Analysis of Beeman v. BGI Creditors’ Liquidating Trust (In re BGI, Inc.),

2014 WL 5462477 (2d Cir. 2014) and Its Implications for Both Bankruptcy Law and Our Clients

Exam #: 124

[Alson Alston] Bankruptcy Law

Fall Semester 2014

1

TO: Juliet Attorney, Esq., Senior Partner, ACME Law Firm LLP

FROM: [Alson Alston] Exam #124, Esq., Junior Partner, ACME Law Firm LLP

DATE: December 16, 2014

RE: Analysis of Beeman v. BGI Creditors’ Liquidating Trust (In re BGI, Inc.)

Ms. Attorney, you have requested that I prepare an analysis of In re BGI, Inc., 772 F.3d

102, 2014 WL 5462477 (2d Cir. 2014). You have asked me to address the following:

the important facts of the case;

the prior law that In re BGI, Inc. changes or clarifies;

how this case changes or clarifies that law;

why this case is important;

cases in other circuits addressing the same issues; and

which circuits are more favorable to creditors and which are more favorable to debtors,

with respect to the issues that In re BGI, Inc. changes or clarifies.

In In re BGI, Inc., former book retailer BGI Inc., f/k/a Borders Group, Inc., and its

affiliates (“Borders” or “Debtors”) filed voluntary petitions in February 2011 for relief through

reorganization under Chapter 11 of the Bankruptcy Code.1 The Bankruptcy Court established

June 1, 2011 as the deadline for prepetition claims to be filed by purported creditors (the “Bar

Date”).2 Borders completed all notice requirements for the Bar Date, pursuant to Rule 2002.3

In July 2011, after Borders failed to reorganize as on ongoing concern, the court permitted

1 11 U.S.C. § 1101, et seq.; Id. at 104.

2 Id. 3 Id. at 105.

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Borders to liquidate its assets and close its business.4 On September 20, 2011, Borders closed

the last of its retail branches and, one week later, discontinued accepting gift card sales and all

website sales.5 In November 2011, Borders filed its Chapter 11 liquidation plan under section

1125 of the Bankruptcy Code, together with the required Disclosure Statement, pursuant to 11

U.S.C. § 1125(b).6 Borders complied with all notification requirements, including publication of

the confirmation hearing date in The New York Times on November 16, 2011.7 No appellant

filed an objection to the Plan before or during the hearing.8 The court approved the liquidation

plan (the “Plan”) after the December 20, 2011 confirmation hearing and ordered the Plan put

into effect on January 12, 2012 (the “Confirmation Order”).9

Two weeks after the hearing, on January 4, 2012, Appellants Beeman and Freij filed

motions to file untimely proofs of claim, alleging that they never received adequate notice of

the bankruptcy proceedings or Bar Date (“Late Claims Motion”).10 A third Appellant, Traktman,

filed a late claim without authorization.11 All three Appellants filed a motion for class

certification (“Class Certification Motion”).12 The Appellants held unused gift cards issued by

Borders.13 Appellees BGI Creditors' Liquidating Trust (the “Trust”) and the Liquidating Trustee

filed objections to the motions.14

4 Id. at 105. 5 Id. 6 Id. 7 Id. 8 Id. 9 Id. 10 Id. at 106. 11 Id. 12

Id. 13 Id. at 104. 14 Id. at 106.

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The court denied all motions.15 Pursuant to Rule 2002, the court found that only the

“constructive notice” of the newspaper publication was required for gift card holders because

their identities were unknown to Borders.16 The court concluded that the Appellants would be

entitled to “actual notice” of the Bar Date only if they were “known” debtors of the Chapter 11

debtor.17 Because the Plan had been substantially consummated, the court concluded that

relief, if granted, would have been “disastrous” to the estate and, therefore, inequitable.18

Further, because they had no entitlement to actual notice, the court concluded that their

failure to file timely proofs of claim could not be considered excusable neglect and hence could

not be excused under Bankruptcy Rule 9006(b)(1).19 After denying the Lateness Motion (and

similarly denying Traktman’s motion), the court then denied the Class Certification Motion as

moot.20 The Appellants timely appealed to District Court, which dismissed all three appeals as

equitably moot.21 The Appellants appealed to the Second Circuit.22 The Second Circuit ruled

that equitable mootness applied and affirmed the District Court decisions.23

15 Id. 16 Id.; In re BGI, Inc., 476 B.R. 812, 820-21, 823-24 (Bankr. S.D.N.Y. 2012). 17 In re BGI, Inc., 772 F.3d at 106. 18 Id. 19 Id. 20 Id. at 107. 21 Id. The doctrine of equitable mootness permits a district court, in its discretion, to dismiss a bankruptcy appeal, that could otherwise be granted, when implementation of the relief would be inequitable because the realities and interests of the parties in finality outweigh the appellant’s right to review and relief. Id.; In re Charter Commc'ns, Inc., 691 F.3d 476, 481 (2d Cir.2012). Constitutional (Article III) mootness arises when “an event occurs which renders it impossible for this court, if it should decide the case in favor of the plaintiff, to grant him any effectual relief whatever.” Mills v. Green, 159 U.S. 651, 653, 16 S. Ct. 132, 133, 40 L. Ed. 293 (U.S.S.C. 1895) (emphasis added). The typical invocation of equitable mootness, however, arises after a Chapter 11 plan has been approved under section 1129 of the Bankruptcy Code, but an objecting creditor exercises its right to appeal the plan. 2010 Ann. Surv. of Bankr.Law 9. Relief in a constitutional sense is still possible, because there remains an actual case or controversy, but is not granted pursuant to a balancing of equitable, not constitutional, considerations. In re AOV Indus., Inc., 792 F.2d 1140, 1147 (D.C. Cir. 1986) (concluding that “Even when the moving party is not entitled to dismissal on article III grounds, common sense or equitable considerations may justify a decision not to decide a case on the merits”). Equitable mootness is, therefore, to be distinguished from Article III mootness utterly. However, the fact that a court may choose to declare an active case or controversy moot is troubling to some

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In the Second Circuit, prior to In re BGI, Inc., the courts had fashioned the doctrine of

equitable mootness for Chapter 11 reorganizations, but not for liquidations.24 The In re BGI,

Inc. ruling advances prior precedent regarding equitable mootness as applied to Chapter 11

liquidations in the Second Circuit, which had not addressed the question, by concluding that the

doctrine “applied to appeals arising from Chapter 11 liquidation proceedings,” not merely

appeals from Chapter 11 reorganization proceedings.”25 The court concluded that there was no

reason to limit its application to reorganizations, so it extended equitable mootness to

liquidations.26

Equitable mootness is a “pragmatic” doctrine, which takes notice of the fact that the

passage of time after a judgment in equity entitles the parties to a sense of finality when

disturbing that finality on appeal is “impractical, imprudent, and therefore inequitable.”27 In

the Second Circuit, a bankruptcy court ruling is presumed equitably moot when the

jurists, so, at minimum, the terminology should be modified. See the analysis of Seventh Circuit Judge Easterbrook’s comments in Bankruptcy Appeals and Equitable Mootness:

On appeal, Judge Easterbrook found that the “raw ability” to award relief existed, effectively ruling out mootness under the authority of Mills v. Green. Rather, he focused on the possibility that the case should be dismissed as equitably *2326 moot. Judge Easterbrook attempted, however, to banish the term “equitable mootness” from the local lexicon. Instead of determining whether the case was moot, Judge Easterbrook suggested that it was more accurate to determine “whether it [was] prudent to upset the plan of reorganization.” Ross E. Elgart, Bankruptcy Appeals and Equitable Mootness, 19 CARDOZO L. REV. 2311, 2325-26 (1998).

22 In re BGI, Inc., 772 F.3d at 107. 23 Id. at 110-11. 24 In In re BGI, Inc., 772 F.3d at 107, the Second Circuit explained that:

It was developed judicially “in response to the particular problems presented by the consummation of plans of reorganization under Chapter 11,” in which “the need for finality, and the need for third parties to rely on that finality,” is of paramount importance. (internal citations omitted)

25 Id. at 107. 26 Id. at 108 (holding that “We see no principled reason, in a Chapter 11 liquidation proceeding, for denying a court discretion to apply the doctrine of equitable mootness and the corresponding Chateaugay analysis.”). 27 Id. at 107; Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 144 (2d Cir.2005) (quoting MAC Panel Co. v. Va. Panel Corp., 283 F.3d 622, 625 (4th Cir.2002)).

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reorganization plan is “substantially consummated.”28 Section 1101(2) of the Bankruptcy Code

defines “substantial consummation” as:

(A) transfer of all or substantially all of the property proposed by the plan to be transferred; (B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and (C) commencement of distribution under the plan. 11 U.S.C. § 1101(2).

An objector may overcome a plan’s presumed equitable mootness due to substantial

consummation if all five conditions of FritoLay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10

F.3d 944 (2d Cir.1993) (“Chateaugay II ”) are satisfied.29 Those conditions are:

(a) the court can still order some effective relief, *953 Church of Scientology v. United States, 506 U.S. 9, 113 S.Ct. 447, 449, 121 L.Ed.2d 313 (1992); (b) such relief will not affect “the re-emergence of the debtor as a revitalized corporate entity”, In re AOV Industries, Inc., 792 F.2d at 1149; (c) such relief will not unravel intricate transactions so as to “knock the props out from under the authorization for every transaction that has taken place” and “create an unmanageable, uncontrollable situation for the Bankruptcy Court”, In re Roberts Farms, Inc., 652 F.2d 793, 797 (9th Cir.1981); (d) the “parties who would be adversely affected by the modification have notice of the appeal and an opportunity to participate in the proceedings”, Central States, Southeast and Southwest Areas Pension Fund v. Central Transport, Inc., 841 F.2d 92, 96 (4th Cir.1988) (citations omitted); and (e) the appellant “pursue[d] with diligence all available remedies to obtain a stay of execution of the objectionable order ... if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from”, In re Roberts Farms, Inc., 652 F.2d at 798. Chateaugay II, 10 F.3d 944, 952-53 (2d Cir. 1993).

These conditions must be evaluated in a context-specific inquiry into the actual effects of any

requested relief on a given bankruptcy.30

The significance of equitable mootness, as applied in Chapter 11 liquidations, is that it

recognizes that the compromises made to execute a liquidation frequently cannot be undone

28

Id. at 108; In re Charter Commc'ns, Inc.,691 F.3d at 482. 29 Id. at 109. 30 In re BGI, Inc., 772 F.3d at 108.

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and that any attempt to do so invites perilous and unpredictable results.31 More specifically,

the court in In re BGI, Inc. stated:

In such a liquidation, affected parties may have devoted months of time and resources toward developing an acceptable plan; creditors with urgent needs may have been stayed from accessing assets and funds to which they are entitled; and extensive judicial resources may have been consumed. In liquidation as in reorganization, substantial interests may counsel in favor of preventing tardy disruption of a duly developed, confirmed, and substantially consummated plan. In re BGI, Inc., 772 F.3d at 108-09.

Equitable mootness, then, attempted to guarantee a kind of common-sense fairness and

predictability to all parties in interest.

While In re BGI, Inc. firmly entrenched the doctrine of equitable mootness for Chapter

11 liquidation plans in the Second Circuit, there is a mixed application in other circuits.32 The

following circuits have explicitly endorsed the doctrine for Chapter 11 liquidations: the Fifth,33

Eighth,34 and Tenth.35 The following Circuits have explicitly endorsed the doctrine for Chapter 7

liquidations, but it would appear likely that the doctrine would be extended to Chapter 11

liquidations36: the First,37 Fourth,38 and Ninth.39

31 Id. at 108-09. 32 Id. at 109. Note that we initially rely on the findings of In re BGI, Inc. to cite precedent in other circuits. However, we also independently assess precedent. 33 See Schaefer v. Superior Offshore Int'l, Inc. (In re Superior Offshore Int'l, Inc.), 591 F.3d 350, 353–54 (5th Cir.2009) (applying equitable mootness analysis to appeal of order confirming a Chapter 11 liquidation plan) cited with approval in In re BGI, Inc., 772 F.3d at 109 n.10 (2d Cir. 2014). 34 See Zegeer v. President Casinos, Inc. (In re President Casinos, Inc.), 409 Fed.Appx. 31 (8th Cir.2010) (dismissing as equitably moot appeal related to a Chapter 11 liquidation proceeding) cited with approval in In re BGI, Inc., 772 F.3d at 109 n.10 (2d Cir. 2014). 35 See Sutton v. Weinman (In re Centrix Fin. LLC), 355 Fed.Appx. 199, 201–02 (10th Cir.2009) (remanding appeal to district court in a Chapter 11 liquidation proceeding to apply equitable mootness analysis) cited with approval in In re BGI, Inc., 772 F.3d at 109 n.10 (2d Cir. 2014). 36 See In re BGI, Inc., 772 F.3d at 109. 37 See Hicks, Muse & Co. v. Brandt (In re Healthco Int'l, Inc.), 136 F.3d 45, 48–49 (1st Cir.1998) (applying equitable mootness analysis in a Chapter 7 liquidation proceeding) cited with approval in In re BGI, Inc., 772 F.3d at 109 n.10 (2d Cir. 2014). 38

See Drawbridge Special Opportunities Fund, L.P. v. Shawnee Hills, Inc. (In re Shawnee Hills, Inc.), 125 Fed.Appx. 466, 469–70 (4th Cir.2005) (applying equitable mootness analysis in a Chapter 7 liquidation proceeding) cited with approval in In re BGI, Inc., 772 F.3d at 109 n.10 (2d Cir. 2014).

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The extent to which a circuit’s extension of equitable mootness to Chapter 11

liquidation benefits creditors or debtors requires an analysis of the elements identified by each

circuit. In all circuits below, except where previously indicated, we describe the doctrine as

applied to Chapter 11 reorganizations, not liquidations, because the doctrine was merely

extended to liquidations, unaltered, and the case law is extensive only for reorganizations.40

Though my review of dozens of cases suggests that no circuit is resistant to the doctrine or its

extension to liquidation (only the name of the doctrine is particularly controversial), our

attorneys should be prepared to argue for that extension as a natural and trivial adaptation,

when necessary for a debtor.41 The tests for equitable mootness established by each circuit

follow.

The First Circuit requires the court to inquire as to “whether an unwarranted or

repeated failure to request a stay enabled developments to evolve in reliance on the

bankruptcy court order to the degree that their remediation has become impracticable or

impossible.”42 The circuit further requires the court to determine whether the relief is feasible

in light of the impact on the plan.43

39 See Fitzgerald v. Ninn Worx Sr., Inc. (In re Fitzgerald), 428 B.R. 872, 881 (9th Cir.BAP 2010) (applying equitable mootness analysis in a Chapter 7 liquidation proceeding) cited with approval in In re BGI, Inc., 772 F.3d at 109 n.10 (2d Cir. 2014). 40 The court in In re BGI, Inc., for instance, discounted the notion that the doctrine should change when applied to liquidations with: “Indeed, to the contrary: several of our sister circuits have applied the doctrine in the liquidation setting and did so with no more than cursory discussion.” See In re BGI, Inc., 772 F.3d at 109. 41 Due to its ubiquitous support, however, our attorneys are well advised not to argue against it as a viable doctrine when representing objecting creditors in liquidation matters. The tests established by the circuits present ample opportunity for defeating the doctrine’s application in a given case. 42 In re Healthco Int'l, Inc., 136 F.3d 45, 48 (1st Cir. 1998). 43 See In re Pub. Serv. Co. of New Hampshire, 963 F.2d 469, 473 (1st Cir. 1992) (“The failure to obtain a stay is not sufficient ground for a finding of mootness. … in the absence of a stay, . . . the reviewing court must scrutinize each individual claim, testing the feasibility of granting relief against the potential impact on the reorganization scheme as a whole. . . . The case is moot if the requested relief would be either inequitable or impracticable in light of the change in circumstances.”) (quotation marks and citations omitted).

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The Third Circuit requires that five factors be considered with weights according to the

circumstances of the case; the chief among these factors is whether the plan has been

substantially consummated.44 Specifically, the court stated:

Factors that have been considered by courts in determining whether it would be equitable or prudential to reach the merits of a bankruptcy appeal include (1) whether the reorganization plan has been substantially consummated, (2) whether a stay has been obtained, (3) whether the relief requested would affect the rights of parties not before the court, (4) whether the relief requested would affect the success of the plan, and (5) the public policy of affording finality to bankruptcy judgments. See Manges, 29 F.3d at 1039; Rochman, 963 F.2d at 471–72. The Trustees have not taken issue with our identification of these factors. In re Cont'l Airlines, 91 F.3d 553, 560 (3d Cir. 1996).

The Third Circuit recently reaffirmed this five-factor test and explained the relationships

between the factors in detail.45

The Fourth Circuit requires a four-part balancing test to determine whether equitable

mootness applies:

(1) whether the appellant sought and obtained a stay; (2) whether the reorganization plan or other equitable relief ordered has been substantially consummated; (3) the extent to which the relief requested on appeal would affect the success of the reorganization plan or other equitable relief granted; and (4) the extent to which the relief requested on appeal would affect the interests of third parties. Mac Panel Co. v. Virginia Panel Corp., 283 F.3d 622, 625 (4th Cir. 2002).

The Fifth Circuit requires that only three factors be considered to apply equitable

mootness, but permits the court to hear the appeal even if multiple factors are actually met,

especially if the court can fashion effective relief without disturbing the finality of the plan:

44 In re Cont'l Airlines, 91 F.3d 553, 560 (3d Cir. 1996). 45 In re Semcrude, L.P., 728 F.3d 314, 320-21 (3d Cir. 2013) (“These factors, as we explained recently, are interconnected and overlapping. Phila. Newspapers, 690 F.3d at 168–69. ‘The second factor principally duplicates the first in the sense that a plan cannot be substantially consummated if the appellant has successfully sought a stay.’ In analyzing the first factor, courts have asked ‘whether allowing an appeal to go forward will undermine the plan, and not merely whether the plan has been substantially consummated under the Bankruptcy Code's definition.’ This collapses the first and fourth factors. . . .”) (most quotation marks and citations omitted).

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When determining whether a bankruptcy issue is equitably moot, the court considers “(1) whether a stay was obtained, (2) whether the plan has been ‘substantially consummated,’ and (3) whether the relief requested would affect either the rights of parties not before the court or the success of the plan.” In re Manges, 29 F.3d 1034, 1039 (5th Cir.1994). Here, the first and third factors predispose toward equitable mootness, but the doctrine does not prevent this court from addressing the issues on appeal. In re Superior Offshore Int'l, Inc., 591 F.3d 350, 353 (5th Cir. 2009).

The Sixth Circuit also adopted these three factors.46

The Seventh Circuit rejects the name “equitable mootness” because mootness, as an

Article III constitutional bar to review, is jurisdictional, and cannot be overcome by equitable

considerations.47 Chief Judge Posner captured the view of the Seventh Circuit on the matter

with:

The now nameless doctrine is perhaps best described as merely an application of the age-old principle that in formulating equitable relief a court must consider the effects of the relief on innocent third parties. So if modification of a plan of reorganization would upset legitimate expectations, it may be refused . . . . Matter of Envirodyne Indus., Inc., 29 F.3d 301, 304 (7th Cir. 1994) (internal citations omitted).

The discretion of the courts of the Seventh Circuit is, therefore, broad. Specific factors to be

weighed are not explicitly authorized within the circuit.

46 See In re United Producers, Inc., 526 F.3d 942, 947 (6th Cir. 2008) (holding that “The leading Sixth Circuit case on equitable mootness issues is In re American HomePatient in which we adopted the Fifth Circuit's three-part test for determining whether an appeal from the confirmation of a bankruptcy plan should be dismissed as equitably moot. In re American HomePatient, 420 F.3d at 563-64.”). 47 See, for instance, Matter of Envirodyne Indus., Inc., 29 F.3d 301, 304 (7th Cir. 1994), in which the Seventh Circuit stated that:

A case is moot if there is no possible relief which the court could order that would benefit the party seeking it. The appeal in this case is not moot in that sense. At least partial relief is possible, and that is enough to satisfy the requirements of Article III. Id. at ––––, 113 S.Ct. at 450; In re UNR Industries, Inc., 20 F.3d 766, 768 (7th Cir.1994). . . . But even when relief is possible . . . courts will frequently refuse to modify the plan if it has already been implemented, because of the effects of modification on nonparties to the dispute. Id. at 769-70, and cases cited there. This principle went by the misleading name of “equitable mootness,” until the name was anathematized by Judge Easterbrook in the UNR case. Id. at 769.” Matter of Envirodyne Indus., Inc., 29 F.3d 301, 303-04 (7th Cir. 1994) (some citations omitted).

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In the Eighth Circuit, the standard is not completely clear. One Bankruptcy Appellate

Panel decision, which the Eight Circuit approves, but only in an unpublished opinion, appears to

adopt the standard of the First Circuit.48 Another appears to adopt the Third Circuit’s test.49

The Ninth Circuit has adopted a four-factor, sequentially applied test that places

significant emphasis on its first factor, whether a stay has been obtained or at least sought with

due diligence50:

We endorse a test similar to those framed by the circuits that have expressed a standard: [a] We will look first at whether a stay was sought, for absent that a party has not fully pursued its rights. [b] If a stay was sought and not gained, we then will look to whether substantial consummation of the plan has occurred. [c] Next, we will look to the effect a remedy may have on third parties not before the court. [d] Finally, we will look at whether the bankruptcy court can fashion effective and equitable relief without completely knocking the props out from under the plan and thereby creating an uncontrollable situation for the bankruptcy court. In re Thorpe Insulation Co., 677 F.3d at 881.

The D.C. Circuit follows the standard of the Ninth Circuit.51

48 See In re President Casinos, Inc., 409 F. Appx. at 31-32. In re President Casinos, Inc. explicitly endorses the Bankruptcy Appellate Panel’s decision In re Williams, 256 B.R. 885, 896 (8th Cir.BAP 2001) (factors considered in determining equitable mootness). In re President Casinos, Inc., 409 F. Appx. at 32. In re Williams, 256 B.R. 885, 896 (8th Cir.BAP 2001) describes the standard to be applied in the Eighth Circuit as that of the First Circuit standard:

In essence, the appellate court “inquires whether an unwarranted or repeated failure to request a stay enabled developments to evolve in reliance on the bankruptcy court order to the degree that their remediation has become impracticable or impossible.” Hicks, Muse & Co., Inc. v. Brandt (In re Healthco International Inc.), 136 F.3d 45, 48 (1st Cir.1998). In re Williams, 256 B.R. 885, 896 (B.A.P. 8th Cir. 2001).

49 In re Michels, 286 B.R. 684, 690 (B.A.P. 8th Cir. 2002) (holding “In In re Continental Airlines, 91 F.3d 553 (3d Cir.1996), the Third Circuit established the doctrine of equitable mootness under which an appellate court may dismiss an appeal from a bankruptcy court as moot ‘even though effective relief could conceivably be fashioned, [when] implementation of that relief would be inequitable.’ Id. at 559.”). The In re Michels court then proceeds to list and follow the factors provided by In re Continental Airlines., deciding that the test argued against equitable mootness. In re Michels, 286 B.R. at 690-91. 50 See In re Thorpe Insulation Co., 677 F.3d 869, 881 (9th Cir. 2012) (“A failure to seek a stay can render an appeal equitably moot. In re Roberts Farms, 652 F.2d at 797–98. However, failure to obtain a stay does not require a conclusion of equitable mootness where parties use due diligence in seeking the stay.”). 51 In re AOV Indus., Inc., 792 F.2d 1140, 1148 (D.C. Cir. 1986) (“Although this circuit has not considered the issue directly, a line of Ninth Circuit decisions has applied these principles to disputes over the continued viability of bankruptcy appeals. . . . We think that properly understood, the Ninth Circuit's decisions provide the appropriate analytic framework for the mootness issue.”).

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The Tenth Circuit implicitly endorsed the approach of the Third Circuit by following the

Third Circuit’s precedent identified in 1998.52 However, later the court adopted a six-factor

test:

It seems that under the doctrine of equitable mootness a court should decline to hear an appeal of a bankruptcy court's decision where the answers to the following six questions indicate that reaching the merits would be unfair or impracticable: (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 on bankruptcy court decisions—be undermined by reversal of the plan? (5) If 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 appellant's challenge to the plan, is appellant's challenge legally meritorious or equitably compelling? These six factors are not necessarily conclusive, nor will each factor always merit equal weight. But these six factors seem to reflect the factors often weighed in other cases where equitable mootness is at issue. In re Paige, 584 F.3d 1327, 1339 (10th Cir. 2009).

The Eleventh Circuit holds that a nine-part inquiry is necessary to determine equitable

mootness53:

The mootness inquiry necessarily involves many subsidiary questions: Has a stay pending appeal been obtained? If not, then why not? Has the plan been substantially consummated? If so, what kind of transactions have been consummated? What type of relief does the appellant seek on appeal? What effect would granting relief have on the interests of third parties not before the court? And, would relief affect the re-emergence of the debtor as a revitalized entity? The answers to these questions provide the reviewing court with the backdrop to evaluate the ultimate issue of whether a

52 Specifically, the Tenth Circuit stated:

In Continental Airlines, the court isolated five factors that may be considered when determining if equitable or prudential mootness is applicable. Continental Airlines, 91 F.3d at 560. These factors, which may be given “varying weight, depending on the particular circumstances” of any given case, include . . .. A short examination of the issues raised by Telco on appeal in relation to these five factors reveals the problems that would be faced if we were to exercise jurisdiction and reverse the Bankruptcy Court's Confirmation Order or Modification Order. In re Long Shot Drilling, Inc., 224 B.R. 473, 479 (B.A.P. 10th Cir. 1998).

53 In re Lett, 632 F.3d 1216, 1226 n.20 (11th Cir. 2011) (“The Eleventh Circuit in In re Club Associates offered a list

of subsidiary questions a court may consider when looking at the circumstances of the case.”) (internal quotation marks omitted).

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confirmation plan has progressed to the point where effective judicial relief is no longer a viable option. In re Club Associates, 956 F.2d 1065, 1069 n.11 (11th Cir. 1992).

The Federal Circuit appears to be silent on the issue of equitable mootness, although it

is aware of the doctrine.54

In determining which circuit court would be most favorable to a creditor or debtor on

the question of equitable mootness, we initially note the different interests that each seeks to

protect. A debtor generally favors equitable mootness because it is a defense against a creditor

attempting to unravel a confirmed plan. The lower the bar for advancing the doctrine, the

better for the debtor because the debtor’s defense will be easier to mount. The doctrine,

however, works against an objecting creditor because it is a barrier to the creditor’s appeal

being heard. Such a creditor would favor a rigid standard for applying the doctrine. However, a

non-objecting creditor, reasonably satisfied with confirmed plan, would, like the debtor, prefer

that the plan not be disturbed and, therefore, favor a standard that is easy to meet. Hence, the

circuits that would benefit a debtor or satisfied creditors are those with minimal standards to

meet to apply the doctrine successfully. The circuits that would benefit a dissatisfied creditor

are those with more exacting standards for the successful invocation of equitable mootness.

The most difficult standard to apply is likely that of the Second Circuit, which requires

that all five of the elements of its test be met. The other circuits permit the doctrine to be

applied as part of more traditional balancing tests, so will be more or less difficult to apply,

depending on the individual circumstances of the client. In general, however, it might be

54 A Westlaw search on the terms “equitable mootness” and similar terms in the Federal District yielded only one case, which merely stated that the court need not reach that question. See In re Cambridge Biotech Corp., 186 F.3d 1356, 1360 (Fed. Cir. 1999) (“Cambridge cross-appeals, urging that we dismiss appellants' appeal under the equitable mootness doctrine. We affirm all of the district court's rulings appealed by appellants and thus do not reach the issue raised by Cambridge's cross-appeal.”).

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argued that the more factors to be considered, the higher the bar for the successful application

of equitable mootness. The Third, Tenth, and Eleventh Circuits are found at this end of the

continuum. However, whether the objecting creditor has sought and/or obtained a stay

pending appeal is a consideration common to all circuits because the existence of a stay soon

enough after the plan has been confirmed essentially freezes the effects of the plan and

reduces any harm that equitable relief disturbing the plan could possibly cause. Similarly,

whether the plan has been substantially consummated is explicitly or inferentially common to

all circuits.

Finally, depending on the size and sophistication of the debtor, there could be

significant choice in where the debtor files or where creditors attempt to force an involuntary

bankruptcy upon a debtor.55 After a bankruptcy case has commenced in a given jurisdiction,

the parties can apply for a change of venue, though other parties are likely to object

strenuously.56 Since the Bankruptcy Code has been interpreted as permitting a substantial

degree of forum shopping, your question about which circuits benefit our clients is extremely

important to explore.57

55 The typical small business or individual debtor files where the debtor lives. ELIZABETH WARREN, JAY WESTBROOK, JOEL

M. WESTBROOK, KATHERINE PORTER & JOHN POTTOW, THE LAW OF DEBTORS AND CREDITORS 875 (7th ed. 2014). However, a debtor may file in the district “in which the domicile, residence, principal place of business … or principal assets” of the debtor exists. 28 U.S.C. §1408(1). The courts have held that a corporation’s domicile is its state of incorporation. E.g., In re Ocean Properties of Delaware, Inc., 95 B.R. 304 (Bankr. D. Del. 1988). A company may file where an affiliate has already filed. 28 U.S.C. §1408(2). Effectively, a large company with affiliates in every state could file in any district. See WARREN, supra note 55, at 876. Creditors may also file an involuntary petition against a debtor. 11 U.S.C. §303. That petition is a “case under title 11” and hence is subject to the venue requirements identified above. 28 U.S.C. §1408. 56 28 U.S.C. §1412. For an application of this statute, see In re Patriot Coal Corp., 482 B.R. 718 (Bankr. S.D.N.Y. 2012). 57 See the discussion in footnotes 55 and 56. However, I must note that, to some extent, the circuit in which we address an equitable mootness matter in a Chapter 11 liquidation may not always matter significantly. All circuits have fundamentally similar equitable mootness requirements which attempt to balance the equities of disturbing a confirmed plan vs. providing finality to the parties in interest.

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With these considerations in mind, I would advise the firm to select a venue, where

possible, as follows:

1. For a debtor client, we should avoid the Second Circuit, which has a more exacting

standard for the application of equitable mootness. We should also avoid the Third

Circuit and Eleventh Circuits for debtor clients because these circuits have more factors

to be considered and explicitly include public policy considerations, all of which make

equitable mootness a harder proposition to demonstrate;

2. For our creditor clients, then, we should choose the Second, Third or Eleventh Circuits.

In these circuits, we will have a somewhat better chance of defeating equitable

mootness arguments, due to the range and variety of factors that must be analyzed

there;

3. If further choice is required for either debtor or creditor clients, we should favor the

First and Seventh Circuits because they have distilled broader, equitable considerations,

without explicit statements of multiple factors. There is more room to argue in these

circuits, so, absent other, extreme fact-specific considerations, the better lawyers could

very well prevail. This should benefit our clients because we represent them;

4. If possible, our creditor clients might want to avoid the Tenth Circuit because one

explicit factor to be weighed is a “quick look” at the merits of the appellant’s challenge.

There is no reason to accept this additional hurdle if it could be avoided by choosing

another circuit;

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5. For debtor and creditor clients alike, we should avoid the Eighth and Federal Circuits

because their standards appear to be particularly unevolved and we cannot offer as

much predictability to our clients there as we can in other circuits; and

6. The other circuits, not mentioned above for a given creditor or debtor, seem to offer,

relatively, as many advantages as disadvantages for both creditors and debtors.

The facts surrounding the cases of our debtor and creditor clients will ultimately determine

which circuit we choose, to the extent that choice is available to us. However, the above

guidance presents key considerations that we should weigh once we know the material facts of

our clients’ respective matters.