Contributed by Brian Wells
The Supreme Court of the United States recently denied a petition for a writ of certiorari submitted by two investment firms whose challenges to the Charter Communications, Inc. chapter 11 plan of reorganization had previously been dismissed as equitably moot. The petition was filed in response to the decision R2 Investments v. Charter Communications, Inc., in which United States Court of Appeals for the Second Circuit adopted an abuse of discretion standard for reviewing district court findings of equitable mootness. We previously wrote about the Charter case here. Although the denial of the petition carries no precedential value, the decision is significant because the Second Circuit’s take on equitable mootness – which makes appealing bankruptcy court confirmation orders an uphill battle – will remain good law.
To refresh your memory, Charter Communication, Inc.’s chapter 11 proceeding was described by the bankruptcy court as “perhaps the largest and most complex prearranged bankruptcies ever attempted, and in all likelihood . . . among the most ambitious and contentious as well.” Among other things, the petitioners had contended that the plan of reorganization was improperly confirmed using an artificially-impaired class of creditors (an issue we recently explored in another blog post) and that it illegally provided equity holder Paul Allen with a $200 million distribution while other equity holders were left empty-handed. The debtors argued that the deal with Allen was justified, in part, because billions of dollars of NOLs could be preserved for the estate only if he agreed to voluntarily waive his contractual exchange rights. After hearing testimony from thirty-three witnesses over a nineteen-day hearing, the bankruptcy court agreed and confirmed the plan.
Both petitioners appealed the confirmation order and prudently filed emergency motions for a stay pending appeal, but the stays were denied. Soon after, the plan went effective and was substantially consummated – an important milestone in the Second Circuit that triggers a presumption that appeals challenging the plan are equitably moot. The district court found that the petitioners did not overcome this heightened burden, and they appealed once more. Adopting a lenient abuse of discretion standard, the Second Circuit reviewed the district court’s finding of equitable mootness and upheld it.
The petitioners then petitioned the Supreme Court for a writ of certiorari, which elicited opposition briefs from the respondents (the reorganized debtors, the official committee of unsecured creditors, and Paul Allen).
The petition broadly attacked the doctrine of equitable mootness, painting a picture in stark contrast to that presented by the respondents. (The briefs also contained dramatically different characterizations of the Second Circuit’s decision.) Petitioners described a “judicial construct of questionable foundation” that had “run amok,” allowing debtors and insiders to obtain illegal plan provisions from the bankruptcy court, rush to consummate their plan and moot appeals challenging the illegal provisions, and in that way avoid review by an Article III court. Among other things, the petitioners suggested this result would be at odds with the Court’s recent decision in Stern v. Marshall, in which it held that bankruptcy courts lack constitutional authority to decide certain claims. Petitioners further argued that, though appellants could theoretically request a stay of confirmation to prevent their appeal from becoming equitably moot, this is practically a meaningless protection as such requests are rarely granted and, if granted, they are often conditioned on exorbitant bonds (plus, in either case there are very limited avenues for an appeal). In response, the respondents pointed out that every circuit had independently adopted the doctrine because of its salutary purposes. Dismissing appeals as equitably moot provides finality, the respondents argued, which is necessary for parties to be able to rely on the confirmed plan. Furthermore, the respondents claimed that, in reality, courts reject equitable mootness arguments more often than they accept them and that the doctrine is only applied after a highly fact-intensive analysis of factors that vary greatly between cases.
The petitioners also challenged the Second Circuit decision on narrower grounds, claiming the court had erred by 1) presuming that upon substantial consummation of the plan, their appeal was equitably moot and 2) reviewing the district court’s findings of equitable mootness under the abuse of discretion standard. The petitioners pointed out that the circuits were divided on these two issues, but the parties disagreed as to whether these divisions were “deep” or “shallow” and thus suitable for Supreme Court review. A number of arguments were also raised on the question of whether, assuming these issues were worthy of review, the Charter appeal was an appropriate vehicle for resolving them. One point of contention was whether the petitioners’ claims actually had been asserted before the lower court or waived by dilatory action; another was whether a decision by the Court would be an unconstitutional “advisory opinion” because the district court would likely find against the appellants on the merits, even if their appeal were not moot.
The respondents pointed to many traditional factors supporting equitable mootness as reasons why the court should deny the petition (effectively, and somewhat ironically, arguing that the Court should not review the finding of equitable mootness because the underlying claims were equitably moot). Among other things, the respondents noted that the Court could only provide relief by unraveling Charter’s reorganization, including many transactions taken in reliance on a plan that had been effective for over three years, and that the petitioners had not sought a stay of confirmation from the Second Circuit or an expedited appeal.
Also weighing in with an amicus brief was a group of law professors, self-described as reflecting a “broad range of perspectives on bankruptcy law” but unanimous in agreement that the Court should grant the petition. Highlighting the history of, and controversies surrounding, equitable mootness, the professors urged the Court to decide whether the doctrine should even exist and, if so, resolve the issues on which the circuits have split. Interestingly, their brief was paid for by Aurelius Capital Management LP, a distressed debt firm that has litigated issues in numerous bankruptcy proceedings.
At the end of the day, the Court simply denied the petition. Notably, the Court reported that Justice Alito “took no part in the consideration or decision of [the] petition.” This is somewhat interesting, as the petitioners peppered their brief with Justice Alito quotations that were critical of the equitable mootness doctrine (including his dissent in Continental Airlines, a decision covered by our Throwback Thursday feature). The denial came without any other written explanation and has no precedential value. Yet, in one respect, the Court continued a longstanding tradition. Over the past twenty years, the Court has considered challenges to the doctrine of equitable mootness in fourteen petitions for a writ of certiorari – and all fourteen have been denied.
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