Court of Appeals Wades Through Mootness Maze

You know that an opinion is going to be challenging when the first sentence reads:

The procedural background is a bit of a maze, but it is a facet of the appeal that we need to keep straight in our minds.

Opinion, p. 1. Thus begins the Fifth Circuit's recent opinion on equitable mootness and section 1127(b). In re Blast Energy Services, Inc., No. 08-20702 (5th Cir. 1/7/10).

The Procedural Maze

While the issue decided by the Fifth Circuit was equitable mootness, the underlying dispute concerned an executory contract. In 2006, the Debtor and Alberta Energy Partners entered into a contract where Alberta transferred a 50% interest in its technology to the Debtor and the parties agreed to "work together to develop and manage the technology."

In January 2007, the Debtor filed for chapter 11 reorganization. Alberta filed several motions seeking to compel the Debtor to reject the executory contract on the basis that it could not be assumed over Alberta's objection. Those motions were denied and an appeal ensued. Meanwhile, on February 26, 2008, the Bankruptcy Court confirmed the Debtor's plan which provided for assumption of the contract.

Alberta appealed that order as well. However, the Debtor substantially consummated its plan and the District Court dismissed the appeal of the Confirmation Order based on equitable mootness. Alberta moved for rehearing, which was denied. The parties stipulated that dismissal of the confirmation appeal would not affect the appeal of the executory contract orders. The District Court rejected the parties' stipulation and dismissed the earlier appeal as well. Alberta appealed both the denial of the motion to reconsider the order dismissing the confirmation appeal and the order dismissing the executory contract appeal.

So, does Alberta get to appeal or not? The Fifth Circuit said yes.

Which Order Should Have Been Appealed?

At first, the Debtor argued that the appeal was moot because Alberta had appealed the order denying the motion for rehearing, rather than the order dismissing the confirmation appeal. The mootness argument was that reversing the rehearing order would not have affected the dismissal order so that no relief could be granted. The Fifth Circuit rejected this argument, finding that if the rehearing order was reversed, the District Court could be ordered to grant rehearing and vacate dismissal of the appeal. The circuit also found that despite the fact that the notice of appeal only pertained to the rehearing order, it was clear that Alberta was appealing both rulings.

Equitable Mootness

The Fifth Circuit opinion has a good explanation of equitable mootness. The opinion stated:

Equitable mootness authorizes an appellate court to decline review of an otherwise viable appeal of a Chapter 11 reorganization plan, but only when the re-organization has progressed too far for the requested relief practicably to be granted. (citation omitted). Unlike Article III mootness, equitable mootness is pru-dential, not jurisdictional. (citation omitted). In addressing whether an appeal of a confirmation plan is equitably moot, the Fifth Circuit considers a three-pronged analysis: “(i) whether a stay has been obtained, (ii) whether the plan has been ‘substantially consummated,’ and (iii) whether the relief requested would affect either the rights of parties not before the court or the success of the plan.”

There is no set weight given to the respective prongs. In some cases, a single prong may be determinative, but more often the first two are relevant only insofar as they affect the answer to the third question; if no stay has been obtained and the plan has been substantially consummated, the more likely the third prong indicates equitable mootness. Nevertheless, although substantial consummation is a “momentous event,” it is not necessarily fatal to the appeal of a confirmed reorganization plan. (citation omitted).

Only when the relief that a party requests will likely unravel the plan does it become impracticable and inappropriate for a court to grant such relief; in such a case, the court abstains from reviewing the appeal. (citation omitted). However, when a court applies the doctrine of equitable mootness, it does so “with a scalpel rather than an axe.” (citation omitted). To that end, a court may “fashion whatever relief is practicable” instead of declining review simply because full relief is not available. (citation omitted). Similarly, a court considering whether an appeal is equitably moot should “scrutinize each individual claim, testing the feasibility of granting the relief against its impact on the reorganization scheme as a whole.”

Opinion, at 7-8 (paragraph breaks added).

Reduced to its essence, equitable mootness asks whether it is possible to grant relief without affecting the rights of third parties. This was also the prong that the District Court relied upon in dismissing the appeal. While the District Court concluded generally that assumption or rejection of executory contracts was central to the plan and would affect third parties, it did not make specific findings. The Fifth Circuit noted that the Debtor was not using the technology, had no plans to do so and that the Debtor had stipulated that the executory contract issue would not affect the plan. As a result, the Fifth Circuit reversed and remanded the order for reconsideration by the District Court. The Court of Appeals suggested that the District Court "should articulate in detail the reasons for its conclusion, with references to the record."

Modification Under Section 1127(b)

Finally, the Fifth Circuit rejected the District Court's alternate conclusion that 11 U.S.C. Sec. 1127(b) barred the appeal. Section 1127(b) bars modification of a plan which has been substantially consummated. The Circuit made clear that appealing a confirmation order is not the same as attempting to modify a confirmed plan.