Is it time for the Third Circuit to reconsider equitable mootness?

In re One2One Commc’ns, LLC, No. 13-3410 (3d Cir. July 21, 2015).

Normally, after a bankruptcy court confirms a chapter 11 debtor’s plan of reorganization, a creditor who objects to the plan can appeal the bankruptcy court’s decision. The bankruptcy code confers this right of appellate review. In some circumstances, however, courts, invoking the doctrine of “equitable mootness,” have refused to entertain appeals from plan confirmations. This doctrine holds, roughly, that if reversal of a plan confirmation will produce significant injury to third parties who have relied on the plan (investors, for example), or will create chaos in the bankruptcy court, the appellate court will dismiss the appeal as equitably moot. (“Mootness” here is used imprecisely, as others have noted; it’s not that the appeal is technically moot, because the court is still capable of granting efficacious relief. It’s that the court abstains from reviewing the plan as a matter of prudence.)

In this case, a creditor has appealed the confirmation of a plan, arguing that it violates the bankruptcy code’s “absolute priority rule”: the rule that creditors be paid in full before equity holders get anything. The district court refused to hear the appeal from the bankruptcy court, citing the doctrine of equitable mootness. The Third Circuit now reverses, holding that this is not the kind of complex bankruptcy plan whose unraveling would harm a large number of third parties. Equitable mootness does not bar review.

Judge Krause concurs. She notes that in 1996 the Third Circuit approved the equitable-mootness doctrine only narrowly, over then-Judge Alito’s dissent. Plus, there are lots of reasons to doubt whether equitable mootness is lawful—and even whether it makes practical sense:

  • It has no real basis in the bankruptcy code.
  • It seems to defy the principle that an Article III court is constitutionally required to review the work of an Article I court such as a bankruptcy court.
  • It is uncertain of application; otherwise experienced district courts in the Third Circuit have applied the doctrine to bar appellate review, only to see their decisions reversed on further review.
  • It allows proponents of a bankruptcy plan to insulate themselves from appellate review by quickly implementing a plan.
  • It’s not clear that sophisticated investors are entitled to rely on a bankruptcy court’s order of plan confirmation—and thus not clear that that reliance is entitled to any consideration.

The membership of the Third Circuit has changed a lot since 1996, when the court first recognized equitable mootness. Judge Krause’s concurrence, plus the skepticism that other members of the court have expressed about the doctrine, may presage en banc reconsideration of equitable mootness—if not in this appeal, perhaps in another.