Once Moot, Always Moot – Second Circuit Adopts Deferential Abuse of Discretion Standard of Review for Equitable Mootness Appeals

Contributed by Brian Wells
Under the doctrine of equitable mootness, appellate courts can dismiss an appeal from an order confirming a chapter 11 plan without regard to its merits, where granting the appeal would inequitably disrupt an already-consummated plan.  The United States Court of Appeals for the Second Circuit, in R2 Investments v. Charter Commc’ns, Inc., recently affirmed the dismissal of an appeal from the confirmation order in the bankruptcy of cable company Charter Communications, concluding that the deferential abuse of discretion standard of review was applicable.  This decision will make it more difficult for appellants to seek further appellate review of the dismissal of an appeal because, under the abuse of discretion standard of review, a district court’s judgment will rarely be overturned.  The Second Circuit’s decision did not did not change the substantive factors courts must evaluate to determine whether an appeal should be dismissed as equitably moot.
Charter Communications bought and built its way to being the nation’s fourth-largest cable television company.  This growth was fueled by a combination of debt—over $22 billion—and billions of dollars invested by Paul Allen (the co-founder of Microsoft).  Despite its successes, a killer combination of tightening credit markets, lower cable provider valuations, and soaring debt-service costs left Charter in financial distress.  In 2009, the company sought to restructure through a pre-packaged chapter 11 filing—one that the bankruptcy court described as “perhaps the largest and most complex prearranged bankruptcies ever attempted, and in all likelihood . . . among the most ambitious and contentious as well.”
Two main goals drove the formation of Charter’s plan—retention of below-market-rate secured loans, serviced by J.P. Morgan, and preservation of over $2 billion in NOLs.  Accomplishing either would require the assistance of Allen, whose equity position gave him almost complete control over the Charter companies, because the secured loans included covenants requiring that he maintain a 35% voting block and the NOLs would be lost if he exercised his contractual exchange rights.  Because his equity would otherwise be wiped out in a bankruptcy, the plan incorporated a settlement whereby he would cooperate in exchange for roughly $375 million in cash and securities, as well as a third-party release.
Though this “Allen deal” arguably was essential to any reorganization, it had its detractors (including equity holders, who had interests at the same priority as Allen’s but would receive nothing in the reorganization).  Disagreement over the settlement and plan culminated in a contentious, 19-day confirmation hearing.  When the dust settled, the plan was confirmed, emergency motions for stays were denied, and Charter quickly moved to begin distributions under the plan.
Opposing Allen’s unique treatment, several parties continued to fight the plan on appeal.  This proved to be an uphill battle, however, as the debtor’s quick action to effectuate distributions meant the plan had been “substantially consummated,” as defined in section 1101(2) of the Bankruptcy Code.  Under Second Circuit law, substantial consummation of the plan triggered a presumption that the appeal should be dismissed as equitably moot.  That presumption, however, can be overcome if the appellant demonstrates that each of the remedies sought on appeal could be granted without, among other things, interfering with the debtor’s ability to reemerge successfully from bankruptcy.  This proved a problem for the appellants, as the district court (like the bankruptcy court) found that the Allen settlement was necessary for a successful reorganization, and thus could not be modified without potentially destroying the debtor’s chances of survival.  The district court thus dismissed the appeals as equitably moot.
The plan objectors then appealed the dismissal to the Second Circuit.  The generally applicable standard of appellate review in bankruptcy matters is de novo analysis of legal conclusions and review of factual findings for clear error.  The Second Circuit, however, had never before determined the applicable standard of appellate review of a decision dismissing a bankruptcy appeal as equitably moot.  Noting a split of circuit authority on this point, the Second Circuit undertook a thorough analysis of the issue and concluded that a deferential abuse of discretion standard would apply because the special ability of appellate courts to dismiss an otherwise appropriate bankruptcy appeal without hearing it on the merits is a matter committed to the equitable discretion of the first reviewing court.  The decision likely will dissuade some appellants from seeking further review of the dismissal of a bankruptcy appeal because reversal will be unlikely under the abuse of discretion standard.