Contributed by Kelly E. McDonald
A confirmed plan of reorganization that has become effective is essentially a binding contract between the debtor and its stakeholders that is bolstered by an accompanying court order. On occasion, parties appeal the confirmation order, but if a court does not institute a stay pending appeal of the plan and the plan becomes effective and “substantially consummated,” then a doctrine referred to as “equitable mootness” typically will prevent later appellate attacks on the plan of reorganization. The reasoning is simple: creditors and other stakeholders assume the plan resolves each creditor’s claim and stakeholder’s interest in the reorganization with finality. In this two-part series, we examine two recent decisions on equitable mootness (one rendered by the United States District Court for the Southern District of New York and the other issued by the United States Court of Appeals for the Fifth Circuit) that seem to have arrived at completely opposite results.
Today, we discuss the R2 Investments, LDC v. Charter Communications (In re Charter Communications, Inc.), No. 09-cv-10506 (GBD), 2011 WL 1344553, *1 (S.D.N.Y. March 30, 2011) decision in which the United States District Court for the Southern District of New York reaffirmed the importance of finality to the doctrine of equitable mootness in dismissing appeals of certain noteholders, relying on prevailing Second Circuit precedent, Official Committee of Unsecured Creditors of LTV Aerospace & Def. Co. v. Official Comm. of Unsecured Creditors of LTV Steel Co. (In re Chateaugay Corp.), 988 F.2d 322, 325 (2d Cir. 1993); Frito Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944 (2d Cir. 1993).
The bankruptcy community was abuzz in the spring of 2009 when Charter Communications filed its prenegotiated chapter 11 case in the United States Bankruptcy Court for the Southern District of New York, seeking to strip away over $8 billion of debt from its balance sheet and reinstate $12 billion in low-interest debt from a consortium of lenders led by J.P. Morgan. The banks balked, insisting that because a change in ownership was essentially effected through the bankruptcy, a “change of control” had occurred and, therefore, the debtors had defaulted under their credit agreements and could not reinstate the loans without lender consent. Both the bankruptcy and district courts called the case “perhaps the largest and most complex prearranged bankruptcies ever attempted, and in all likelihood . . . among the most ambitious and contentious as well.” Over objection of the lenders, the bankruptcy court confirmed the plan in Charter Communications in November, 2009.
Multiple appeals of the confirmation order ensued, including (i) by the lender group; (ii) by Wells Fargo, as agent for the third lien secured lenders; (iii) by the Law Debenture Trust (indenture trustee with respect to $479 million in aggregate principal amount of 6.5% Convertible Senior Notes due 2027); and (iv) by noteholder R2 Investments. After the bankruptcy court denied a motion for stay of the confirmation order pending the appeal, Charter emerged from bankruptcy on November 30, 2009.
A year and a half later, on March 30, 2011, the United States District Court for the Southern District of New York, in Charter Communications, relying on Chateaugay, granted a motion by the unsecured creditors’ committee, the reorganized debtors, and former controlling shareholder Paul Allen to dismiss the appeals of Law Debenture Trust and R2 Investments as moot. The appeals of the lenders and Wells Fargo are still pending.
In Chateaugay, the Second Circuit Court of Appeals held that an appeal should be dismissed as equitably moot—even though relief conceivably could be fashioned—if implementation of the relief would be inequitable. Appellate courts often presume bankruptcy appeals are equitably moot where a plan of reorganization has been “substantially consummated” under section 1101(2) of the Bankruptcy Code. An appellant may overcome the presumption of mootness by establishing the presence of each of five factors commonly known as the “Chateaugay factors”:
- the court can still order some effective relief;
- such relief will not affect the re-emergence of the debtor as a revitalized corporate entity;
- such relief will not unravel intricate transactions so as to knock the props out from under the authorization for every transaction that has taken place and create an unmanageable, uncontrollable situation for the Bankruptcy Court;
- the parties who would be adversely affected by the modification have notice of the appeal and an opportunity to participate in the proceedings; and
- the appellant pursued with diligence all available remedies to obtain a stay of execution of the objectionable order . . . if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from.
Because the Charter court found that Charter’s plan was substantially consummated under section 1101(2) of the Bankruptcy Code, it also presumed the pending appeals to be equitably moot and applied the Chateaugay factors to determine whether the presumption could be rebutted with respect to the R2 Investments and Law Debenture Trust Company appellants.
In summarizing its Chateaugay analysis, the court found that even though it appeared the appellants sought relief that would not require Charter’s plan to unravel, the remedies requested by the appellants would have required the court to vacate and modify “cherry-picked” provisions of the Plan without regard on the effect on the other plan provisions. For example, notwithstanding a comprehensive non-severability provision in the plan, the appellants-noteholders argued that settlement consideration paid to former majority shareholder Paul Allen in return for continuing obligations to reorganized Charter (and enabling “billions of dollars of wealth to be created for Charter and its stakeholders” among other things, by not exercising prepetition exchange rights) violated the “absolute priority rule” and “entire fairness” standard and asked the court to order Allen to return the settlement consideration or to pay similar consideration to the noteholders.
The court reasoned that the plan expressly provided for the classification and treatment of claims and interests in great detail and that the non-severability provisions of the plan barred the modifications required to provide the requested relief. It also found reorganized Charter’s ability to afford the requested remedy, as “wholly unpersuasive,” and ultimately held that the appellants failed to satisfy their burden to demonstrate that the “proposed piecemeal dismantling” would not unravel the bankruptcy or otherwise be inequitable.
The Charter Communications decision confirmed the role of equitable mootness – emphasizing that even if the relief requested on appeal were theoretically possible, if, practically speaking, the relief sought threatens to unravel the plan, the appeal will be dismissed as equitably moot. The Fifth Circuit’s decision in Bank of New York Trust Company, N.A. v. Pacific Lumber Company (In re ScoPac), 624 F.3d 274 (5th Cir. 2010), which we will discuss in the continuation of this series, tells a different story and indicates that the doctrine of equitable mootness may not be as cemented as the Charter Communications decision suggests.
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