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Federal Appeals Court Addresses Equitable Mootness Doctrine

Courts reviewing a bankruptcy court’s decision to approve a chapter 11 reorganization plan over the objections of an interested party must consider not only the merits, but also (if implementation of the plan was not stayed) potential injury to the reliance interests of other parties relying on the plan. These issues are confronted in Drivetrain, LLC v. Kozel (In re Abengoa Bioenergy Biomass of Kansas), 2020 WL 2121449 (10th Cir. May 5, 2020), a recent Tenth Circuit decision holding, based on circuit precedent, that an objector’s challenge to a chapter 11 plan that had already been implemented was barred under the doctrine of equitable mootness. Nonetheless, the decision noted that the doctrine is controversial and open to question.

Abengoa, S.A. is a Spanish engineering conglomerate. Several of its US subsidiaries filed for bankruptcy in 2016, some in Missouri, and one, Abengoa Bioenergy Biomass of Kansas (“ABBK”), in Kansas. ABBK’s trustee proposed a liquidation plan that subordinated inter-company claims from Abengoa’s other subsidiaries below other general unsecured claims, resulting in no recovery on those claims. Drivetrain LLC, the liquidating trustee in the Missouri case, objected to the plan, which the bankruptcy court approved over Drivetrain’s objection. Drivetrain sought a stay of plan implementation from the bankruptcy court and the district court, and was unsuccessful. After the estate’s assets were substantially distributed, ABBK’s trustee sought to dismiss Drivetrain’s appeal of the plan confirmation as equitably moot. The district court agreed that the appeal was equitably moot, pointing to the potential for harm to innocent third-party creditors. Drivetrain appealed to the Tenth Circuit.

The Tenth Circuit explained that every circuit has accepted the equitable mootness doctrine, under which courts dismiss appeals of plan confirmation where confirmed plans have been substantially carried out and reversal would be impracticable because of its effects on innocent third parties acting in reliance on the confirmed plan. Relying on Search Market Direct, Inc. v. Paige (In re Paige), 584 F.3d 1327 (10th Cir. 2009), the court noted the six-question test for equitable mootness in the Tenth Circuit:

(1) Has the appellant sought and/or obtained a stay pending appeal? (2) Has the appealed plan been substantially consummated? (3) Will the rights of innocent third parties be adversely affected by reversal of the confirmed plan? (4) Will the public-policy need for reliance on the confirmed bankruptcy plan—and the need for creditors generally to be able to rely upon decisions of the bankruptcy court—be undermined by reversal of the plan? (5) If the appellant’s challenge were upheld, what would be the likely impact upon a successful reorganization of the debtor? And (6) based upon a quick look at the merits of the appellant’s challenge to the plan, is it legally meritorious or equitably compelling?

Abengoa, 2020 WL 2121449, at *3. The third question, about the effects on third-party creditors, is the foremost concern.

The Tenth Circuit rejected Drivetrain’s argument that equitable mootness was not applicable here because the chapter 11 plan was a liquidation plan rather than a more conventional reorganization plan. The court made clear that details of a plan can affect the analysis, but there is no categorical bar to applying equitable mootness to a chapter 11 plan of liquidation.

The Tenth Circuit proceeded to apply the test here. The stay pending appeal factor disfavored equitable mootness because Drivetrain had diligently sought a stay, even though it had been unsuccessful. The substantial consummation factor favored equitable mootness, because the parties agreed that the plan had been substantially consummated, and because consummation had involved multiple large transactions that would be difficult to unwind. The innocent third parties factor also favored equitable mootness, because creditors receiving distributions had relied on the plan confirmation. (The Tenth Circuit rejected Drivetrain’s argument that such creditors should not be considered “innocent” because the most significant creditors knew of its objections and pending appeal, concluding that such an analysis was only appropriate where creditors participated in the proceedings beyond what one would ordinarily expect of an interested third-party creditor.) The public policy needs factor likewise favored equitable mootness, with the Tenth Circuit noting that ABBK had withdrawn millions of dollars of claims with prejudice from the Missouri bankruptcy in reliance on the confirmed plan. The impact on reorganization factor cut against equitable mootness, because there was no going concern emerging from the bankruptcy process. Finally, the sixth factor, a quick look on the merits, favored equitable mootness, because the bankruptcy court had appropriately concluded that the other Abengoa subsidiaries had not expected to be repaid and the claims were not the product of arms-length bargaining. The Tenth Circuit thus held that the district court did not abuse its discretion in dismissing the appeal as equitably moot.

In the course of its analysis, the Tenth Circuit expressed some uncertainty about the precedent it applied. The Tenth Circuit noted that the equitable-mootness doctrine has judicial and academic critics who object to the lack of a textual anchor and to its facilitation of deference to bankruptcy courts. However, since the Supreme Court has not weighed in, the court adhered to circuit precedent.