Second Circuit Rules That Equitable Mootness Applies In Chapter 11 Liquidations As Well As Reorganizations

In Beeman v. BGI Creditors' Liquidating Trust (In re BGI, Inc.), 772 F.3d 102 (2d Cir. 2014), the U.S. Court of Appeals for the Second Circuit considered whether the doctrine of "equitable mootness" applied to the appeal of a confirmation order approving a liquidating chapter 11 plan. In a matter of first impression, the court ruled that the standards governing equitable mootness in an appeal of an order confirming a chapter 11 plan of reorganization also apply in the context of a chapter 11 liquidation. The Second Circuit affirmed a district court ruling dismissing an appeal because the appellants failed to overcome the presumption of mootness triggered by "substantial consummation" of a liquidating chapter 11 plan.

Mootness

"Mootness" is a doctrine that precludes a reviewing court from reaching the underlying merits of a controversy. In federal courts, an appeal can be either constitutionally or equitably moot. Constitutional mootness is derived from Article III of the U.S. Constitution, which limits the jurisdiction of federal courts to actual cases or controversies and, in furtherance of the goal of conserving judicial resources, precludes adjudication of cases that are hypothetical or merely advisory. In contrast, the judge-fashioned remedy of "equitable mootness" bars adjudication of an appeal when a comprehensive change of circumstances occurs such that it would be inequitable for a reviewing court to address the merits of the appeal. In bankruptcy cases, appellees often invoke equitable mootness as a basis to preclude appellate review of an order confirming a chapter 11 plan. Protecting legitimate expectations of innocent stakeholders and the difficulty of "unscrambling the eggs" following the completion of complex restructuring transactions are issues that a court considers when confronted with any challenge to a plan confirmation order. Courts sometimes reject such a challenge (if in the form of an appeal of the confirmation order) as equitably moot because it is simply too late or too difficult to undo transactions consummated under the plan. A court also will dismiss an appeal of a confirmation order as equitably moot if effective relief, even if arguably possible, would be inequitable under the circumstances, given the difficulty of restoring the status quo ante and the impact on all parties involved. Before deciding whether relief may be granted and what impact that relief may have on the various stakeholders in a chapter 11 case, however, courts often conduct a threshold inquiry as to whether a chapter 11 plan has been "substantially consummated." Section 1101(2) of the Bankruptcy Code provides that substantial consummation occurs when substantially all property transfers proposed by the plan have been completed, the reorganized debtor or its successor has assumed control of the debtor's business and property, and plan distributions have commenced. Several circuit courts of appeal have formally adopted the doctrine of equitable mootness in considering whether to hear appeals of plan confirmation orders. For example, in Search Market Direct, Inc. v. Jubber (In re Paige), 584 F.3d 1327 (10th Cir. 2009), the Tenth Circuit considered six factors in determining whether the doctrine should moot appellate review of a confirmation order: (1) whether the appellant sought...