Tenth Circuit Holds the Doctrine of Equitable Mootness Applies to Liquidating Plans

The Bottom Line

In Drivetrain LLC v. Kozel (In re Abengoa Bioenergy Biomass of Kansas LLC), 18-3120 (10th Cir. May 5, 2020), the Tenth Circuit held that the doctrine of equitable mootness applies to appeals of confirmed Chapter 11 plans of liquidation. The court determined that there is no reason to “erect a categorical bar” between liquidating plans and conventional reorganizations when assessing equitable mootness. Though the doctrine is applicable in both instances, the court also held that certain factors should weigh heavier in the liquidation context.

What Happened?

Background

Debtor Abengoa Bioenergy Biomass of Kansas (ABBK) built and operated an ethanol conversion facility in Kansas. Although the plant was substantially completed in late 2014, ABBK never saw significant cash flow from the plant, and by March 2016 ABBK was in bankruptcy. 

After several months, ABBK proposed a plan that would liquidate the plant and subordinate inter-company claims below all of its other creditors. An affiliate objected, but the plan was confirmed over the objection. The affiliate then appealed. The district court dismissed the appeal for equitable mootness, and the affiliate appealed once more to the Tenth Circuit, seeking a ruling that equitable mootness does not apply in the context of a Chapter 11 liquidation plan.

The Tenth Circuit’s Decision

The Tenth Circuit dismissed the appeal, finding no grounds to withhold application of equitable mootness with respect to a liquidating Chapter 11 plan.

The concept of equitable mootness does not originate in the Bankruptcy Code. Instead, it is “a judicially-created doctrine of abstention that permits the dismissal of bankruptcy appeals where confirmed plans have been substantially completed and reversal would prove inequitable or impracticable.”^[1] Every circuit, included the Tenth, has adopted the doctrine.^[2] Tenth Circuit precedent provides six factors to assess the propriety of a dismissal based on equitable mootness: (1) Has the appellant sought and/or obtained a stay pending appeal? (2) Has the appealed plan been substantially consummated? (3) Will the rights of innocent third parties be adversely affected by reversal of the confirmed plan? (4) Will the public-policy need for reliance on the confirmed bankruptcy plan — and the need for creditors generally to be able to rely upon decisions of the bankruptcy court — be undermined by reversal of the plan? (5) If the appellant’s challenge were to be upheld, what would be the likely impact upon a successful reorganization of the debtor? And (6) based upon a quick look at the merits of the appellant’s challenge to the plan, is it legally meritorious or equitably compelling?^[3]

The Tenth Circuit saw no reason to treat a Chapter 11 liquidation plan differently than a reorganization plan. Other circuits apply the doctrine to such plans, and the Tenth Circuit has previously affirmed a district court’s determination of equitable mootness in a Chapter 11 liquidation.^[4] Furthermore, the court found that the six-factored test for applying equitable mootness ensures that any special considerations that may be present in a liquidation plan will be addressed.^[5] For instance, as to the fifth factor in its governing test for mootness — the “likely impact upon a successful reorganization” — the court recognized that “a liquidation masquerading as a reorganization likely will not implicate the same concerns that animate determination of equitable mootness in cases where a going concern emerges from the bankruptcy process.”

After the court declined the appellant’s request to limit the scope of the doctrine of equitable mootness, it then reviewed the district court’s decision for abuse of discretion and found none. To reach this conclusion, the Tenth Circuit reviewed the aforementioned factors as applied to this case. In doing so, the court specifically held that the third (effect on innocent third parties), fourth (public-policy needs) and fifth (impact on reorganization) factors were the most relevant when considering a confirmed liquidation plan.

Why This Case Is Interesting

The Tenth Circuit now joins the Second^[6] and Fifth Circuits^[7] in holding that equitable mootness applies to liquidating plans. However, this line of jurisprudence is not without its detractors. Critics argue that the doctrine results in several negative consequences, including that it undercuts the principles of appellate jurisdiction, unduly burdens the right to appeal, dilutes sources for interpretation of the Bankruptcy Code and results in Article III courts unduly deferring to courts not entrusted with the judicial power of the United States.^[8] The Tenth Circuit acknowledged this represented an “important legal debate,” but determined not to deviate from its earlier-adopted test for mootness in the absence of a Supreme Court decision to the contrary.

^[1] _{Drivetrain LLC v. Kozel (In re Abengoa Bioenergy Biomass of Kansas LLC), 18-3120 (10th Cir. May 5, 2020).}

^[2] _Id.

^[3] _Id.

^[4] _Id.

^[5] _Id.

^[6] _{Beeman v. BGI Creditors’ Liquidating Trust (In re BGI, Inc.), 772 F.3d 102, 107–09 (2d Cir. 2014).}

^[7] _{Schaefer v. Superior Offshore Int’l, Inc. (In re Superior Offshore Int’l, Inc.), 591 F.3d 350, 353–54 (5th Cir. 2009).}

^[8] _{Drivetrain LLC v. Kozel (In re Abengoa Bioenergy Biomass of Kansas LLC), 18-3120 (10th Cir. May 5, 2020).}