Tuesday, October 30 10:30 - 11:30 AM | CC Lila Cockrell Theatre

Hooked on the Hornsof a Legal Dilemma:Can “Moo”tness Be Equitable?

2018

Presented by:

92nd Annual National Conference of Bankruptcy Judges

October 28–31, 2018

San Antonio, TX

Hooked on the Horns of a Legal Dilemma: Can “Moo”tness Be Equitable?

Panel Hon. Bernice B. Donald, U.S. Court of Appeals, Sixth Circuit Hon. Michael J. Melloy, U.S. Court of Appeals, Eighth Circuit

Hon. Richard A. Paez, U.S. Court of Appeals, Ninth Circuit

Oral Advocates Susan M. Freeman, Partner, Lewis Roca Rothberger Christie LLP

Danielle Spinelli, Partner, WilmerHale

Moderator Hon. William J. Lafferty, III, U.S. Bankruptcy Court, N.D. Cal.

Hooked on the Horns of a Legal Dilemma: Can “Moo”tness Be Equitable?

Table of Contents

1. Equitable Mootness and the Prospects of Unwinding a Confirmed Plan on Appeal. By Hon. William J. Lafferty, III (U.S. Bankruptcy Court, Northern District of California) ...................1

2. Arbitrage Nat’l Bank v. Bunnyslope Ltd. P’ship (In re Bunnyslope Ltd. P’ship)

a. Fourteenth Circuit Panel Opinion ..................................................................................3

b. Order Granting Rehearing En Banc .............................................................................10

c. Supplemental Brief for Appellant Arbitrage National Bank. By Danielle Spinelli (Wilmer Cutler Pickering Hale & Dorr LLP) ..............................................................11

d. Appellee’s Supplemental Brief on Equitable Mootness. By Susan M. Freeman (Lewis Roca Rothgerber Christie LLP) .......................................................................55

National Conference of Bankruptcy Judges Mock Argument 2018: Equitable Mootness and the Prospects of Unwinding a Confirmed Plan on Appeal

Equitable Mootness

Chapter 11 plans are often the product of complex and contentious negotiations. In order to facilitate confirmation of such plans in the practical world of chapter 11 bankruptcy, parties, including those who provide necessary financing to distressed debtors in connection with a plan of reorganization, rely on the finality of confirmed plans. If the effectiveness of a reorganization plan can be delayed or threatened for months or years by an unstayed appeal, parties may use the threat of such delay to essentially hold a reorganization hostage in exchange for more favorable treatment, which in turn may deter vital financing in chapter 11 cases.

On the other hand, parties that are on the losing end of a confirmed plan may have legitimate legal and fact-based objections to confirmation; and they have an interest in a final adjudication on the merits of their appeal. Appellate review of orders overruling objections to confirmation provides two benefits: (1) in particular cases, it serves to validate objections to plans of dubious legality; and (2) in general, it promotes confidence in the chapter 11 confirmation process through rigorous appellate review of the results of that process. But if appellate courts are willing essentially to abrogate the review process in the interests of finality—or because the beneficiaries of confirmed plans might be harmed by the reversal of a confirmation order—the benefits of appellate review will be lost.

To address these tensions, the Federal Circuit Courts of Appeals have developed and applied the doctrine of “equitable mootness” when considering review of a confirmed chapter 11 plan.

Unlike Article III mootness, equitable mootness is a judge-made doctrine, and not a constitutional requirement. Although the standards for when to apply equitable mootness vary across circuits, the Ninth Circuit looks to the following factors: 1) “whether a stay was sought, for absent that a party has not fully pursued its rights”; 2) “if a stay was sought and not gained, [the court] then will look to whether substantial consummation of the plan has occurred”; 3) “[the court] will look to the effect that a remedy may have on third parties not before the court”; and 4) “[the court] will look at whether the bankruptcy court can fashion effective and equitable relief without completely knocking the props out from under the plan and thereby creating an uncontrollable situation before the bankruptcy court.” In re Transwest Resort Properties, Inc., 801 F.3d 1161, 1167-68 (9th Cir. 2015), quoting In re Thorpe Insulation, 677 F.3d at 881.

Courts applying the equitable mootness doctrine seek to balance the need to review disputed legal issues against the goal of promoting finality of the confirmation process, and limiting the financial damage that might result to entities that provided the debtor-in-possession with a chance to reorganize, should plan effectiveness be delayed or challenged.

Facts/Procedural Posture for Mock Oral Argument:

The debtor in this case is Bunnyslope Limited Partnership (“Bunnyslope”). Bunnyslope developed and operated an apartment complex in Chimera, Anozira. The apartment complex was financed in large part by government agencies in exchange for a requirement that the apartments would be operated as affordable housing. The senior loan was made by a private entity but was guaranteed by the Department of Housing and Urban Development (“HUD”). The government of Chimera also contributed some financing.

Bunnyslope eventually defaulted on its debt, and HUD acquired the senior loan that it had guaranteed and resold it to Arbitrage National Bank (“ANB”). ANB attempted to foreclose but was stopped when Bunnyslope was placed into an involuntary bankruptcy, which was promptly converted into a case under chapter 11.

In the course of the bankruptcy, Bunnyslope used § 1129(b) to obtain confirmation of a plan of reorganization, valuing the apartment complex as a going concern, but limited by the effect of certain affordable housing restrictions—which had the anomalous effect of valuing the property for plan purposes at less than would have been received were the property to have been subject to foreclosure by ANB. ANB objected to confirmation on the theory that the apartment complex should be valued based on its foreclosure value. Since foreclosure would have stripped the affordable housing restrictions from the property, such a valuation would have been much higher than the value with those restrictions in place. Bunnyslope argued the valuation should be determined based upon Bunnyslope’s proposed use of the property, which included the affordable housing restrictions. The bankruptcy court and the district court both agreed with Bunnyslope, and the district court denied a stay of the confirmation order pending appeal. A panel of the U.S. Court of Appeals for the Fourteenth Circuit reversed the district court in favor of ANB on the § 506 valuation issue. The panel also adopted the Ninth Circuit’s standard for finding that an appeal is equitably moot and held that Bunnyslope had not met its burden under that standard.

The U.S. Court of Appeals for the Fourteenth Circuit subsequently accepted Bunnyslope’s petition for en banc rehearing on the issue of equitable mootness only. This program’s mock oral argument takes place before the Fourteenth Circuit’s en banc rehearing panel.

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United States Court of Appeals for the Fourteenth Circuit _________________________________________

In the Matter of Bunnyslope Limited Partnership, Debtor No. 18-1234

ARBITRAGE NATIONAL BANK,

Appellant, D.C. No. 17-1234

v.

BUNNYSLOPE LIMITED PARTNERSHIP,

Appellee. OPINION

_________________________________________

Appeal from the United States District Court for the District of Anozira

John Johnson, District Judge, Presiding

Argued and Submitted January 10, 2018

Filed April 10, 2018

Before: Charl E. Brown, P. E. Permint-Patty, and Lucille van Pelt, Circuit Judges

Opinion by Judge Permint-Patty

This case requires us to determine the proper method for bankruptcy courts to use when valuing a secured interest in real property under 11 U.S.C. § 506(a)1 when such property is encumbered by affordable housing restrictions, and a debtor has exercised the “cram down” option under § 1129(b).

The debtor in this case is Bunnyslope Limited Partnership (“Bunnyslope”). Bunnyslope developed and operated an apartment complex in Chimera, Anozira. The apartment complex was financed in large part by government agencies in exchange for a requirement that the apartments would be operated as affordable housing. The senior loan was made by a private entity but funded with public bonds and guaranteed by the Department of Housing and Urban Development (“HUD”). The government of Chimera also contributed some financing.

Bunnyslope eventually defaulted on its debt, and HUD acquired the senior loan that it had guaranteed after satisfying the bond debt, and resold the loan to Arbitrage National Bank (“ANB”). ANB

1 Unless otherwise stated, all references to legal code sections herein are to Title 11 of the United States Code (the Bankruptcy Code).

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attempted to foreclose but was stopped when a senior managing partner put Bunnyslope into an involuntary bankruptcy.

In the course of the bankruptcy, Bunnyslope used § 1129(b) to obtain confirmation of a plan of reorganization to which ANB objected. ANB argued that the plan could not be confirmed because the apartment complex should be valued at its foreclosure value. Since foreclosure would have stripped the affordable housing restrictions from the property, such a valuation would have been much higher than the value with those restrictions in place. Bunnyslope argued the valuation should be determined based upon Bunnyslope’s proposed use of the property under the plan, which included the affordable housing restrictions. The bankruptcy court and the district court both agreed with Bunnyslope.

ANB appealed. In addition to the valuation question discussed above, we must also determine whether ANB’s appeal is equitably moot, which is a question of first impression in the Fourteenth Circuit.

Background

Bunnyslope is a limited partnership formed in Anozira. The apartment complex it developed contained 150 apartments. MoneyBags, LLC (“MoneyBags”) provided the bulk of the financing for the complex. The loan (“Moneybags Loan”) amount was $8.5 million, and HUD guaranteed it. The loan terms provided a 40-year repayment period at 6% interest per year. The loan was secured by a first position deed of trust. HUD’s guarantee was conditioned upon Bunnyslope entering into and recording an agreement to operate the complex as affordable housing, which entailed limiting rents to amounts approved by HUD.

The Moneybags Loan was funded by the sale of municipal bonds issued by the Chimera Development Authority (“CDA”). The CDA required that restrictive covenants be recorded to run with the land that required the apartments to be operated as affordable housing. That agreement stated that the covenants were binding on successors but would terminate upon foreclosure or delivery of a deed in lieu of foreclosure.

The City of Chimera provided $3.5 million of additional funding for the apartment project, secured by a second position deed of trust. A condition of that loan was Bunnyslope recording additional restrictive covenants that ran with the land setting 23 units aside to be operated as affordable housing. Like the Moneybags Loan, these covenants would also be terminated by a foreclosure or by the transfer of a deed in lieu of foreclosure. Bunnyslope also entered into and recorded further similar covenants requiring that all 150 units in the apartment project qualify as low income units in order to obtain federal tax credits.

The project was completed in 2008, just in time for the 2008 financial crisis (and the bursting housing bubble that largely precipitated it) to commence. As a result, the apartment project received far less revenue than initially projected. By the summer of 2009, Bunnyslope defaulted on the MoneyBags Loan. HUD, as guaranteed, took the loan from MoneyBags after satisfying the CDA bond debt. In September of 2010, HUD sold a package of loans, of which the MoneyBags Loan was one, to ANB. ANB purchased the MoneyBags Loan for $5,000,000, and HUD released its agreement.

In October 2010, ANB commenced a foreclosure against Bunnyslope and noticed a trustee’s sale. ANB negotiated an agreement to sell the project after foreclosure for $8,000,000. Before the sale

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could be completed, Bunnyslope’s general partner filed an involuntary bankruptcy petition, which was later converted to a voluntary chapter 11 case.

During the bankruptcy, Bunnyslope proposed a plan to retain ownership of the apartment project by exercising the cram down provision of § 1129(b). The cram down provision would allow Bunnyslope to retain the property over ANB’s objection to the plan so long as the plan provided payments to ANB in an amount equal to the present value of ANB’s secured claim as of the effective date of the plan. The value of ANB’s secured claim is determined by § 506(a). See Associates Commercial Corp. v. Rash, 520 U.S. 953, 957 (1997). The primary subject of this appeal is the proper valuation of the apartment project.

Bunnyslope’s proposed plan of reorganization asserted a valuation of the apartment project based on its use as affordable housing, which was Bunnyslope’s intended use of the property and in accordance with the recorded restrictive covenants. ANB, on the other hand, argued that the valuation should be determined without considering any affordable housing restrictions because such restrictions would be terminated by a foreclosure. ANB also argued that any valuation based on the use of the apartments as affordable housing should reflect the value of the federal tax credits obtainable for doing so.

The bankruptcy court mostly agreed with Bunnyslope (it sided with ANB on the tax credit issue) and concluded that the value of the apartment project was $4 million based on the continued application of the affordable housing covenants and value of the federal tax credits for low-income housing. The bankruptcy court confirmed Bunnyslope’s plan.

The confirmed plan proposed to pay $4 million to ANB over 40 years at an interest rate of 4% per year. The balance of ANB’s claim would be paid in a balloon payment at the end of the 40th year because ANB exercised its rights under § 1111(b). The plan was to be funded by a $1.2 million investment from White Knight Investors, LLC (“White Knight”), which was to take over ownership of Bunnyslope, in addition to the income generated from operating the apartment project as affordable housing.

ANB appealed to the district court the plan confirmation order and the order valuing the apartment project at $4 million. The bankruptcy court granted a stay pending appeal through the district court appeal level only. The district court affirmed both orders and denied a stay pending a further appeal by ANB. White Knight provided the new funding and took control of Bunnyslope.

ANB timely appealed to this Court. Bunnyslope moved to dismiss the appeal on equitable mootness grounds.

Article III Mootness

Prior to exploring the application of the uncharted, in this Circuit, waters of equitable mootness to this appeal, we think it helpful to discuss traditional Article III mootness. Article III of the United States Constitution provides that federal courts may decide only actual cases and controversies. For a federal court to maintain jurisdiction, a live controversy must “persist throughout all stages of the litigation”; it is not enough that an actual controversy existed at the time the litigation was commenced. See Arizonans for Official English v. Arizona, 520 U.S. 43, 67 (1997); Gator.com Corp. v. L.L. Bean, Inc., 398 F.3d 1125, 1129 (9th Cir. 2005). Accordingly, a claim becomes moot “when the issues presented are

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no longer live or the parties lack a legally cognizable interest in the outcome. The basic question is whether there exists a present controversy as to which effective relief can be granted.” Council of Ins. Agents & Brokers v. Molasky-Arman, 522 F.3d 925, 933 (9th Cir. 2008) (citation omitted). An appeal is constitutionally moot only when it has become impossible to grant any effectual relief whatever to the prevailing party. See Chafin v. Chafin, 568 U.S. 165, 172 (2013); Knox v. Serv. Employees Int’l Union, 567 U.S. 298, 307 (2012). A case is not moot “as long as the parties have a concrete interest, however small, in the outcome of the litigation.” Knox, 567 U.S. at 307-08. The party moving for dismissal of an appeal on constitutional mootness grounds bears a heavy burden to show that effective relief is impossible. See Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 677 F.3d 869, 880 (9th Cir. 2012).

Bunnyslope contends that there is no effective relief that may be granted to ANB at this stage of the proceedings because the plan has been substantially consummated and White Knight is now the equity owner of Bunnyslope. However, Bunnyslope has not met its burden to show that no effective relief is possible. If we determine that the bankruptcy court erred in its valuation of the apartment complex, we could reverse the confirmation order or order modification of the plan. See id. Such relief, while perhaps inconvenient and costly to other plan participants, would not be impossible.

Equitable Mootness

“Unlike Article III mootness, which causes federal courts to lack jurisdiction and so to have an inability to provide relief, equitable mootness is a judge-created doctrine that reflects an unwillingness to provide relief.” JPMCC 2007–C1 Grasslawn Lodging, LLC, v. Transwest Resort Props. Inc. (In re Transwest Resort Props., Inc.), 801 F.3d 1161, 1167 (9th Cir. 2015). This important distinction has caused some judges to question the constitutional validity of the equitable mootness doctrine, especially in cases where it is not impossible to fashion relief on remand. See In re One2One Communications, LLC, 805 F.3d 428, 434 (3rd Cir. 2015) (Krause, J., concurring). We are also aware that, strictly speaking, a discussion of whether an appeal can ever be equitably moot is not necessary to the disposition of this case. However, given that this issue is one of first impression in this Circuit and in the context of the nationwide debate on the prudence of the doctrine of equitable mootness, we take the following position. Notwithstanding the well-argued objections to the doctrine of equitable mootness referenced above, we believe that, when conservatively invoked, and in limited circumstances, application of the doctrine may appropriately further the unique objectives of the bankruptcy system. For the reasons stated below, however, we do not find this particular appeal to be equitably moot.

Bunnyslope has moved to dismiss these appeals as equitably moot. Equitable mootness potentially moots appeals even if granting relief is not literally impossible. Courts in this circuit have not previously applied the doctrine of equitable mootness so we will look to the case law of other circuits to start our examination. An appeal is equitably moot if the case presents “transactions that are so complex or difficult to unwind” that “debtors, creditors, and third parties are entitled to rely on [the] final bankruptcy court order.” In re Mortgages Ltd., 771 F.3d 1211, 1215 (9th Cir. 2014) (quoting In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir. 2012)); see also Transwest Resort Properties, 801 F.3d at 1168-73.

Bunnyslope points primarily to the new money invested by White Knight in support of dismissing the appeals as equitably moot. Bunnyslope argues that White Knight would be unable to recover a substantial portion of its investment if the plan were unwound. Additionally, due to the nature

5

of the transaction, White Knight’s owners would be subject to tax liabilities of $1.5 million inclusive of penalties and interest if unwinding of plan transactions were to occur.

The Court of Appeals for the Second Circuit presumes an appeal to be equitably moot if the plan of reorganization has been “substantially consummated.” In re Charter Communications, Inc., 691 F.3d 476, 482 (2nd Cir. 2012). The Second Circuit considers five factors, all of which must be met to rebut such a presumption. They are:

1) “the court can still order some effective relief; 2) such relief will not affect the re-emergence of the debtor as a revitalized corporate entity; 3) such relief will not unravel intricate transactions so as to knock the props out from under the authorization for every transaction that has taken place and create an unmanageable, uncontrollable situation for the Bankruptcy Court; 4) the parties who would be adversely affected by the modification have notice of the appeal and an opportunity to participate in the proceedings; and 5) the appellant pursued with diligence all available remedies to obtain a stay of execution of the objectionable order if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from.”

Id. (citation omitted).

The Court of Appeals for the Ninth Circuit has identified four factors to determine whether a case should be deemed equitably moot. They are:

1) “whether a stay was sought, for absent that a party has not fully pursued its rights”; 2) “if a stay was sought and not gained, [the court] then will look to whether substantial consummation of the plan has occurred”; 3) “[the court] will look to the effect that a remedy may have on third parties not before the court”; and 4) “[f]inally, [the court] will look at whether the bankruptcy court can fashion effective and equitable relief without completely knocking the props out from under the plan and thereby creating an uncontrollable situation before the bankruptcy court.”

Mortgages Ltd., 771 F.3d at 1217 (quoting Thorpe Insulation, 677 F.3d at 881). The burden of proving equitable mootness is heavy and rests on the party asserting mootness. See In re Focus Media, Inc., 378 F.3d 916, 923 (9th Cir. 2004) (citation omitted).

Other circuits that have applied equitable mootness have substantially similar tests. The Third Circuit considers an additional factor, which is “the public policy of affording finality to bankruptcy judgments.” One2One Communications, 805 F.3d at 434.

We incorporate the factors used in the Ninth Circuit because we believe those factors give appellate courts more flexibility to balance the importance of deciding appeals on the merits with the sometimes complex economic realities of bankruptcy reorganization.

With respect to the first factor, ANB applied for a stay in both the bankruptcy court and the district court. A stay was initially granted, then a further stay was denied. Despite ANB’s failure to seek a stay from this court, we conclude that two attempts were sufficient, and the failure to seek a stay from this court does not doom this appeal.

As for the second factor, all parties agree that the plan was substantially consummated. White Knight invested in Bunnyslope and took over its operations.

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Respecting the third factor, in our view, the unraveling of the plan would not have a negative effect on innocent third parties not before the court, which are the parties the doctrine of equitable mootness protects. White Knight is the key third party that the unraveling of the plan would affect. Technically, White Knight is not before the court. However, as Bunnyslope concedes, White Knight is now the equity owner of Bunnyslope. Moreover, White Knight’s principals are sophisticated investors. White Knight’s principals decided to obtain funds for this investment via an exchange transaction that posed potential tax liabilities if something went wrong. They were also involved with Bunnyslope’s plan of reorganization by providing testimony to support confirmation. White Knight was aware that the valuation issue in this case was vigorously disputed by ANB and knew that ANB was pursuing this appeal. White Knight could have waited to see the outcome of the appeal before proceeding, but it chose to go forward knowing the risk that the plan confirmation order might be overturned.

Bunnyslope also argues that the City of Chimera is an innocent third party that would be harmed by unraveling the plan. However, Chimera did not make an additional investment as a result of the plan. Chimera was not induced by the plan confirmation order to take on any more risk than it already had. Certainly, Chimera is interested in the outcome of the case and would like the apartment project to remain as affordable housing. However, such concerns do not make equitable mootness more or less prudential in this case.

The fourth factor is generally the most important factor. Thorpe Insulation, 677 F.3d at 833. It also presents a paradox. A court of appeals operates without the detailed factual observations of a trial court. Furthermore, in many cases, “an appraisal of the merits is essential to the framing of an equitable remedy.” In re Metromedia Fiber Network Inc., 416 F.2d 136, 144 (2nd Cir. 2005). However, in order to determine whether the bankruptcy court can “fashion effective and equitable relief without completely knocking the props out from under the plan and thereby creating an uncontrollable situation before the bankruptcy court,” it might be posited that the appellate court must make some assessment of the facts on the ground and put itself in the shoes of the bankruptcy judge to decide whether a hypothetical “different outcome” would create an insoluble problem. Such a calculation is not typically made by an appellate court, and the basis for any such ruling is not entirely clear to us. However, we believe the transactions involved in this case are relatively straightforward and do not compel us to engage in the sort of fact-finding analysis described above.

Bunnyslope argues that the transactions here are more complex than we believe them to be. In fact, the transactions are straightforward. In our view, Bunnyslope’s argument is that unwinding the transactions will have a negative effect on White Knight, which is not the same as arguing they cannot be unwound at all. Unwinding the transactions may negatively impact White Knight. However, as discussed above, White Knight, despite its name, is not the sort of innocent third party that equitable mootness protects.

Accordingly, we deny Bunnyslope’s motion to dismiss the appeals as equitably moot.

Section 506(a) Valuation

This Court reviews de novo a district court’s decision in a bankruptcy appeal. This Court will “accept the bankruptcy court’s findings of fact, unless the court is left with the definite and firm conviction that a mistake has been committed.” In re JTS Corp., 617 F.3d 1102, 1109 (9th Cir. 2010) (citation omitted).

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The valuation question hinges on whether the value of the apartment project should be assessed assuming it must be operated as affordable housing as the debtor proposes and the remaining affordable housing restrictions require, or rather assessed based on the market value of the property after a foreclosure strips the affordable housing covenants. The facts on that issue are undisputed.

ANB is a secured creditor in first position after acquiring the defaulted Moneybags Loan from HUD. HUD released its agreement with affordable housing restrictions from the Moneybags Loan when it sold the loan to ANB. Affordable housing restrictions remain in effect, but are all attached to financing that is subordinate to ANB’s interest. Any foreclosure would remove the remaining affordable housing restrictions, and ANB’s interest, according to experts for both sides, would be worth $7 million.

The bankruptcy prevented a foreclosure, but that does not mean that the secured value of ANB’s interest may be suppressed by conditions attached to subordinate loans held by junior creditors. Section 506(a)(1) provides that the value of a secured claim “shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property. . .” In Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), the Supreme Court held that the proper valuation under § 506 is the replacement value, not the foreclosure value.

Bunnyslope argues that the “use of such property” means the use the Debtor proposes. However, Rash defined “use” as merely the alternative to surrendering the property. Nothing in the Court’s decision supports the proposition that the “replacement value” of the property should be measured based on the income generated from the property when put to whatever use the debtor proposes. Rather, replacement value is what an arm’s length buyer would pay for a comparable piece of property. In this case, ANB’s collateral value is the cost of buying or building an apartment project similar to that at issue here. Rash did not discuss the replacement value as a function of the debtor’s proposed use of the property, and we see no reason to do so either.

Bunnyslope argues that valuing ANB’s secured interest without accounting for the affordable housing restrictions will eliminate the apartment project’s use as affordable housing. While unfortunate, we believe that allowing debtors to substantially diminish the value of senior interests in this way will make financing future affordable housing projects more expensive, if not impossible. We also worry that HUD will have a far more difficult time selling defaulted loans on the secondary market if potential buyers believe their investment may be substantially undervalued by a bankruptcy court. In this case, the MoneyBags loan was sold to ANB explicitly without the HUD affordable housing restrictions attached. Also, HUD and ANB did not agree to make the MoneyBags loan subject to the affordable housing restrictions attached to junior liens. We decline to intervene and rewrite agreements for sophisticated parties.

Conclusion

Valuing ANB’s secured interest with the affordable housing restrictions in place is not appropriate under § 506(a). As a result, the bankruptcy court and the district court should not have confirmed Bunnyslope’s plan of reorganization. We reverse the judgment of the district court and remand for additional proceedings not inconsistent with this opinion.

REVERSED AND REMANDED.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE FOURTEENTH CIRCUIT

In re:

BUNNYSLOPE LIMITED PARTNERSHIP,

Debtor.

No. 18-1234

D.C. No. 17-1234District of Anozira,Chimera

ARBITRAGE NATIONAL BANK,

Plaintiff-Appellant,

v.

BUNNYSLOPE LIMITED PARTNERSHIP,

Defendant-Appellee.

ORDER

SMITH, Chief Judge:

Upon the vote of a majority of nonrecused active judges, it is ordered that this case be

reheard en banc pursuant to Federal Rule of Appellate Procedure 35(a) on the issue of equitable

mootness only. The three-judge panel opinion shall not be cited as precedent by or to any court

of the Fourteenth Circuit.

The parties shall simultaneously file supplemental briefs on equitable mootness within

30 days of the date of this order.

No. 18-1234

United States Court of Appeals for the Fourteenth Circuit

IN RE: BUNNYSLOPE LIMITED PARTNERSHIP,

Debtor.

ARBITRAGE NATIONAL BANK, Appellant,

v.

BUNNYSLOPE LIMITED PARTNERSHIP, Appellee.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ANOZIRA

SUPPLEMENTAL BRIEF FOR APPELLANT ARBITRAGE NATIONAL BANK

DANIELLE SPINELLI ISLEY M. GOSTIN WILMER CUTLER PICKERING HALE & DORR LLP 1875 Pennsylvania Ave., N.W. Washington, D.C. 20006 (202) 663-6000 danielle.spinelli@wilmerhale.com

Counsel for Appellant Arbitrage National Bank

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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ................................................................................... iii

STATEMENT OF THE ISSUE ................................................................................. 1

INTRODUCTION ..................................................................................................... 1

STATEMENT OF THE CASE .................................................................................. 5

STANDARD OF REVIEW ....................................................................................... 9

ARGUMENT ............................................................................................................. 9

I. THE COURT SHOULD NOT ADOPT THE EQUITABLE MOOTNESS

DOCTRINE ....................................................................................................... 10

A. Equitable Mootness Has No Constitutional Basis .............................. 10

B. Equitable Mootness Has No Statutory Basis ...................................... 12

C. The Courts’ Equitable Powers Cannot Justify Equitable Mootness ............................................................................................. 18

D. Equitable Mootness Raises Constitutional Concerns .......................... 21

E. Equitable Mootness Has Proven Inequitable In Practice And Frustrates Development Of The Law .......................................... 28

II. EVEN IF THIS COURT WERE TO ADOPT THE EQUITABLE

MOOTNESS DOCTRINE, THE DOCTRINE SHOULD NOT APPLY IN

THIS CASE ...................................................................................................... 29

A. If Adopted At All, Equitable Mootness Should Be Strictly Limited .................................................................................... 29

B. Under Any Standard, This Appeal Is Not Equitably Moot ................. 31

1. ANB was not required to seek a stay from this Court to preserve its appeal ....................................................... 32

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2. Substantial consummation of the plan is not dispositive ................................................................................. 33

3. No innocent third parties will be harmed by granting ANB a remedy ............................................................ 33

4. Granting relief would not unravel the plan ............................... 36

CONCLUSION ........................................................................................................ 38

iii

TABLE OF AUTHORITIES

CASES

BFP v. Resolution Trust Corp., 511 U.S. 531 (1994) .............................................. 16

Burford v. Sun Oil Co., 319 U.S. 315 (1943) .......................................................... 22

Chesapeake Energy Corp. v. Bank of New York Mellon Trust Co., 2015 WL 4191419 (S.D.N.Y. July 10, 2015) .......................................... 34-35

Church of Scientology v. United States, 506 U.S. 9 (1992)..................................... 11

Cohens v. Virginia, 19 U.S. (6 Wheat.) 264 (1821) ................................................ 21

Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976) .............................................................................. 3, 19–20, 22

Commodity Futures Trading Commission v. Schor, 478 U.S. 833 (1986) ....................................................................................................... 24, 27

Council of Insurance Agents & Brokers v. Molasky-Arman, 522 F.3d 925 (9th Cir. 2008) ........................................................................................ 11

Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017) ....................................... 20

Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) ........................................... 26

In re AOV Industries, 792 F.2d 1140 (D.C. Cir. 1986) ........................................... 33

In re City of Detroit, 838 F.3d 792 (6th Cir. 2015) ..........................................passim

In re Continental Airlines, 91 F.3d 553 (3d Cir. 1996) ................................. 9, 13, 22

In re Focus Media, Inc., 378 F.3d 916 (9th Cir. 2004) ........................................... 32

In re JTS Corp., 617 F.3d 1102 (9th Cir. 2010) ........................................................ 9

In re Mortgages Ltd., 771 F.3d 1211 (9th Cir. 2014) .............................................. 32

In re MPM Silicones, L.L.C., 874 F.3d 787 (2d Cir. 2017) ..................................... 11

In re One2One Communications, LLC, 805 F.3d 428 (3d Cir. 2015) ..............passim

iv

In re Pacific Lumber Co., 584 F.3d 229 (5th Cir. 2009) ..................................passim

In re Paige, 584 F.3d 1327 (10th Cir. 2009) ............................................... 32, 33, 34

In re Resource Technology Corp., 430 F.3d 884 (7th Cir. 2005) ............................ 30

In re Roberts Farms, Inc., 652 F.2d 793 (9th Cir. 1981) ......................................... 13

In re Scopac, 624 F.3d 274 (5th Cir. 2010) ............................................................. 34

In re Semcrude, L.P., 728 F.3d 314 (3d Cir. 2013) ........................... 9, 14, 23, 31, 36

In re Swedeland Development Group, Inc., 16 F.3d 552 (3d Cir. 1994)................. 11

In re Texas Grand Prairie Hotel Realty, L.L.C., 710 F.3d 324 (5th Cir. 2013) ........................................................................................................ 33, 34

In re Thorpe Insulation Co., 677 F.3d 869 (9th Cir. 2012) ............................... 31, 36

In re TOUSA, Inc., 680 F.3d 1298 (11th Cir. 2012) .................................................. 9

In re Tribune Media Co., 799 F.3d 272 (3d Cir. 2015) ............................... 18, 19, 27

In re UNR Industries, Inc., 20 F.3d 766 (7th Cir. 1994) ....................... 12, 14, 15, 16

Law v. Siegel, 571 U.S. 415 (2014) ................................................................... 16, 20

Lexmark International, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377 (2014) ........................................................................................ 21, 22

New Orleans Public Service, Inc. v. Council of City of New Orleans, 491 U.S. 350 (1989)....................................................................................... 21

NLRB v. Noel Canning, 134 S. Ct. 2550 (2014) ...................................................... 28

Nordhoff Investments, Inc. v. Zenith Electronics Corp., 258 F.3d 180 (3d Cir. 2001) ................................................................................................. 28

Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) .............................................................................. 18, 24, 25, 26

Norwest Bank of Worthington v. Ahlers, 485 U.S. 197 (1988) ........................... 3, 20

Quackenbush v. Allstate Insurance Co., 517 U.S. 706 (1996) ................................ 23

v

Railroad Commission of Texas v. Pullman Co., 312 U.S. 496 (1941) .................... 22

Sprint Communications, Inc. v. Jacobs, 134 S. Ct. 584 (2013) ............................... 23

Stern v. Marshall, 564 U.S. 462 (2011) ............................................................. 24, 26

Susan B. Anthony List v. Driehaus, 134 S. Ct. 2334 (2014) .................................... 22

Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568 (1985) ............................................................................................................. 26

Weinberger v. Romero-Barcelo, 456 U.S. 305 (1982) ...................................... 19, 20

Wellness International Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015) ..... 24, 25, 27

Younger v. Harris, 401 U.S. 37 (1971) .................................................................... 22

CONSTITUTIONS, STATUTES, AND RULES

U.S. Const. art. I, § 8, cl. 4 ................................................................................................ 30 art. III, § 1 ...................................................................................................... 24 art. III, § 2 ...................................................................................................... 11

11 U.S.C. § 363 ........................................................................................................ 14, 15 § 364 ........................................................................................................ 14, 15 § 1101 ............................................................................................................ 32 § 1127 ...................................................................................................... 14, 15 § 1129 .............................................................................................................. 6

28 U.S.C. § 157 ........................................................................................................ 17, 25 § 1334 ...................................................................................................... 17, 18

Bankruptcy Rule 805 ......................................................................................... 12–13

1

STATEMENT OF THE ISSUE

Whether this appeal by Arbitrage National Bank (“ANB”) of the bankruptcy

court’s orders valuing its collateral and confirming the chapter 11 plan of

reorganization of Bunnyslope Limited Partnership (“Bunnyslope”) should be

dismissed as equitably moot.

INTRODUCTION

A panel of this Court has held that Bunnyslope’s chapter 11 plan improperly

deprived ANB, its senior secured creditor, of fully half the value to which ANB

was entitled for its collateral. The parties unquestionably have a live dispute on an

important legal issue. Yet Bunnyslope asks the en banc Court to dismiss ANB’s

appeal as “equitably moot” and thus immunize its unlawful plan from any review

by an Article III court. According to Bunnyslope, this Court should not entertain

ANB’s appeal because granting ANB relief would upset the purported reliance

interests of investors—investors who knew full well that ANB had objected to the

plan and appealed the order confirming it. This Court should refuse to adopt the

doctrine of “equitable mootness”—or, alternatively, hold that it does not apply in

this case—and deny Bunnyslope’s bid to dismiss ANB’s appeal.

“Equitable mootness” is not mootness. Rather, it is a judge-made doctrine

that some courts have used to avoid deciding the merits of live appeals from

confirmed plans of reorganization. In the panel’s formulation, “[a]n appeal is

2

equitably moot if the case presents transactions that are so complex or difficult to

unwind that debtors, creditors, and third parties are entitled to rely on [the] final

bankruptcy court order.” In re Bunnyslope Ltd. P’ship, No. 18-1234, slip op. 4

(Apr. 10, 2018) (“Panel Op.”) (internal quotation marks and citations omitted).

Equitable mootness is in fact the opposite of Article III mootness: While Article

III mootness bars a court from deciding an appeal when granting relief to the

appellant will no longer have any effect, “equitable mootness” permits a court to

refuse to decide an appeal when, in the court’s view, granting relief to the appellant

would have too great an effect. See, e.g., In re Pacific Lumber Co., 584 F.3d 229,

240 (5th Cir. 2009).

Whether to adopt the equitable mootness doctrine is a question of first

impression in this Circuit. The en banc Court should decline to do so. As an

initial matter, the doctrine lacks any constitutional or statutory basis. Nothing in

Article III or in the Judiciary Code suggests that courts may refuse to hear appeals

within their jurisdiction when they deem it “equitable” to do so. And the

Bankruptcy Code refutes any notion that courts should privilege finality over an

appellant’s legal rights in the plan confirmation context. The Code limits appellate

courts’ ability to modify certain specific bankruptcy court orders, but orders

confirming chapter 11 plans are not among them. Nor do general principles of

equity justify denying parties harmed by a confirmation order a remedy that the

3

appellate court has the power to award. As the Supreme Court has made clear,

equity “must and can only be exercised within the confines of the Bankruptcy

Code.” Norwest Bank of Worthington v. Ahlers, 485 U.S. 197, 206 (1988).

Employing equitable mootness to render bankruptcy court orders

unreviewable also raises serious constitutional questions. Federal courts have a

“virtually unflagging obligation” under the Constitution “to exercise the

jurisdiction given them.” Colorado River Water Conservation Dist. v. United

States, 424 U.S. 800, 817 (1976). A broad and malleable doctrine permitting

courts to decline to decide bankruptcy appeals on “equitable” grounds flouts that

obligation. Moreover, the equitable mootness doctrine results in orders of the

bankruptcy court—a non-Article III tribunal—going entirely unreviewed by any

Article III court. Orders confirming plans very often, as here, finally determine

private parties’ rights against one another. The constitutionality of authorizing a

non-Article III tribunal to make such final decisions would be in serious doubt if

Article III review were not available. Yet the application of equitable mootness

leaves some of bankruptcy courts’ most significant and controversial decisions, in

some of the highest-stakes disputes, without any Article III review.

Just as “equitable mootness” is not mootness, it is often not equitable. Plan

proponents routinely attempt to use equitable mootness as a tool to shift value from

creditors to whom it rightfully belongs to other constituencies. Knowing that a

4

substantially consummated plan will likely be unreviewable, plan proponents are

more likely to push the envelope of the law. And a creditor who knows its

appellate rights may not be honored is more likely to accept less than its due.

Meanwhile, equitable mootness is often invoked on behalf of parties who were

involved in formulating the plan and knew very well that it could be appealed.

Moreover, equitable mootness inhibits the development of the law on some of the

most significant issues in bankruptcy. This Court should reject the doctrine—or at

a minimum, reserve it for extraordinary circumstances where granting any remedy

to the appellant would unduly harm truly innocent third parties.

Even if this Court were to adopt some version of the equitable mootness

doctrine, it would not apply to this appeal. The transactions underlying

Bunnyslope’s plan—most notably, the equity investment from the plan sponsor,

White Knight—are not too complicated to unwind (and unwinding them might not

be necessary to provide relief to ANB anyway). The only party in interest that

acted in reliance on confirmation of the plan was the plan sponsor, and it provided

its equity investment with full knowledge of the risk that ANB might prevail in this

appeal. Equitable mootness should not protect parties from downside risks that

they chose to assume. Accordingly, as the panel correctly concluded, this appeal is

not equitably moot.

5

STATEMENT OF THE CASE

Before its bankruptcy filing, Bunnyslope developed and operated an

apartment complex in Chimera, Anozira. The apartment complex was financed in

large part by government agencies, on the condition that the apartments would be

operated as affordable housing. The senior loan, secured by a first-priority deed of

trust on the apartment complex, was made by a private entity but funded with

public bonds and guaranteed by the Department of Housing and Urban

Development (“HUD”). HUD’s guarantee required Bunnyslope to enter into an

agreement to operate the complex as affordable housing (the “HUD Agreement”).

The public bonds likewise mandated that restrictive covenants be recorded

requiring the complex to be operated as affordable housing. Those covenants were

binding on successors but would terminate upon foreclosure or delivery of a deed

in lieu of foreclosure.

The City of Chimera provided additional funding for the apartment project,

secured by a second-priority deed of trust. Again, the loan was conditioned on

recording restrictive covenants requiring certain units to be operated as affordable

housing. These covenants would also be terminated by a foreclosure or by the

transfer of a deed in lieu of foreclosure. In addition, to obtain federal tax credits,

Bunnyslope recorded similar covenants requiring that all units in the apartment

project qualify as low-income units.

6

Bunnyslope defaulted on the senior loan in the summer of 2009. HUD, as

guarantor, acquired the loan. After satisfying the public bond debt, HUD sold the

loan to ANB and released the HUD agreement. In October 2010, ANB

commenced a foreclosure proceeding against Bunnyslope’s property and noticed a

trustee’s sale. ANB negotiated an agreement to sell the property after foreclosure

for $8 million.

Bunnyslope then filed for chapter 11 bankruptcy, halting the foreclosure. In

its chapter 11 case, Bunnyslope proposed a plan of reorganization under which it

would keep the property. It sought confirmation of the plan pursuant to the “cram-

down” provisions of section 1129(b) of the Bankruptcy Code. The cram-down

provisions would allow Bunnyslope to keep the property over ANB’s objection so

long as the plan paid ANB the full amount of its secured claim through a stream of

payments whose present value equaled the value of ANB’s collateral. See 11

U.S.C. § 1129(b)(2)(A)(i). The plan was to be funded by a $1.2 million investment

from White Knight Investors, LLC (“White Knight”), which was to take over

ownership of Bunnyslope, as well as income generated from operating the

apartment project as affordable housing.

The parties disputed the value of ANB’s collateral. Bunnyslope argued that

the collateral should be valued as affordable housing with the recorded restrictive

covenants, which was Bunnyslope’s intended use of the property. ANB argued

7

that the collateral should be valued without the affordable housing restrictions

because those restrictions would be terminated by foreclosure. ANB also argued

that any valuation based on the use of the apartments as affordable housing should

reflect the value of the federal tax credits obtainable for doing so.

The bankruptcy court agreed with Bunnyslope that the complex should be

valued based on its use as affordable housing but agreed with ANB on the tax-

credit issue. It concluded that the value of the apartment project was only $4

million based on the continued application of the affordable housing covenants and

the value of the federal tax credits for low-income housing. The bankruptcy court

confirmed Bunnyslope’s plan.

ANB appealed the plan confirmation order and the order valuing the

apartment project to the district court. The bankruptcy court granted a stay

pending appeal through the district court appeal only. The district court affirmed

both orders and denied a stay pending a further appeal by ANB. With the stay

lifted, White Knight provided the new funding and took control of Bunnyslope.

ANB timely appealed to this Court. Bunnyslope moved to dismiss the

appeal on both constitutional and equitable mootness grounds. It argued that if the

Court were to reach the merits, it should affirm the decisions of the lower courts.

On April 10, 2018, a panel of this Court issued a ruling on Bunnyslope’s

motion to dismiss and the merits of the appeal. It held that ANB’s appeal was not

8

constitutionally moot. Panel Op. 3–4. As to equitable mootness, the panel noted

that the doctrine had recently been called into question, but opined, “we believe

that, when conservatively invoked, and in limited circumstances, application of the

doctrine may appropriately further the unique objectives of the bankruptcy

system.” Id. at 4. The panel adopted the Ninth Circuit’s test for equitable

mootness, which examines (1) whether the appellant sought a stay; (2) whether the

plan has been substantially consummated; (3) the effect of the remedy on third

parties not before the court; and (4) whether the court can fashion relief without

“completely knocking the props out from under the plan.” Id. at 5 (internal

quotation marks and citation omitted). The panel concluded that while the plan

had been substantially consummated, the remaining factors weighed in ANB’s

favor; in particular, White Knight’s investment did not support equitable mootness

since White Knight knew of ANB’s pending appeal. Id. at 5–6.

On the merits, the panel reversed and remanded, holding that “[v]aluing

ANB’s secured interest with the affordable housing restrictions in place is not

appropriate under § 506(a).” Panel Op. 7. This Court granted en banc review

solely on the equitable mootness issue and ordered supplemental briefing on that

issue.

9

STANDARD OF REVIEW

This Court “review[s] the order of the bankruptcy court independently of the

district court.” In re TOUSA, Inc., 680 F.3d 1298, 1310 (11th Cir. 2012). It

reviews “determinations of law made by either court de novo” and “the findings of

fact of the bankruptcy court for clear error.” Id.; accord In re JTS Corp., 617 F.3d

1102, 1109 (9th Cir. 2010).

ARGUMENT

Whether to adopt the “equitable mootness” doctrine is a question of first

impression in this circuit. Panel Op. 4. Although other circuits have done so, they

“have rarely analyzed the source of their authority to refuse to hear an appeal on

equitable mootness grounds.” In re Semcrude, L.P., 728 F.3d 314, 317 (3d Cir.

2013); see In re City of Detroit, 838 F.3d 792, 808 (6th Cir. 2015) (Moore, J.,

dissenting) (courts of appeals “have adopted the doctrine … with … minimal

exploration of its legal basis”). The doctrine has been increasingly criticized in

recent years, and rightly so, as it lacks any constitutional or statutory basis, raises

serious constitutional questions, and thwarts the orderly development of the law.

See, e.g., City of Detroit, 838 F.3d at 805–814 (Moore, J., dissenting); In re

One2One Commc’ns, LLC, 805 F.3d 428, 438–454 (3d Cir. 2015) (Krause, J.,

concurring); In re Continental Airlines, 91 F.3d 553, 567–573 (3d Cir. 1996) (en

banc) (Alito, J., dissenting).

10

While equitable mootness has remained in place in other circuits where it

was adopted uncritically years ago, this Court can decide the issue afresh. It

should reject the doctrine. At the very least, it should reconceive the doctrine as a

prudential restriction on remedies and limit it to the extraordinary situation in

which granting any remedy at all to the appellant would inflict significant harm on

truly innocent third parties—not proponents of the plan or their allies or those who

should have known of a potential appeal.

Under any version of the doctrine, this appeal is an exceptionally poor

candidate for dismissal on equitable mootness grounds. The only party that

purportedly acted in reliance on the confirmed plan, White Knight, was a sponsor

of the plan. It was fully aware of ANB’s objection to its treatment under the plan

and of the possibility that ANB would prevail on appeal. White Knight made its

investment with its eyes wide open, and it is not entitled to the windfall it would

reap if ANB were barred from exercising its appellate rights and receiving what it

is owed.

I. THE COURT SHOULD NOT ADOPT THE EQUITABLE MOOTNESS DOCTRINE

A. Equitable Mootness Has No Constitutional Basis As the panel correctly observed, “equitable mootness” is not constitutional

mootness. Panel Op. 4. Under Article III, the judicial power of the United States

extends only to “cases” and “controversies”—meaning live disputes, not abstract

11

debates. U.S. Const. art. III, § 2. A claim becomes “moot”—and thus

nonjusticiable—‘“when the issues presented are no longer live or the parties lack a

legally cognizable interest in the outcome.”’ Council of Ins. Agents & Brokers v.

Molasky-Arman, 522 F.3d 925, 933 (9th Cir. 2008). “The basic question is

whether there exists a present controversy as to which effective relief can be

granted.” Id. A case is constitutionally moot only when it has become “impossible

[to] grant any effectual relief whatever” to the prevailing party. Church of

Scientology v. United States, 506 U.S. 9, 12 (1992) (internal quotation marks

omitted). An appeal is not moot “merely because a court cannot restore the parties

to the status quo ante. Rather, when a court can fashion ‘some form of meaningful

relief,’ even if it only partially redresses the grievances of the prevailing party, the

appeal is not moot.” In re Swedeland Dev. Grp., Inc., 16 F.3d 552, 560 (3d Cir.

1994) (en banc) (quoting Church of Scientology, 506 U.S. at 12–13).

“Equitable mootness” is quite different. Indeed, it is not mootness at all.

Rather, equitable mootness “allows appellate courts to dismiss bankruptcy appeals

when, during the pendency of an appeal, events occur such that even though

effective relief could conceivably be fashioned, implementation of that relief

would”—in the court’s view—“be inequitable.” In re MPM Silicones, L.L.C., 874

F.3d 787, 804 (2d Cir. 2017) (emphasis added) (internal quotation marks omitted).

As the Seventh Circuit trenchantly put it, “there is a big difference between

12

inability to alter the outcome (real mootness) and unwillingness to alter the

outcome (‘equitable mootness’).” In re UNR Indus., Inc., 20 F.3d 766, 769 (7th

Cir. 1994). Stated differently, “in an equitably moot appeal, the relief sought is the

opposite of moot—the consequences of granting it would be so great that they are

deemed inequitable.” City of Detroit, 838 F.3d at 806 (Moore, J., dissenting); see

also In re Pacific Lumber, 584 F.3d 229, 240 (5th Cir. 2009) (“Article III mootness

concerns arise when a judicial ruling would have no effect; equitable mootness

applies when a judicial ruling might have too much effect.”).

The difference between Article III mootness and equitable mootness is

apparent in this case: A ruling for ANB on the merits of this appeal plainly could

“alter the outcome,” UNR Industries, 20 F.3d at 769—and that is precisely why

Bunnyslope does not want this Court to hear it.

B. Equitable Mootness Has No Statutory Basis

Nor is there any statutory basis for the doctrine. The panel did not offer one,

and the few bits of putative statutory support for the doctrine that other courts have

offered are unpersuasive. Indeed, they demonstrate that Congress never

contemplated a broad “equitable mootness” doctrine and that such a doctrine is

inconsistent with the statutory scheme.

One of the earliest court of appeals decisions from which the equitable

mootness doctrine grew relied on former Bankruptcy Rule 805, which provided

13

that a sale of property to a good-faith purchaser or an issuance of debt to a good-

faith holder ‘“shall not be affected by the reversal or modification of such order on

appeal.”’ See In re Roberts Farms, Inc., 652 F.2d 793, 796–797 (9th Cir. 1981);

Continental Airlines, 91 F.3d at 569 (Alito, J., dissenting) (discussing Roberts

Farms). As then-Judge Alito explained, “the best reading of the [Roberts Farm]

opinion is that the challenge to the plan of reorganization in that case could not be

entertained because no relief was practicable as a result of the many post-

confirmation transactions that were irreversible due to this provision of former

Rule 805.” Continental Airlines, 91 F.3d at 569. Judge Alito explained that while

courts initially cited Roberts Farms for the proposition that a bankruptcy appeal

should not be heard if the court could not grant “effective relief,” it was later

interpreted “more expansively” to mean that an appeal should not be heard if a

court could not grant “equitable” relief. Id. at 570. In other words, a narrow

decision based on a special rule for appellate review of two specific types of

bankruptcy court orders was transformed over the years—as through a game of

telephone—to a broad doctrine permitting courts to refuse to hear appeals if they

deemed it equitable. That “substantial extension of Roberts Farms cannot be

squared with the narrow authority on which that decision relied.” Id.; accord City

of Detroit, 838 F.3d at 807 (Moore, J., dissenting).

14

The rule embodied in former Bankruptcy Rule 805 is now codified in two

sections of the Bankruptcy Code. Section 363(m) provides that the validity of a

sale of property to a good-faith purchaser is unaffected by a reversal on appeal of

the order approving the sale, 11 U.S.C. § 363(m), while section 364(e) provides the

same protection for lenders who extend credit to debtors during a bankruptcy case,

id. § 364(e). Some courts have relied on those provisions as a basis for the

equitable mootness doctrine. Some have also relied on section 1127(b), which

provides that in chapter 11 cases, “[t]he proponent of a plan … may modify such

plan at any time after confirmation … and before substantial consummation.” Id.

§ 1127(b).

In UNR Industries, for example, the Seventh Circuit relied on both section

363(m) and section 1127(b), which that court characterized as “dramatically

curtail[ing] the power of a bankruptcy court to modify a plan of reorganization

after its confirmation and ‘substantial consummation.’” 20 F.3d at 769. The court

opined that “the reasons underlying §§ 363(m) and 1127(b)—preserving interests

bought and paid for in reliance on judicial decisions, and avoiding the pains that

attend any effort to unscramble an egg—are so plain and so compelling that courts

fill the interstices of the Code with the same approach.” Id. Other courts of

appeals have cited UNR Industries’ statutory-gap-filling rationale as “[t]he most

plausible basis” for the equitable mootness doctrine. Semcrude, 728 F.3d at 317.

15

As other judges have noted, there are many problems with this reasoning.

First, as even UNR Industries acknowledged, section 1127(b) has nothing to do

with appeals. 20 F.3d at 769. It merely provides that once a confirmed plan has

been substantially consummated, the debtor or plan proponent typically may not

change the plan. It certainly does not suggest that a confirmation order cannot be

overturned on appeal. In those circumstances, revision of the plan on remand is

not modification of a confirmed plan at all, and section 1127(b) is entirely

irrelevant.

Sections 363(m) and 364(e) likewise provide no basis for a broad equitable

mootness doctrine. To the contrary. Those provisions demonstrate that when

Congress thought that the finality of a bankruptcy court’s order should trump other

considerations, it expressly specified that reversal of the order on appeal would

have no effect. It thus created two—and only two—narrow exceptions to normal

appellate review, for asset sales and debtor-in-possession financing, where finality

is particularly important. The obvious inference is that Congress did not intend to

create—or grant courts the authority to create—a broad and amorphous doctrine

enabling courts to refuse to hear a meritorious appeal when they deem finality

more important than the appellant’s interests and the plan’s legality.

“It is generally presumed that Congress acts intentionally and purposely

when it includes particular language in one section of a statute but omits it in

16

another.” BFP v. Resolution Trust Corp., 511 U.S. 531, 537 (1994). Had

Congress believed that finality concerns justified limiting appellate review of

orders confirming plans, it knew how to say so. See, e.g., Law v. Siegel, 571 U.S.

415, 424 (2014) (“The [Bankruptcy] Code’s meticulous … enumeration of …

exceptions to … exemptions confirms that courts are not authorized to create

additional exceptions.”). Thus, “under the maxim of expres[s]io unius est exclusio

alterius, … Congress’s express inclusion of two bankruptcy-law exceptions to

appellate review indicates an intent to preclude recognition of others.” City of

Detroit, 838 F.3d at 809 (Moore, J., dissenting) (internal quotation marks and

brackets omitted); accord One2One Commc’ns, 805 F.3d at 444 (Krause, J.,

concurring) (“Because Congress specified certain orders that cannot be disturbed

on appeal absent a stay, basic canons of statutory construction compel us to

presume that Congress did not intend for other orders to be immune from

appeal.”); Pacific Lumber, 584 F.3d at 240 (noting that the Bankruptcy Code

“forbids appellate review of certain un-stayed orders and restricts post-

confirmation plan modifications” but does not expressly limit appellate review of

plan confirmation orders). Indeed, UNR Industries’ reference to “fill[ing] the

interstices of the Code,” 20 F.3d at 769, is itself a concession that the Bankruptcy

Code does not provide for the doctrine.

17

The Judiciary Code does not support equitable mootness either. Section

1334 gives district courts original jurisdiction over all “cases under title 11” and

“all civil proceedings arising under title 11, or arising in or related to cases under

title 11.” 28 U.S.C. § 1334(a), (b). Section 157 allows them to refer that

jurisdiction to bankruptcy courts. Id. § 157(a). Orders, including confirmation

orders, entered by a bankruptcy court pursuant to its authority under section 157

are “subject to review under section 158.” Id. § 157(b)(1). In turn, section 158

provides that the district courts “shall have jurisdiction” over appeals of final

orders from bankruptcy courts, id. § 158(a), and courts of appeals “shall have

jurisdiction” over appeals from final orders of district courts acting in their

appellate capacity, id. § 158(d).

“Neither § 157 nor § 158 states or implies that district courts may decline to

exercise that jurisdiction by dismissing an appeal as equitably moot.” One2One

Commc’ns, 805 F.3d at 441 (Krause, J., concurring). Indeed, section 158 was

amended in 2005 to provide for certification of bankruptcy appeals directly to the

court of appeals. “The twin purposes of the provision were to expedite appeals in

significant cases and to generate binding appellate precedent in bankruptcy, whose

caselaw has been plagued by indeterminacy.” Pacific Lumber, 584 F.3d at 242–

243. Dismissing bankruptcy appeals on equitable mootness grounds runs contrary

to those objectives. See id.

18

The Judiciary Code’s statutory provisions for abstention in bankruptcy cases

likewise provide no basis for the equitable mootness doctrine. The statute says that

“a district court [may] in the interest of justice, or in the interest of comity with

State courts or respect for State law, … abstain[] from hearing a particular

proceeding arising under title 11 or arising in or related to a case under title 11.”

28 U.S.C. § 1334(c)(1). It does not support equitable mootness. First, it “cannot

be read to authorize district courts to abstain from exercising their appellate

jurisdiction” because “it refers to the original jurisdiction of the district courts, not

to appellate jurisdiction at all.” One2One Commc’ns, 805 F.3d at 442 (Krause, J.,

concurring). Second, section 1334(c) was “enacted to respond to the Supreme

Court’s decision in Northern Pipeline Construction Co. v. Marathon Pipe Line

Co., 458 U.S. 50 (1982), and to avoid constitutional concerns with having state law

claims resolved in federal courts.” One2One Commc’ns, 805 F.3d at 442 (Krause,

J., concurring) (emphasis added). “Congress’s intent was to authorize bankruptcy

courts to abstain from hearing state law claims in certain circumstances—not to

allow district courts to abdicate their appellate jurisdiction.” Id. at 442–443.

C. The Courts’ Equitable Powers Cannot Justify Equitable Mootness Perhaps recognizing the flaws in other courts’ statutory analyses, some have

argued that federal courts’ inherent equitable powers—independent of those

granted by Congress—justify the doctrine. See In re Tribune Media Co., 799 F.3d

19

272, 287 (3d Cir. 2015) (Ambro & Vanaskie, JJ., concurring) (“A simpler way” to

justify equitable mootness than UNR Industries’ statutory analysis “starts from the

premise that bankruptcy courts are courts of equity and apply the principles and

rules of equity jurisprudence.” (internal quotation marks, brackets and ellipsis

omitted)).

The Tribune concurrence pointed to decisions highlighting a district court’s

discretion in crafting injunctive relief. 799 F.3d at 287–288; see Weinberger v.

Romero-Barcelo, 456 U.S. 305, 319–320 (1982) (upholding district court’s

decision ordering the Navy to apply for a necessary permit under the Federal Water

Pollution Control Act but permitting it to continue its activities without a permit in

the interim). But recognizing that district courts have some discretion to tailor the

equitable remedy of an injunction to the circumstances of a particular case is a far

cry from concluding that courts of appeals have “equitable” discretion to refuse to

hear certain appeals at all. The right to appeal and to have a lower court’s

erroneous legal conclusions reversed has never been considered an “equitable”

remedy subject to appellate courts’ discretion. Not only do parties aggrieved by a

confirmation order have a statutory right to appeal, but—as discussed further

below—courts of appeals have a “virtually unflagging obligation” to hear those

appeals within their jurisdiction. Colorado River Water Conservation Dist. v.

20

United States, 424 U.S. 800, 817 (1976). District courts have no similar obligation

to grant injunctions.

Moreover, the court in Romero-Barcelo granted relief that would remedy the

statutory violation; all that was at issue was whether it was required to grant an

injunction against the Navy during the interim period before the relief would take

effect. Had the court found a violation of the FWPCA but decided for “equitable”

reasons not grounded in the statute to provide no remedy, there can be no question

it would have erred. See Romero-Barcelo, 456 U.S. at 318 (“We read the FWPCA

as permitting the exercise of a court’s equitable discretion … to order relief that

will achieve compliance with the Act.” (emphasis added)). Courts of appeals have

no greater discretion under the Bankruptcy Code.

More broadly, the Supreme Court has made clear again and again that any

equitable powers courts have “must and can only be exercised within the confines

of the Bankruptcy Code.” Norwest Bank, 485 U.S. at 206; see also Siegel, 571

U.S. at 421. That is so not only when the Code expressly prohibits the court’s

action, but also when the action is inconsistent with the Code’s overall structure

and purpose—even when it is reserved for “rare cases.” See Czyzewski v. Jevic

Holding Corp., 137 S. Ct. 973, 987 (2017). As discussed above, by crafting

particular narrow statutory exceptions to the rule of appellate review, the

Bankruptcy Code forecloses a broad “equitable” exception.

21

D. Equitable Mootness Raises Constitutional Concerns

The doctrine of equitable mootness also raises serious constitutional

concerns.

First, equitable mootness contravenes the long-standing principle that

“federal courts lack the authority to abstain from the exercise of jurisdiction that

has been conferred.” New Orleans Pub. Serv., Inc. v. Council of City of New

Orleans, 491 U.S. 350, 358 (1989). Federal courts “have no more right to decline

the exercise of jurisdiction which is given, than to usurp that which is not given.

The one or the other would be treason to the [C]onstitution.” Cohens v. Virginia,

19 U.S. (6 Wheat.) 264, 404 (1821).

The Supreme Court has repeatedly cast doubt on doctrines permitting courts

to decline to hear cases on prudential (as opposed to statutory or constitutional)

grounds. In Lexmark International, Inc. v. Static Control Components, Inc., 134

S. Ct. 1377 (2014), for example, the Court rejected the petitioner’s argument that it

should decline to adjudicate the respondent’s claim on “prudential” grounds,

explaining that a “prudential” standing doctrine would be “in some tension with

our recent reaffirmation of the principle that ‘a federal court’s obligation to hear

and decide’ cases within its jurisdiction ‘is virtually unflagging.’” Id. at 1386

(internal quotation marks omitted). The issue, the Court explained, was not one of

“prudential standing” but rather of statutory interpretation: “We do not ask

22

whether in our judgment Congress should have authorized [plaintiff]’s suit, but

whether Congress in fact did so. Just as a court cannot apply its independent

policy judgment to recognize a cause of action that Congress has denied, it cannot

limit a cause of action that Congress has created merely because ‘prudence’

dictates.” Id. at 1388; see also Susan B. Anthony List v. Driehaus, 134 S. Ct. 2334,

2347 (2014) (similarly rejecting a “prudential ripeness” argument).

“Dismissing appeals in the name of equitable mootness violates this

‘virtually unflagging obligation of the federal courts to exercise the jurisdiction

given them.’” One2One Commc’ns, 805 F.3d at 439–440 (Krause, J., concurring)

(quoting Colorado River, 424 U.S. at 817). “Although equitable-mootness is

imposed by judges on ourselves, it is no less an affront to the separation of powers

than a doctrine usurping jurisdiction that Congress never provided.” City of

Detroit, 838 F.3d at 810 (Moore, J., dissenting); accord Continental Airlines, 91

F.3d at 568 (Alito, J., dissenting).

The Supreme Court has recognized that, in a few narrow sets of cases, a

federal court may abstain from hearing a case within its jurisdiction, generally

when doing so would interfere with a state proceeding or interest. See Colorado

River, 424 U.S. at 818; Younger v. Harris, 401 U.S. 37, 49–54 (1971); Burford v.

Sun Oil Co., 319 U.S. 315, 333–334 (1943); Railroad Comm’n of Tex. v. Pullman

Co., 312 U.S. 496, 501 (1941). But those doctrines apply in “‘exceptional

23

circumstances,’ where denying a federal forum would clearly serve an important

countervailing interest,” and they proceed from the premise that “federal courts can

relinquish their jurisdiction in favor of another forum.” Quackenbush v. Allstate

Ins. Co., 517 U.S. 706, 716–718, 722 (1996) (emphasis added). The Supreme

Court has made clear that they are to be applied narrowly. See, e.g., Sprint

Commc’ns, Inc. v. Jacobs, 134 S. Ct. 584, 593 (2013) (even where there is a

parallel state proceeding, “abstention from the exercise of federal jurisdiction is the

exception, not the rule”).

Although it is sometimes referred to as an “abstention” doctrine, see, e.g.,

Semcrude, 728 F.3d at 317; Pacific Lumber, 584 F.3d at 240, equitable mootness

bears little resemblance to these well-established abstention doctrines. “For one,

[these abstention doctrines] are generally based at least in part on federalism

concerns that are not present in equitable-mootness cases.” City of Detroit, 838

F.3d at 811 (Moore, J., dissenting). Moreover, “abstention doctrines counsel in

favor of deferring to a different forum,” while “[t]he result of equitable mootness is

that no court will hear the issue.” Id. “[W]here there is no other forum and no

later exercise of jurisdiction, as in the case of equitable mootness, relinquishing

jurisdiction is not abstention; it’s abdication.” One2One Commc’ns, 805 F.3d at

440 (Krause, J., concurring).

24

Second, equitable mootness “undermines the delicate constitutional balance

on which bankruptcy adjudication is based.” City of Detroit, 838 F.3d at 811

(Moore, J., dissenting). Article III of the Constitution vests the judicial power of

the United States in judges with lifetime tenure and other protections. U.S. Const.

art. III, § 1. Article III serves a dual role. It protects litigants’ personal “interest in

an impartial and independent federal adjudication of claims within the judicial

power of the United States.” Commodity Futures Trading Comm’n v. Schor, 478

U.S. 833, 850 (1986). It also “safeguards the role of the Judicial Branch in our

tripartite system”—a key structural protection for the separation of powers. Id.;

accord Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1944 (2015).

In determining whether a delegation of the “judicial power” to non-Article

III bankruptcy courts encroaches on the interests Article III protects, a critical

consideration is the extent to which Article III courts retain a supervisory role. In

Marathon, 458 U.S. at 71, a plurality of the Court held that matters of “private

right,” like the state-law breach-of-contract action brought by the debtor against a

third-party non-creditor in that case, could not constitutionally be decided by a

non-Article III tribunal absent the parties’ consent. Similarly, in Stern v. Marshall,

564 U.S. 462, 503 (2011), the Court held that a bankruptcy court could not finally

adjudicate a state-law tort claim by the debtor against a creditor “that is not

resolved in the process of ruling on a creditor’s proof of claim.” An open question

25

after Stern was whether a bankruptcy court could, consistent with Article III,

finally decide matters of “private right” with the consent of the parties. In

Wellness, the Supreme Court held that they could, but explicitly premised its

decision on the existence of appellate review by Article III courts, reasoning that

“allowing Article I adjudicators to decide claims submitted to them by consent

does not offend the separation of powers so long as Article III courts retain

supervisory authority over the process.” 135 S. Ct. at 1944 (emphasis added).

To be sure, the Supreme Court has not held that the confirmation of a plan of

reorganization is a matter of “private right” like those at issue in Marathon and

Stern. But nor has the Court held that it is a matter of “public right”—a category

originally developed for claims against the government rather than between private

parties. The Marathon plurality stated in dicta that “the restructuring of debtor-

creditor relations,” as opposed to a contract claim by the debtor against a third

party, “may well be a ‘public right,’” 458 U.S. at 71, and plan confirmation is a

“core” proceeding under the Judiciary Code that a bankruptcy court may hear and

finally decide without the parties’ consent, 28 U.S.C. § 157(b)(2)(L). Nonetheless,

plan confirmation is a complex proceeding that may decide many issues, and it

regularly involves determinations of “the liability of one individual to another

under the law”—the definition of a matter of “private right.” Marathon, 458 U.S.

at 71 (plurality). And, after Marathon, the Supreme Court has questioned whether

26

“the restructuring of debtor-creditor relations is in fact a public right.” See

Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56 n.11 (1989) (“This thesis has

met with substantial scholarly criticism …, and we need not and do not seek to

defend it here.”); see also Stern, 564 U.S. at 492 n.7 (following “same approach”

as Granfinanciera).

Relegating disputes between private parties that ultimately stem from non-

bankruptcy law to a non-Article III tribunal without requiring the parties’ consent

and without Article III review thus raises substantial constitutional questions even

if such disputes are part of the restructuring of debtor-creditor relations. See, e.g.,

Marathon, 458 U.S. at 69 n.23 (plurality) (“[E]ven with respect to matters that

arguably fall within the scope of the ‘public rights’ doctrine, the presumption is in

favor of Art. III courts. … [W]hen Congress assigns these matters to administrative

agencies, or to legislative courts, it has generally provided, and we have suggested

that it may be required to provide, for Art. III judicial review.”); see also Thomas

v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 592 (1985) (upholding

delegation of arguable public right to agency in part because the statute “limits but

does not preclude review of the arbitration proceeding by an Article III court” and

concluding “that, in the circumstances, the review afforded preserves the

‘appropriate exercise of the judicial function’”). Consent and Article III review are

the two central protections that weigh in favor of a conclusion that assignment of

27

private parties’ disputes to a non-Article III tribunal is constitutional. See

Wellness, 135 S. Ct. at 1942–1945. Taking away both of those protections

threatens both the personal and structural concerns that Article III safeguards.

The doctrine of equitable mootness is a particular threat to Article III

principles because it “not only prevents appellate review of a non-Article III

judge’s decision; it effectively delegates the power to prevent that review to the

very non-Article III tribunal whose decision is at issue.” One2One Commc’ns, 805

F.3d at 445 (Krause, J., concurring). As Judge Krause further explained:

Although Article III judges decide whether an appeal is equitably moot, bankruptcy courts control nearly all of the variables in the equation, including whether a reorganization plan is initially approved, whether a stay of plan implementation is granted, whether settlements or releases crucial to a plan are approved and executed, whether property is transferred, whether new entities (in which third parties may invest) are formed, and whether distributions (including to third parties) under the plan begin — all before plan challengers reach an Article III court.

Id. Because review by an Article III court is critical to preserving the structural

“role of the Judicial Branch in our tripartite system,” Schor, 478 U.S. at 850,

equitable mootness upsets that constitutional structure.1

1 The concurrence in Tribune argued that Judge Krause’s concerns were

misplaced because Article III’s structural concern is “congressional aggrandizement,” and the only personal right it protects is the right “to have claims decided before judges who are free of potential domination by other branches of government.” 799 F.3d at 285 (Ambro & Vanaskie, JJ., concurring) (internal quotation marks omitted). The concurrence saw no structural concern—nor any infringement on the personal right—because Article III courts themselves (not

28

E. Equitable Mootness Has Proven Inequitable In Practice And Frustrates Development Of The Law

After decades of experience with the equitable mootness doctrine, it has

proven itself to be less than equitable in practice. As then-Judge Alito warned,

equitable mootness “can easily be used as a weapon to prevent any appellate

review of bankruptcy court orders confirming reorganization plans.” Nordhoff

Invs., Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 192 (3d Cir. 2001) (Alito, J.,

concurring). That “places far too much power in the hands of bankruptcy judges.”

Id. But it also grants too much power to “opportunistic plan proponents [who] can

(and … regularly do) use this to their advantage.” One2One Commc’ns, 805 F.3d

at 445 (Krause, J., concurring). Regular players in bankruptcy court know the

well-trodden path: try to ensure that any particularly questionable legal decisions

are made as part of plan confirmation; “rush to implement [plans] so [plan

proponents] may avail themselves of an equitable mootness defense,” id. at 446;

and then have investors avow that they would never have risked their money had

the plan been any different, so that it would be inequitable to unwind it. In such Congress) apply the equitable mootness doctrine. Id. As an initial matter, this response misses Judge Krause’s point that bankruptcy courts—not district courts or courts of appeals—have the real power to determine whether an appeal will be equitably moot. In any event, this view of the separation of powers protected by Article III is overly narrow: Courts can undermine Article III by abdicating their responsibilities even if Congress is not “aggrandized” in the process. See, e.g., NLRB v. Noel Canning, 134 S. Ct. 2550, 2593 (2014) (the “vitality” of the separation of powers “does not depend on whether the encroached-upon branch approves the encroachment”).

29

circumstances, “equitable mootness merely serves as part of a blueprint for

implementing a questionable plan that favors certain creditors over others without

oversight by Article III judges.” Id. at 448.

Equitable mootness has also impeded the development of bankruptcy law.

Critically important questions—for instance, the interpretation of the Bankruptcy

Code’s protections for secured creditors in the “cram-down” provisions and

elsewhere—may never be resolved by an appellate court because they are bound

up in complex plans that have been consummated by the time the appeal is

reached. See, e.g., One2One Commc’ns, 805 F.3d at 447 (Krause, J., concurring)

(“By excising appellate review, equitable mootness … stunts the development of

uniformity in the law of bankruptcy.”); id. at 454 (“Merits review is particularly

important for complex questions, like whether a plan comports with the

Bankruptcy Code’s cram down provisions, an issue that often cries out for

appellate review.” (internal quotation marks omitted)). That is particularly

unacceptable in the one area of the law where the Constitution demands

uniformity. U.S. Const. art. I, § 8, cl. 4.

II. EVEN IF THIS COURT WERE TO ADOPT THE EQUITABLE MOOTNESS

DOCTRINE, THE DOCTRINE SHOULD NOT APPLY IN THIS CASE

A. If Adopted At All, Equitable Mootness Should Be Strictly Limited

If this Court decides to adopt any version of the equitable mootness doctrine,

it should be reconceived and reserved for the extraordinary case.

30

First, equitable mootness should not be used to avoid hearing the merits of

an appeal. All agree that equitable mootness is not a threshold jurisdictional

inquiry. The court has the power to hear “equitably moot” appeals. If equitable

mootness is anything, it is a prudential limit on the remedy granted to the

appellant. To avoid stagnation in the law, and because remedies often cannot be

adequately assessed without an understanding of the merits, any such remedial

questions should be analyzed after the court has addressed the merits. See

One2One Commc’ns, 805 F.3d at 449–451 (Krause, J., concurring).

Second, a court should not give an appellant no remedy simply because it

cannot give the appellant its full remedy without unduly harming innocent third

parties. It should craft the best remedy it can, even if doing so is difficult. See

One2One Commc’ns, 805 F.3d at 450 (Krause, J., concurring). “Unscrambling a

transaction may be difficult, but it can be done. No one … thinks that an antitrust

or corporate-law challenge to a merger becomes moot as soon as the deal is

consummated. Courts can and do order divestiture or damages in such situations.”

In re Resource Tech. Corp., 430 F.3d 884, 886–887 (7th Cir. 2005).

Third, the doctrine should be invoked only to protect truly innocent third

parties—parties who reasonably relied on the finality of the plan, were not

involved in the bankruptcy case, and had no reason to know of the appeal. That is

likely to be a small group. Investors in debt or equity of businesses exiting

31

bankruptcy are typically well aware of pending appeals and the effect such appeals

have on the value of their holdings. So limited, the doctrine might at least deserve

the “equitable” part of its name.

B. Under Any Standard, This Appeal Is Not Equitably Moot

Even courts that have adopted the doctrine acknowledge that a court should

“proceed most carefully before dismissing an appeal as equitably moot.”

Semcrude, 728 F.3d at 318; accord Pacific Lumber, 584 F.3d at 240–241. A party

seeking dismissal of an appeal on equitable mootness grounds thus ‘“bears a heavy

burden.”’ In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir. 2012); accord

Semcrude, 728 F.3d at 320.

In considering whether Bunnyslope’s plan was “‘so complex or difficult to

unwind’ that ‘debtors, creditors, and third parties are entitled to rely on [the] final

bankruptcy court order,’” Panel Op. 4, the panel applied the four factors used by

the Ninth Circuit to determine equitable mootness: (1) “whether a stay was sought,

for absent that a party has not fully pursued its rights”; (2) “whether substantial

consummation of the plan has occurred”2; (3) “the effect that a remedy may have

on third parties not before the court”; and (4) ‘“whether the bankruptcy court can

2 In chapter 11, “substantial consummation” means that: (1) substantially all

the property to be transferred under the plan has been transferred; (2) the reorganized debtor or its successor has assumed the business or the management of substantially all the property dealt with by the plan; and (3) distributions under the plan have commenced. 11 U.S.C. § 1101(2).

32

fashion effective and equitable relief without completely knocking the props out

from under the plan and thereby creating an uncontrollable situation before the

bankruptcy court.”’ Id. at 5 (quoting In re Mortgages Ltd., 771 F.3d 1211, 1217

(9th Cir. 2014)). The panel rightly concluded that Bunnyslope failed to carry its

burden of proving equitable mootness.

1. ANB was not required to seek a stay from this Court to preserve its appeal

With respect to the first factor, the panel correctly determined that ANB’s

“failure to seek a stay from this court does not doom th[e] appeal.” Panel Op. 5.

ANB sought a stay from the bankruptcy court and district court. The bankruptcy

court granted a stay through the district court appeal only, and the district court

denied a further stay. ANB sought diligently to protect its rights, twice seeking a

stay, and was not required to take the further step of seeking this Court’s review of

the district court’s denial of a stay. As other courts of appeals have recognized,

“[w]here a party has sought a stay from both the bankruptcy and district courts, the

party’s failure to appeal that decision to this court, which so rarely overturns the

district courts’ decisions, will not, without more, render an appeal of the merits

moot.” In re Paige, 584 F.3d 1327, 1341 (10th Cir. 2009); see also In re Focus

Media, Inc., 378 F.3d 916, 924 (9th Cir. 2004) (declining to dismiss on equitable

mootness grounds when appellant pursued a stay only before bankruptcy and

district courts).

33

2. Substantial consummation of the plan is not dispositive

With respect to the second factor, Bunnyslope’s plan was indeed

substantially consummated following the district court’s denial of a further stay

pending appeal. But that, of course, is not dispositive. “‘Substantial

consummation’ is not a blanket discharge of [the] judicial duty to examine

carefully each request for relief.” Paige, 584 F.3d at 1340 (quoting In re AOV

Indus., 792 F.2d 1140, 1148 (D.C. Cir. 1986)).

3. No innocent third parties will be harmed by granting ANB a remedy

The panel correctly held that the effect on third parties not before the court

does not support equitable mootness. Panel Op. 6.

Bunnyslope argued that ANB’s appeal was equitably moot in light of White

Knight’s new equity investment. Specifically, Bunnyslope contended that due to

the nature of the transaction, White Knight’s owners would be subject to tax

liabilities of more than $1.5 million, including penalties and interest, if the plan

confirmation order were reversed. It also asserted that White Knight would be

unable to recover a substantial part of the $1.2 million that it had invested in

Bunnyslope if the plan were unwound.

“But equitable mootness protects only ‘the rights of parties not before the

court.’” In re Texas Grand Prairie Hotel Realty, L.L.C., 710 F.3d 324, 329 (5th

Cir. 2013). Where a party plays a “pivotal role in the bankruptcy proceedings, it is

34

hard to consider it a ‘third party’ or at least an innocent third party.” Paige, 584

F.3d at 1344. While White Knight is not technically a party to this appeal, it is

now the owner of Bunnyslope, and, as the plan’s equity sponsor, participated

actively in the confirmation proceedings. For example, White Knight’s principals

provided testimony in support of confirmation of the plan. Moreover, they are

sophisticated investors and knew full well that ANB vigorously disputed the

valuation and was pursuing this appeal. White Knight decided to obtain funds for

its investment via an exchange transaction that posed potential tax liabilities if

something went wrong. It could have waited to see the outcome of the appeal

before proceeding but chose to go forward knowing the risk that plan confirmation

might be reversed. Accordingly, White Knight is simply not the type of party that

equitable mootness protects. See One2One Commc’ns, 805 F.3d at 437 (factor did

not support finding of equitable mootness because plan was funded by single

equity sponsor and “‘[t]his is not a case where a debtor issued publicly traded

securities or debt pursuant to a plan that third parties to the bankruptcy case could

have purchased on the open market’”); Texas Grand Prairie, 710 F.3d at 329

(“The fact ‘that a judgment might have adverse consequences [to the equity

holders of the reorganized bankrupt] is not only a natural result of any appeal ...

but [should have been] foreseeable to them as sophisticated investors.’”); In re

Scopac, 624 F.3d 274, 282 (5th Cir. 2010) (same); Chesapeake Energy Corp. v.

35

Bank of New York Mellon Tr. Co., 2015 WL 4191419, at *15 (S.D.N.Y. July 10,

2015) (where debtor redeemed notes while appeal of decision that redemption

would not trigger make-whole payment was pending, noteholders were entitled to

payment of full make-whole amount following reversal; “Chesapeake …

affirmatively chose to pursue a course leading to a redemption knowing … that it

might be held on appeal to [owe the make-whole] …. Chesapeake controlled its

choices and ran a known risk.”), aff’d, 837 F.3d 146 (2d Cir. 2016).

Indeed, it is likely safe to say that there is no other area of the law in which a

party’s reliance on an order it knows to be non-final would ever be allowed to

block an appeal from that order. “[I]n any other context, we would not hesitate to

[say] that a party should not rely blindly on the decision of a trial court when

timely appellate proceedings are commenced.” City of Detroit, 838 F.3d at 812 n.2

(Moore, J., dissenting). Bankruptcy should be no different.

Bunnyslope also argued that the City of Chimera is an innocent third party

that would be harmed by unraveling the plan because of its interest as a junior

creditor and its interest in the project’s remaining affordable housing. But

Chimera, like White Knight, is a sophisticated party, and there is no suggestion

that it was not aware of ANB’s objection to, and appeal of, confirmation.

Moreover, Chimera did not take any action in reliance on the confirmed plan; it did

not, for example, make an additional investment or take on any more risk than it

36

already had. To be sure, if the confirmation order were reversed, Chimera would

not receive the treatment it expected under the confirmed plan; but the mere risk

that a non-final order will be reversed on appeal “is present in nearly all

bankruptcy reorganizations” and is not an “injury” that equitable mootness is

designed to prevent. One2One Commc’ns, 805 F.3d at 437.

4. Granting relief would not unravel the plan

With respect to the fourth factor, the panel correctly held that granting relief

would not “knock[] the props out from under the plan.” Panel Op. 6.

As a preliminary matter, Bunnyslope does not explain why, if ANB were to

prevail on the merits, its plan could not simply be amended to increase the

payments to ANB without unwinding the transactions. Even if paying the

increased amount of ANB’s claim in full were not feasible, “appellate review need

not be declined when, because a plan has been substantially consummated, a

creditor could not obtain full relief.” Pacific Lumber, 584 F.3d at 241. To the

contrary, “[w]here equitable relief, though incomplete, is available, the appeal is

not moot.” Thorpe Insulation, 677 F.3d at 883; see also Semcrude, 728 F.3d at

324–325 (“the feared consequences of a successful appeal are often more

appropriately dealt with by fashioning limited relief at the remedial stage than by

refusing to hear the merits of an appeal at its outset”). Bunnyslope cannot show

that increasing payments to ANB in any amount would be infeasible.

37

Moreover, even if unwinding the plan were required, the transactions

underlying the plan “are straightforward” rather than too intricate to unravel, as the

panel correctly found. Panel Op. 6. The facts here are similar to those in One2One

Communications, in which the plan provided for an equity investment from a

single sponsor, and did not otherwise provide for “new financing, mergers or

dissolutions of entities, issuance of stock or bonds, name change, change of

business location, change in management or any other significant transactions.”

805 F.3d at 435–436. Based on those facts, the Third Circuit held that the district

court abused its discretion in finding that the fourth factor weighed in favor of

equitable mootness. It explained:

[The] post-confirmation transactions entered into in the ordinary course of the reorganized Debtor’s business…, including the investment by the Plan Sponsor, the commencement of distributions, the hiring of new employees and entering into various agreements with existing and new customers are likely to transpire in almost every bankruptcy reorganization where the appealing party is unsuccessful in obtaining (or fails to seek) a stay. Further, the Plan did not involve the issuance of any publicly traded securities, bonds, or other circumstances that would make it difficult to retract the Plan.

Id. at 436–437. Essentially the same is true here.

As the panel noted, Bunnyslope does not actually dispute the ability to

unwind the transactions underlying the plan; its only argument is that doing so

would be inequitable to White Knight. Panel Op. 6. But as explained above,

unwinding the transactions—even if detrimental to White Knight—is not

38

inequitable. To the contrary, White Knight elected to act in reliance on the

confirmation order notwithstanding the pending appeal and the risk of reversal.

Equity does not grant it immunity from the very risk it assumed.

CONCLUSION

The Court should decline to dismiss this appeal as equitably moot.

Respectfully submitted,

/s/ Danielle Spinelli DANIELLE SPINELLI ISLEY M. GOSTIN WILMER CUTLER PICKERING HALE AND DORR LLP 1875 Pennsylvania Ave., N.W. Washington, D.C. 20006 (202) 663-6000 danielle.spinelli@wilmerhale.com

Counsel for Appellant Arbitrage National Bank

No. 18-1234

United States Court of Appeals for the Fourteenth Circuit

___________________________________________________________

In the Matter of Bunnyslope Limited Partnership, Debtor

ARBITRAGE NATIONAL BANK,

Appellant, v.

BUNNYSLOPE LIMITED PARTNERSHIP,

Appellee,

On Appeal from the United States District Court

for the District of Anozira

No. 17-1234

Honorable John Johnson

APPELLEE’S SUPPLEMENTAL BRIEF ON EQUITABLE MOOTNESS

LEWIS ROCA ROTHGERBER CHRISTIE LLP Susan M. Freeman, State Bar No. 004199 E-mail: SFreeman@LRRC.com

201 East Washington Street, Suite 1900 Phoenix, Arizona 85004-4429 Tel: 602.262.5756 Fax: 602.262.5747 Attorneys for Debtor-Appellee

105131230_2

CORPORATE DISCLOSURE STATEMENT

Pursuant to FRAP 26.1, Appellee Bunnyslope Limited Partnership

(“Bunnyslope”) certifies that Bunnyslope is a limited partnership.

Pursuant to the terms of Bunnyslope’s confirmed Chapter 11 plan of

reorganization, 100% of the equity interest in Bunnyslope was acquired by White

Knight Investors, LLC on or about December 31, 2012. The membership interests

in White Knight Investors, LLC are indirectly held by Bruce Wayne and Clark

Kent.

105131230_2

i

TABLE OF CONTENTS

CORPORATE DISCLOSURE STATEMENT

TABLE OF AUTHORITIES .................................................................................... ii

I. Facts Critical to Equitable Mootness .................................................... 1

II. Investors and Creditors Are Entitled to Rely on Unstayed Final Judgments. ............................................................................................. 3

A. Finality of Judgments Is Particularly Important in Bankruptcy Reorganization Cases. ............................................. 3

B. Investors Are Worthy of Special Protection. .............................. 5

C. Bunnyslope’s Governmental Creditors Deserve Protection. ...... 7

D. ANB Could and Should Have Paid for a Stay. ........................... 8

III. Appeals Should Proceed Only Where Effective Relief Can Be Granted Without Unraveling a Consummated Plan ............................11

IV. Equitable Mootness Is Sound Policy. ..................................................13

A. The Doctrine Is Consistent with the Constitution and Code and Not Unfair ..........................................................................13

B. Bunnyslope Is Not Too Small for Equitable Mootness. ...........15

C. A Peek at the Merits Shows No Impropriety Below. ...............17

V. Conclusion ...........................................................................................20

CERTIFICATE OF COMPLIANCE .......................................................................22

STATEMENT OF RELATED CASES ...................................................................23

105131230_2

ii

TABLE OF AUTHORITIES

Cases

Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997) ....................................................................................... 18, 19

Central States, Se. & Sw. Areas Pension Fund v. Central Transport, Inc., 841 F.2d 92 (4th Cir.1988) ..................................................................................... 6

Duff v. Central Sleep Diagnostics, LLC, 801 F.3d 833 (7th Cir. 2015) ..................................................................... 8, 11, 17

In re Adelphia Communications Corp., 361 B.R. 337 (S.D.N.Y. 2007) .............................................................................10

In re Chagteaugay Corp., 10 F.3d 944 (2d Cir. 1933) ...................................................................................12

In re Charter Communications, Inc., 691 F.3d 476 (2d Cir. 2012) .................................................................................11

In re Club Assocs., 956 F.2d 1065 (11th Cir. 1992) .............................................................................. 5

In re Cont’l. Airlines, 91 F.3d 553 (3d Cir. 1996) .......................................................................... 5, 7, 16

In re GWI PCS 1 Inc., 230 F.3d 788 (5th Cir. 2000) .................................................................................. 5

In re Manges, 29 F.3d 1034 (5th Cir. 1994) ............................................................................5, 13

In re Motors Liquidation Co., 539 B.R. 676 (Bankr. S.D.N.Y. 2015) ........................................................... 10, 11

In re One2One Communications, LLC, 805 F.3d 428 (3d Cir. 2015) .............................................................. 14, 15, 16, 17

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In re Pacific Lumber, 584 F.3d 229 (5th Cir. 2009) ............................................................................7, 13

In re Paige, 584 F.3d 1327 (10th Cir. 2009) .............................................................................. 7

In re Public Serv. Co. of N.H., 963 F.2d 469 (1st Cir. 1992) ...............................................................................4, 5

In re Roberts Farms, Inc., 652 F.2d 793 (9th Cir. 1981) ............................................................................3, 13

In re Seasons Partners LLC, 532 F. App’x 660 (9th Cir. 2013) ........................................................................... 6

In re Semcrude, L.P., 728 F.3d 314 (3d Cir. 2013) ................................................................................... 5

In re Thorpe Insulation Co., 677 F.3d 869 (9th Cir. 2012) ............................................................................9, 13

In re Transwest Resort Props., Inc., 801 F.3d 1161 (9th Cir. 2015) ..................................................................... 6, 7, 13

In re Tribune Media Co., 799 F.3d 272 (3d Cir. 2015) ......................................................................... passim

Mac Panel Co. v. Virginia Panel Corp., 283 F.3d 622 (4th Cir. 2002) .................................................................................. 9

In re UNR Indus., 20 F.3d 766 (7th Cir. 1994) ....................................................................... 4, 13, 15

Winzler v. Toyota Motor Sales U.S.A., Inc., 681 F.3d 1208 (10th Cir. 2012) ............................................................................15

Statutes

11 U.S.C. § 363(m) ..................................................................................................15

11 U.S.C. § 506(a) ...................................................................................................18

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11 U.S.C. § 1111(b) .................................................................................................20

11 U.S.C. § 1127(b) .................................................................................................15

11 U.S.C. § 1129(a)(7)(A) .......................................................................................20

11 U.S.C. § 1129(a)(11) ............................................................................................. 7

Internal Revenue Code § 42(i)(3)(A) .......................................................................20

Internal Revenue Code § 1033 ................................................................................... 2

Rules

Fed.R.Bankr.P. 8007(c) ...........................................................................................10

105703179_1

1

Bunnyslope Limited Partnership (“Bunnyslope”) is doing business under its

consummated reorganization plan in the only legally permissible manner it can, as

an affordable housing project. The sole relief sought by Arbitrage National Bank

(“ANB”) is to double Bunnyslope’s largest payment obligation, eviscerating the plan

and forcing a foreclosure. The effect on non-parties to this appeal will be disastrous.

Governmental creditors will never be paid. And despite the public policy of

encouraging investors to fund emergence from bankruptcies, the new investors who

funded Bunnyslope’s plan in reliance on confirmation-order finality to make

irreversible payments and capital improvements will lose their investments and bear

significant taxes.

Knowing both that these consequences would occur and that the district court

had rejected its appellate arguments, ANB chose not to stay the confirmation order

with a supersedeas bond it could easily have obtained, as a bank. ANB sought only

a free stay, and stopped asking once the district court rejected that request in light of

its ruling against the bank on the merits. ANB’s appeal is equitably moot.

I. Facts Critical to Equitable Mootness

Bunnyslope’s confirmed plan provides for paying ANB’s $4 million secured

claim with interest over the plan period, followed by a balloon payment of ANB’s

deficiency claim. At that point the affordable housing restrictions will expire and

rental rates will increase, ensuring a sale price or refinancing sufficient for full

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repayment. But if the secured component of ANB’s claim is doubled to $8 million,

the installment payments will be too costly for Bunnyslope to service the debt, given

the rental limitations imposed by affordable housing regulations, rendering

foreclosure inevitable.

Bunnyslope persuaded White Knight Investors, LLC, owned by individuals

supportive of affordable housing, to invest $1.2 million necessary to meet plan

requirements to pay administrative, tax and other priority and unsecured claimants

under the plan, and fund property renovations, a long-term lease of adjacent parkland

and capital improvements to it, and contractual obligations. White Knight’s

principals provided testimony of their willingness to fund the plan, necessary to

establish plan feasibility, but had no prepetition connections with Bunnyslope.

After the district court affirmed the $4 million ANB claim valuation and

Bunnyslope plan confirmation, and denied ANB’s request for a further free stay

pending the appeal to this Court, finding ANB unlikely to prevail, White Knight

relied on the finality of these orders and funded plan consummation. Nearly all of

that money has been disbursed, and cannot be recovered from the recipients. White

Knight used funds from an Internal Revenue Code § 1033 exchange on the deadline

to replace previously-owned property condemned by the City. If plan confirmation

were to be reversed, White Knight and its principals would be subjected to tax

liabilities from the condemnation proceeds of more than $1.5 million.

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The City of Chimera is owed $3.5 million, secured by a lien junior to ANB’s.

In furtherance of the City’s interest in affordable housing for its impoverished

citizens, and its conclusion it could best ensure payment of its claim by supporting

the plan, the City agreed to accept a balloon payment at the end of the plan term after

satisfaction of ANB’s deficiency claim. The City’s claim will be eliminated by

ANB’s foreclosure, to the substantial detriment of its taxpayers and policies, if ANB

succeeds in its appeal.

After the district court rejected ANB’s request for a stay pending a further

appeal, ANB did not seek a stay from this Court. Nor did ANB propose posting a

supersedeas bond to buy a further stay by ensuring coverage of Bunnyslope’s

damages from continued restricted operations in bankruptcy without new investor

funding during the appeal period.

II. Investors and Creditors Are Entitled to Rely on Unstayed Final Judgments.

A. Finality of Judgments Is Particularly Important in Bankruptcy

Reorganization Cases. For decades, equitable mootness has been a fundamental principle enabling

bankruptcy reorganizations to be structured and funded. See, e.g., In re Roberts

Farms, Inc., 652 F.2d 793, 797 (9th Cir. 1981); In re Public Serv. Co. of N.H., 963

F.2d 469, 473 (1st Cir. 1992). Entitlement to rely on judgment finality despite an

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unstayed appeal is a basic legal concept. It is especially apt in bankruptcy for two

reasons.

First, if any of the multiple parties to a bankruptcy plan could force alteration

of plan settlements years later, the disincentives to resolve differences and the

leverage gained from threats to disrupt consummated transactions would imperil

reorganizations overall. “Every incremental risk of revision on appeal puts a cloud

over the plan of reorganization, and derivatively over the assets of the reorganized

firm.” In re UNR Indus., Inc., 20 F.3d 766, 770 (7th Cir. 1994). And second, “[b]y

protecting the interests of persons who acquire assets in reliance on a plan of

reorganization, a court increases the price the estate can realize ex ante, and thus

produces benefits for creditors in the aggregate.” Id. “People pay less for assets that

may be snatched back or otherwise affected by subsequent events.” Id.

As the Third Circuit explained: If we jettisoned the entire equitable mootness doctrine, it is hard to imagine that any complex plan would be consummated until all appeals are terminated. For why would an equity investor wish to put money into a reorganized entity if the plan could be ordered unraveled? And would not the cost of credit increase prohibitively with such a specter? Without equitable mootness, any dissenting creditor with a plausible (or even not-so-plausible) sounding argument against plan confirmation could effectively hold up emergence from bankruptcy for years (or until such time as other constituents decide to pay the dissenter sufficient settlement consideration to drop the appeal), a most costly proposition.

In re Tribune Media Co., 799 F.3d 272, 288-89 (3d Cir. 2015).

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B. Investors Are Worthy of Special Protection.

Rather than supporting the reorganization of struggling companies, the

Panel’s opinion sends the opposite message to potential investors: your money is not

safe. Other circuits recognize that investment in reliance on an unstayed

confirmation order is worthy of protection. See, e.g., In re Semcrude, L.P., 728 F.3d

314, 321 (3d Cir. 2013) (courts take into account “the reliance of third parties, in

particular investors, on the finality of [plan confirmation]” (emphasis added)); In re

Cont’l. Airlines, 91 F.3d 553, 562 (3d Cir. 1996) (“High on the list of prudential

considerations taken into account by courts considering whether to allow an appeal

following a consummated reorganization is the reliance by third parties, in particular

investors, on the finality of the transaction.”); In re GWI PCS 1 Inc., 230 F.3d 788,

803 (5th Cir. 2000) (appeal moot where relief would “have a detrimental affect [sic]

on the postbankruptcy investors and entities”); In re Manges, 29 F.3d 1034, 1043

(5th Cir. 1994) (appeal was moot when “cash infusions [had been made] . . . in

reliance upon the Plan, much of which cannot be recovered”); In re Club Assocs.,

956 F.2d 1065, 1070 (11th Cir. 1992) (appeal moot where relief requested “would

have jeopardized the Plan as a whole, which in turn would have put at risk the limited

partners’ newly invested funds”); Public Serv., 963 F.2d at 474-75 (“setting aside

the confirmed reorganization plan would adversely affect investors in the

reorganized PSNH who acted in legitimate reliance on the order of confirmation in

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the absence of a stay”), citing Central States, Se. & Sw. Areas Pension Fund v.

Central Transport, Inc., 841 F.2d 92, 95 (4th Cir. 1988) (modification of plan would

affect rights of investor in reorganized company); see also In re Seasons Partners

LLC, 532 F. App’x 660, 661 (9th Cir. 2013) (holding that “[a]ny modification of the

plan here would plainly affect the interests of the investor that has infused $2.5

million into the apartment venture in reliance on the confirmed plan.”).

“One reason some third parties have reliance interests more worthy of

protection than others is that we want to encourage behavior (like investment in a

reorganized entity) that contributes to a successful reorganization.” Tribune Media,

799 F.3d at 279. As noted by the dissent in Transwest, the rule adopted by the

Transwest majority (and the Panel here),

ignores the realities of the marketplace, and creates strong incentives for investors to delay funding improvements until after the appeal is completed…decreasing the value of [the lender’s] collateral and impeding, or terminating, the ability of the Debtors to generate cash flow and service their debt. Worse, the majority approach discourages third parties from agreeing to make these kinds of post-confirmation investments in the first instance…decreasing the value of debtors’ estates ex ante and making it more difficult to facilitate workable reorganizations.

In re Transwest Resort Props., Inc., 801 F.3d 1161, 1175 (9th Cir. 2015).

White Knight’s principals, who were not litigants below and are not parties to

the appeal, are outside investors whose involvement in the plan was testimony of

willingness to fund it, evidence necessary to prove the confirmation element of

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feasibility in any case. 11 U.S.C. § 1129(a)(11). This is not a case where the

investors are antagonistic competitors who crafted underhanded plans to harm the

debtors. See In re Paige, 584 F.3d 1327, 1343 (10th Cir. 2009); In re Pacific Lumber,

584 F.3d 229, 244 (5th Cir. 2009); Transwest, 801 F.3d at 1174.

While reasonableness of reliance should not be determinative,1 that was

eminently the case for Bunnyslope’s investors. They funded after district court

affirmance of the bankruptcy court’s rulings as well as stay denial where the district

court found reversal to be unlikely. Yet the Panel held that it is unreasonable to fund

a plan whenever an appeal is taken, taking this Court out of step with equitable

mootness precedent across circuits, and upending the law on stays pending appeal.

The funds White Knight invested in reliance on the unstayed confirmation order are

largely irretrievably spent, and their losses will be exacerbated by significant tax

consequences if the order is reversed.

C. Bunnyslope’s Governmental Creditors Deserve Protection.

The Panel opinion also holds that the plan confirmation order can be reversed

in its entirety, despite the City of Chimera’s $3.5 million claim becoming

uncollectible and its interest in affordable housing extinguished, because the City

did not take on more risk under the plan by making an additional investment.

1 Continental, 91 F.3d at 565 (“[T]o focus on the ‘reasonableness’ of that reliance, at least as measured by the likelihood of reversal on appeal, is necessarily a circular enterprise and therefore of little utility.”).

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Bunnyslope believes this is the first case to hold that creditor interests are irrelevant

to mootness because the creditors did not advance more money under the plan.

In addition to the third parties (particularly investors)…, equitable mootness properly applied benefits the estate and the reorganized entity. All these players have a common interest in the finality of a plan: the estate because it can wind up; the reorganized entity because it can begin to do business without court supervision and can seek funding in the capital markets without the cloud of bankruptcy; investors because a reorganized entity will command a higher and more stable market value outside of bankruptcy; lenders because they can collect interest and principal; customers in certain industries who need parts or services; and other constituents for different context-specific reasons that may boil down to it is easier to do business with an entity outside of bankruptcy. Equitable mootness assures these stakeholders that a plan confirmation order is reliable and that they may make financial decisions based on a reorganized entity’s exit from Chapter 11 without fear that an appellate court will wipe out or interfere with their deal.

Tribune Media Co., 799 F.3d at 279-80 (citations omitted). See also Duff v. Central

Sleep Diagnostics, LLC, 801 F.3d 833, 840 (7th Cir. 2015) (creditors’ reliance in

passively receiving payment counts as a significant mootness factor). And under the

Panel’s logic, if the City had advanced money, it would not have been “innocent”

and its interests would have been disregarded. The Panel was wrong; the City

deserved the protection of equitable mootness for its plan treatment of full payment

and full compliance with affordable housing covenants.

D. ANB Could and Should Have Paid for a Stay.

Appellant efforts to obtain a stay are critical to defeating equitable mootness.

See, e.g., In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir. 2012) (“We will

105703179_1

9

look first at whether a stay was sought, for absent that a party has not fully pursued

its rights.”). But after the district court rejected ANB’s appellate arguments and

found ANB unlikely to prevail at the circuit level, found substantial harm to the

debtor and the public interest from a stay, and that the bank’s injury was monetary,

not irreparable, ANB took no further action. ANB is a bank, but it did not offer to

post a supersedeas bond and it did not seek a stay from this Court.

ANB’s strategic choice to allow the plan to become effective means it should

bear the risks attendant to that decision. Mac Panel Co. v. Virginia Panel Corp.,

283 F.3d 622, 625 (4th Cir. 2002). As the Third Circuit noted in Tribune Media,

where the court conditioned a stay upon posting of a significant bond,

[The appellant’s] failure to attempt to reduce the bond to a more manageable figure (assuming its representations are correct that it would be unable to finance such a large bond on short notice) leads us to conclude that it effectively chose to risk a finding of equitable mootness and implicitly decided that an appeal with a stay conditioned on any reasonable bond amount was not worth it. This risk-adjusted choice by such a rational actor makes a finding of mootness not unfair, as it appears from the record before us that Aurelius had the opportunity to obtain a stay that would have foreclosed the possibility of a mootness finding.

Tribune Media, 799 F.3d at 282.

Bankruptcy Rule 8007(c) provides that a bankruptcy court or appellate court

may condition a stay pending appeal on filing a bond or other security.

Fed.R.Bankr.P. 8007(c). A bond protects prevailing parties against losses caused by

an unsuccessful appeal, including the delays incident to an appeal. Tribune Media,

105703179_1

10

799 F.3d at 281. As with other civil appeals, posting a supersedeas bond to protect

the appellee in a bankruptcy appeal is a standard appellate stay condition. In re

Adelphia Communications Corp., 361 B.R. 337, 350 (S.D.N.Y. 2007); In re Motors

Liquidation Co., 539 B.R. 676, 686 (Bankr. S.D.N.Y. 2015) (“[I]f the movant seeks

imposition of a stay without a bond, the applicant has the burden of demonstrating

why a court should deviate from the ordinary full security requirement.”).

While determining the bond amount is more complicated when the order

confirms a reorganization plan than when it awards simple monetary damages,

courts can and do determine the losses to be protected in appeals of bankruptcy plan

confirmation orders. See, e.g., Adelphia Communications, 361 B.R. at 350-54, 368;

Tribune Media, 722 F.3d at 282 (approving as “well considered and convincing” a

bond calculation of likely damage to the bankruptcy estate of a confirmation order

appeal, analyzing costs to the debtor and its creditors caused by a stay, “additional

professional fees, opportunity costs to creditors who would receive delayed

distributions from the DCL Plan or delayed interest and principal payments from

reorganized Tribune, and a loss in market value to equity investors caused by the

delayed emergence.”); Motors Liquidation, 539 B.R. at 687-92 (explanation of

factors comprising determination of bond amount).

ANB’s appeal poses risks of loss for parties in interest (including those not

parties to this appeal) in order to satisfy the bank, a single creditor. Had ANB posted

105703179_1

11

a bond to provide protection from the damages resulting from an extended period in

bankruptcy, its arguments on the merits could have been resolved on appeal without

mootness. ANB chose not to even propose a supersedeas bond in any amount, and

must bear the consequences. As the Seventh Circuit noted in Duff, claimants under

a bankruptcy plan, whose money would be clawed back should the appellant prevail,

have “legitimate expectations” when they know that the appellant never posted a

supersedeas bond after his arguments failed and his arguments were rejected by the

district court. Duff, 801 F.3d at 840.

III. Appeals Should Proceed Only Where Effective Relief Can Be Granted Without Unraveling a Consummated Plan.

ANB asks this Court to destroy the pillar on which the plan depends, not relief

that would keep Bunnyslope’s plan intact. If ANB succeeds, the consummated plan

will fail. See In re Charter Communications, Inc., 691 F.3d 476, 487 (2d Cir. 2012)

(appellate court could not grant the relief appellant sought of re-valuing the debtor

without requiring a significant revision to the plan, which would knock the props out

from under completed transactions or affect re-emergency of debtor from

bankruptcy). This Court cannot grant effective relief in this case because of the

impact of post-judgment events, transactions implementing the plan that cannot be

unwound. Even if ANB were willing to refund all the payments it received – which

it has never suggested – money cannot be recovered from taxing authorities, vendors

and creditors.

105703179_1

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Nor can the implemented plan requirement for the new equity investor to enter

into agreements to acquire and develop adjacent parkland be reversed. Even if the

Court could ignore White Knight’s separate entity status without any evidence of

piercing the veil and deem it and its owners to be parties to the appeal, the Court

cannot order the City that executed a long term lease or the contractors who

improved the adjacent parkland to rescind their contracts, dismantle the

improvements, and refund payments.

Cases rejecting equitable mootness almost invariably deny relief that would

unwind a plan entirely, while allowing specific relief that affects only parties to the

appeal without completely undermining the plan, e.g. by eliminating a third party

release within a confirmation order. See Tribune, 799 F.3d at 280-81, 283-84 (citing

cases allowing recovery of funds from third parties “without a plan coming apart”

and rejecting portion of appeal that would undermine entire plan); In re Chagteaugay

Corp., 10 F.3d 944, 954 (2d Cir. 1933) (relief only for a “fractional recovery that

does not impair feasibility or affect parties not before this Court”); Thorpe

Insulation, 677 F.3d at 882-83 (plan changes on remand can be made in a way that

would be equitable to all affected parties); Pacific Lumber, 584 F.3d at 250-52 (court

could award effective relief with a lien or cash payment not imperiling

reorganization; other relief requests held equitably moot); Transwest, 801 F.3d at

1171-73 (court could grant relief “without unraveling the plan” by reducing the

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length of a due-on-sale clause window or giving partial sale proceeds to the lender);

compare e.g. UNR, 20 F.3d at 769 (noting that “[u]ndoing all of [the plan

transactions] is impossible” and holding that an appeal must be dismissed); Roberts

Farms, 652 F.2d at 797 (appeal moot when reversal “would knock the props out

from under the authorization for every transaction that has taken place”).

As the Fifth Circuit explained, equitable mootness “is a recognition by

appellate courts that there is a point beyond which they cannot order fundamental

changes in reorganization actions,” and equitably moot cases are dismissed because

“effective judicial relief is no longer available.” Manges, 29 F.3d at 1039. Holding

that a consummated plan with multiple implemented transactions and payments can

be axed entirely, instead of applying a scalpel to specific provisions, conflicts with

decisions across the circuits.

IV. Equitable Mootness Is Sound Policy.

A. The Doctrine Is Consistent with the Constitution and Code and Not Unfair.

A concurrence in In re One2One Communications, LLC, 805 F.3d 428, 444-

46 (3d Cir. 2015) asserted that the doctrine of equitable mootness raises serious

constitutional concerns by failing to provide appellate review of bankruptcy judges’

decisions by Article III courts, leaving merits and stay decisions in the Article I

judges’ control. But contrary to the concurrence statements, stays pending appeal

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can be granted by Article III appellate courts to ensure their review of the merits. Id.

at 445; see § I.D. herein. And equitable mootness is a prudential doctrine exercised

by Article III appellate courts. Indeed, Bunnyslope’s confirmation order was upheld

by an Article III district court, that itself denied a further appellate stay.

Concurring judges in Tribune Media responded to the One2One concurrence

statements. Tribune Media, 799 F.3d at 284-86. They noted that no case holds that

an Article III court may not abstain from hearing a case. Id. at 285. They concluded

that “neither the personal rights nor the separation of powers guaranteed by Article

III are infringed when Article III courts decline to hear a quite constricted class of

cases seeking relief that would upend cases resolved and plans implemented (often

years before) and/or would significantly harm third parties who relied on that

resolution and implementation.” Id. at 286. Indeed, Article III courts even hold that

cases are “prudentially moot” despite qualifying as a “case or controversy,” and

decline to decide the merits, when cases “reach the point where prolonging the

litigation any longer would itself be inequitable.” Winzler v. Toyota Motor Sales

U.S.A., Inc., 681 F.3d 1208, 1210 (10th Cir. 2012) (Gorsuch, J.).

The One2One concurrence also reasoned that the Bankruptcy Code does not

authorize the equitable mootness doctrine and it is unfair to deny appellants relief

when the court errs. 805 F.3d at 439-44. As noted in the Tribune Media concurrence,

Code provisions show Congressional intent to leave consummated transactions

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intact. 799 F.3d at 286, quoting UNR, 20 F.3d at 769; 11 U.S.C. § 363(m) (reversal

of sale order on appeal will not affect sale validity to purchaser); 11 U.S.C. § 1127(b)

(limiting ability to modify reorganization plans after substantial consummation).

Moreover, the equitable mootness doctrine is premised on bankruptcy courts

being courts of equity, and applies the fundamental principle that effects on innocent

third parties must be considered in formulating equitable relief. Tribune Media, 799

F.3d at 287. Courts regularly decline to grant statutorily authorized injunctions and

preliminary injunctions even where the movant establishes likely success on the

merits for just that reason. Id. at 287-88. The Tribune Media concurrence concluded

that discretion to deny relief where the practical harm would greatly outweigh the

benefit is no less appropriate in the plan confirmation context than in ordering other

equitable remedies. Id. at 288. Given the substantial costs to parties in interest of

reversing a consummated plan long after the fact, and the availability of a stay

pending appeal with a supersedeas bond to prevent equitable mootness, the doctrine

is a tool that should not be discarded. Id. at 288-89.

B. Bunnyslope Is Not Too Small for Equitable Mootness.

The One2One concurrence also disparaged applicability of equitable

mootness to “a small, garden-variety bankruptcy [that] did not implicate intricate

transactions that would be difficult to unravel, nor…pose a significant risk of

injuring third parties.” 805 F.3d at 439. In that case, there was only one secured

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creditor with a lien securing less than $100,000, seventeen unsecured creditors, a

plan consisting of an exclusive right to purchase the equity for $200,000, and “no

other circumstances that would make it difficult to retract the Plan.” Id. at 431-32,

435-36.

Unlike Bunnyslope, the One2One district court “articulated no specific harm

that would inure to the detriment of third parties,” and the circuit held that reliance

by investors on the finality of plan confirmation was minimal. Id. at 437. The court

applied the standards used by other circuits, including whether “outside investors

have relied on the confirmation of the plan.” Id. at 436, quoting Continental, 91 F.3d

at 560-61. But the evidence in One2One was different than the evidence here: “the

Debtor did not present sufficient evidence that the Plan would be difficult to

unravel.” Id. And “in the event the Plan could not be undone, [the appellant] urged

the District Court to grant the limited relief of striking third-party releases from the

Plan.” Id. at 439. The One2One concurrence asserted the justness of the court using

“its equitable authority to fashion a limited remedy while still protecting third parties

that may be harmed if a plan is undone,” an alternative impossible in Bunnyslope.

Id. at 442.

Bunnyslope is not a multi-million dollar case with complex settlements and

restructuring of publicly-held debt. But the $1.2 million unrecoverable investment

and $1.5 million tax penalty that White Knight and its two owners would suffer is

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very real and immediate to them. And Bunnyslope desperately needed their equity

infusion to repair and upgrade the project and bring in tenants to enable it to operate

normally and effectively as well as to meet its plan obligations.

In Bunnyslope, like the massive Tribune Media case, each day in bankruptcy

is “a day when [a business] will have a hard time attracting the investors, employees,

and, in some industries, customers that it needs to exist and prosper.” Tribune Media,

799 F.3d at 289. In America, justice is not available only to the rich and powerful.

Like every other federal protection, abstention from potentially reversing a decision

on grounds of equitable mootness should not be denied to smaller companies. Other

circuits recognize equitable mootness in small cases. See Duff, 801 F.3d at 841. This

Court should too.

C. A Peek at the Merits Shows No Impropriety Below.

The Bunnyslope district court upheld a straightforward application of a

Bankruptcy Code provision and an on-point Supreme Court decision. This Court

need not be concerned about abuse of bankruptcy or correction of aberrant rulings

adversely impacting circuit precedent.

Because Bunnyslope owns and operates an affordable housing project, rental

rates are restricted by law in accordance with recorded restrictive covenants,

servitudes that run with the land and cannot be extinguished in bankruptcy.

RESTATEMENT (THIRD) OF PROPERTY: SERVITUDES (“RESTATEMENT”) §§1.3, 7.9(2)

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(2000). Only the secured lender’s foreclosure will eliminate the covenants. Id.

§ 7.9(1). In this unusual situation, the project’s resale value post-foreclosure when

higher rent can be charged exceeds its going concern value in bankruptcy.

The Bankruptcy Code requires that a claim is allowed as secured “to the extent

of the value of such creditor’s interest in the estate’s interest in such property…Such

value shall be determined in light of the purpose of the valuation and of the proposed

disposition or use of such property….” 11 U.S.C. § 506(a). Bunnyslope’s estate’s

interest was encumbered by servitudes, and its plan use was as affordable housing.

Associates Commercial Corporation v. Rash, 520 U.S. 953 (1997) held that

when collateral is used in a reorganization plan, valuation must be based upon

“actual use” not a hypothetical “foreclosure sale that will not take place.” Id. at 964.

Rash directs determining value by what a willing buyer in the debtor’s business

would pay for “like” property. The Bunnyslope Panel recognized that “replacement

value is what an arm’s length buyer would pay for a comparable piece of property,”

but also said that value should not “be measured based on the income generated from

the property when put to whatever use the debtor proposes.” Panel Slip Op. at 3.

Affordable housing use is not a mere choice for Bunnyslope or any purchaser

from Bunnyslope, however. The restrictive covenants are subordinate to ANR’s

lien, but they still exist and affect property value because the property can only be

used by Bunnyslope or any buyer from Bunnyslope as affordable housing until and

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unless ANB forecloses. No willing buyer would purchase similar property to

Bunnyslope’s for a price that does not reflect the restrictive covenants because those

covenants burden how it could use the property. ANB purchased its secured loan

knowing of the restrictive covenants that its predecessor required to be recorded

when the loan was made.

Moreover, Bunnyslope’s plan provides for payment of ANR in full. The

secured portion of the debt is paid in installments over the 40-year period typical of

affordable housing loans meeting Internal Revenue Code requirements, upon

evidence and fact findings of an extended useful life and sound maintenance. See

Internal Revenue Code § 42(i)(3)(A). The deficiency balance will be paid in a

balloon at term end, when the restrictive covenants expire and property value will

increase with increased rental rates. Upon any plan default, ANR can foreclose and

likewise cause the value to increase with termination of the restrictions. ANR’s

choice to require full payment under Bankruptcy Code § 1111(b) waived its

deficiency claim and related ability to prevent plan confirmation under Bankruptcy

Code § 1129(a)(7)(A). This uncommon choice means the case is unlikely to arise

again.

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V. Conclusion

For the foregoing reasons, this Court en banc should hold that ANR’s appeal

of the Bunnyslope plan confirmation order is equitably moot, and dismiss the appeal.

LEWIS ROCA ROTHGERBER CHRISTIE LLP

By: /s/ Susan M. Freeman Susan M. Freeman, State Bar No. 004199 E-mail: SFreeman@LRRC.com

201 East Washington Street, Suite 1900 Phoenix, Arizona 85004-4429 Tel: 602.262.5756 Fax: 602.262.5747 Attorneys for Debtor-Appellee

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CERTIFICATE OF SERVICE

I hereby certify that on July 10, 2018, I electronically filed the foregoing

with the Clerk of the Court for the United States Court of Appeals for the

Fourteenth Circuit by using the appellate CM/ECF System.

I certify that all participants in the case are registered CM/ECF users and

that service will be accomplished by the appellate CM/ECF system.

/s/ Susan M. Freeman

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CERTIFICATE OF COMPLIANCE

The undersigned certifies that pursuant to FRAP 32(a)(7)(C) and 14th

Circuit Rule 32-1, the attached APPELLEE’S SUPPLEMENTAL BRIEF ON

EQUITABLE MOOTNESS is proportionally spaced, has typeface of 14 or more

points, and contains 4,773 words.

/s/ Susan M. Freeman

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No. 18-1234

United States Court of Appeals for the Fourteenth Circuit

___________________________________________________________

In the Matter of Bunnyslope Limited Partnership, Debtor

ARBITRAGE NATIONAL BANK,

Appellant, v.

BUNNYSLOPE LIMITED PARTNERSHIP,

Appellee,

STATEMENT OF RELATED CASES

Appellee Bunnyslope Limited Partnership, through undersigned counsel,

states that there are no related cases pending before this Court.