The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), analyzing a recent decision of interest:
Disagreeing with other circuits which have addressed the issue, the United States Court of Appeals for the Eighth Circuit (the Circuit) sharply limited the application of the doctrine of equitable mootness in reviewing bankruptcy plan confirmation orders, holding that the “virtually unflagging obligation” of an Article III appellate court to exercise its subject matter jurisdiction prevented it from ducking a federal question without a rigorous test of whether the review should proceed. On a secondary but live appellate issue, the Circuit also held that the timeliness requirement of Bankruptcy Rule 8002(a)(1) was not jurisdictional, although it did compel dismissal of an untimely bankruptcy appeal. FishDish, LLP v VeroBlue Farms USA, Inc. (In re VeroBlue Farms USA, Inc.), 2021 WL 3411834 (8th Cir. August 5, 2021).
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Debtors VeroBlue Farms USA, Inc. and affiliates were in the aquaculture business, farming fish and selling them through wholesalers. FishDish, LLP bought preferred shares, as did Alder Aqua, Ltd. Amstar Group, LLC loaned the Debtors $29 million and Alder Aqua loaned additional funds, eventually acquiring a participation interest in the secured Credit Facility. Amstar transferred its interest in the Credit Facility to Broadmoor Financial, L.P. Through a series of maneuvers, by 2018 Alder Aqua had taken control of the Debtors’ boards, as well as the business operations of the Debtors. When the Debtors filed Chapter 11 in September 2018, they listed the secured Credit Facility of $54 million as undisputed. After a first day motion, the bankruptcy court approved a priming first lien for Alder Aqua as post petition lender; this interim order was soon entered as a final debtor-in-possession financing order (“the DIP Order”). The DIP Order provided that the Credit Facility would be deemed allowed unless the Creditors Committee gave notice of a potential Challenge during an investigation period. Without a timely challenge, the Credit Facility would be deemed allowed for all purposes.
The Creditors Committee gave timely notice of a Challenge; then an Ad Hoc Committee of Equity Security Holders (“AHC”), consisting of FishDish and other shareholders, joined the Committee’s Challenge. AHC moved for an order “confirming” its derivative standing to pursue the Challenge claims; the bankruptcy court deferred ruling on the motion pending confirmation. The Committee then settled the issues in its Challenge in return for modified plan terms. Eventually, the bankruptcy court issued an order (the “AHC Standing Order”) which prevented any party in interest from objecting to the allowance of the Credit Facility, finding such action barred because no timely Challenge had been made. As the confirmation process moved forward, FishDish objected to the Credit Facility claim, which was denied by an April 18, 2019 Claim Objection Order, and also objected to the disclosure statement and plan and certain discovery procedures. The Bankruptcy Court approved the plan with an April 22, 2019 order.
FishDish appealed the confirmation order, the AHC Standing order, a Discovery Order, other interim orders, and the Claim Objection Order, all on May 6, 2019, to the Eighth Circuit BAP; the Debtors timely elected that the appeals be heard by the district court. The district court granted Alder Aqua’s motion to dismiss based on the doctrine of equitable mootness, but denied a motion to dismiss the appeal of the Claim Objection Order as untimely under Rule 8002(a)(1), finding that appeal timely because it held that Rule 8002 only applied to final orders, while the Claim Objection Order was interlocutory.
ACH appealed the equitable mootness dismissal to the Circuit. Broadmoor cross appealed the timeliness issue of the appeal of the Claim Objection Order. The Circuit reversed the timeliness order, ruling that Rule 8002(a)(1) also applied to interlocutory orders. Although it held that the Rule 8002 deadlines were not jurisdictional, nevertheless the Rule mandated dismissal of an untimely appeal such as AHC’s. The Circuit reversed and remanded the equitable mootness issue, finding the doctrine ill-favored and that it required application of a much more rigorous test before an Article III court should abstain from exercising its subject matter jurisdiction.
The Circuit addressed the disposition of the Claim Objection Order appeal first. It noted that the Bankruptcy Rules, enacted by the Supreme Court for the practice and procedures in title 11 cases, do not, in themselves, create or withdraw federal jurisdiction. A rule is jurisdictional only if the legislature has enacted it, which did not happen with the Bankruptcy Rules. The Circuit then determined that the deadlines of Rule 8002(a)(1) apply not just to final orders, but also to properly appealed interlocutory orders such as the Claim Objection Order. Therefore, although the appeal of that order was untimely under Rule 8002(a)(1), that lateness did not deprive the district court of jurisdiction. The Circuit had previously held, however, that dismissal of an untimely appeal was mandatory and therefore the district court erred in not dismissing the late appeal.
On the primary issue on appeal, the Circuit first remarked that the doctrine’s name was misleading. “A case is moot, that is, beyond a federal court’s Article III jurisdiction, only if ‘it is impossible for a court to grant any effectual relief whatsoever.’” The Circuit opined that there is a difference between inability to alter the outcome and unwillingness to alter the outcome, which is what equitable mootness invited. The equitable mootness doctrine arises from a recognition that even when dismissal is not warranted on Article III grounds, common sense or equitable considerations may justify a court deciding not to rule on the merits.
Because the determination was an equitable one, a variety of factors could be relevant in a particular case. The Circuit refused to adopt two-step or five-step analyses used by other courts or, for that matter, any specific multi-factor test. It cited with favor a concurring opinion from the Third Circuit which criticized the overuse of equitable mootness, which among other things delayed finality of bankruptcy court decisions, rather than speeding things up. In the instant case, the record suggested that the plan confirmation might have been an unfair and inequitable result. Denying AHC standing could by itself have been unfair. Applying a court-created doctrine, supposedly founded in equity, which prevented a review of all equitable factors seemed to stand that purpose on its head.
The Circuit concluded that the Article I power of bankruptcy courts was pervasive only because the exercise of those powers was subject to Article III review. Ducking the exercise of subject matter jurisdiction by utilizing a non-statutory doctrine flies in the face of the “presumptive position…. that federal courts should hear and decide on the merits cases properly before them.” Equitable mootness should be the rare exception, not the rule.
This is a move in the right direction. The application of equitable mootness to appellate review of confirmed chapter 11 plans has become muddied by the various circuits as they limit or expand its impact. Right now, it is almost impossible to know how much, if at all, a reviewing court will consider the equities of proceeding with an appeal when a plan has been substantially consummated. The Circuit’s ruling that vigorous application of equitable principles should be employed before an Article III court refuses to exercise its subject matter jurisdiction seems profound, yet other circuits are trending in the opposite direction. Their growing presumption against allowing review, even when there are hints of unfair or inequitable legal rulings in the record, seems out of whack. The presumption should run in the other direction.
In a move to settle the circuit split, two petitions for certiorari on this very issue have recently been filed with the Supreme Court. This author hopes the Court will understand the importance of the issue, grant review, and solve the circuit split with some definitive directions.
This submission was authored by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.