine of equitable mootness is meant for any case, it is this one.”  Id. at *12.

Equitable mootness is judge-made doctrine that arises during appeals of bankruptcy court orders, most often appeals of orders confirming chapter 11 plans.  Plan proponents argue that reversal on appeal would wreak havoc on a debtor’s bargained-for reorganization.

In Ultra, the debtor, an oil and gas exploration company, encountered financial challenges during COVID-19.  In May 2020, it filed for chapter 11 and, several months later, confirmed a plan.  A shareholder who had objected to the plan appealed the confirmation order to the district court.  The debtor sought dismissal on the ground of equitable mootness.  The district court ruled for the debtor, noting that no stay had been obtained, the plan had been substantially consummated, and that the debtor had been replaced by a “reorganized and recapitalized entity.”  The shareholder then appealed to the Fifth Circuit and again sought dismissal on equitable mootness grounds.

Equitable mootness is controversial because it denies appellants a right of appellate review.  The term is also misleading because cases aren’t “moot” in the constitutional sense.  Cases are moot – and thus federal courts have no jurisdiction to hear them – when there’s no live case or controversy.  U.S. Const., Article III, section 2.  When equitable mootness is applied, there’s a case or controversy.  But citing prudential rather than jurisdictional concerns, district courts, bankruptcy appellate panels, and courts of appeal can and do refuse to hear appeals and defer to decisions of bankruptcy courts.

Significantly, equitable mootness has been applied by every circuit court of appeal.  It was first recognized by the Ninth Circuit in an appeal under the Bankruptcy Act of 1891.  Trone v. Roberts Farms, Inc. (In re Roberts Farms, Inc.), 652 F.2d 793 (9th Cir. 1981).  Most courts consider if an appellant has obtained a stay pending appeal or if a plan has been substantially consummated.  If there’s no stay but there is substantial consummation, then courts are more likely to invoke equitable mootness.  The Second Circuit stands alone with a view that substantial consummation creates a “presumption” of equitable mootness.  R2 Investments, LDC v. Charter Comm. (In re Charter Comm.), 691 F.3d 476 (2d Cir. 2012).  Some courts also take quick look at the merits of an appeal before deciding if it should proceed or not.

In the appeal in Ultra, the Fifth Circuit noted that it is “more hesitant to invoke equitable mootness than many circuits, treating it as a ‘scalpel rather than an axe.’” 2022 U.S. App. LEXIS 8941, at *6-7 (quoting In re PAC. Lumber Co., 584 F.3d 229, 240 (5th Cir. 2009)).

Even so, the court declined to hear the shareholder’s appeal.  As noted, the shareholder hadn’t obtained a stay, the plan had been substantially consummated, and the shareholder sought “re-litigation of the bankruptcy proceedings” that would impact “the entire confirmation order,” and not just partial relief.  Id. at *8 and 11.  The court noted that granting appellate relief would “affect the rights of parties not before us.”  Id. at *9.  Therefore, in these circumstances, the Fifth Circuit “declined the invitation” to hear the appeal.  Id. at *13.