The Ninth Circuit Reins In The Equitable Mootness Doctrine

Since the development of the doctrine of equitable mootness nearly a quarter century ago, courts have struggled to apply it in a way that strikes the appropriate balance between the need to ensure the finality and certainty of a chapter 11 plan for stakeholders, on the one hand, and the need to exercise the court's jurisdiction and honor the right to appellate review, on the other. In JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props. Inc. (In re Transwest Resort Props., Inc.), 2015 BL 302540 (9th Cir. Sept. 15, 2015), the Ninth Circuit Court of Appeals curbed the application of the equitable mootness doctrine where the appellant diligently sought to stay consummation of the plan. The decision reflects broader concerns over the appropriateness of the doctrine, as well as the ongoing process of refining the circumstances under which it should be applied.

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. See, e.g., In re LCI Holding Company, Inc., 2015 BL 295784 (3d Cir. Sept. 15, 2015) (stating that doctrine "comes into play in bankruptcy (so far as we know, its only playground) after a plan of reorganization is approved" and ruling that equitable mootness would not cut off the authority to hear an appeal outside the plan context).

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: (i) whether the appellant sought and/or obtained a stay pending appeal; (ii) whether the plan has been substantially consummated; (iii) whether the rights of innocent third parties would be adversely affected by reversal of the confirmation order; (iv) whether the public policy need for reliance on confirmed bankruptcy plans—and the need for creditors generally to be able to rely on bankruptcy court decisions—would be undermined by reversal of the confirmation order; (v) the likely impact upon a successful reorganization of the debtor if the appellant's challenge is successful; and (vi) whether, on the basis of a brief examination of the merits of the appeal, the appellant's challenge is legally meritorious or equitably compelling.

Substantially similar tests for equitable mootness have been adopted by the Second, Third, Fifth, and Ninth Circuits. See Frito-Lay, Inc. v. LTV Steel Co...