U.S. Supreme Court Update: Petitions Seek Review of Notable Bankruptcy Law Rulings

At a conference to be held at the end of the summer recess on September 27, 2021, the U.S. Supreme Court will consider whether to grant petitions seeking review during the new Term that begins on October 4 of three notable appeals involving issues of bankruptcy law. Two of those appeals address the doctrine of "equitable mootness." The third concerns federal preemption of a non-debtor third party's tortious interference claims against other non-debtor third parties.

The court-fashioned remedy of equitable mootness bars adjudication of an appeal when a comprehensive change of circumstances has occurred such that it would be inequitable for a reviewing court to address the merits of the appeal. In bankruptcy cases, appellees often invoke equitable mootness as a basis for precluding appellate review of an order confirming a chapter 11 plan.

The equitable mootness doctrine has been criticized as an abrogation of federal courts' "virtually unflagging obligation" to hear appeals within their jurisdiction. In re One2One Commc'ns, LLC, 805 F.3d 428, 433 (3d Cir. 2015); In re Charter Commc'ns, Inc., 691 F.3d 476, 481 (2d Cir. 2012). According to this view, dismissing an appeal on equitable mootness grounds "should be the rare exception." In re Tribune Media Co., 799 F.3d 272, 288 (3d Cir. 2015); accord In re VeroBlue Farms USA, Inc., 2021 WL 3411834, *1 (8th Cir. Aug. 5, 2021) (as in decisions by the Third, Tenth, and numerous other Circuits, "we conclude that the district court did not apply a sufficiently rigorous test to determine when bankruptcy equities and pragmatics justify foregoing Article III judicial review of a bankruptcy court order confirming a Chapter 11 plan"); In re Pac. Lumber Co., 584 F.3d 229, 240 (5th Cir. 2009) (equitable mootness should be applied "with a scalpel rather than an axe"). In VeroBlue, the Eighth Circuit even went so far as "banish 'equitable mootness' from the (local) lexicon" because it is "misleading," holding that, in accordance with the Supreme Court's decision in Mission Prod. Holdings Inc. v. Tempnology LLC, 139 S. Ct. 1652 (2019), an appeal is "moot, that is, beyond a federal court's Article III jurisdiction, only if 'it is impossible for a court to grant any effectual relief whatsoever.'" VeroBlue, 2021 WL 3411834, at *5 (quoting Mission Prod., 139 S. Ct. at 1660).

Substantially similar tests (briefly discussed here) have been applied by most circuit courts of appeals in assessing whether an appeal of a chapter 11 confirmation order should be dismissed under the doctrine. Those tests, a common element of which is whether a chapter 11 plan has been substantially consummated, generally focus on whether the appellate court can fashion effective and equitable relief.

Some courts, including the Third and Fifth Circuits, have taken the position that equitable mootness does not apply outside the context of appeals of chapter 11 plan confirmation orders. See, e.g., In re LCI Holding Company, Inc., 802 F.3d 547, 554 (3d Cir. 2015); In re Sneed Shipbuilding, Inc., 916 F.3d 405, 409 (5th Cir. 2019).

Other courts, including the Fourth, Ninth, Tenth, and Eleventh Circuits, have been less constrained in relying on the doctrine to dismiss appeals. See Myers v. Offit Kurman, P.A., 773 F. App'x 161, 162 (4th Cir. 2019) (finding that an appeal from a bankruptcy court order granting a chapter 7 trustee's motion for approval of a settlement agreement was equitably moot given that the agreement had been fully consummated and funds had been distributed accordingly); Stokes v. Gardner, 483 F. App'x 345, 346 (9th Cir. 2012) (finding that an appeal of an order approving a settlement agreement in a chapter 7 case was equitably moot); Ordonez v. ABM Aviation, Inc., 787 F. App'x 533 (10th Cir. 2019) (appeals from a bankruptcy court order relating to a chapter 7 trustee's settlement of the debtor's employment discrimination claims were equitably moot, since the debtor did not diligently seek a stay, the settlement agreement had been fully consummated, the funds had been distributed, the estate had been fully administered, and the debtor's challenges were neither legally meritorious nor equitably compelling); In re JMC Memphis, LLC, 655 F. App'x 802 (11th Cir. 2016) (dismissing as equitably moot an appeal from an unstayed order approving a settlement between the chapter 7 trustee and the debtor's property insurer).

The Second Circuit recently joined this group in In re Windstream Holdings, Inc., 838 Fed. App'x. 634 (2d Cir. 2021), ruling in a nonprecedential summary order that an appeal of a "critical vendor" order directing the payment of the prebankruptcy claims of vendors deemed essential to the success of a chapter 11 debtor's reorganization before the claims of other unsecured creditors was equitably moot after confirmation of the debtor's chapter 11 plan. In so ruling, the Second Circuit noted that: "Our precedent is clear that equitable mootness can be applied 'in a range of contexts,' including appeals involving all manner of bankruptcy court orders…. [A]n appeal does not need to directly challenge a reorganization plan to impact that plan." Id. at 637.

One of the Windstream debtor's general unsecured creditors filed a petition seeking Supreme Court review of the ruling on July 21, 2021. See GLM DFW, Inc. v. Windstream Holdings, Inc., No. 21-78 (U.S.) (petition for cert. filed July 21, 2021).

In In re Nuverra Environmental Solutions, Inc., 834 Fed. App'x 729 (3d Cir. 2021) (discussed here), a divided panel of the Third Circuit handed down a long-awaited ruling that could have addressed, but ultimately did not address, the validity of "gifting" chapter 11 plans under which a senior creditor class gives a portion of its statutorily entitled recovery to one or more junior classes as a means of achieving consensual confirmation. By avoiding the merits and holding that an appeal of an order confirming a "horizontal gifting" plan was equitably moot, the Third Circuit skirted a question that continues to linger in the aftermath of Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), which invalidated final distributions to creditors departing from the Bankruptcy Code's priority scheme as part of a nonconsensual "structured dismissal" of a chapter 11 case.

A creditor who objected to the Nuverra debtor's chapter 11 plan filed a petition seeking review of the decision on July 6, 2021. See Hargreaves v. Nuverra Environmental Solutions Inc., No. 21-17 (U.S.) (petition for cert. filed July 6, 2021).

In Sutton 58 Associates LLC v. Pilevsky, 164 N.E.3d 984 (N.Y. 2020), New York's highest court decided by a 4–3 margin that the doctrine of federal preemption does not bar a non-debtor third party's tortious interference claims against other non-debtor third parties for actions taken in anticipation of a debtor's chapter 11 filing. In Pilevsky, a lender provided $150 million in financing for a housing project that was structured as a bankruptcy-remote single-asset real estate entity. However, at the behest of the project's advisors and in violation of the loan agreement, the project owner engaged in conduct, including selling an ownership interest in the project to another entity, that disqualified it as a "single-asset real estate debtor" in a subsequent chapter 11 case. After the bankruptcy court confirmed the owner's chapter 11 plan, the lender sued the advisors in New York state court, arguing that their actions amounted to tortious interference with contract by causing the project owner to breach its agreements with the lender. A trial court decided that the claims were not preempted by federal bankruptcy law and an intermediate state appellate court reversed, concluding that the claims were preempted.

The New York Court of Appeals reversed the intermediate appellate court, holding that "[p]laintiff's tortious interference claims—asserted against defendants who were not debtors in the bankruptcy proceedings and which are premised upon conduct that occurred prior to those proceedings—are peripheral to, and do not impugn, the bankruptcy process." Id. at 994. In a dissenting opinion, three of the court's judges expressed "fear [that] state litigation may disincentivize lawyers and potential secondary lenders from assisting debtors who wish to file for bankruptcy but need legal counsel and financial assistance to do so." Id. at 1014.

The defendants asked the Supreme Court to review the decision on April 20, 2021. See Pilevsky v. Sutton 58 Associates LLC, 20-1483 (U.S.) (petition for cert. filed Apr. 20, 2021).

In a conference later in the upcoming Term, the Court will consider whether to grant a petition seeking review of a ruling by the U.S. Court of Appeals for the Third Circuit in In re Venoco LLC, 998 F.3d 94 (3d Cir. 2021). In that case, before filing for chapter 11 protection, the debtors leased an offshore oil and gas drilling rig from the State of California and its Lands Commission (collectively, the "State"). After the debtors abandoned the leased rig, the State took over decommissioning the rig and plugged the abandoned wells. The liquidating trustee appointed under the debtors' confirmed chapter 11 plan filed an adversary proceeding in the bankruptcy court seeking to recover, on an inverse condemnation theory, compensation from the State for the alleged taking of the debtors' refinery without any compensation. The State moved to dismiss on the basis of, among other things, state sovereign immunity conferred by the Eleventh Amendment to the U.S. Constitution.

The bankruptcy court denied the motion to dismiss, and a district court affirmed on appeal. A three-judge panel of the Third Circuit also affirmed. Among other things, the Third Circuit panel ruled that the liquidating trustee's claims were brought to effectuate the bankruptcy court's in rem jurisdiction and, in accordance with the Supreme Court's decision in Central Virginia Community College v. Katz, 546 U.S. 356 (2006), were therefore claims as to which the State had waived its sovereign immunity from suit by ratifying the Bankruptcy Clause of the U.S. Constitution (Art. I § 8 cl. 4).

The State asked the Supreme Court to review the decision on July 23, 2021. See Cal. State Lands Comm'n v. Davis, No. 21-109 (petition for cert. filed July 23, 2021). It its petition, the State argues, among other things, that the "limited consent" to a waiver of state sovereign immunity found in Katz should not apply in a case involving claims that do not arise under federal bankruptcy law.

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