Third Circuit Heads in Opposite Directions Regarding the Doctrine of Equitable Mootness. In two recent opinions issued within a month of each other, Third Circuit judges have argued in favor of overturning, and then preserving, the Court’s “equitable mootness” doctrine. Pursuant to this doctrine, an appellate court may forbear deciding (indeed, even reaching) the merits of appeals in bankruptcy cases that would “undermine the finality and reliability of consummated plans of reorganization.” In re Tribune Media Co., Nos. 14-3332 & 14-3333, at *10 (3d Cir. Aug. 19, 2015). Equitable mootness is not identified in the Bankruptcy Code, but rather is a judicially created “prudential” doctrine that is intended to bring finality to a confirmed plan when that plan has been substantially consummated, and granting the relief requested in the appeal will “(a) fatally scramble the plan and/or (b) significantly harm third parties who have justifiably relied on plan confirmation.” Id. at *12. All other Circuit Courts of Appeal also have found bankruptcy appeals to be equitably moot, although there is disagreement in the standards for applying the doctrine.
The Third Circuit adopted the equitable mootness doctrine en banc in a 7-6 decision in In re Cont’l Airlines, 91 F.3d 553 (3d Cir. 1996) (en banc), with then Judge Alito leading the dissent. Continental Airlines can only be overturned by en banc reconsideration, which is precisely what Judge Krause requested in her concurring opinion in In re One2One Commc’ns, LLC, No. 13-3410 (3d Cir. July 21, 2015) (Krause, J., concurring) (the “Krause Concurrence”).
Judge Krause criticized the equitable mootness doctrine with a three-pronged attack, arguing that its constitutionality was dubious, it was not authorized by any statute, and that it caused inequitable and inefficient results. Judge Ambro addressed these criticisms in his defense of the equitable mootness doctrine in his concurring opinion in Tribune (the “Ambro Concurrence”). Interestingly, Judge Ambro was the author of another Third Circuit opinion that cautioned strongly against the broad application of equitable mootness, and indeed was interpreted by some as a suggestion that he would not apply the doctrine but for the mandate of Continental Airlines. See Samson Energy Res. Co. v. SemCrude (In re SemCrude, L.P.), 728 F.3d 314 (3d Cir. 2013) (“The presumptive position remains that federal courts should hear and decide on the merits cases properly before them”).
Abstention. Judge Krause’s constitutional concerns with equitable mootness began with the “virtually unflagging obligation of the federal courts to exercise the jurisdiction given them,” Krause Concurrence, at *5 (quoting Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976)). Believing federal courts to be required to exercise their jurisdiction unless there is an exception, she distinguished equitable mootness from the “narrow and deeply rooted abstention doctrines recognized by the Supreme Court.” Id. at *5. Specifically, she argued that the abstention doctrines recognized by the Supreme Court, namely, Pullman, Burford, Younger, and Colorado River, allow federal courts either to relinquish jurisdiction in favor of another forum, or postpone its exercise. Id. at *5-7. On the other hand, equitable mootness yields to no other forum, and there is no later exercise of jurisdiction. While Judge Ambro did not address Judge Krause’s abstention argument directly, it appears that he disagreed that a federal judge who determines that a plan confirmation appeal is equitably moot has abstained from exercising jurisdiction; instead, Judge Ambro believed that this judge has simply made an equitable determination to not award any relief. Ambro Concurrence, at *5-8.
Statutory Basis for Equitable Mootness and Related Constitutional Concerns. Judge Krause found no statutory support for equitable mootness in the Bankruptcy Code or related jurisdictional statutes. Krause Concurrence, at *8-14. Yet, Judge Ambro found that Bankruptcy Code sections 363(m) and 1127(b) “bespeak a congressional intent ‘that courts should keep their hands off consummated transactions.’” Ambro Concurrence, at *4-5 (quoting In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir. 1994)). Judge Ambro agreed with the UNR Court that this congressional intent permits courts to fill in the interstices of section 1129—the plan confirmation provision, which is silent on judicial authority to modify or reverse plan confirmation orders on appeal—by protecting the finality of consummated plans with the equitable mootness doctrine. Id. at *5. Judge Krause, however, interpreted these provisions as narrowly prescribing certain specific orders that cannot be disturbed on appeal absent a stay, and not establishing a general policy supporting equitable mootness.
Judge Ambro also contended that because bankruptcy courts are courts of equity that apply the principles of equity jurisprudence, courts may decline to decide a case on the merits when granting relief would dismantle a consummated plan or disturb third parties’ reasonable reliance on the finality of such a plan. Id. at *6. Judge Ambro compared the equitable mootness doctrine to the balance of harms inquiry undertaken by courts considering whether to award an injunction, in which a court will consider the harms to be suffered by the parties and the public if an injunction is or is not awarded. Id. at *6-8. Just as a court may decline to award injunctive relief because it would be inequitable—even after finding a strong likelihood of success on the merits—Judge Ambro argued that a court may decline to issue equitable remedies in the bankruptcy context.
For Judge Krause, even assuming, arguendo, that there were a statutory reading supporting equitable mootness, this reading would implicate serious constitutional concerns. Krause Concurrence, at *15-19. Bankruptcy courts are “Article I” courts, in that they do not conform to the requirements for the exercise of judicial powers provided by Article III of the U.S. Constitution. Among other things, bankruptcy judges are appointed by Circuit Court judges for 14-year terms, and thus differ from federal district and appellate judges who are appointed by the President, confirmed by the Senate, and have life tenure and salary protection. Judge Krause argued that a litigant has a constitutional right to an Article III adjudicator, which is frustrated if there is no appellate review of a bankruptcy court’s adjudication. Krause Concurrence, at *15 (citing Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1944 (2015)). She also contended that the result of equitable mootness is that an Article III judge does not adjudicate Article III business, so that the congressional decision to authorize bankruptcy judge adjudication impinged on the power of the Judicial Branch. Judge Krause noted that the Supreme Court recently approved adjudication of general litigation claims (i.e. claims not involving exclusively “core” bankruptcy matters) by bankruptcy judges with the parties’ consent, but only with appellate review by Article III courts. Krause Concurrence, at *17.
Judge Ambro responded that a litigant’s right is “to have claims decided before judges who are free from potential dominations by other braches of government,” and because Article III courts apply equitable mootness, this right is not infringed. Ambro Concurrence, at *2 (quoting Schor, 478 U.S. at 848). With respect to Judge Krause’s structural concern, Judge Ambro argued that Supreme Court jurisprudence warns against congressional efforts to transfer adjudication from state courts and Article III courts to bankruptcy and other so-called “Article I courts,” rather than Article III courts declining to hear a case, as with equitable mootness. Ambro Concurrence, at *2.
Prudential Problems. The final battleground between Judge Krause and Judge Ambro is not whether equitable mootness is legitimate, but whether it actually works. Judge Krause questioned the efficacy of equitable mootness, finding that it has promoted uncertainty and delay rather than finality. Krause Concurrence, at *19. Judge Krause complained that proponents of plans of reorganization rush to implement them so that they may utilize an equitable mootness defense, instead of litigating the merits of the appeal. Id. at *20. Yet, rather than promoting finality, a fight of equitable mootness could simply delay the resolution of the merits, and thus prolong the uncertainty. The One2One procedural history is illustrative of this; the district court in One2One found the appeal of the plan confirmation order to be equitably moot, but on further appeal to the Third Circuit this finding was reversed and remanded for a ruling on the merits, two years after the parties briefed the district court appeal. Id. at *21. Judge Krause reasoned that because a district court’s equitable mootness ruling could be reversed by the Third Circuit, the equitable mootness doctrine does not achieve finality. Id. at *21. Furthermore, Judge Krause wrote that removing appellate review harms the bankruptcy adjudication system by shielding errors and impeding the development of uniformity in bankruptcy law. Id. at *21-22.
Judge Ambro cautioned that the abolishment of the equitable mootness doctrine would likely thwart complex reorganizations from being consummated until all appeals were terminated. Ambro Concurrence, at *8. He further predicted that any litigious creditor could coerce other constituents to pay settlement consideration in order to drop a plan confirmation appeal by threatening to delay emergence from bankruptcy for years. Id. at *9. Judge Ambro contended that any delay is costly, as a company will have difficulty attracting investors, employees, and possibly even customers as long as it remains in bankruptcy. Id.
Judge Ambro acknowledged (as he did previously in SemCrude) that equitable mootness is the “rare exception,” and is “only in play for consideration when modifying a court order approving a sinceconsummated plan would do significant harm.” Ambro Concurrence, at *8. Nonetheless, he suggests that it may be applied in “[c]omplex bankruptcies reorganiz[ing] thousands of relationships among countless parties,” which are routinely filed in the Delaware bankruptcy court, and whose appeals go to the Third Circuit. Ambro Concurrence, at *8. However, Judge Krause argued that the equitable mootness doctrine has been overused. She noted that “district courts have continued to invoke the doctrine in modest, non-complex bankruptcies and where appellants have sought limited relief,” Krause Concurrence, at *2-3, even though the Third Circuit designed the doctrine “to be ‘limited in scope and cautiously applied’”, Krause Concurrence, at *1 (quoting Continental, 91 F.3d at 559), only for “attempts to ‘unscramble complex bankruptcy reorganizations,’” id. at *2 (quoting Nordhoff Invs., Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 185 (3d Cir. 2001) (emphasis in original)), and inapplicable when limited relief is available on appeal.
Conclusion. The recent, internal Third Circuit debate over the legitimacy and efficacy of the equitable mootness doctrine, and the significance of the doctrine in the bankruptcy realm, indicate that the Court may be prepared to revisit whether the doctrine should be modified or abolished. Moreover, given differing standards among the Circuits as to when and how equitable mootness should be applied, see In re Charter Commc’ns, Inc., 691 F.3d 476, 482 (2d Cir. 2012) (appeal is presumed moot when plan is consummated and burden is placed on appellant), and now-Justice Alito’s concerns about the doctrine as expressed in Continental Airlines, the Supreme Court may elect to consider this issue in the not too distant future