In re Semcrude, L.P., 728 F.3d 314 (3d Cir. 2013). An egg cream is a fountain drink, associated primarily with New York City, whose ingredients include neither egg nor cream. As explained in this opinion by Judge Ambro, “equitable mootness” is a doctrine that involves neither equity nor mootness. Instead, equitable mootness is “a judge-made abstention doctrine that allows a court to avoid hearing the merits of a bankruptcy appeal because implementing the requested relief would cause havoc.” Judge Ambro noted that “prudential forbearance” is a more accurate description of this doctrine, whose “only playground” is in bankruptcy cases.
Judge Ambro noted that the Third Circuit had adopted the doctrine by a 7-6 vote in In re Continental Airlines, 91 F.3d 553, 568 (3d Cir. 1996) (en banc). “[I]ts judge-made origin, coupled with the responsibility of federal courts to exercise their jurisdictional mandate, obliges us, however, to proceed most carefully before dismissing an appeal as equitably moot.”
Here, the district court had found an appeal to be equitably moot. Applying the abuse of discretion standard of review adopted in Continental (while noting its inclination to agree with then-Judge Alito’s dissenting view in that case that plenary review was the more appropriate standard), the Third Circuit reversed, finding that the evidentiary record did not support that result.
Judge Ambro began by recognizing that an aggrieved party has the statutory right to appeal the confirmation of a bankruptcy reorganization plan, the context of this case. When an appeal is presented, federal courts have a “virtually unflagging obligation” to consider it. Equitable mootness will call for a court to refrain from deciding an appeal only when granting relief on appeal is “almost certain to produce a ‘perverse’ outcome,” “‘chaos in the bankruptcy court’ from a plan in tatters, and/or significant ‘injury to third parties.'”
Continental set out five “prudential factors” that inform equitable mootness rulings: “(1) whether the reorganization plan has been substantially consummated, (2) whether a stay has been obtained, (3) whether the relief requested would affect the rights of parties not before the court, (4) whether the relief requested would affect the success of the plan, and (5) the public policy of affording finality to bankruptcy judgments.” Judge Ambro boiled these down to “two analytical steps: (1) whether a confirmed plan has been substantially consummated; and (2) if so, whether granting the relief requested in the appeal will (a) fatally scramble the plan and/or (b) significantly harm third parties who have justifiably relied on plan confirmation.”
The Third Circuit had not previously decided who has the burden of proof in the equitable mootness context. Because dismissing an appeal over which a court has jurisdiction should be “the rare exception and not the rule,” and should be based on an evidentiary record, Judge Ambro put the burden on the party seeking dismissal on equitable mootness grounds. The panel went on to conclude that, on the evidentiary record here, there was no basis for dismissal based on equitable mootness.
Overall, this opinion makes clear that the Third Circuit is not wild about equitable mootness. The panel seemed to regret that Continental had adopted it and Judge Ambro expressly observed that the adoption of the doctrine was not accompanied by any “independent analysis” but rather occurred because the Third Circuit was content to rely on decisions of other Circuits (again quoting Judge Alito’s dissent).
Though the panel could not, of course, overrule the en banc decision in Continental, the tenor of this decision makes clear that equitable mootness will be a hard sell. It will be much easier to get an egg cream than to get a bankruptcy appeal dismissed based on equitable mootness.