Equitable Mootness in Bankruptcy Appeals: A Constitutionally Questionable Doctrine

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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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.

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.

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