KEYWORDS: Bankruptcy, Appeals, Equitable Mootness, Prudential Mootness, Article III
SUBMITTED BY:
Daniel J. Artz,
Private Practice,
(214) 969-9016, 11/22/2006
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DESCRIPTION:
Several Courts of Appeals have approved of the doctrine of "Equitable
Mootness", often referred to as "Prudential Mootness", in dismissing
appeals from Bankruptcy Courts when, because no stay pending appeal was
issued, parties took actions in reliance upon the Bankruptcy Court's order
which the Courts chose not to disturb. The doctrine is normally applied
in the context of confirmation of a plan of reorganization under Chapter
11 of the Bankruptcy Code, but can also be applied in Bankruptcy Court
approved sales of assets or in settlements approved by the Bankruptcy
Court when the settlement impacts objecting third-parties' rights. When
equitable mootness is applied at the District Court level, the appellant
is deprived of any appeal from the Bankruptcy Court, even though the legal
issues have never been addressed by an Article III tribunal. Under
Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50,
60-61 (1982), it is clear that Bankruptcy Judges are not Article III
judges. However, application of Equitable Mootness at the District Court
level effectively grants Bankruptcy Judges judicial power which is
unreviewable by any Article III judge. This article would argue that the
Doctrine of Prudential Mootness violates Article III of the Constitution
when it deprives an appellant of any Article III review of the Bankruptcy
Court decision.
Perhaps the most egregious example I am aware of occurred in the Second
Continental Airlines Bankruptcy in Delaware, circa 1992. The Bankruptcy
Court confirmed a Plan over numerous objections, and there was really
little doubt that the Plan did not comply with the Bankruptcy Code. An
indenture trustee appealled the Confirmation Order, and in a decision on
the Motion for Stay Pending Appeal, the District Court, applying the four
factors traditionally used to determine whether a stay should be granted,
determined that the Appellant had a substantial probability of success on
the merits (since the Confirmed Plan clearly did not comply with the
Bankruptcy Code), but also ruled that the public interest weighed against
granting the stay, since Continental stood to lose the new investment of
several hundred million dollars if implementing the Plan was delayed. The
District Court ruled that it would only grant the Stay if the Appellant
put up a Bond in the amount of well over $100 Million - of course, that
was impossible. When no bond was placed, the Stay was denied, and the
Appeal was dismissed for prudential mootness once the Confirmed Plan of
Reorganization was implemented. The dismissal of the Appeal was affirmed
by the 3d Circuit. The end result was that the Appellant, and all other
creditors in the Continenntal Airlines case, were bound by a Confirmed
Plan where there was really little doubt that the Plan did not comply with
law, and there was never an opportunity for review on the merits by an
Article III Judge.
RECOMMENDED READING:
Northern Pipeline, 458 U.S. 50 (1982); Crowell v. Benson, 285 U.S. 22, 51
(1932) (the "essential attributes of the judicial power" must be retained
by an Article III tribunal); United States v. Raditz, 447 U.S. 667, 683
(1980) (in case involving magistrate, ultimate decision must rest with
Article III judge); Matter of Texas General Petroleum, 52 F.3d 1330 (5th
Cir. 1995) (discussing litigants' rights to an Article III court in
Bankruptcy context). There are numerous cases applying the Equitable
Mootness Doctrine - I do not have cites handy, but there are several in
the 5th Circuit, 7th Circuit, and 9th Circuit, at least, as well as the 3d
Circuit decision in In re Continental Airlines. None directly address the
Article III issues involved in denying any appeal from the Bankruptcy
Court. There is a useful 7th Circuit Opinion in which Judge Posner (I
believe) questions the notion of "prudential mootness", noting that there
is a substantial difference between a Court not being able to fashion
effective relief, and a Court simply choosing not to.