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Equitable Mootness and Substantial Consummation Are You Losing Your Appeal

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Upon the entry of a final order that confirms a plan of reorganization over a creditor's objection, an appeal becomes ripe. Indeed, a creditor may immediately appeal the confirmation order. Despite the ripeness of the appeal, certain actions, if not stayed, may occur that moot an otherwise valid appeal. An appeal is moot in the constitutional sense only if events have taken place during the pendency of the appeal that make it "impossible for the court to grant 'any effective relief whatsoever.'" Church of Scientology v. United States, 506 U.S. 9, 12, 113 S.Ct. 447, 449, 121 L.Ed.2d 313 (1992) (quoting Mills v. Green, 159 U.S. 651,653, 16 S.Ct. 132, 133, 40 L.Ed. 293 (1895)). Thus, when a court can fashion some form of relief, even if it only partially redresses the grievances of the prevailing party, the appeal is not moot. Church of Scientology, 506 U.S. at 12-14, 113 S.Ct. at 450.

The doctrine of equitable mootness, however, states that an appeal should be dismissed as moot when, even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable.1 Consequently, practitioners must be aware of the doctrine of equitable mootness, and should consider the necessary strategy to prevent its application. Preventing its application, after all, will prevent the loss of an otherwise valid appeal.

The Equitable Mootness Doctrine

The doctrine of equitable mootness "is a recognition by the appellate courts that there is a point beyond which they cannot order fundamental changes in reorganization actions." Manges, 29 F.3d at 1038-39. "Consequently...when there has been substantial consummation of a plan ...effective judicial relief is no longer available—even though there may still be a viable dispute between the parties on appeal." In re GWI PSC 1 Inc., et al, 230 F.3d 788, 800 (5th Cir. 2000).

When evaluating whether an appeal of a plan of reorganization is moot, courts examine whether (1) a stay has been obtained, (2) the plan has been substantially consummated, and (3) the relief requested would affect either the rights of parties not before the court or the success of the plan. Id.; In re Continental Airlines, 91 F.3d 553, 560 (3d Cir. 1996) (citing Manges, 29 F.3d at 1039). Certain courts also list the public policy of affording finality to bankruptcy judgments as a factor. See Continental Airlines, 91 F.3d at 560. This factor is actually the underlying consideration for the equitable mootness doctrine.

1. Obtaining a Stay. The first step in preventing the loss of an appeal to the doctrine of equitable mootness is obtaining a stay of consummation. Specifically, an appellant should move the bankruptcy court for a stay of consummation, since the stay set forth in Federal Rules of Bankruptcy Procedure 7062 lasts only 10 days. The procedural basis for a motion for stay pending appeal is Federal Rules of Bankruptcy Procedure 8005, which provides a procedure to preserve the status quo. Since Rule 8005 set forth the procedure for obtaining this relief, "[t]he party who appeals without seeking to avail himself of that protection does so at his own risk." Official Committee of Unsecured Creditors of LTV Aerospace & Defense Co. v. Official Committee of Unsecured Creditors of LTV Steel Co. (In re Chateaugay Corp.), 988 F.2d 322, 326 (2d Cir. 1993). This motion is in addition, of course, to a timely notice of appeal, as well as compliance with the Federal Rules of Bankruptcy Procedure's other appellate rules. See Fed. R. Bankr. P. 8001-8020.

If the bankruptcy court declines to issue such a stay, the appellant must then seek a stay of consummation from the district court, or bankruptcy appellate panel (BAP) where appropriate. The appellant cannot rest on its laurels with the act of merely seeking relief from the bankruptcy court. Furthermore, if the district court or BAP refuses to issue such a stay, the appellant must then seek to mandamus the district court from the appropriate circuit court of appeals.

Not only must the appellant seek this relief, it must do so immediately. After all, the appellees, who are now aware of the appeal, will attempt to consummate the plan of reorganization as quickly as possible. See In re Zenith Electronics Corp., 250 B.R. 207, 215 (D. Del. 2000). In addition, any delay in seeking a stay may result in the consummation, or substantial consummation, of the plan of reorganization. Simply stated, "[a] stay not sought, and a stay sought and denied, lead equally to the implementation of the plan of reorganization." In re UNR Industries Inc., 20 F.3d 766, 770 (7th Cir. 1994).

2. Acting Prior to Substantial Consummation. Notwithstanding the importance of obtaining a stay, substantial consummation is considered by some courts to be "the foremost consideration," particularly "where the reorganization involves intricate transactions." Continental Airlines, 91 F.3d at 560 (citing Rochman v. Northeast Utilities Service Group (In re Public Serv. Co.), 963 F.2d 469, 473-74 (1st Cir.), cert. denied, 506 U.S. 908, 113 S.Ct. 304, 121 L.Ed.2d 226 (1992)). "'Substantial consummation' is the statutory measure for determining whether a reorganization plan may be amended or modified by the bankruptcy court." GWI, 230 F.3d at 800. Substantial consummation is specifically defined in 11 U.S.C. §1101(2) as the:

  • a. transfer of all or substantially all of the property proposed by the plan to be transferred,
  • b. assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan, and
  • c. commencement of distribution under the plan.

More specifically, substantial consummation may include such acts as the infusion of cash into the post-confirmation estate and/or completion of all elements of the plan, without considering the pay-out of unsecured creditors. Continental Airlines, 91 F.3d at 561. Thus, time is of the essence for both parties as plan proponents will seek to consummate at the earliest opportunity, and appellants will seek to prevent, or act prior to, substantial consummation.

Once such actions occur, and a plan of reorganization is substantially consummated, a court may "decline to consider the merits of confirmation...[if] effective judicial relief is no longer available—even though the parties may have a viable dispute on appeal." In re U.S. Brass Corp., 169 F.3d 957, 960 (5th Cir. 1999) (citing Berryman, 159 F.3d at 944).

3. The Effect Upon Third Parties, and the Success of the Plan. The final question in the equitable mootness inquiry focuses on either (a) the effect upon third parties and/or (b) the success of the plan. See U.S. Brass, 169 U.S. at 961. "High on the list of prudential considerations taken into account by courts considering whether to allow an appeal following a consummated reorganization is the reliance by third parties, particularly investors, on the finality of the transaction." Continental Airlines, 91 F.3d at 562 (citing Manges, 29 F.3d at 1039).

After all, strong public policy exists in favor of maximizing debtors' estates and facilitating successful reorganization. See Continental Airlines, 91 F.3d at 565. Furthermore, courts have recently recognized that mootness of a plan of reorganization, where the third parties to whom harm would occur are insiders, is also a consideration. See GWI, 230 F.3d at 802. In holding that the insiders' status was inconsequential, the Fifth Circuit held that "it [is] natural for many, if not a majority, of the transactions set forth in a reorganization plan to involve the participants of the chapter 11 proceedings." Id.

Thus, the harm to third parties' consideration is not limited to parties otherwise unrelated to the reorganization. Other courts, however, have distinguished between non-adverse third parties, i.e., outside investors, and non-outside investors such as bondholders, lenders, retailers, distributors and suppliers. See Zenith, 250 B.R. at 217.

Additional harm may come to third parties because the reversal of the plan would prohibit its success. When considering the harm to the success of the plan, courts consider whether any alternate plan provisions, or even a new plan, is offered. See Zenith, 250 B.R. at 218. Thus, it is apparent that an appellant arguing against equitable mootness must be prepared to demonstrate alternatives to the complained of plan, as mere reversal and possible conversion is insufficient. Id.

For appellee/plan proponents, this last factor may prove to be a lifeline, since reorganization is favored over liquidation. When competing plans are at issue, however, this factor may quickly fall aside as an alternative plan is already in existence.


Practitioners must remember above all else that the doctrine of equitable mootness is founded in equity. Consequently, this determination is very fact-intensive, and the parties' actions control. Considering the equitable nature of this doctrine, appellants and appellees alike are wise to act expediently, but equitably, in the furtherance of their interests.


1 See Official Committee of Unsecured Creditors of LTV Aerospace & Defense Co. v. Official Committee of Unsecured Creditors of LTV Steel Co. (In re Chateaugay Corp.), 988 F.2d 322, 325 (2d Cir. 1993). Indeed, virtually every circuit court of appeals has recognized this doctrine. See Manges v. Seattle-First National Bank (In re Manges), 29 F.3d 1034, 1038-39 (5th Cir. 1994), cert. denied, 513 U.S. 1152, 115 S.Ct. 1105, 130 L.Ed.2d 1071 (1995); In re Specialty Equipment Cos., 3 F.3d 1043, 1048 (7th Cir. 1993); Rochman v. Northeast Utilities Service Group (In re Public Serv. Co.), 963 F.2d 469, 471-72 (1st Cir.), cert. denied, 506 U.S. 908, 113 S.Ct. 304, 121 L.Ed.2d 226 (1992); First Union Real Estate Equity & Mortgage Investment v. Club Associates (In re Club Associates), 956 F.2d 1065, 1069 (11th Cir. 1992); Central States, Southeast and Southwest Areas Pension Fund v. Central Transportation Inc., 841 F.2d 92, 95-6 (4th Cir. 1988); In re AOV Industries, 792 F.2d 1140, 1147 (D.C. Cir. 1986); Trone v. Roberts Farms Inc. (In re Roberts Farms Inc.), 652 F.2d 793, 796-97 (9th Cir. 1981). Return to article

Journal Date: 
Thursday, February 1, 2001

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