Third Circuit Judges Debate the Future of Equitable Mootness

Global Publication October 28, 2015

Equitable mootness is a judge-made doctrine that applies only in bankruptcy appeals. It allows appellate courts to dismiss an appeal of a confirmed plan of reorganization as “equitably moot” if, under the particular circumstances of a case, granting the requested relief would “produce a perverse outcome—chaos in the bankruptcy court from a plan in tatters and/or significant injury to third parties.” Because equitable mootness allows for dismissal of an appeal without consideration of the merits, it has occasionally been the subject of some controversy. To limit its application, the Third Circuit has emphasized that federal courts have a “virtually unflagging obligation” to hear appeals and, therefore, dismissing an appeal on equitable mootness grounds “should be the rare exception.” Although the doctrine of equitable mootness has been recognized and applied by all of the circuit courts except the Federal Circuit (which does not hear bankruptcy appeals), doubts remain in the minds of some judges as to whether the doctrine should continue to be applied.

In recent months, two Third Circuit judges wrote concurrences debating the issue. In July 2015, Judge Cheryl Ann Krause entered a concurring opinion in In re One2One Communications, LLC, No. 13-3410, 2015 WL 4430302 (3d Cir. July 21, 2015), suggesting that courts should not persist in “failed attempts to cabin this legally ungrounded and practically unadministrable judge-made abstention doctrine. . . . Rather, the time has come to reconsider whether it should exist at all, and, if we conclude it should, to reform it substantially.” Judge Krause challenged, among other things, whether equitable mootness is constitutional, appropriate under the applicable statutory regime (the Bankruptcy Code), or fair to appellants.

In August, Judge Thomas L. Ambro, a former Delaware bankruptcy practitioner recognized as one of the leading bankruptcy experts on the Third Circuit, responded to Judge Krause with a concurring opinion (which was joined by Judge Thomas I. Vanaskie) in In re Tribune Co., No. 14-3332, 2015 WL 4925923 (3d Cir. Aug. 19, 2015). Judge Ambro’s concurrence is noteworthy in its robust defense of the equitable mootness doctrine as an important part of a judge’s “equitable toolbox.”

Contrasting Equitable Mootness Decisions in Tribune and One2One

In the Third Circuit, an analysis of equitable mootness proceeds in two analytical steps: (1) whether a confirmed plan has been substantially consummated; and (2) if so, whether granting the relief requested in the appeal would fatally “scramble” the plan and/or significantly harm third parties who justifiably relied on the confirmed plan.

In both Tribune and One2One, the Third Circuit performed a straightforward application of the principles of equitable mootness. In One2One, the case involved a $200,000 investment in the reorganized debtor and only one secured creditor that held a blanket lien in the Debtor’s assets for less than $100,000. In addition, the Debtor had only seventeen non-insider unsecured creditors, and the plan did not provide for new financing or any complex restructuring transactions. Therefore, the Third Circuit found that, although the plan had been substantially consummated, “the Plan did not involve intricate transactions and the Debtor did not present sufficient evidence that the Plan would be difficult to unravel.” The Third Circuit observed that this was not a case in which the debtor had issued publicly traded securities under its plan that third parties were trading on the open market. Accordingly, the Third Circuit remanded the case to the District Court for it to consider the appeal on its merits.

In contrast, Tribune was a case in which the underlying restructuring transactions were highly complex, difficult to unravel, and had resulted in public trading of newly-issued securities by third parties. The principal appeal in the case challenged a global settlement that was at the very foundation of the confirmed plan. A reversal of the confirmation order would have required the annulment of that global settlement and the reinstatement of billions of dollars of litigation claims relating to Tribune’s 2007 leveraged buy-out. The Third Circuit also observed that “returning to the drawing board would at a minimum drastically diminish the value of new equity’s investment,” which had been made in reliance on the settlement. Therefore, the Third Circuit found that allowing that appeal to proceed, even if the merits of the appeal were valid, would “recall the entire Plan for a redo,” and dismissed the appeal as equitably moot. Notably, a separate appeal in the Tribune case was not dismissed as equitably moot. That appeal challenged whether the allocation of approximately $30 million to one class of creditors rather than a different class was appropriate. The Third Circuit observed that a challenge regarding $30 million in the context of a $7.5 billion reorganization would not unravel the plan and that the creditors who had relied (although not “justifiably” in the legal context) on those distributions were easily identifiable. Accordingly, while the appeal of the settlement at the heart of the Tribune plan was dismissed as equitably moot, the appeal of the allocation of certain distributions was remanded to the District Court for consideration of the merits.

These decisions highlight that the Third Circuit does not lightly dismiss cases as “equitably moot” and will only do so if it determines after careful scrutiny that, even if the appellant would win, it would not be fair to award the appellant the relief it seeks.

Constitutionality of Equitable Mootness

Judge Krause’s concurrence expressed “serious constitutional concerns” that the equitable mootness doctrine results in failure to provide appellate review of bankruptcy judges’ decisions by an Article III court, in spite of the acknowledged “virtually unflagging obligation” to do so. As Judge Krause wrote, an appellate court’s refusal to hear the merits of a case on equitable mootness grounds “is not abstention; it’s abdication.” The concurrence noted that the insulation of bankruptcy judges’ decision violated (1) a personal right to Article III adjudication, and (2) the structural integrity of the judicial branch.

In response, Judge Ambro stressed that equitable mootness is only applied to “a quite constricted class of cases” and only where the relief requested “would upend cases resolved and plans implemented (often years before) and/or would significantly harm third parties who relied on that resolution and implementation.” Although the Judge acknowledged that his analysis was perhaps “formalistic,” the key point was that the significant harm that might befall parties in bankruptcy appeals presents a unique circumstance that outweighs constitutional concerns.

Appropriateness Under the Bankruptcy Code

Judge Krause’s concurrence challenged whether equitable mootness has any basis in law, and concluded that it does not. The concurrence analyzed a number of provisions of the Bankruptcy Code and the federal statutes conferring bankruptcy jurisdiction, including provisions specifying that certain bankruptcy court orders may not be disturbed after consummation (e.g., 11 U.S.C §§ 363(m) and 1127(b)). Judge Krause concluded that, rather than establishing a general “policy” supporting equitable mootness, these provisions weigh against the doctrine: “Because Congress specified certain orders that cannot be disturbed on appeal absent a stay, basic canons of statutory construction compel us to presume that Congress did not intend for other orders to be immune from appeal.”

Judge Ambro did not state whether he agreed with that statutory analysis, and instead observed that the “simpler” approach starts from the premise that bankruptcy courts are courts of equity and apply the principles and rules of equity jurisprudence. Judge Ambro compared the equitable mootness doctrine to other forms of equitable relief, such as injunctions, and noted that “courts always consider a balance of harms to the parties and the public,” and equitable mootness is the manifestation of that principle in the bankruptcy appellate context. Judge Ambro concluded: “[T]he One2One concurrence . . . misses the point that [equitable mootness] is in the equitable toolbox of judges for that scarce case where the relief sought on appeal from an implemented plan, if granted, would leave the plan in tatters and/or bankruptcy battlefield strewn with too many injured bodies.”

Fairness to Appellants

Finally, the concurrences addressed the question of whether it is unfair as a practical matter to deny appellants relief when a bankruptcy or district court has made an error of law. Judge Ambro acknowledged “the unfairness that might result” where an aggrieved party is deprived of appellate relief even in the face of an erroneous lower court decision. However, that unfairness is only exacted upon appellants in the rare cases where modifying a confirmation order would do significant harm.

Judge Ambro observed that, in complex bankruptcies, restoring an estate to the status quo ante consummation would not only be difficult, but would often result in “crushing expense to the reorganized entity and its shareholders.” The Judge hypothesized that, in the absence of the equitable mootness doctrine, no complex plan would be consummated (and no equity investor would put money into a reorganized entity) until all appeals were terminated. That situation would, in Judge Ambro’s view, result in dissenting creditors with any plausible sounding argument gaining the ability to hold up emergence from bankruptcy for years “or until such time as other constituents decide to pay the dissenter sufficient settlement consideration to drop the appeal.”

Judge Ambro indicated that he has a favorable view of stays pending appeal conditioned on the posting of supersedeas bonds. Citing to the Tribune bankruptcy decision that granted the appellants a stay pending appeal conditioned upon the posting of a bond (which they did not post), Judge Ambro noted the “practical benefit” of the approach and stated that it could effectively balance the conceivable harms to various constituencies, and also shift the burden to the appealing party of determining whether its appeal is “really worth the candle.”

The Future of Equitable Mootness in the Third Circuit

In lieu of abolishing the doctrine of equitable mootness entirely (which seems unlikely), Judge Krause’s concurrence advocated that the Third Circuit should adopt four reforms. The proposed reforms, together with our observations, are presented in the following table.

Judge Ambro’s concurrence declined to express a view on Judge Krause’s proposed changes in his concurrence (other than the fourth one). It seems likely that the Third Circuit will consider Judge Krause’s proposals in a precedential opinion if the facts of the case make any of the issues ripe.

Marc Roitman is an associate in Chadbourne & Parke’s New York Office in the firm’s bankruptcy and financial restructuring group.

Judge Krause's Proposed Reforms

Proposed Reform


Place greater weight on an appellant’s attempts to obtain a stay, perhaps permitting dismissal only where an appellant does not seek one.

This modification is logical, except that dismissal should also be permitted where an appellant failed to post a supersedeas bond required as a condition of a stay.

Clarify what constitutes “significant harm” to “third parties who have justifiably relied on plan confirmation.” Specifically, who is a “third party,” and when is their reliance “justifiable”?

The Tribune decision illuminates the importance of these clarifications. Although Judge Ambro’s Opinion of the Court attempted to expound upon these concepts in refusing to dismiss the trustees’ appeal on the allocation dispute, the decision unfortunately may have muddied the waters rather than clarified them.

Change the standard of review of determinations of equitable mootness from abuse of discretion to de novo.

There is a circuit split on the appropriate standard of review. Given the gravity of the equitable mootness determination and the fact that the doctrine should only be applied in very limited circumstances, it is reasonable for the circuit court to exercise de novo review.

Incorporate into the equitable mootness test a quick look at the merits of an appellant’s challenge to determine if it is legally meritorious or equitably compelling.

Judge Ambro’s concurrence advised against a requirement that courts decide the merits of an appeal before addressing equitable mootness. Courts are not prohibited from addressing the merits before addressing mootness, and in some cases a merits adjudication might serve the interests of the court and the parties. However, requiring a merits adjudication first would not make sense in cases such as Tribune, where the appeal of the plan settlement was squarely within the parameters of equitable mootness and a merits adjudication would have been very costly and time-consuming.

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