Equitable Mootness Doctrine Examined (Part 2): Is a Confirmation Order Truly Final? Or Can An Appellant Take Another Bite at the Apple?

Contributed by Kelly E. McDonald
In a previous entry, we examined the R2 Investments, LDC v. Charter Communications (In re Charter Communications, Inc.), Nos. 09-10506, 09-10566(GBD), 2011 WL 1344553, *1 (S.D.N.Y. March 30, 2011) decision, in which the United States District Court for the Southern District of New York dismissed an appeal of a confirmation order as equitably moot where the relief requested, though theoretically possible, could have ultimately unraveled the confirmed plan. 
In today’s post, we examine a decision rendered by the United States Court of Appeals for the Fifth Circuit last year, Bank of New York Trust Company, N.A. v. Pacific Lumber Company (In re ScoPac), 624 F.3d 274 (5th Cir. 2010), where the finality of the debtor’s plan was called into question when certain creditors appealed an order disallowing their superpriority administrative expense claim arising under section 507(b) of the Bankruptcy Code.  At the time the debtor’s plan was confirmed and became effective, the creditors’ claim had been valued at zero dollars by the bankruptcy court.  The creditors appealed the bankruptcy court’s order.  The appellees, who were the plan proponents, argued the confirmation order that had been affirmed by the Fifth Circuit a year earlier (which assumed the administrative claim at issue to be worth zero) governed and urged the Fifth Circuit to dismiss the appeal of the claim disallowance decision as equitably moot in light of the confirmed plan.  They reasoned that reversal of the bankruptcy court’s order could destroy the confirmed plan and injure third parties that had relied on the plan.  Specifically, they noted that the reorganized debtor did not have liquid assets on hand to pay a judgment of “even a few million dollars.”  The Fifth Circuit disagreed, holding that the claim allowance issue was a separate issue from that of confirmation and revalued the administrative expense from zero (as of confirmation and plan effectiveness) to $29.7 million. 
In examining the appellees’ arguments, the court analyzed the ScoPac facts under the equitable mootness factors elucidated by prevailing Fifth Circuit precedent:  “(i) whether a stay has been obtained; (ii) whether the plan has been ‘substantially consummated’; and (iii) whether the relief requested would affect either the rights of parties not before the court or the success of the plan.”  Noting that no stay was in place and the plan had been “substantially consummated” under section 1101(2) of the Bankruptcy Code, the court focused its analysis on the effect of the determination of the noteholders’ section 507(b) claim on the reorganization and third parties. 
The Fifth Circuit cited its decision in In re Pacific Lumber Co., 584 F.3d 229 (5th Cir. 2009), where a valuation claim threatened a “similarly-sized judgment on a similarly cash-poor entity, which had just emerged from bankruptcy.”  In Pacific Lumber, the Fifth Circuit found that the threat of the judgment did not moot the appeal because, instead of mooting their appeal, the Pacific Lumber appellants were willing to accept a fractional recovery.  In concluding the ScoPac appellants’ appeal was not equitably moot, the Fifth Circuit noted that the facts before it resembled those of Pacific Lumber; adverse consequences of the appeal could have been foreseen by the appellants as sophisticated investors; the appellees could not be considered “third parties” for purposes of the equitable mootness analysis; and so long as there was a possibility of “fractional recovery,” the noteholders “need not suffer the mootness of their claims.” 
Not discussed in this appeal (treated as separate from the appeal of the confirmation order) was whether the  noteholders’ (new) 507(b) claim might have affected the feasibility of the confirmed and effective plan.  Under prevailing Fifth Circuit precedent discussed above, one equitable mootness factor is whether the determination would affect the “success of the plan.”  A large superpriority administrative expense charged to an estate that did not have liquid assets on hand to pay a judgment of even a few million dollars might have presented a feasibility issue at confirmation.  Therefore, post-confirmation and post-emergence assessing a superpriority expense claim against essentially a new entity—a reorganized debtor now owned by a former creditor that accepted the equity in exchange for its claim under the plan—seems in contravention of Fifth Circuit precedent and inequitable as upsetting expectations of those stakeholders who negotiated and voted on the plan in reliance on all of its provisions and banking on the plan’s finality.  Like the plan in Charter Communications, the plan in ScoPac provided for detailed claims classification and treatment, so any determination of a superpriority administrative expense (that was not reserved under the plan) is a confirmation issue, particularly if the issue might have impacted feasibility of the Plan, and, therefore, “the success of the plan” under Fifth Circuit precedent cited in the decision. 
The different results in these two cases may be difficult to reconcile.  On one hand, following Chateaugay, in dismissing the appeals as moot, the Charter Communications court cited the need to respect notions of finality.  On the other hand, in the Fifth Circuit, ScoPac illustrated that, practically speaking, even a plan that has become effective and substantially consummated may not be final at all until all appeals (including those still pending a year after the confirmation order has been appealed and affirmed twice) have concluded, whenever that might be.  Ultimately, the only common denominator that can be drawn from the two decisions is that equitable mootness is a highly subjective, fact intensive standard.  What’s considered equitably moot by one court, may not be considered as such in the other.