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NO. 16-412

IN THE

SUPREME COURT OF THE UNITED STATES OF AMERICA

IN RE PADCO, INC., DEBTOR

MEGAN KUZNIEWSKI,

PETITIONER,

v.

PADCO, INC.,

RESPONDENT.

ON WRIT OF CERTIORARI FROM THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT

BRIEF FOR RESPONDENT

TEAM R 43 COUNSEL FOR RESPONDENT

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QUESTIONS PRESENTED

1.   Whether an appellate court has authority to decline to hear an appeal from a bankruptcy court order confirming a Chapter 11 plan on prudential grounds using equitable mootness principles.

2.   Whether a Chapter 11 plan of reorganization can permanently enjoin claims that non-consenting creditors have against a non-debtor when the claims are not derivative of the debtor’s claims against the non-debtor and no provision is made for full payment of the enjoined claims.

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TABLE OF CONTENTS QUESTIONS PRESENTED ......................................................................................................... i TABLE OF CONTENTS ............................................................................................................. ii TABLE OF AUTHORITIES ........................................................................................................v OPINIONS BELOW .................................................................................................................. viii

STATEMENT OF JURISDICTION ........................................................................................ viii

STATUTORY PROVISIONS ................................................................................................... viii

STATEMENT OF FACTS ............................................................................................................1

SUMMARY OF THE ARGUMENT ...........................................................................................3

ARGUMENT ..................................................................................................................................4

I.   AN APPELLATE COURT HAS AUTHORITY TO DECLINE TO HEAR AN APPEAL FROM A BANKRUPTCY COURT ORDER CONFIRMING A CHAPTER 11 PLAN ON PRUDENTIAL GROUNDS USING EQUITABLE MOOTNESS PRINCIPLES. .............................................................................................4

A.   The Third Circuit Established a Five-Factor Test to Determine Equitable

Mootness in In re Continental Airlines in 1996. This Five Factor Test Has Boiled Down to Two Analytical Questions in In re SemCrude in 2013. .............................5

1.   Padco’s Reorganization Plan Has Been Substantially Consummated. ............ 5

2.   Petitioner Requested a Relief Which Will Fatally Scramble Padco’s

Reorganization Plan and/or Which Will Significantly Harm Investors Who Have Justifiably Relied Upon Padco’s Confirmation Order. ............................7

i.   Petitioner requested a relief which will fatally scramble Padco’s

reorganization plan. ..........................................................................................7

ii.   Petitioner requested a relief which will significantly harm investors who have justifiably relied upon Padco’s confirmation order. .............................10

B.   The Bankruptcy Code Embodies a Strong Policy of Limiting Judicial Review. .13

C.   The Thirteenth Circuit Did Not Violate Article III of the Constitution When the Court Decided Not to Hear Petitioner’s Claim Under Equitable Mootness Grounds. .....................................................................................................................15

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II.   A CHAPTER 11 PLAN OF REORGANIZATION CAN PERMANENTLY ENJOIN CLAIMS THAT PETITIONER HAS AGAINST GADGET WHEN THE CLAIMS ARE NOT DERIVATIVE OF PADCO’S CLAIMS AGAINST GADGET AND NO PROVISION IS MADE FOR FULL PAYMENT OF THE ENJOINED CLAIMS. .17

A.   The Express Statutory Language of the Bankruptcy Code Authorizes the

Bankruptcy Courts to Issue Permanent Injunctions. .............................................17

1.   Reading section 105(a) and section 1123(b)(6) of the Bankruptcy Code together authorizes the bankruptcy court to issue a permanent injunction to successfully carry out Padco’s reorganization plan. .........................................18

2.   Section 524(e) of the Bankruptcy Code does not limit the bankruptcy court’s

authority to issue a permanent injunction to successfully carry out Padco’s reorganization plan. .............................................................................................21

B.   A Permanent Injunction of Petitioner’s Claims Against a Gadget is Permissible

as long as this Permanent Injunction is both Necessary and Appropriate Under Unusual Circumstances. ............................................................................................23

CONCLUSION ............................................................................................................................28

APPENDICES APPENDIX A ................................................................................................................................. I APPENDIX B ................................................................................................................................ II APPENDIX C ............................................................................................................................... III APPENDIX D .............................................................................................................................. IV APPENDIX E ................................................................................................................................ V APPENDIX F .............................................................................................................................. VI APPENDIX G ............................................................................................................................. VII APPENDIX H ............................................................................................................................ VIII APPENDIX I ................................................................................................................................. X APPENDIX J ............................................................................................................................... XI APPENDIX K ............................................................................................................................. XII APPENDIX L ............................................................................................................................ XIII

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APPENDIX M .......................................................................................................................... XIV APPENDIX N ............................................................................................................................. XV

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TABLE OF AUTHORITIES

Statutory Provisions

11 U.S.C. § 105(a). ....................................................................................................... viii, 18, 19, I

11 U.S.C. § 1101(2). ................................................................................................................ viii, 5

11 U.S.C. § 1123(b)(6). ..................................................................................................... ix, 18, VI

11 U.S.C. § 1127(b). ......................................................................................................... ix, 13, VII

11 U.S.C. § 1129. ............................................................................................................ ix, 21, VIII

11 U.S.C. § 1141(a) ...................................................................................................................... 17

11 U.S.C. § 1141(d)(1). ............................................................................................................ ix, X

11 U.S.C. § 1144. ..................................................................................................................... ix, XI

11 U.S.C. § 363(m). .......................................................................................................... viii, 13, II

11 U.S.C. § 364(e). .......................................................................................................... viii, 13, III

11 U.S.C. § 524(e). .......................................................................................................... viii, 21, IV

28 U.S.C. § 157(b)(1). ...................................................................................................... ix, 15, XII

28 U.S.C. § 158(a)(1). ..................................................................................................... ix, 15, XIII

U.S. Supreme Court Cases

Gladstone, Realtors v. Bellwood,

441 U.S. 91 (1979) .................................................................................................................... 16

Stern v. Marshall,

564 U.S. 462 (2011). ................................................................................................................. 15

United States v. Energy Res. Co.,

495 U.S. 545 (1990) ...................................................................................................... 17, 18, 19

Warth v. Seldin,

422 U.S. 490 (1975) .................................................................................................................. 16

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U.S. Circuit Court of Appeals Cases

Airadigm Commuc’ns, Inc. v. FCC (In re Airadigm Commc’ns, Inc.),

519 F.3d 640 (7th Cir. 2008). ....................................................................................... 18, 21, 22

Bank of N.Y. Tr. Co. NA v. Official Unsecured Creditors’ Comm. (In re Pac. Lumber Co.),

584 F.3d 229 (5th Cir. 2009). ....................................................................................... 13, 14, 15

Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.),

280 F.3d 648 (6th Cir. 2002). ............................................................................................ passim

Deutsche Bank AG, London Branch v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Networks, Inc.),

416 F.3d 136 (2d Cir. 2005)..................................................................................... 5, 18, 19, XV

Feld v. Zale Corp. (In re Zale Corp.),

62 F.3d 746 (5th Cir. 1995) ...................................................................................................... 23

First Union Real Estate Equity & Mortg. Invs. v. Club Assocs. (In re Club Assocs.),

956 F.2d 1065 (11th Cir. 1992). .................................................................................... 5, 10, 12

Grasslawn Lodging, LLC v. Transwest Resort Props.,

801 F.3d 1161 (9th Cir. 2015). .......................................................................................... passim

In re Cont’l Airlines,

91 F.3d 553 (3d Cir. 1996), cert. denied, 519 U.S. 1057 (1997). ...................................... passim

In re Crystal Oil Co.,

854 F.2d 79 (5th Cir. 1988). ......................................................................................... 7, 8, 9, 11

In re Drexel Burnham Lambert Grp.,

960 F.2d 285 (2d Cir. 1992)................................................................................................ 17, 23

In re SemCrude,

728 F.3d 314 (3d Cir. 2013)............................................................................................... passim

In re Specialty Equip. Cos.,

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3 F.3d 1043 (7th Cir. 1993). ............................................................................................... 18, 21

In re UNR Indus.,

20 F.3d 766 (7th Cir. 1994). .............................................................................................. passim

Landsing Div. Props. v. First Nat’l Bank and Trust Co. of Tulsa (In re W. Real Estate Fund),

922 F.2d 592 (10th Cir. 1990) .................................................................................................. 23

MacArthur Co. v. Johns-Manville Corp.,

837 F.2d 89 (2d Cir. 1988)........................................................................................................ 18

Manges v. Seattle-First Nat’l Bank (In re Manges),

29 F.3d 1034 (5th Cir. 1994) .................................................................................................... 10

Menard-Sanford v. Mabey (In re A.H. Robins Co.),

880 F.2d 694 (4th Cir. 1989). ............................................................................................ passim

Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.),

677 F.3d 869 (9th Cir. 2012). ................................................................................................... 10

Republic Supply Co. v. Shoaf,

815 F.2d 1046 (5th Cir. 1987) .................................................................................................. 21

Resorts Int'l v. Lowenschuss (In re Lowenschuss),

67 F.3d 1394 (9th Cir. 1995) .................................................................................................... 23

Rev Op Grp. v. ML Manager LLC (In re Mortgs. Ltd.),

771 F.3d 1211 (9th Cir. 2014). ................................................................................................... 4

Rochman v. Ne. Util. Serv. Grp. (In re Pub. Serv. Co.),

963 F.2d 469 (1st Cir. 1992) ....................................................................................................... 8

SE Prop. Holdings, LLC v. Seaside Eng’g & Surveying (In re Seaside Eng’g & Surveying),

780 F.3d 1070 (11th Cir. 2015). ............................................................................. 23, 24, 25, 26

Templeton v. O’Cheskey (In re Am. Hous. Found.),

785 F.3d 143 (5th Cir. 2015). ..................................................................................................... 4

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U.S. District Court Cases

Master Mortg. Inv. Fund, Inc. v. Am. Nat’l Fire Ins. Co. (In re Master Mortg. Inv. Fund, Inc.), 168 B.R. 930 (Bankr. W.D. Mo. 1994). ................................................................................... XV

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OPINIONS BELOW

The bankruptcy court confirmed a Chapter 11 reorganization plan for Padco in January,

2015. R. at 3. After the bankruptcy court did not find any support for Petitioner’s novel tort

theory, Petitioner requested a stay of the confirmation order. R. at 5. The bankruptcy court

denied the stay requested. R. at 5.

Next, Petitioner requested a stay from the District Court for the District of Moot, but the

district court denied the request. R. at 5. Petitioner appealed to the district court. R. at 5. Padco

moved to dismiss the appeal. R. at 5. The district court affirmed the confirmation order and the

appeal on equitable mootness grounds on June 30, 2016. R. at 5.

Subsequently, Petitioner appealed to the United States Court of Appeals for the

Thirteenth Circuit. R. at 6. On October 1, 2016, the court of appeals decided and affirmed the

appeal on equitable mootness grounds. R. at 2. Petitioner filed a writ of certiorari with the

United States Supreme Court. R. at 1.

STATEMENT OF JURISDICTION

The formal statement of jurisdiction is waived pursuant to Competition Rule VIII.

STATUTORY PROVISIONS

The statutory provisions listed below are relevant to determine the present case. These

provisions are reproduced in Appendices A through N.

11 U.S.C. § 105(a).

11 U.S.C. § 363(m).

11 U.S.C. § 364(e).

11 U.S.C. § 524(e).

11 U.S.C. § 1101(2).

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11 U.S.C. § 1123(b)(6).

11 U.S.C. § 1127(b).

11 U.S.C. § 1129.

11 U.S.C. § 1141(d)(1).

11 U.S.C. § 1144.

28 U.S.C. § 157(b)(1).

28 U.S.C. § 158(a)(1).

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STATEMENT OF FACTS

Padco, Inc. (“Padco”) faced voluminous litigation after many of their tablet computers

exploded because of a battery defect. R. at 2. The defective batteries almost caused the

liquidation of Padco because the company lacked adequate capital to continue its business in the

face of such numerous lawsuits. R. at 2. In an attempt to reorganize, Padco filed for Chapter 11

reorganization. R. at 2. Gadget, Inc., (“Gadget”) provided over $500 million in financial support

to help Padco reorganize. R. at 2. Moreover, as part of the reorganization plan, Padco would be

merged into Gadget. R. at 2-3. After the plan of reorganization merging Padco into Gadget was

confirmed, Gadget borrowed an additional $2.6 billion from public bonds to redesign the

defective product but also created new products. R. at 3.

As part of the reorganization plan, unsecured creditors were divided into a number of

different classes. R. at 3. The plan classified Megan Kuzniewski (“Petitioner”) in a separate class

of unsecured creditors, which were provided with a larger bankruptcy distribution than other

unsecured creditors. R. at 3. Petitioner and the affected class received this larger distribution to

compensate them for their enjoined direct claims against Gadget. R. at 3. Furthermore, the

bankruptcy court found Petitioner and each creditor in her class “received a distribution that was

more than it would have received in a Chapter 7 liquidation.” R. at 5.

Petitioner argued that an injunction against Gadget was inappropriate and not permissible

under the Bankruptcy Code. R. at 4. Petitioner subsequently furthered novel tort theories relating

to Gadget’s pre-bankruptcy ownership of Padco. R. at 4. However, even while Padco was

Gadget’s subsidiary, Gadget kept its operations separate. R. at 4. Thus, after making specific

factual findings, the bankruptcy court confirmed the plan in 2015. R. at 3. The bankruptcy court

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determined the injunction was essential to the reorganization plan, fair to Gadget, and reasonable

to Petitioner. R.at 5.

Even though Petitioner voted to reject the proposed plan, eighty percent of Petitioner’s

class voted in favor of the proposed plan. R. at 4. Thus, the bankruptcy court determined that an

overwhelming majority of Petitioner’s class approved the reorganization plan. R. at 4. As to the

Petitioner’s tort claims, the bankruptcy court applied a probability discount of ninety percent to

those claims and determined that the premium provided to Petitioner’s class exceeded the value

of the direct claims that were being enjoined. R. at 5. Petitioner did not challenge these findings.

R. at 5. However, the possible claims asserted by Petitioner against Gadget were so large that

Gadget was concerned and unwilling to participate in the reorganization unless Gadget could be

certain it would be free of all liabilities related to the defective battery. R. at 3. At the

confirmation hearing, Gadget’s Chief Executive Officer, Naffie Lamin, testified as to Gadget’s

concern. R. at 3. Furthermore, the bankruptcy court found Gadget’s financial contributions to the

plan far exceeded the value of Padco’s assets and the value of any Padco-related claims against

Gadget. R. at 5.

Furthermore, two days after the confirmation order was entered by the Bankruptcy Court,

the reorganization plan became substantially consummated within the meaning of 11 U.S.C. §

1101(2). R. at. 5. From the time the plan was confirmed by the bankruptcy court to the time the

distict court affirmed the confirmation, Padco emerged from the bankruptcy and the

reorganization plan as a successful enterprise. R. at 3.

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SUMMARY OF THE ARGUMENT

An appellate court has the authority to decline to hear an appeal from a bankruptcy court

order confirming a Chapter 11 plan on prudential grounds using equitable mootness principles if

the plan has been substantially consummated, the relief sought would significantly harm

investors who have justifiably relied on the reorganization order, and the relief sought would

fatally scramble the plan. Additionally, an appellate court has the authority to decline to hear an

appeal from a bankruptcy court because the Bankruptcy Code embodies a strong policy limiting

judicial review. Although section 1127(b) of the Bankruptcy Code does not expressly preclude

an appellate court to review a case, an appellate court could supplement section 1127(b) with

equitable mootness principles to preclude itself from hearing a case. Furthermore, an appellate

court has the authority to decline to hear an appeal from a bankruptcy court because applying

prudential factors, such as equitable mootness, are not a violation of Article III of the

Constitution.

Moreover, a Chapter 11 plan of reorganization may include a permanent injunction of

claims not derivative of the debtor’s claims regardless of creditors objection. Despite the

reorganization plan not providing provisions for full payment of the enjoined claims, the express

statutory language of the Bankruptcy Code authorizes bankruptcy courts to issue permanent

injunctions under sections 105(a) and 1123(b)(6) for the success of the reorganization.

Furthermore, section 524(e) of the Bankruptcy Code does no limit bankruptcy courts from

issuing permanent injunctions as long as they are both necessary and appropriate under unusual

circumstances.

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ARGUMENT

This Court reviews a lower court’s findings of law de novo and exercises plenary review

over those questions. Templeton v. O’Cheskey (In re Am. Hous. Found.), 785 F.3d 143, 152

(5th Cir. 2015).

I.   AN APPELLATE COURT HAS AUTHORITY TO DECLINE TO HEAR AN APPEAL FROM A BANKRUPTCY COURT ORDER CONFIRMING A CHAPTER 11 PLAN ON PRUDENTIAL GROUNDS USING EQUITABLE MOOTNESS PRINCIPLES.

“Bankruptcy separates the past and future of an enterprise, satisfying claims attributable

to yesterday’s activities out of existing assets and thereby enabling business operations that have

positive value to carry on, unburdened by the sunk costs of blunders that are beyond recall.” In

re UNR Indus., 20 F.3d 766, 771 (7th Cir. 1994). “Equitable mootness is a prudential doctrine

by which a court elects not to reach the merits of a bankruptcy appeal.” Grasslawn Lodging,

LLC v. Transwest Resort Props., 801 F.3d 1161, 1167 (9th Cir. 2015). “An appeal is equitably

moot if the case presents transactions that are so complex or difficult to unwind that debtors,

creditors, and third parties are entitled to rely on the final bankruptcy court order.” Id. (citing

Rev Op Grp. v. ML Manager LLC (In re Mortgs. Ltd.), 771 F.3d 1211, 1215 n.2 (9th Cir.

2014)). Judge Easterbrook from the Seventh Circuit perfectly describes the definition of

“equitable mootness” as the “unwillingness to alter the outcome” of a bankruptcy case.1 In re

UNR Indus., 20 F.3d at 769; In re Cont’l Airlines, 91 F.3d 553, 559 (3d Cir. 1996), cert. denied,

519 U.S. 1057 (1997). “The test for mootness reflects a court’s concern for striking the proper

balance between the equitable considerations of finality and good faith reliance on a judgment

and the competing interests that underlie the right of a party to seek review of a bankruptcy court

1 Bankruptcy courts have invoked the equitable mootness doctrine in dismissing a complaint seeking revocation of plan confirmation under 11 U.S.C. § 1144 outside the appellate context. In re SemCrude, L.P., 728 F.3d 314, 317 n.1. (3d Cir. 2013).

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order adversely affecting him.” First Union Real Estate Equity & Mortg. Invs. v. Club Assocs.

(In re Club Assocs.), 956 F.2d 1065, 1069 (11th Cir. 1992). “Courts have held that ‘an appeal

should be dismissed as moot when, even though effective relief could conceivably be fashioned,

implementation of that relief would be inequitable.” Deutsche Bank AG, London Branch v.

Metromedia Fiber Network, Inc. (In re Metromedia Fiber Networks, Inc.), 416 F.3d 136, 143 (2d

Cir. 2005); In re Cont’l Airlines, 91 F.3d at 559; In re Club Assocs., 956 F.2d at 1065 (using a

holistic approach to equitable mootness). “If equitable mootness is limited in scope and

cautiously applied, this doctrine provides a vehicle whereby the court can prevent substantial

harm to numerous parties.” In re Cont’l Airlines, 91 F.3d at. 559.

A.   The Third Circuit Established a Five-Factor Test to Determine Equitable Mootness in In re Continental Airlines in 1996. This Five Factor Test Has Boiled Down to Two Analytical Questions in In re SemCrude in 2013.

The Third Circuit relied on five2 prudential factors in In re Continental Airlines when

assessing equitable mootness; however, the same court reassessed the factors and merged them

into two analytical questions in In re SemCrude. In re SemCrude, 728 F.3d at 320-21. The court

balances: (1) if the plan has been substantially consummated; and (2) if so, would granting the

relief requested (i) fatally scramble the plan and/or (ii) significantly harm third parties who have

relied on the plan and are not present in front of the court. Id. at 321. The burden is on the party

seeking dismissal. Id. Therefore, the Thirteenth Circuit should implement the two analytical

questions in In re SemCrude to assess equitable mootness.

1.   Padco’s Reorganization Plan Has Been Substantially Consummated.

“Whether one or another detail in a plan of reorganization could have been accomplished

better is precisely the sort of question that should not upset a substantially consummated plan of

2 Appendix M.

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reorganization.” In re UNR Indus., 20 F.3d at 771. The term “substantially consummated”3 has

been defined in the Bankruptcy Code. 11 U.S.C. § 1101(2). See In re SemCrude, 728 F.3d at

321; Transwest Resort, 801 F.3d at 1168. “A plan has reached substantial consummation when it

advances to the point that turning back may be imprudent.” In re SemCrude, 728 F.3d at 321.

The complexity of transactions involved in the reorganization are heavily weight in favor of not

upsetting the plan. In re Cont’l Airlines, 91 F.3d at 560.

The substantial consummation of a plan allows courts not to reverse a reorganization plan

under equitable mootness grounds. For instance, the Third Circuit held the plan in In re

SemCrude was substantially consummated because the distribution of assets had been made to

the creditors, financial transactions were put in place, and the Reorganized Debtors had emerged

from bankruptcy as a financially sound business. 728 F.3d at 323. To illustrate, in In re Cont’l

Airlines, the Third Circuit similarly held the plan was substantially consummated because

investors made a $450 million investment into the reorganized entity. 91 F.3d at 561.

Additionally, all elements of the plan, except distributions to the unsecured creditors, had been

completed, and a reversal of the order confirming the plan likely would put the appellee back

into bankruptcy. Id.

The plan has been substantially consummated when the transfer of all of the property

proposed by the plan has been transferred. Similar to In re SemCrude, in which the assets of the

plan had been distributed to the point of no return, Padco’s assets within the Plan had been fully

distributed. The bankruptcy court confirmed Padco’s reorganization plan in January of 2015,

and the district court affirmed the confirmation order in middle 2016. Padco’s reorganization

plan classified Padco’s unsecured creditors into a number of classes, some classes received a

cash payout of a percentage of their claims, others received a mixture of cash and stock in 3 Appendix E.

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Gadget, and some others received only stocks in Gadget. In addition, most of the unsecured

creditors received at least some stocks in Gadget. Also, both Gadget stock and the bonds are

publically traded and numerous parties have bought and sold those securities since the plan

confirmation. Lastly, like in In re Cont’l Airlines, where a reversal of the plan would put the

appellee bank into bankruptcy, reversing Padco’s reorganization plan would most likely put the

Padco-Gadget merged company in bankruptcy again. Therefore, Padco’s reorganization plan has

been substantially consummated, and the court properly decided not to disturbe Padco’s plan.

2.   Petitioner Requested a Relief Which Will Fatally Scramble Padco’s Reorganization Plan and/or Which Will Significantly Harm Investors Who Have Justifiably Relied Upon Padco’s Confirmation Order.

Courts have applied jurisprudential principles of fairness and equity under the equitable

mootness doctrine. The strong public policy favors encouragement on reliance on the finality of

the bankruptcy court order, on the successful completion of large reorganizations, and on the

protection of innocent investors. In re Cont’l Airlines, 91 F.3d at 562, 565. Allowing an appeal

following a consummated reorganization diminishes the “reliance by third parties, and particular

investors, on the finality of the transaction.” Id. at 562. Thus, the Thirteenth Circuit properly

decided not to hear Petitioner’s claim under equitable mootness grounds in compliance with

public policy.

i.   Petitioner requested a relief which will fatally scramble Padco’s reorganization plan.

The Court must “assess if the remedies completely knock the props out from under

the plan and thereby create an uncontrollable situation for the bankruptcy court.” In re

SemCrude, 728 F.3d at 323; Transwest Resort, 801 F.3d at 1175 (Smith, J., dissenting). A plan

of reorganization should be disturbed only for compelling reasons. In re UNR Indus., 20 F.3d at

769; In re Crystal Oil Co., 854 F.2d 79, 82 (5th Cir. 1988). However, the appeal is not moot if

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the court could grant a partial and equitable relief. In re UNR Indus., 20 F.3d at 1171; In re

Cont’l Airlines, 91 F.3d at 565. “The strong public policy in favor of maximizing debtors’

estates and facilitating successful reorganization, reflected in the [Bankruptcy] Code itself,

clearly weighs in favor of encouraging reliance.” In re Cont’l Airlines, 91 F.3d at 565. Courts

rely on the plan if reorganization makes it imprudent to revise the plan. In re UNR Indus., 20

F.3d at 769. Relying on the finality of bankruptcy court confirmation orders is one public policy

that courts must weight in favor of not disturbing the reorganization plan. In re Cont’l Airlines,

91 F.3d at 561; Rochman v. Ne. Util. Serv. Grp. (In re Pub. Serv. Co.), 963 F.2d 469, 471-71

(1st Cir. 1992) (concluding the “mootness doctrine facilitates the important public policy

favoring orderly reorganizations and settlement of debtor[‘s] estates by affording finality to the

judgments of the bankruptcy court”); Transwest Resort, 801 F.3d at 1173 (stating reassessing the

reorganization plan discourages potential investors from relying on the finality of bankruptcy

court confirmation orders) (Smith, J., dissenting).

Courts should not disturb a reorganization plan because reliance on a successful

reorganization plan is critical. To illustrate in In re UNR Indus., the Seventh Circuit held

undoing part of plan is possible, but has ramifications for the rest of the plan. 20 F.3d at 769.

Furthermore, the court concluded intervention of the court would decrease the reliance on the

reorganization plan because warrants for additional stock have been issued and are trading,

corporate acquisitions and divestitures have occurred, tax consequences have been realized, large

insurance settlements have been disturbed, and lawsuits have been dismissed. Id. For instance,

in In re Crystal Oil, the Fifth Circuit held the relief requested would tremendously impact the

plan and would be evidently inequitable for the court to consider the merits of the appellant’s

appeal. 854 F.2d at 82. Next, the court also concluded common sense and equitable

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considerations require dismissal of the appellant’s appeal. Id. at 81 (emphasis added). The

appellee made several concessions, approved a $2,000,000 payment to the appellant, approved a

$4,000,000 payment to the unsecured creditors, allowed its rights to be subordinated to the

purchasers of new bonds, and accepted a new note with lower interest rate in exchange for the

existing note, to prompt court’s approval of a reorganization plan. Id. The court reasoned it

cannot deprive the appellee of the benefits the appellee bargained for without jeopardizing the

entire plan should the appellee retract major concessions. Id.

Finality of bankruptcy court order is key to encourage the reliance on the

reorganization plan. Similar to In re UNR Indus. and In re Crystal Oil, where the Seventh and

Fifth Circuits respectively concluded that intervention of the court will deteriorate the reliance on

a reorganization plan, the Thirteenth Circuit carefully considers the effect of altering Padco’s

reorganization plan. The court takes into consideration the complicated multi-party negotiation

that resolved a wide array of business and legal issues affecting Padco. The court states the

plan’s terms reflect a large number of compromises by different interest groups, unsecured

creditors, new, innocent investors, Padco, Gadget, and Petitioner. Padco has emerged from

bankruptcy as a successful enterprise after obtaining a successful reorganization plan.

Additionally, parallel to In re Crystal Oil, where the appellee made several concessions in

reliance of the plan, Padco’s reorganization plan achieved success because the parties to the

reorganization were able to rely on the confirmation order to seal their bargains and because

numerous third parties could trust on Padco’s apparent rise from bankruptcy to invest in the new

Padco-Gadget. Also, the parties to Padco’s reorganization plan traded their debt and equity

securities and entered into new transactions with Padco-Gadget. Moreover, because Gadget

relied on Padco’s reorganization plan, Gadget invested more than $500 million to redesign the

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Padco tablet computer and borrowed an additional $2.6 billion through a series of public bond

offerings that took place after the confirmation of the reorganization plan. The court properly

addresses and concludes that a reversal of this confirmation order would undermine public

confidence in the finality of bankruptcy orders and would make the successful completion of

large reorganizations more difficult. Thus, the court carefully and rightfully concluded not to

invalidate the permanent injunction against direct claims not to knock the props out from under

Padco’s plan. By applying the equitable mootness doctrine, the Thirteenth Circuit has complied

with public policy and encouraged the reliance on the finality of bankruptcy court orders and

successful completion of large reorganizations.

ii.   Petitioner requested a relief which will significantly harm investors who have justifiably relied upon Padco’s confirmation order.  

“To reach the matter of a bankruptcy appeal after confirmation . . . , [the court considers]

the effect of the requested relief on the rights of parties not before the court.” In re Cont’l

Airlines, 91 F.3d at 565 (emphasis added). Specific relief sought “must bear unduly on innocent

third party not before the court.” Transwest Resort, 801 F.3d at 1169. The alteration of the plan

in question should not “affect third party[‘s] interests to such an extent that the change is

inequitable.” Id. (citing Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe

Insulation Co.), 677 F.3d 869, 882 (9th Cir. 2012)). Courts should question whether they want to

encourage or discourage reliance by investors and others on the finality of bankruptcy

confirmation orders. Id. “Courts preserve plans of reorganization unless a powerful reason

demands alteration.” In re UNR Indus., 20 F.3d at 770. Courts weight in favor of the protection

of reliance by innocent parties who are not in front of the reviewing court, but who have acted in

reliance upon the plan as implemented when a relief is requested. In re Cont’l Airlines, 91 F.3d

at 562; In re Club Assocs., 956 F.2d at 1069; Manges v. Seattle-First Nat’l Bank (In re Manges),

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29 F.3d 1034, 1039 (5th Cir. 1994) (citing In re UNR Indus, 20 F.3d at 769 (“concept of

mootness from a prudential standpoint protects the interests of non-adverse third parties who are

not before the reviewing court but who have acted in reliance upon the plan as implemented”));

In re Crystal Oil, 854 F.2d at 81-82.

The relief sought would be overwhelmingly bearing on innocent third parties who relied

on the reorganization plan and who are not before the court. For instance, like in In re Cont’l

Airlines, the Third Circuit held the distribution had affected innocent third parties, including

unsecured creditors, the merger of fifty-three debtors other than the appellee-debtor, the partners

and foreign company who invested $110 million in cash in the reorganized entity, foreign

governments transferred various route authorities, and the reorganized entity’s assumption of

unexpired leases and executory contracts worth over $5.0 billion. 91 F.3d at 567. To illustrate,

in In re UNR Indus., the Seventh Circuit determined since the plan went into effect, more than

15 million shares of the reorganized entity have been distributed to its creditors and prepetition

shareholders and were traded on public exchanges. 20 F.3d at 769. Additionally, the court

found if the allocation of insurance proceeds must be changed, there will be a sudden revaluation

of the shares of the reorganized entity, which current holders (innocent third parties) purchased

on the assumption that all asbestos payments would be borne by the Trust. Id.

Protecting the reliance of innocent third parties on the reorganization plan reinforces their

investments on a Chapter 11 reorganization. For instance, in In re UNR Indus., the Third Circuit

reasoned every incremental risk of revision on appeal of a reorganization plan “puts a cloud over

the plan and the assets of the reorganized entity.” 20 F.3d at 770. The court recognized by

protecting the interest of investors who acquire assets in reliance on a plan of reorganization, a

court increases the price the estate can realize and produces benefits for creditors in the

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aggregate. Id. To illustrate, in In re Club Assocs., the Eleventh Circuit held the relief sought by

the appellant would jeopardize the plan as a whole. 956 F.2d at 1071. Next, the court

determined the relief sought by the appellant would put the limited partners’ newly invested

funds at risk. Id. For example, in In re Cont’l Airlines, the Third Circuit held the investors

relied on the bankruptcy court’s confirmation order in making the decision to proceed to close

the transaction and an essential disallowance of the appellant’s adequate protection claim. 91

F.3d at 562-63. The court found the investors agreed to an “Investment Agreement” which limit

their exposure as a condition of their participation in the plan. Id. at 563. The court concluded

“no statute, rule, or precedent would deny investors the right to limit their investments on the

existence of conditions which they believe give the newly reorganized company a reasonable

opportunity to succeed.” Id. at 563.

Innocent investors not before the court should not be harmed by the relief sought.

Similar to In re UNR Indus., where the shares of the reorganized entity were traded in public

exchange, after Padco-Gadget merged, both the Gadget stock and the bonds were publically

traded and numerous innocent parties have bought and sold those securities since the

confirmation of Padco’s plan. In addition, like in In re Cont’l Airlines, where the court protected

innocent, unsecured creditors and investors from the relief sought, the relief requested by

Petitioner will harm Padco’s numerous, innocent unsecured creditors who received a mixture of

cash and/or stock in Gadget. Most unsecured creditors received at least some stock in Gadget.

Protection of innocent parties not before the court encourages the reliance of these parties

on courts’ confirmation orders. Parallel to In re Club Assocs., where relief sought would

jeopardize the reliance of third parties on the reorganization plan, the Thirteenth Circuit properly

recognizes the policy of protecting reliance parties is at least as strong for a plan’s financial

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sponsor like Gadget as it is for unrelated, innocent third parties. Similar to In re Cont’l Airlines,

where the investors negotiated the plan to limit their liabilities, eliminating the injunction and

permitting Petitioner’s claims to be asserted against Gadget would frustrate and undermine

Gadget’s expectations. Gadget is justifiably relying on Padco’s confirmation order. In addition,

numerous, innocent parties who are not before the court have purchased and traded in the debt

and equity securities of Gadget since confirmation. Their interests would be adversely affected

by a decision exposing Gadget to these direct claims. Thus, the relief Petitioner is seeking will

significantly harm innocent, unsecured creditors and investors who have justifiably relied upon

Padco’s confirmation order. By applying the equitable mootness doctrine, the Thirteenth Circuit

has complied with public policy and protected the reliance of innocent third parties not before

the court on bankruptcy court orders, the safety of their investments, and successful completion

of large reorganization.

Therefore, because the plan has been substantially consummated, the relief requested

would significantly harm innocent investors who have justifiably relied on the confirmation

order and would fatally scramble Padco’s reorganization plan, this Court should implement the

two analytical questions in In re SemCrude to find Petitioner’s claim equitably moot.

B.   The Bankruptcy Code Embodies a Strong Policy of Limiting Judicial Review.

Several provisions of the Bankruptcy Code provide that courts should not disturbed a

consummated transaction or plan of reorganization. In re UNR Indus., 20 F.3d at 769. Sections

363(m) and 364(e) of the Bankruptcy Code limit the review of appellate courts on consummated

transactions, asset sales and post-petition financing, respectively. 11 U.S.C. §§ 363(m), 364(e).

See In re SemCrude, 728 F.3d at 317; Bank of N.Y. Tr. Co. NA v. Official Unsecured Creditors’

Comm. (In re Pac. Lumber Co.), 584 F.3d 229, 240 (5th Cir. 2009). Both sections protect good

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faith reliance parties from reversal on appeal. Additionally, section 1127(b) diminishes the

power of a bankruptcy court to alter a plan of reorganization after its confirmation and

substantial consummation. 11 U.S.C. § 1127(b). See In re UNR Indus., 20 F.3d at 769. Unlike

sections 363(m) and 364(e), section 1127(b) does not restrain the power of a court of appeals. In

re UNR Indus., 20 F.3d at 769; In re SemCrude, 728 F.3d at 318; In re Pac. Lumber, 584 F.3d at

240. Nevertheless, the courts applied section 1127(b) to preserve the interests bought and paid

for in reliance on the confirmation by good faith reliance parties. In re UNR Indus., 20 F.3d at

769.

The Bankruptcy Code restricts appellate review to protect good faith reliance parties

under sections 363(m). To illustrate, in In re UNR Indus., the Seventh Circuit interpreted the

language of section 363(m) to limit the appellate court review. 20 F.3d at 769. The court

concluded a transaction survives appellate review even if transaction should not have been

authorized in the first place. Id. However, the Bankruptcy Code does not limit appellate courts

to review confirmation orders under section 1127(b). For instance, in In re Pac. Lumber, the

Fifth Circuit held because the Bankruptcy Code does not expressly prohibit appellate courts from

reviewing the confirmation orders under section 1127(b), the court attempts to “strike the proper

balance between the quotable considerations of finality and good faith reliance on a judgment

and competing interests that underlie the right of a party to seek review of a bankruptcy order

adversely affecting him.” 584 F.3d at 240. Additionally, in In re SemCrude, the Third Circuit

held because the language in 1127(b) of the Code does not expressly limit the power of appellate

courts to review a confirmation order, courts have filled the gap by applying the prudential

factors of equitable mootness. 728 F.3d at 317-18. The court also considered the interests of

finality and the interests of the petitioning party as gap fillers. Id. at 318.

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The Bankruptcy Code embodies a strong policy of limiting judicial review when the plan

has been substantially consummated by filling in the gaps of section 1127(b) with the prudential

factors of equitable mootness. Similar to In re Pac. Lumber, where the court reasoned section

1127(b) of the Code did not expressly limit its power to review a confirmation order, the

Thirteenth Circuit properly determined section 1127(b) curtails its power to modify Padco’s plan

after confirmation and substantial consummation have taken effect. Like its sister court in In re

Pac. Lumber, where the court applied prudential factors to fill in the gaps of section 1127(b), the

Thirteenth Circuit equitably weights the prudential factors of equitable mootness, the interests of

finality in Padco’s plan, and the interests of Petitioner at stake to fill in the interstices and

concludes not to hear Petitioner’s claims after substantial consummation of Padco’s

reorganization plan. Thus, the Thirteenth Circuit properly interprets that it has the power to

review Petitioner’s claim under section 1127(b) of the Bankruptcy Code and rightfully

determines not to hear Petitioner’s claim under equitable mootness grounds.

C.   The Thirteenth Circuit Did Not Violate Article III of the Constitution When the Court Decided Not to Hear Petitioner’s Claim Under Equitable Mootness Grounds.

The Bankruptcy Code grants bankruptcy courts the authority to enter appropriate

confirmation orders “subject to review” from Article III courts under 158 of title 28. 28 U.S.C. §

157(b)(1) (2015). Section 158(a)(1) gives district courts jurisdiction to hear appeals from final

orders. See id. § 158(a)(1). “Article III of the Constitution provides that the judicial power of

the United States may be vested only in courts whose judges enjoy the protections set forth in

that Article.” Stern v. Marshall, 564 U.S. 462, 503 (2011). Article III courts have the power to

adjudicate, render final judgments, and issue binding orders in traditional common law claims to

ordinary appellate review. Id. at 494. Article III courts have used prudential limitations when

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exercising appellate review. Gladstone, Realtors v. Bellwood, 441 U.S. 91, 99 (1979) (analizing

prudential limitations on a standing matter).

Article III courts have applied prudential principles when determining whethwe to hear or

not a case. For instance, in Bellwood, this Court held even when a case falls within

constitutional boundaries, a plaintiff may still lack standing under prudential principles. Id.

(emphasis added). Moreover, this Court determined Article III courts could avoid deciding a

case where no individual rights could have been vindicated. Id. at 99-100. This Court also

concluded “Congress may expand standing to the full extent permitted by Article III, so allowing

litigant by one ‘who otherwise would be barred by prudential standing rules.’” Id. (citing Warth

v. Seldin, 422 U.S. 490, 501 (1975)) (emphasis added).

Using the prudential rule of equitable mootness to decline hearing a case is within

appellate courts’ power. The Thirteenth Circuit did not violate Article III of the Constitution by

applying equitable mootness to Petitioner’s claim. This Court has recognized the need to apply

prudential factors even when a petitioner has asserted a violation of a right. Similar to Bellwood,

where this Court used prudential standing rules to decline to review a case, the Thirteenth Circuit

found necessary the application of prudential factors on the grounds of equitable mootness. The

court mirrored this Court’s ruling in Bellwood not to upset Padco’s reorganization plan. Thus,

the Thirteenth Circuit did not violate Article III of the Constitution by relying on equitable

mootness grounds to decline to hear Petitioner’s claim.

Therefore, an appellate court has the authority to decline to hear an appeal from a

bankruptcy court order confirming a Chapter 11 plan on prudential grounds using equitable

mootness principles if the plan has been substantially consummated, the relief requested would

significantly harm investors who have justifiably relied on the reorganization order, and the relief

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requested would fatally scramble the plan. In addition, an appellate court has the authority to

decline to hear an appeal from a bankruptcy court because the Bankruptcy Code embodies a

strong policy limiting judicial review after a plan has been substantially consummated and

because applying prudential factors, such as equitable mootness, are not in violation of Article III

of the Constitution.

II.   A CHAPTER 11 PLAN OF REORGANIZATION CAN PERMANENTLY ENJOIN CLAIMS THAT PETITIONER HAS AGAINST GADGET WHEN THE CLAIMS ARE NOT DERIVATIVE OF PADCO’S CLAIMS AGAINST GADGET AND NO PROVISION IS MADE FOR FULL PAYMENT OF PETITIONER’S ENJOINED CLAIMS.

“The Bankruptcy Code does not explicitly prohibit or authorize a bankruptcy court [from

enjoining] a non-consenting creditor’s claims against a non-debtor to facilitate a reorganization

plan.” Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d

648, 656 (6th Cir. 2002). Nevertheless, bankruptcy courts have broad authority to modify

creditor-debtor relationships under a Chapter 11 plan of reorganization. Id. (citing United States

v. Energy Res. Co., 495 U.S. 545, 549 (1990)). “A court may enjoin a creditor from suing a

[non-debtor], provided the injunction plays an important part in the debtor’s reorganization

plan.” In re Drexel Burnham Lambert Grp., 960 F.2d 285, 293 (2d Cir. 1992); Menard-Sanford

v. Mabey (In re A.H. Robins Co.), 880 F.2d 694, 701 (4th Cir. 1989). Thus, the bankruptcy

court has the authority to permanently enjoin Petitioner from suing a non-debtor such as Gadget.

A.   The Express Statutory Language of the Bankruptcy Code Authorizes the Bankruptcy Courts to Issue Permanent Injunctions.

“Bankruptcy courts are forums for resolving complex and large mass litigations and have

a statutory power to reorder creditor-debtor relations when needed to achieve a successful

reorganization.” See generally In re Dow Corning, 280 F.3d 648. “Bankruptcy courts do have

the power to conclude the legality of provisions, including releases, incorporated into a

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reorganization plan.” In re Specialty Equip. Cos., 3 F.3d 1043, 1045 (7th Cir. 1993). The

provisions of the confirmed plan “bind all creditors whether or not a particular creditor has voted

to accept the plan.” Id. at 1046 (citing 11 U.S.C. § 1141(a)). Thus, bankruptcy courts are able to

exercise broad equitable powers within the plans of reorganization themselves under section

105(a) and section 1123(b)(6) of the Bankruptcy Code and are not limited by section 524(e) of

the Bankruptcy Code.

1.   Reading section 105(a) and section 1123(b)(6) of the Bankruptcy Code together authorizes the bankruptcy court to issue a permanent injunction to successfully carry out Padco’s reorganization plan.

The Bankruptcy Code states “[t]he court may issue any order, process, or judgment that is

necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a) (emphasis

added); Energy Res. Co., 495 U.S. at 549; In re Metromedia Fiber, 416 F.3d at 142; In re A.H.

Robins, 880 F.2d at 701; MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 93 (2d Cir.

1988). This section has been interpreted liberally to enjoin claims that might impede the

reorganization process. MacArthur, 837 F.2d at 93 (emphasis added). “Any power that a judge

enjoys under [section] 105 must derive ultimately from some other provision [such as section

1123(b)(6)] of the Bankruptcy Code.” In re Metromedia Fiber, 416 F.3d at 142; In re Dow

Corning, 280 F.3d at 656. “The Code grants the bankruptcy courts residual authority to approve

reorganization plans including ‘any [other] appropriate provision not inconsistent with the

applicable provisions of this title.’” 11 U.S.C. § 1123(b)(6); see also Energy Res. Co., 495 U.S.

at 549; Airadigm Commuc’ns, Inc. v. FCC (In re Airadigm Commc’ns, Inc.), 519 F.3d 640, 657

(7th Cir. 2008). “When a plan provides for the full payment of all claims, enjoining claims

against a non-debtor so as not to defeat reorganization is consistent with the bankruptcy court’s

primary function.” In re Dow Corning, 280 F.3d at 656 (citing In re A.H. Robins, 880 F.2d at

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701) (emphasis added). Nevertheless, even if a plan is consistent with the Bankruptcy Code, a

provision cannot be appropriate if it conflicts with another law the bankruptcy court should have

taken into consideration when exercising its discretion. Energy Res. Co., 495 U.S. at 586. See

also In re Metromedia Fiber, 416 F.3d at 141 (stating “section 105(a) does not allow the

bankruptcy court to create substantive rights that are unavailable under applicable law”).

Section 105(a) grants bankruptcy courts broad equitable powers to carry out provisions of

the Bankruptcy Code. For instance, in Energy Res. Co., this Court held a bankruptcy court had

the authority to order the petitioner (IRS) to apply payments to trust fund liabilities if the

bankruptcy court determined this designation was necessary for the success of the reorganization

plan. 495 U.S. at 548-49. This Court determined such action did not violate its broad power

under section 105(a). Id. at 551. In addition, this Court concluded restrictions, that provide a

priority for specified tax claims, make those tax debts non-dischargeable, and guarantee the

collection of the tax debt owed, on a bankruptcy court’s authority did not preclude the court from

issuing orders of the type on petitioner. Id. at 549, 550. The respondents argued tax payments

within a Chapter 11 reorganization were best characterized as voluntary; thus, the petitioner’s

own rules bind the petitioner to respect the debtor’s designation of tax payments if the

bankruptcy court deemed it fit for the success of the reorganization. Id. at 548.

Section 105(a) allows bankruptcy courts to issue orders to prevent interference with a

successful reorganization of a plan. For example, in In re A.H. Robins, the Fourth Circuit held

section 105(a) granted the power to the bankruptcy court to carefully design a reorganization

plan in conjunction with a settlement agreement for the satisfaction of the petitioners’ (class B

members who chose to opt-out for compensatory damages) claim. 880 F.2d at 700, 701. The

court concluded the permanent injunction was essential to the reorganization. Id. at 702. Thus,

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the court stated the petitioners had two choices, either resort to the source of funds provided for

them in the plan and the settlement agreement,4 or be prohibited from interfering with the

reorganization, including all the other creditors involved. Id.

Consistent with a bankruptcy court’s equitable powers, enjoining the claims against a

non-debtor so as to defeat the reorganization plan is consistent with sections 105(a) and

1123(b)(6). To illustrate, in In re Dow Corning, the Sixth Circuit held the bankruptcy court had

the authority to enjoin claims against third parties under sections 105(a) and 1123(b)(6) of the

Bankruptcy Code. 280 F.3d at 656-57. Additionally, the court also concluded the injunction

was not inconsistent with the Bankruptcy Code and was authorized under section 1123(b)(6). Id.

at 657. The court reasoned a bankruptcy court has considerable discretion to reorder creditor-

debtor relationship in order to achieve successful reorganization. Id.

In a Chapter 11, the bankruptcy court has the authority to enjoin Petitioner’s direct claim

against Gadget under the broad equitable power that sections 105(a) and 1123(b)(6) grant.

Similar to In re A.H. Robins and In re Dow Corning, where the Fourth and Sixth Circuits,

respectively, reasoned that bankruptcy courts, as courts of equity, are granted broad discretion

under sections 105(a) and 1123(b)(6) of the Bankruptcy Code to include permanent injunctions,

the Thirteenth Circuit properly concluded the bankruptcy court has the broad authority under the

language of sections 105(a) and 1123(b)(6) of the Code to issue a permanent injunction against

Petitioner’s non-derivative claims to ensure Padco’s successful reorganization. Therefore,

sections 105(a) and 1123(b)(6) of Chapter 11 of the Code properly allows the bankruptcy court

to issue a permanent injunction, in which, Petitioner is stopped to raise non-derivative claims

against Gadget for the success of Padco’s reorganization plan.

4 The In re A.H. Robins’s court also stated the doctrine of marshalling is analogous to the equitable power section 105(a) grants to bankruptcy courts because “a creditor has no right to choose which of two funds will pay his claim.” In re A.H. Robins, 880 F.2d at 701.

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2.   Section 524(e) of the Bankruptcy Code does not limit the bankruptcy court’s authority to issue a permanent injunction to successfully carry out Padco’s reorganization plan.

The Bankruptcy Code states a “discharge of a debt of the debtor does not affect the

liability of any other entity on . . . such debt.” 11 U.S.C. § 524(e); In re Airadigm Commc’ns,

519 F.3d at 656. Section 524(e) works as a saving clause, limits the operation of other parts of

the bankruptcy code, and preserves rights that might be construed as lost after the reorganization.

519 F.3d at 656. Nevertheless, section 524(e) “does not purport to limit the bankruptcy court’s

powers to release a non-debtor from a creditor’s claims.” Id. See In re A.H. Robins, 880 F.2d at

702; In re Specialty Equip. Cos., 3 F.3d at 1047 (concluding the language of section 524(e) does

not purport to limit or restrict the power of the bankruptcy court to otherwise grant a release to a

non-debtor); Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1050 (5th Cir. 1987) (stating section

524(e) “does not by its specific words preclude the discharge of a guaranty when it has been

accepted and confirmed as an integral part of a plan of reorganization”). “If Congress would

have intended such a limit, [Congress] would have used the mandatory terms ‘shall’ or ‘will’

rather than definitional term ‘does.’” In re Airadigm Commc’ns, 519 F.3d at 656 (citing 11

U.S.C. § 1129(a) “[t]he court shall confirm a plan only if the following requirements are met . . .

.”) (emphasis added).

Section 524(e) does not preclude bankruptcy courts from releasing a non-debtors’

liabilities under a Chapter 11 reorganization plan. For instance, in In re Airadigm Commc’ns,

the Seventh Circuit held section 524(e) did not bar a release of liability of a non-debtor without

consent of creditors. 519 F.3d at 656. The court reasoned if Congress would have meant section

524(e) to act as a limitation on release of non-debtors’ liabilities, Congress would have used

mandatory language when writing section 524(e). Id. The debtor-appellee filed for a Chapter 11

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bankruptcy that included a provision releasing the non-debtor (financier) from all liability in

connection with the reorganization, except for willful misconduct. Id. at 655. Additionally, in In

re A.H. Robins, the Fourth Circuit held “section 524(e) need not be literally applied to limit the

power of the bankruptcy courts.” 880 F.2d at 702. The court reasoned section 524(e) should not

be construed to limit the equitable power of the bankruptcy court to enjoin claims against a non-

debtor, where such claims were accepted and confirmed as an integral part of the reorganization.

Id. Moreover, in In re Dow Corning, the Sixth Circuit held while the language of section 524(e)

explained the effect of a debtor’s discharge, section 524(e) did not prohibit the release of a non-

debtor. 280 F.3d at 657. The court concluded section 524(e) did not limit a bankruptcy court’s

power to enjoin non-consenting creditors’ claims in order to facilitate a Chapter 11 plan of

reorganization. Id. at 663.

Section 524(e) of the Bankruptcy Code does not prohibit the bankruptcy court from

permanently enjoining non-consenting creditors from bringing claims against a non-debtor.

Parallel to In re Airadigm Commc’ns, In re A.H. Robins, and In re Dow Corning, where the

Seventh, Fourth, and Sixth Circuits, respectively, did not read section 524(e) of the Bankruptcy

Code to limit the bankruptcy courts’ authority from releasing non-debtors, the Thirteenth Circuit

properly decided the language of section 524(e) did not limit the bankruptcy court’s broad power

to issue a permanent injunction. Furthermore, similar to In re A.H. Robins, where the court did

not interpret section 524(e) to limit the power of the bankruptcy courts’ to enjoin the entire

reorganization when the plan depended on a permanent injunction releasing non-debtors, the

Thirteenth Court properly concluded section 524(e) does not preclude the bankruptcy court from

exercising its equitable powers and permanently enjoining Petitioner’s claims against Gadget

because this injunction is an integral part of Padco’s reorganization plan. In sum, section 524(e)

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of a Chapter 11 of the Code does not preclude a bankruptcy court’s power to permanently enjoin

Petitioner’s non-derivative claims against Gadget for the success of Padco’s reorganization plan.

Therefore, because reading sections 105(a) and 1123(b)(6) of the Bankruptcy Code

together authorizes the bankruptcy court to issue a permanent injunction to successfully carry out

Padco’s reorganization plan and section 524(e) of the Bankruptcy Code does not limit the

bankruptcy court from issuing a permanent injunction to successfully carry out Padco’s plan, the

express statutory language of the Bankruptcy Code authorizes bankruptcy courts to issue

permanent provisions.

B.   A Permanent Injunction of Petitioner’s Claims Against Gadget is Permissible as long as this Permanent Injunction is both Necessary and Appropriate Under Unusual Circumstances.

“The Bankruptcy Code gives bankruptcy courts the power to grant injunctions necessary

or appropriate to carry out the provisions of the Bankruptcy Code.” In re Dow Corning, 280

F.3d at 658 (emphasis added). Thus, because of this statutory grant of power, the bankruptcy

courts are not confined to traditional equity jurisprudence. Id. The majority of circuits, with the

exception of three,5 have held enjoining a non-consenting creditor’s claim is only appropriate in

unusual circumstances. Id. (emphasis added). See In re Drexel Burnham, 960 F.2d at 293

(stating release is proper only in rare cases). The First, Second, Third, Fourth, Sixth, Seventh,

Eighth, Eleventh, and District of Columbia Circuits have implemented different factors to

establish unusual circumstances. In re Dow Corning, 280 F.3d at 558. Some Circuits have

implemented a four-factor,6 a five-factor,7or a six-factor8 analysis. “The factors should be

5 Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746, 761 (5th Cir. 1995) (holding the bankruptcy court lacked the power to issue a permanent injunction); Resorts Int'l v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1396 (9th Cir. 1995) (concluding Federal bankruptcy law precluded the discharge of non-debtor liabilities); Landsing Div. Props. v. First Nat’l Bank and Trust Co. of Tulsa (In re W. Real Estate Fund), 922 F.2d 592, 595 (10th Cir. 1990) (reasoning a stay may not be extended post-confirmation in the form of a permanent injunction that effectively relieves the non-debtor from its own liability to the creditor). 6 Appendix N

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considered a non-exclusive list of considerations and should be applied flexibly, always keeping

in mind that such orders should be used cautiously and infrequently, and only where essential,

fair, and equitable.” SE Prop. Holdings, LLC v. Seaside Eng’g & Surveying (In re Seaside

Eng’g & Surveying), 780 F.3d 1070, 1079 (11th Cir. 2015). This Court should implement the

factors outlined by the Sixth Circuit in In re Dow Corning Corporation because these factors

encompass the rare circumstances a debtor, non-debtor, and a non-consenting creditor should

establish for the bankruptcy court to grant a permanent injunction. When applying the Dow

Corning test, the Sixth Circuit have found the second factor, non-debtor has contributed

substantial assets to the reorganization, third factor, injunction is essential to reorganization, and

fifth factor, plan provides a mechanism to pay for all, or substantially all, of the class or classes

affected by the injunction, to carry more weight than the other factors (first, fourth, and six).

To determine a permanent injunction as necessary and appropriate, a court should apply

the Dow Corning test. The second, third, and fifth factors heavily weight in favor of a permanent

injunction. For instance, in In re Dow Corning, the Sixth Circuit held when the factors where

present, the bankruptcy court may enjoin a non-consenting creditor’s claims against a non-

debtor. 280 F.3d at 658. The court considered the findings in the record produced by the

bankruptcy court did not establish unusual circumstances. Id. The court reviewed and

determined the release and injunction provisions of the plan were ambiguous to conclude they

were essential to the reorganization of plan. Id. at 659. The court also analyzed and concluded

the non-debtor would not make significant contributions to the reorganization plan. Id. Finally,

the court considered and concluded the plan did not ensure an opportunity or procedural

mechanism for classes who chose not to settle to recover in full. Id. at 659, 661.

7 Appendix N 8 Appendix N

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In addition, in In re Seaside Eng’g, the Eleventh Circuit held the bankruptcy court’s

decision in approving the non-debtor releases was necessary to ensure the debtor may continue to

operate as an entity. 780 F.3d at 1081. The court applied the Dow Corning test to determine

unusual circumstances and concluded the factors were present. Id. at 1079. The court reviewed

the second factor of the Dow Corning test and concluded the release of non-debtors had

contributed to the reorganized debtor with their labor. Id. at 1080. Additionaly, the court also

considered the third factor of the Dow Corning test and determined the injunction was essential

to the reorganization because without the bar order, the litigation would have likely continued

and bleed the non-debtor dry, frustrating the reorganization. Id. Finally, the court analyzed the

fifth factor of the Dow Corning test and decided the plan provided a mechanism to pay for all, or

substantially all, non-consenting creditors from the share of debtor. Id. at 1080-81.

A permanent injunction is permissible if the injunction is necessary and appropriate under

unusual circumstances. If the second, third, and fifth factors of the Dow Corning are present,

these factors weight heavily in favor of a permanent injunction. Similar to In re Seaside Eng’g,

where the Eleventh Circuit applied the second factor of the Dow Corning test and concluded the

release of the non-debtor had contributed to the reorganization of the debtor, the release of

Gadget had contributed to the reorganization plan of Padco. At the confirmation hearing,

Gadget’s Chief Executive Officer, Naffie Lamin, testified Gadget was very concerned about

claims arising from Padco battery defect. Those claims were so enormous that Gadget was

reluctant to acquire Padco and invest in the new product line unless Gadget could be confident

that it would be free of all liabilities related to Padco. In addition, because Gadget was release of

liability, Gadget invested more than $500 million to redesign the Padco tablet computer. Thus,

the release of Gadget’s liability contributed to the reorganization of Padco. Additionally, as in In

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re Seaside Eng’g, where the Eleventh Circuit applied the third factor of the Dow Corning test

and concluded the injunction was essential to the reorganization of the debtor, the injunction of

Petitioner’s claims was essential to the reorganization of Padco because Gadget would have not

acquired Padco and would have not invested in the new product line unless the permanent

injunction freeing Gadget of all liabilities related to Padco’s defective battery was issued.

Therefore, the permanent injunction of Petitioner’s claims was essential to the reorganization of

Padco. Moreover, parallel to In re Seaside Eng’g, where the Eleventh Circuit applied the fifth

factor of the Dow Corning test and concluded the plan provided a mechanism to pay for all, or

substantially all, non-consenting creditors from the share of debtor, the bankruptcy court

provided a mechanism to pay substantially all of Petitioner’s claims from Padco’s bankruptcy

estate. The plan of reorganization grouped Petitioner in a separate class of unsecured creditors

which were provided with a larger bankruptcy distribution than other unsecured creditors to

compensate them for their enjoined direct claims against Gadget. The bankruptcy court applied

a probability discount of ninety percent to those claims and concluded the premium provided to

the class surpassed the value of the direct claims that were being enjoined. Furthermore, the

bankruptcy court found Petitioner and each creditor in her class collected a distribution that was

more than they would have received in a Chapter 7 liquidation. Lastly, although the bankruptcy

courts do not give much deference to the additional factors of the Dow Corning test, those

factors are present in Padco’s circumstances. The bankruptcy court determined an

overwhelming majority of Petitioner’s class approved the reorganization plan. Although

Petitioner voted to reject the proposed plan, an overwhelming eighty percent of Petitioner’s class

voted in favor of the proposed plan. Thus, the Thirteenth Circuit should apply the Dow Corning

test to conclude a permanent injunction enjoining Petitioner from bringing claims against Gadget

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would have been necessary and appropriate to Padco’s successful reorganization because of the

unusual circumstances in this case.

Therefore, because the express statutory language of the Bankruptcy Code authorizes the

bankruptcy courts to issue permanent injunctions so long as the permanent injunction is both

necessary and appropriate under unusual circumstances, a Chapter 11 plan of reorganization can

permanently enjoin claims from non-consenting creditors against a non-debtor even when the

claims are not derivative of the debtor’s claims against the non-debtor and no provision is made

for full payment of the enjoined claims.

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CONCLUSION

Therefore, an appellate court has the authority to decline to hear an appeal from a

bankruptcy court, which includes a Chapter 11 plan of reorganization, on prudential grounds

using equitable mootness principles if the plan has been substantially consummated, the relief

requested would significantly harm investors who have justifiably relied on the reorganization

order, and the relief requested would fatally scramble the plan. Additionally, an appellate court

has the authority to decline to hear an appeal from a bankruptcy court because the Bankruptcy

Code embodies a strong policy limiting judicial review after a plan has been substantially

consummated and because applying prudential factors, such as equitable mootness, are not a

violation of Article III of the Constitution.

Lastly, a Chapter 11 plan of reorganization can permanently enjoin claims that non-

consenting creditors have against a non-debtor when the claims are not derivative of the debtor’s

claims against the non-debtor because the express statutory language of the Bankruptcy Code

authorizes bankruptcy courts to issue permanent injunctions as long as permanent provision is

both necessary and appropriate under unusual circumstances even when and no provision is

made for full payment of the enjoined claims.

This Court should affirm.

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I

APPENDIX A

11 U.S.C. § 105(a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out

the provisions of this title.

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II

APPENDIX B

11 U.S.C. § 363(m) The reversal or modification on appeal of an authorization under subsection (b) or (c) of this

section of a sale or lease of property does not affect the validity of a sale or lease under such

authorization to an entity that purchased or leased such property in good faith, whether or not

such entity knew of the pendency of the appeal, unless such authorization and such sale or lease

were stayed pending appeal.

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III

APPENDIX C

11 U.S.C. § 364(e) The reversal or modification on appeal of an authorization under this section to obtain credit or

incur debt, or of a grant under this section of a priority or a lien, does not affect the validity of

any debt so incurred, or any priority or lien so granted, to an entity that extended such credit in

good faith, whether or not such entity knew of the pendency of the appeal, unless such

authorization and the incurring of such debt, or the granting of such priority or lien, were stayed

pending appeal.

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IV

APPENDIX D

11 U.S.C. § 524(e)

Except as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not

affect the liability of any other entity on, or the property of any other entity for, such debt.

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APPENDIX E

11 U.S.C. § 1101(2)

“substantial consummation” means—(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.

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APPENDIX F

11 U.S.C. § 1123(b)(6)

Subject to this subsection (a) of this section, a plan may include any other appropriate provisions

not inconsistent with the applicable provisions of this title.

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VII

APPENDIX G

11 U.S.C. § 1127(b) The proponent of a plan or the reorganized debtor may modify such plan at any time after

confirmation of such plan and before substantial consummation of such plan, but may not

modify such plan so that such plan as modified fails to meet the requirements sections 1122 and

1123 of this title. Such plan as modified under this subsection becomes the plan only if

circumstances warrant such modification and the court, after notice and a hearing, confirms such

plan as modified, under section 1129 of this title.

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VIII

APPENDIX H

11 U.S.C. § 1129(a) (a) The court shall confirm a plan only if all of the following requirements are met:

(1) The plan complies with the applicable provisions of this title.

(2) The proponent of the plan complies with the applicable provisions of this title.

(3) The plan has been proposed in good faith and not by any means forbidden by law.

(4) Any payment made or to be made by the proponent, by the debtor, or by a person issuing

securities or acquiring property under the plan, for services or for costs and expenses in or in

connection with the case, or in connection with the plan and incident to the case, has been

approved by, or is subject to the approval of, the court as reasonable.

(5)(A)(i) The proponent of the plan has disclosed the identity and affiliations of any

individual proposed to serve, after confirmation of the plan, as a director, officer, or voting

trustee of the debtor, an affiliate of the debtor participating in a joint plan with the debtor, or

a successor to the debtor under the plan; and

(ii) the appointment to, or continuance in, such office of such individual, is consistent

with the interests of creditors and equity security holders and with public policy; and

(B) the proponent of the plan has disclosed the identity of any insider that will be

employed or retained by the reorganized debtor, and the nature of any compensation for

such insider.

(6) Any governmental regulatory commission with jurisdiction, after confirmation of the

plan, over the rates of the debtor has approved any rate change provided for in the plan, or

such rate change is expressly conditioned on such approval.

(7) With respect to each impaired class of claims or interests—

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(A) each holder of a claim or interest of such class—

(i) has accepted the plan; or

(ii) will receive or retain under the plan on account of such claim or interest property

of a value, as of the effective date of the plan, that is not less than the amount that

such holder would so receive or retain if the debtor were liquidated under chapter 7 of

this title on such date; or

(B) if section 1111(b)(c) of this title applies to the claims of such class, each holder of a

claim of such class will receive or retain under the plan on account of such claim property

of a value, as of the effective date of the plan, that is not less than the value of such

holder's interest in the estate's interest in the property that secures such claims.

(8) With respect to each class of claims or interests—

(A) such class has accepted the plan; or

(B) such class is not impaired under the plan.

(9) Except to the extent that the holder of a particular claim has agreed to a different

treatment of such claim, the plan provides that—

(A) with respect to a claim of a kind specified in section 507(a)(2) or 507(a)(3) of this

title, on the effective date of the plan, the holder of such claim will receive on account of

such claim cash equal to the allowed amount of such claim;

(B) with respect to a class of claims of a kind specified in section 507(a)(1), 507(a)(4),

507(a)(6), or 507(a)(7) of this title, each holder of a claim of such class will receive—

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APPENDIX I

11 U.S.C. § 1141(d)(1) Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan,

the confirmation of a plan—(A) discharges the debtor from any debt that arose before the date of

such confirmation, and any debt of a kind specified in , 502(h), or 502(i) of this title, whether or

not—(i) a proof of the claim based on such debt is filed or deemed filed under section 501 of this

title; (ii) such claim is allowed under section 502 of this title; or (iii) the holder of such claim has

accepted the plan; and (B) terminates all rights and interests of equity security holders and

general partners provided for by the plan.

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APPENDIX J

11 U.S.C. § 1144 On request of a party in interest at any time before 180 days after the date of the entry of the

order of confirmation, and after notice and a hearing, the court may revoke such order if and only

if such order was procured by fraud. An order under this section revoking an order of

confirmation shall—

(1) contain such provisions as are necessary to protect any entity acquiring rights in good

faith reliance on the order of confirmation; and

(2) revoke the discharge of the debtor.

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APPENDIX K

28 U.S.C. § 157(b)(1) (b)(1) Bankruptcy judges may hear and determine all cases under title 11 and all core

proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a)

of this section, and may enter appropriate orders and judgments, subject to review under section

158 of this title.

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XIII

APPENDIX L

28 U.S.C. § 158(a)(1) (a) The district courts of the United States shall have jurisdiction to hear appeals

(1) from final judgments, orders, and decrees;

(2) from interlocutory orders and decrees issued under section 1121(d) of title 11 increasing

or reducing the time periods referred to in section 1121 of such title; and

(3) with leave of the court, from other interlocutory orders and decrees;

and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered

in cases and proceedings referred to the bankruptcy judges under section 157 of this title. An

appeal under this subsection shall be taken only to the district court for the judicial district in

which the bankruptcy judge is serving.

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APPENDIX M

Equitable Mootness

In re Continental Airlines Five-Factor Test

Third Circuit five factor test: (1) reorganization plan has been substantially consummated; (2) a

stay has been obtained; (3) relief would affect the rights of parties not before the court; (4) relief

requested would affect the success of the plan; and (5) the public policy of affording finality to

bankruptcy judgments. In re Cont’l Airlines, 91 F.3d 553, 560 (3d Cir. 1996).

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APPENDIX N

Permanent Injunction Factors

In re Metromedia Fiber Four-Factor Test The Second Circuit applies four factors: (1) “the estate received substantial consideration; (2) the

enjoined claims were channeled to a settlement fund rather than extinguished; (3) the enjoined

claims would indirectly impact the debtor’s reorganization by way of indemnity or contribution;

and (4) the plan otherwise provided for the full payment of the enjoyed claims.” In re

Metromedia Fiber, 416 F.3d at 142.

In re Master Mortg. Inv. Fund, Inc. Five-Factor Test

The Bankruptcy Court for the Western District of Missouri distinguishes five factors: (1) identity

of the interest between debtor and the entities to be protected by the injunction; (2) non-debtor

has contributed substantial assets to the reorganization; (3) injunction is essential to the

reorganization; (4) creditor approval of the injunction; (5) plan provides for the payment of all,

or substantially all, of the claims of the class or classes affected by the injunction. Master Mortg.

Inv. Fund, Inc. v. Am. Nat’l Fire Ins. Co. (In re Master Mortg. Inv. Fund, Inc.), 168 B.R. 930,

935, 938 (Bankr. W.D. Mo. 1994).

In re Dow Corning Seven-Factor Test The Sixth Circuit employs seven factors: (1) identity of interests between the debtor and the third

party usually an indemnity relationship such that a suit against non-debtor is, in essence, a suit

against the debtor or will deplete the assets of the estate; (2) non-debtor has contributed

substantial assets to the reorganization; (3) injunction is essential to reorganization namely the

reorganization hinges on the debtor being free from indirect suits against parties who would have

indemnity or contribution claims against the debtor; (4) impacted class, or classes, has

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overwhelmingly voted to accept the plan; (5) plan provides a mechanism to pay for all, or

substantially all, of the class or classes affected by the injunction; (6) plan provides an

opportunity for those claims who choose not to settle to recover in full; and (7) bankruptcy court

made a record of specific factual findings that support its conclusion (the seven factor is not

consider a substantial factor, but a necessity for the success of the release). In re Dow Corning,

280 F.3d at 658.