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Debtors Must Provide Clear Evidence to Argue a Bankruptcy Appeal’s Mootness

Feb 27, 2020

With their Chapter 11 reorganization plan approved and underway, corporate debtors recently contested an appeal of their final settlement agreement, citing the appeal’s equitable and statutory mootness.

While District Judge Jane J. Boyle of the Fifth Circuit ultimately did dismiss the appeal, her decision to uphold the settlement was based on its merits alone.

In determining that this appeal was not moot, the judge acknowledged that other courts have applied expanded terms in “particularly messy” bankruptcy cases. But with her decision, Judge Boyle underscored the strict evidentiary requirements debtors must meet to invoke mootness for appeal dismissal. ‌

Case Background

The appeal followed the confirmation of a Chapter 11 reorganization plan filed by corporate debtors operating nursing homes. Under the plan, the debtors agreed to reject leases for unprofitable locations, restructuring their business around cost-effective facilities.‌

The landlord of a particular “unprofitable location” initially rejected this plan. After the landlord and debtors negotiated a global settlement of all outstanding disputes, a judge confirmed an arrangement that transferred the facility to a new owner.

However, the property’s guarantor appealed this settlement order — but not the confirmation or sale orders. Citing that the sale and the settlement were “inextricably intertwined,” the debtors contended that the appeal was equitably and statutorily moot.

When is an Appeal Considered Moot?

The Doctrine of Equitable Mootness allows a court to exercise its discretion to refuse to hear an appeal. In general, this consideration promotes the integrity of a bankruptcy court’s confirmation order and action triggered pursuant to that order.

In evaluating if an appeal is moot by this standard, courts must examine whether:

  • The appellant has obtained or sought a stay
  • The plan has been substantially carried out to date
  • The intent of the appeal would not impact the rights of third parties or the likelihood of successful plan execution
  • There are public policy concerns, such as the undermining of bankruptcy court decisions creditors rely on

There’s also the consideration of statutory mootness under Section 363(m) of the Bankruptcy Code. If an order authorizing the sale of assets is appealed, this provision works to ensure that settlement modifications or reversal do not affect the validity of an active sale to a buyer is acting in good faith.

The Fifth Circuit’s Application

In this case, the debtors argued for the appeal’s dismissal as moot because:

  • The appellant failed to obtain a stay pending appeal
  • The confirmed reorganization plan had been substantially consummated
  • All transactions under the settlement agreement had occurred

But the guarantor did not appeal the bankruptcy plan’s confirmation, only the global settlement between the estate and the debtors. This limited the disputes’ authority — and Judge Boyle noted that even if the court did extend mootness application to settlement agreements, transferring property ownership back to the estate would not have substantial secondary effects.

Further, Judge Boyle found no evidence that the facility’s sale had closed, contradicting statutory mootness requirements. Finding no validity in the debtors’ claims of equitable or statutory mootness, the court declined to dismiss the appeal on this basis.

Instead, Judge Boyle addressed the merit of the appeal itself. The guarantor contended that the bankruptcy court:

  • Erred in expediting the settlement agreement’s consideration
  • Should have ordered further discovery prior to its approval
  • Was not adequately apprised of all underlying disputes, thus misinformed in its decision to approve the agreement

Finding no abuse of discretion or error on the bankruptcy court’s behalf, Judge Boyle confirmed that it met its obligations while complying with Fifth Circuit rules. She ruled that the approved settlement is fair, equitable, and in the estate’s best interest, upholding the agreement and dismissing the appeal with prejudice.

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