Equitable Mootness Remains Alive and Well in the Third Circuit


The Business Advisor

November 17, 2021

Courtesy of the United States Supreme Court, the doctrine of equitable mootness remains alive and well in courts in the Third Circuit. On October 12, 2021, the Supreme Court declined to entertain a challenge to the viability of the doctrine of equitable mootness as it has been developed by the Third Circuit. In Hargreaves v. Nuverra Environmental Solutions, Inc., 595 U.S. ___ (U.S. Oct 12, 2021) (Docket No. 20-17), the Court denied the petition for a writ of certiorari filed by a creditor whose appeal from a plan confirmation order had been dismissed by the Third Circuit as equitably moot.

In In re Nuverra Environmental Solutions, Inc., a/k/a Heckmann Corp. a/k/a Rough Rider Escrow Inc., 834 Fed. App’x. 729 (3d Cir. 2021) (“Nuverra”), the debtors’ enterprise value was approximately $302.5 million, but secured claims aggregated approximately $500 million. In other words, the debtors lacked any equity in their assets. The bankruptcy court had confirmed a plan providing a 100 percent dividend on the claims of “certain trade creditors and other creditors, whose debts arise out of the debtor’s day to day operations” (collectively, “Trade Creditors”), while providing holders of certain unsecured notes (“2018 Notes”) with a dividend of approximately six percent. The dividend to the trade and other creditors was funded by a “gift” from the secured creditors (whose claims were not fully satisfied) from their dividends under the plan.

A holder of 2018 Notes, David Hargreaves, had objected to the confirmation of the plan on the basis that the payment of the Trade Creditors’ claims in full while holders of 2018 Notes received a six per cent dividend on their claims constituted unfair discrimination. Hargreaves appealed the confirmation order to the district court and filed an emergency motion to stay the consummation of the plan pending his appeal. The district court denied the stay motion, and the debtors consummated their plan. Two months later, the district court dismissed Hargreaves’ appeal as equitably moot. Hargreaves then appealed to the Third Circuit.

Hargreaves conceded before both the district court and the Third Circuit that the debtor’s plan had been substantially consummated. Nuverra, 834 Fed. App’x. at 732. As a practical matter, therefore, the plan could not have been unwound, a fact that favored dismissal of Hargreaves’ appeal. Id. Hargreaves, therefore, already had two strikes against him when he arrived at the Third Circuit.

Third Circuit did not, however, reflexively dismiss the noteholder’s appeal as moot merely because the plan had been consummated. Indeed, the court reaffirmed its prior characterizations of equitable mootness as “‘a narrow doctrine [distinct from constitutional mootness] by which an appellate court deems it prudent for practical reasons to forbear deciding an appeal when to grant the relief requested will undermine the finality and reliability of consummated plans of reorganization (emphasis added).” Nuverra, 834 Fed. App’x. at 733 (quoting In re Tribune Media Co., 799 F.3d 272, 277 (3d Cir. 2015) (“Tribune I”). The court similarly acknowledged the “strong presumption” that appeals from confirmation orders must be decided on the merits (id. at 8, quoting Tribune I, 799 F.3d at 278), even if “full relief” is unavailable. Nuverra, id. (quoting In re Blast Energy Services, Inc., 593 F.3d 418, 425 (5th Cir. 2010). The consummation of the plan was only the first step in a determination whether the noteholder’s appeal was equitably moot. Nuverra, id. (quoting Tribune 1, 799 F3d at 278 (citing In re SemCrude, L.P., 728 F.3d 314, 321 (3rd Cir. 2013)). Before dismissing an appeal from a confirmation order as equitably moot, the court must consider whether the relief sought by the appellant will either “fatally scramble” the plan or significantly harm third parties who have justifiably relied on plan confirmation. Nuverra, id. (quoting Tribune I, 799 F.3d at 278 (citing SemCrude, 728 F.3d at 321). It is the prejudice to third parties (including equity investors, lenders, customers, and suppliers), however, that is the more important of the two factors. Nuverra, id., citing SemCrude, 728 F.3d at 325; In re Philadelphia Newspapers, LLC, 690 F.3d 161, 170 (3rd Cir. 2012); In re Continental Airlines, 91 F.3d 553, 562 (3d Cir. 1996).

Indisputably, the consummation of the plan satisfied the first prong of the equitable mootness analysis. The parties also agreed that providing the noteholder the relief he sought—payment of his claim in full, a relatively small sum of $450,000—might not “fatally scramble” the plan. The Third Circuit then considered not the prejudice to third parties that might arise from granting Hargeaves the relief he sought, but whether such relief is permitted by the Bankruptcy Code. Nuverra, 834 Fed. App’x. at 733. The court concluded it was not. Id. Paying Hargreaves’ claim in full would result in the very unfair discrimination proscribed by 11 U.S.C. § 1129(b)(1) that formed the basis of Hargreaves’ confirmation objection and would violate the “central” bankruptcy policy of equality of distribution to similarly situated creditors. Id. In other words, the payment of Hargreaves’ claim in full would accord him the special treatment the Bankruptcy Code prohibits. Id.

To avoid according Hargreaves with special treatment, every claim in the 2018 Notes class would have to be paid in full. Nuverra, 834 Fed. App’x at 736. Such payment would cost the reorganized debtors 23.3 percent of their enterprise value. Id., n. 8. Rejecting the apparent agreement to the contrary among the parties to Hargreaves’ appeal, the Third Circuit concluded that doing so would, in fact, “fatally scramble” the debtors’ plan. Id. at 736. Focusing on the likely harm to third parties who relied on the finality of the confirmation order that would result from so significant a diversion of the reorganized debtors’ assets, the Third Circuit affirmed the district court’s dismissal of Hargreaves’ appeal as equitably moot. Id. As noted at the beginning of this article, Hargreaves fared no better before the Supreme Court.

It remains to be seen how the doctrine of equitable mootness will further develop in the Third Circuit. By virtue of Third Circuit I.O.P. 5.7, Nuverra does not constitute binding precedent. The case might be an outlier, because the relief Hargreaves sought almost certainly violates the Bankruptcy Code and bankruptcy policies. Moreover, the Nuverra opinion cannot, in any real sense, be considered unanimous. In her concurrence, Judge Cheryl Ann Krause questioned the wisdom of the doctrine of equitable mootness and expressed her concern about the Third Circuit’s “ill-advised” expansion of the doctrine beyond the narrow role envisioned by [Third Circuit] precedent. Nuverra, 834 Fed. App’x. at 736-37. She saw the invocation of equitable mootness as an abdication of the Third Circuit’s obligation to have considered the merits of Hargreaves’ claims, although she concurred in the court’s judgment.

Post-confirmation developments in the Purdue Pharmaceutical case bear consideration in the future development of the doctrine of equitable mootness. The broad releases Purdue’s confirmed plan provided for members of the Sackler family, who owned Purdue, generated sharp criticism and triggered appeals from the confirmation order. The appellants were rightly concerned that their appeals could be dismissed as equitably moot and sought to insulate their appeals from dismissal on those grounds. In response and possibly in consideration of the intensity of the controversy generated by their bankruptcy filing, the reorganized Purdue debtors have agreed not to consummate their plan pending a resolution of those appeals.

To put it mildly, the Purdue bankruptcy is sui generis. Moreover, the Third Circuit would not hear an appeal from the confirmation order. Consequently, whether developments in Purdue would have any impact on the reasoning of the Third Circuit is at best an open question. It also bears noting that a post-Stern v. Marshall Supreme Court had the opportunity to review the doctrine of equitable mootness as it has developed in the Third Circuit but elected not to do so. Hence, the doctrine remains alive and well in the Third Circuit for the time being.

The author of this article can be reached at either dcrapo@gibbonslaw.com or 973-596-4523.