The Roles of Constitutional and Equitable Mootness in Chapter 7 Liquidation Cases

Jenna Marshiano

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

            In In re Kramer, the U.S. Court of Appeals for the Sixth Circuit reversed district court holdings of constitutional and equitable mootness in personal and business bankruptcy cases of debtors Keith Bradley Kramer (“Kramer”) and his real estate business on appeal by judgment creditor Said A. Taleb (“Taleb”).[1] The Sixth Circuit reversed the district court on three issues, holding: (1) Taleb’s objection to the trustee’s final report and fee application filed in the individual bankruptcy case was not constitutionally moot; (2) Taleb’s failure to list an entity as a party in a notice of appeal to the district court did not render Taleb’s objection to the bankruptcy court’s order in the business bankruptcy case constitutionally moot according to Bankruptcy Rule 8003; and (3) the equitable mootness doctrine does not apply in liquidation cases filed pursuant to chapter 7 of tite 11 of the United States Code (the “Bankruptcy Code”).[2]

            Taleb was the Vice President and General Counsel of Kramer’s Michigan-based real estate business.[3] In 2011, Kramer falsely accused Taleb of forgery and embezzlement.[4] Taleb received an arbitration judgment for about $800,000 jointly and severally against Kramer and his business.[5] Kramer and his business filed separate petitions under chapter 11 of the Bankruptcy Code, but ultimately both were converted to cases under chapter 7 of the Bankruptcy Code.[6]

Taleb filed an $800,000 non-priority claim in the personal bankruptcy case.[7] Taleb’s former law firm obtained an attorney’s lien on his claim for unpaid fees.[8] In another proceeding, a Michigan state court ordered Kramer’s bankruptcy estate to pay the firm’s fees from Taleb’s creditor distribution and hold remaining money in the firm’s IOLTA until further court order.[9] Taleb objected to the trustee’s final report and fee application, request for fees, and counsel’s fee request, but the bankruptcy court approved each.[10] Taleb filed a notice of appeal without a stay to the district court on three bankruptcy court orders: (1) overruling Taleb’s objection to the trustee’s final report and application for final compensation and reimbursement; (2) granting the trustee’s fees; and (3) granting the trustee’s attorneys’ final application for fees.[11] The trustee and former law firm jointly moved to dismiss Taleb’s appeal as constitutionally and equitably moot.[12]  

The district court dismissed Taleb’s appeal against his former firm for not listing it in the original notice of appeal (only the amended version), and dismissed his appeal against the trustee for three reasons.[13] First, Taleb did not list the trustee’s attorneys as parties in his original notice of appeal of the bankruptcy court’s order granting the trustee’s attorneys’ final application for fees, so the district court found it to be constitutionally moot.[14] Second, the district court held the appeal of the trustee’s final report and application for final compensation and reimbursement was constitutionally moot for Taleb’s failure to seek a stay.[15] Third, the district court held that the appeal of the order granting the trustee’s fees and expenses was constitutionally ripe, but equitably moot based on the Sixth Circuit’s equitable mootness test.[16] Taleb appealed the district court’s holding to the Sixth Circuit.[17]

            Next, Taleb filed a claim for approximately $800,000 against Kramer’s business’s bankruptcy estate.[18] The bankruptcy court approved the trustee’s proposal to pay Taleb about $9,000 in the final report, discharged the trustee, and closed the chapter 7 case.[19] Taleb appealed the following bankruptcy court orders to the district court (again failing to obtain a stay): (1) overruling Taleb’s objection to the trustee’s final report and application for final compensation and reimbursement; (2) granting the trustee’s attorney’s fees; and (3) granting the trustee’s reimbursement for expenses and fees.[20] The trustee moved the district court to dismiss Taleb’s appeal as constitutionally and equitably moot.[21] The district court held Taleb’s appeal was constitutionally moot for not obtaining a stay and not listing the trustee’s counsel as a party.[22] Also, the district court found Taleb’s objection to the order granting the trustee’s fees constitutionally ripe, but equitably moot under the Sixth Circuit’s equitable mootness factors.[23] Taleb appealed the district court’s holding in the business bankruptcy case to the Sixth Circuit as well.[24]

            The Sixth Circuit, in reversing the district court’s decision in the personal bankruptcy case, held the district court could have reversed and ordered the bankruptcy court to reopen the cases, curing the constitutional mootness issues.[25] The Sixth Circuit found the claim on the business bankruptcy trustee’s counsel’s fees not constitutionally moot because Taleb’s notice of appeal “conforms substantially” to the form, which is all Bankruptcy Rule 8003 requires,[26] and it would have provided sufficient notice to the trustee’s counsel in the business bankruptcy case.[27] The Sixth Circuit restricted the equitable mootness doctrine to issues of complex reorganization plans because they require quick implementation and invoke third-party reliance.[28] According to the Sixth Circuit, the qualities of a chapter 7 liquidation are too remote from the purpose and scope of previous implementations of equitable mootness.[29]

            In sum, the Sixth Circuit reversed the district court on three issues. Here, the Sixth Circuit did not the find issues raised in the personal or business bankruptcy cases to be constitutionally moot.[30] Also, the Sixth Circuit categorically prohibited the use of the equitable mootness doctrine in chapter 7 cases.[31]