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Time to Revisit Equitable Mootness

By Michael L. Cook

Respected appellate judges have condemned the judicially created doctrine of “equitable mootness” for at least the past 20 years. That doctrine allows an appellate court to avoid reaching the merits of an appeal from a Chapter 11 plan confirmation order. See, e.g., In re Nordhoff Invs. v. Zenith Elecs. Corp., 258 F. 3d 180,185 (3d Cir. 2001) (“doctrine prevents ' court from unscrambling complex bankruptcy reorganization ' [plans] .”). In 1994, Judge Frank Easterbrook, speaking for the U.S. Court of Appeals for the Seventh Circuit, however, “banish[ed] 'equitable mootness' from the local “lexicon.” In re UNR Indus., 20 F. 3d 766, 769 (7th Cir. 1994). Most recently, Judge Cheryl Ann Krause of the U.S. Court of Appeals for the Third Circuit, in a concurring opinion on July 21, 2015, urged the court to “consider eliminating, or at the very least reforming equitable mootness.” In re One2One Communications, LLC, 2015 WL 4430302, at *7 (3d Cir. July 21, 2015). Two recent decisions from the U.S. Courts of Appeal for the Third and Ninth Circuits confirm why Judge Krause is right.

A lender's appeal from an order confirming a Chapter 11 debtor's cramdown reorganization plan is not equitably moot when the lender “diligently sought a stay” and the court could grant effective relief, held a split panel of the Ninth Circuit on July 1, 2015. In re Transwest Resort Properties, Inc., 2015 WL 3972917, at *1 (9th Cir. July 1, 2015) (2-1). Review of the lender's appeal would not unfairly affect “third parties or entirely unravel the plan,” reasoned the court when reversing the district court's dismissal and remanding to the district court for disposition of the merits. Similarly, in One2One Communications , because the “[confirmed] Plan did not involve the issuance of any publicly traded scurities, bonds, or other circumstances that would make it difficult to retract the plan, and because “of the limited evidence of potential third-party injury,” the Third Circuit reversed the district court's dismissal of the appeal on equitable mootness grounds, requiring the lower court to hear the merits. 2015 WL 4430302, at *6.

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