Equitable Mootness – Are Bankruptcy Courts Still to be “Courts of Equity?”
The concept of “equitable mootness” is a doctrine of relatively long-standing in bankruptcy jurisprudence. It has been used by courts to avoid determination of issues raised on appeal that would require the unscrambling of a plan previously confirmed and implemented. However, that doctrine has recently been questioned in a variety of decisions. It appears that the scope of equitable mootness is clearly ebbing. In that context, a recent decision by this Sixth Circuit Court of Appeals provides an opportunity to further examine the doctrine.
In Ochadleus, et. al. v City of Detroit Michigan, the Sixth Circuit considered an appeal from confirmation of the City of Detroit’s confirmed chapter 9 plan of adjustment. The plan was the product of the so-called “Grand Bargain” that reflected a complex series of settlements and agreements among various creditor constituencies. One aspect of the plan involved a reduction in certain pension benefits under the City’s general retirement system. Although the plan was approved by the class comprised of pension claimants, several pension creditors appealed confirmation of the plan challenging the reduction in their pension benefits.
At the District Court, the City moved to dismiss the appeal as equitably moot and the District Court agreed. That decision was then appealed to the Sixth Circuit. The Sixth Circuit noted that the determinative issue on appeal was the applicability of the doctrine of equitable mootness, including its continued vitality and its applicability in a Chapter 9 bankruptcy case. The appellate court held that the doctrine was both still viable and applicable.
The majority began by noting that “equitable mootness is not technically ‘mootness’ – – constitutional or otherwise – – but is instead ‘a prudential doctrine that protects the need for finality in bankruptcy proceedings and allows third parties to rely on that finality’ by ‘prevent[ing] a court from unscrambling complex bankruptcy reorganizations when the appealing party should have acted before the plan became extremely difficult to retract.’” Thus, unlike conventional mootness doctrines, equitable mootness is not concerned with the court’s ability to grant relief but rather with protecting the good faith reliance created by implementation of the bankruptcy plan from being later undone. The court characterized the doctrine as more akin to waiver, forfeiture or estoppel than to traditional mootness.
The majority analyzed the doctrine under the traditional three-part test: “(1) whether a stay has been obtained; (2) whether the plan has been ‘substantially consummated’; and (3) whether the relief requested would significantly and irrevocably disrupt the implementation of the plan or disproportionately harm the reliance interest of other parties not before the court.” The court found that all three factors strongly supported application of the equitable mootness doctrine in this instance. The court noted that given the complexity of the “Grand Bargain,” the relief requested by the appellants would necessarily unravel the entire plan and force Detroit back into emergency oversight, requiring a wholesale recreation of the complex negotiated settlements that were the underpinnings for the confirmed plan. The court found that the harm that would be visited on others far outweighed the harm to the appellants and that granting their requested relief would be “impractical, imprudent, and therefore inequitable.”
The court noted appellants’ reliance on recent Supreme Court decisions disfavoring prudential doctrines that abdicate jurisdiction in other areas. However, the majority found that those cases and their holdings neither expressly nor necessarily extend to the concept of equitable mootness. The majority went on to state that even if the Supreme Court might choose to abolish the doctrine of equitable mootness, it had not yet done so and that the doctrine therefore remained the law of the Sixth Circuit by virtue of prior decisions.
Appellants also argued that equitable mootness should not be applied in chapter 9 cases, relying on an opinion to that effect in the Jefferson County, Alabama bankruptcy case. The majority found that the facts in Jefferson County were distinguishable and that the decision did not require a conclusion that equitable mootness was not available in any chapter 9 case. Rather, the majority considered the better reading to be that the Jefferson County parties did not meet the standards for application of the equitable mootness doctrine in that instance. And while the Jefferson County decision identified a series of differences between a chapter 9 and other reorganization chapters, the majority felt that those differences were not material for current analytic purposes. The majority held that the principles of finality and avoidance of upending creditor reliance on confirmed plans apply equally in a chapter 9 case.
The dissent in the Detroit case focused primarily on the court’s “virtually unflagging obligation…to exercise the jurisdiction given…[us].” While prudential doctrines had previously been used to justify not exercising jurisdiction, those doctrines were increasingly subject to skepticism at the Supreme Court. The dissent also noted that the effect of declining review in this instance would mean that the appellant’s issues were never determined by an Article III judge.
The dissent acknowledged that applicable precedent supported the equitable mootness doctrine. However, it noted that they were now being asked to expand the doctrine from chapter 11 cases to a municipal bankruptcy under chapter 9. The dissent argued that the invitation to extend that scope should be declined. The dissent concluded by suggesting that the case provided an appropriate opportunity for en banc review of prior support for equitable mootness in the bankruptcy context.
In its application of existing law, the majority decision was clearly correct. If the prudential doctrine of equitable mootness is to have any application, this was clearly a case that called for its use. A reversal of confirmation of Detroit’s plan of adjustment would have allowed a handful of disaffected creditors to frustrate the expectations of literally thousands of creditors that compromised their claims in reliance on the Grand Bargain and resulting plan. Bankruptcy courts are frequently described as “courts of equity.” In this instance, equity clearly supports the conclusion not to disturb the bankruptcy court’s decision to confirm Detroit’s plan of adjustment.
And the dissent’s reference to the lack of a determination by an Article III court does not support a contrary outcome. The District Court had to opportunity to review decisions of law on a de novo basis. It elected not to exercise that opportunity on equitable grounds. One could as easily argue that the dismissal of a late-filed appeal denies the appellant Article III consideration.
The question remains whether courts should ever employ prudential doctrines like equitable mootness to decline to exercise jurisdiction or whether, as stated in the dissent, “[w]e have no more right to decline the exercise of jurisdiction which is given, than to usurp that which is not given.” Hopefully, some discretion remains to provide equity to the parties in a bankruptcy case and to avoid the unscrambling of complex matters once resolved.