Contributed by Jessica Diab
With fall weather now upon us, it may be hard to believe that those long weekends spent at the Hamptons were only weeks ago. Those readers who fell behind on their bankruptcy blog reading due to poor Wi-Fi connection on the Jitney might have missed our post on Transwest, a decision by the United States Court of Appeals for the Ninth Circuit (now that you are back in your office, you can catch up on this missed post here).
This Ninth Circuit decision was particularly notable because it narrowly applied the doctrine of equitable mootness to allow an appeal from a bankruptcy confirmation order to proceed after the chapter 11 plan had been confirmed and substantially consummated and despite the fact that a victory for the appellants would change the chapter 11 plan terms on which a third-party plan sponsor relied. Further, the Ninth Circuit suggested that, where the only party that would be affected by the appeal and any remedies relating thereto would be a third-party plan sponsor who had been actively involved in the plan confirmation, an appeal should not be equitably moot because this type of savvy investor was not the type of innocent third party the doctrine of equitable mootness was intended to protect. For some, including Judge M. Smith who wrote an impassionate dissent, the majority’s decision was troubling because it meant that potential investors or purchasers in a chapter 11 case could no longer rely on the finality of bankruptcy court confirmation orders (at least not in the Ninth Circuit).
On September 15, 2015, the Ninth Circuit withdrew its decision and issued a new superseding opinion and dissent. We reviewed the superseding decision hopeful that the Ninth Circuit reversed its trend of narrowly applying the doctrine of equitable mootness. Unfortunately, however, the superseding decision and dissent are simply a restatement of the prior decision with mostly minor edits. One notable edit, however, was to correct its earlier statement that the third-party plan sponsor was a party to the appeal, a fact which supported its conclusion that the third-party plan sponsor was not the type of third party that the equitable mootness doctrine intended to protect. In the new opinion, the Ninth Circuit corrected this fact by noting that the third-party plan sponsor was not a party to the current appeal. Nevertheless, the Ninth Circuit maintained its holding that the third-party plan sponsor was not an innocent third party because, although not formally before the court in the current appeal, the third-party plan sponsor was involved at every step of the process. Therefore, the law in the Ninth Circuit as expressed in our earlier blog on Transwest still stands. On September 29, 2015, the appellees filed a petition for rehearing en banc (we will keep you posted, of course!).
With little change from the Ninth Circuit thus far, our earlier words of wisdom still stand: location matters. Not all circuits hold the same view as the Ninth Circuit on the issue of equitable mootness (for instance, in the Second Circuit, substantial consummation creates a presumption that an appeal is moot). Accordingly, potential plan investors who are able to negotiate with the debtor before the case is filed should consider requesting that the bankruptcy filing be made in a venue that has more investor-friendly views on equitable mootness. But be sure to do your diligence beforehand because the law on equitable mootness appears to be in flux and change may be on the horizon (see e.g., our discussion of the Third Circuit’s decision in One2One Communications discussed here). For those plan investors who have no choice but to operate in the Ninth Circuit or a jurisdiction with similar (or unknown) views on equitable mootness, consider conditioning your obligation to close on all appeals being resolved in your favor.
Jessica Diab is an Associate at Weil, Gotshal & Manges LLP in New York.