Docket No. 16-412

IN THE

Supreme Court of the United States

October Term, 2016

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IN RE PADCO, INC.

Debtor,

MEGAN KUZNIEWSKI,

Petitioner,

v.

PADCO, INC.,

Respondent.

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On Writ of Certiorari to the United States

Court of Appeals for the Thirteenth Circuit

________________________________________________________________

BRIEF FOR RESPONDENT

________________________________________________________________

Team R39

Counsel for Respondent

Oral Argument Requested

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QUESTIONS PRESENTED

1. Whether an appellate court has authority to decline to hear an appeal from a

bankruptcy court order confirming a chapter 11 plan on prudential grounds using

equitable mootness principles?

2. Whether a chapter 11 plan of reorganization can permanently enjoin claims that

nonconsenting creditors have against a non-debtor when the claims are not derivative of

the debtor’s claims against the non-debtor and no provision is made for full payment of

the enjoined claims?

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TABLE OF CONTENTS

QUESTIONS PRESENTED ....................................................................................................... ii

TABLE OF CONTENTS ............................................................................................................ ii

TABLE OF AUTHORITIES ..................................................................................................... v

OPINIONS BELOW.................................................................................................................. ix

STATEMENT OF JURISDICTION........................................................................................ ix

STATUTORY PROVISIONS INVOLVED ............................................................................ ix

STATEMENT OF THE CASE..................................................................................................1

SUMMARY OF THE ARGUMENT ..........................................................................................3

ARGUMENT..................................................................................................................................4

I. THE THIRTEENTH CIRCUIT CORRECTLY EXERCISED THEIR

JURISDICTION TO DECLINE TO HEAR AN APPEAL FROM A

BANKRUPTCY ORDER USING EQUITABLE MOOTNESS PRINCIPLES……..4

A. The equitable mootness doctrine was created for chapter 11 cases where by

allowing redress would be inequitable against third party, non-debtors……...…5

B. Appellate courts have authority to deny to exercise their jurisdiction under

unique circumstances………………………………………………………………...8

1. Courts deny jurisdiction when decisions of state law and policy are at risk..8

2. Unique circumstances apply where abstention is warranted by

considerations of whether a disruptive effect on policy would result…….....9

C. By allowing court’s to exercise equitable mootness principles, courts would

adhere to the finality policy of the code…………………………………………...10

II. THE BANKRUPTCY COURT ACTED WITHIN ITS AUTHORITY GIVEN TO

THEM BY THE CODE WHEN THE COURT RELEASED THE PETITIONER’S

CLAIM…………………………………………………………………………………..13

A. The plain language of the Bankruptcy Code gives the Bankruptcy Court

authority to create releases………………………………………………………...14

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B. Gadget’s release is essential, consensual, and fair to the reorganization plan….17

1. Gadget’s release was essential to the plan because without Gadget’s

investment Padco would not have the finances to perform a Chapter 11

Bankruptcy plan……………………………………………………………..17

2. The class the Petitioner was placed in consented to the release of Gadget by

an overwhelming majority…………………………………………………..20

3. Gadget’s release was fair because it allowed the Petitioner and other

creditors in their class to receive more money than they would have in any

other plan……………………………………………………………………22

C. Not allowing the court to grant third party releases will not only harm everyone

involved in Padco’s plan, but will also stagnate the economy…………………...23

CONCLUSION............................................................................................................................25

APPENDIX A................................................................................................................................A

APPENDIX B................................................................................................................................B

APPENDIX C................................................................................................................................C

APPENDIX D................................................................................................................................D

APPENDIX E................................................................................................................................E

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TABLE OF AUTHORITIES

UNITED STATES SUPREME COURT CASES

Bullard v. Blue Hills Bank,

135 S. Ct. 1686 (2015)……………………………………………………………………….…..11

Burford v. Sun Oil Co.,

319 U.S. 315 (1943)……………………………………………………………………………….9

Canada Malting Co. v. Paterson S. S., Ltd.,

285 U.S. 413 (1932)……………………………………………………………………………….9

Colo. River Water Conservation Dist. v. United States,

424 U.S. 800 (1976)……………………………………………………………………………...10

Conn. Nat’l Bank v. Germain,

503 U.S. 249 (1992)……………………………………………………………………………...15

La. Power & Light Co. v. City,

360 U.S. 25 (1959)………………………………………………………………………………...9

Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp.,

460 U.S. 1 (1983)……………………………………………………………………………..….10

Quackenbush v. Allstate Ins. Co.,

517 U.S. 706 (1996)……………………………………………………………………………….8

RadLAX Gateway Hotel, LLC v. Amalgamated Bank, U.S.,

132 S. Ct. 2065 (2012)…………………………………………………………………………...15

United States v. Energy Res. Co.,

495 U.S. 545 (1990)…………………………………………………………………………...4, 14

United States v. Ron Pair Enterprises, Inc.,

489 U.S. 235 (1989)……………………………………………………………………………...15

United Student Aid Funds, Inc. v. Espinosa,

559 U.S. 260 (2010)……………………………………………………………………………...11

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UNITED STATES CIRCUIT COURT OF APPEALS CASES

Accord Airadigm Communications, Inc. v. FCC (In re Airadigm Communications, Inc.),

519 F.3d 640, 657 (7th Cir. 2008)…………………………………………………………...14, 15

Bennett v. Veale,

60 F.3d 828 (6th Cir. 1995)……………………………………………………………………….6

Chamber of Commerce v. United States Dep’t of Energy,

627 F.2d 289, 291 (D.C. Cir. 1980)…………………………………...…………………………10

Chateaugay Corp. v. LTV Steel Co. (In re Chateaugay Corp.),

10 F.3d 944 (2d Cir. 1993)……………………………………………………………………...7, 8

Deutsche Bank AG v. Metromedia Fiber Network, Inc.,

416 F.3d 136 (2nd Cir. 2005)……………………………………………………………….Passim

Drexel Burnham Lambert Trading Corp. v. Drexel Burnham Lambert Group, Inc. (In re Drexel

Burnham Lambert Group, Inc.),

960 F.2d 285 (2d Cir. 1992)……………………………………………………………………...18

In re A.H. Robins Co.,

880 F.2d 694 (4th Cir. 1989)……………………………………………………………..16-18, 20

In re AOV Indus., Inc.,

792 F.2d 1140 (D.C. Cir.1986)………………………………………………………………..4, 10

In re Continental Airlines,

203 F.3d 203 (3d Cir. 2000)………………………………………………………………...Passim

In re Dow Corning,

280 F.3d 648 (6th Cir. 2002)………………………………………………………………...16, 17

In re Eagle Picher Indus., Inc.,

172 F.3d 48 (6th Cir. 1998)……………………………………………………………………...16

In re Information Dialogues, Inc.,

662 F.2d 475 (8th Cir. 1988)…………………………………………………………………….11

In re Made in Detroit, Inc.,

414 F.3d 576 (6th Cir. 2005)…………………………………………………………………….12

In re Texaco,

92 Bankr. 38 (S.D.N.Y. 1988)…………………………………………………………………...10

In re Zale Corporation,

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62 F.3d 746 (5th Cir. 1995)………………………………………………………………….17, 18

Manges v. Seattle-First Nat’l Bank (In re Manges),

29 F.3d 1034 (5th Cir. 1994)…………………………………………………………………...4, 6

Momentum Mfg. Corp. v. Employee Creditors Comm. (In re Momentum Mfg. Corp.),

25 F.3d 1132 (2d Cir. 1994)……………………………………………..……………………….14

Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe),

677 F.3d 869 (9th Cir. 2011)……………………………………………………...………………7

Ochadleus v. City of Detroit (In re City of Detroit),

838 F.3d 792 (6th Cir. 2016)…………………………………………………………………….11

Rev Op Group v. ML Manager LLC (In re Mortgs. Ltd.),

771 F.3d 1211 (9th Cir. 2014)…………………………………………………………………….2

Search Mkt. Direct, Inc. v. Jubber (In re Paige),

584 F.3d 1327 (10th Cir. 2009)…………………………………………………………………...5

Trone v. Roberts Farms, Inc. (In re Roberts Farms, Inc.),

652 F.2d 793 (9th Cir. 1981)……………………………………………………………………...6

UNITED STATES DISTRICT COURT CASES

Abrahams v. Hentz,

2013 WL 3147732 (S.D. Cal. 2013)………………………………………………………………6

ACC Bondholder Grp. v. Adelphia Communs. Corp (In re Adelphia Communs. Corp),

367 B.R. 84 (S.D.N.Y. 2007)……………………………………………………………………...7

In re Revere Copper & Brass, Inc.,

78 Bankr. 17 (S.D.N.Y. 1987)…………………………………………………………………...11

UNITED STATES BANKRUTPCY COURT CASES

In re City of Detroit,

504 B.R. 191, 192 (Bankr. E.D. Mich. 2013)……………………………………………………11

In re Master Mortgage Investment Fund, Inc.,

168 B.R. 930 (Bankr. W.D. Mo. 1994)………………………………………………….......16-18

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FEDERAL STATUTES

11 U.S.C. §105(a)……………………………………………………………………..3, 13, 14, 16

11 U.S.C. § 524(e)……………………………………………………………………………14-16

11 U.S.C § 1101(2)…………………………………………………………………………..…5, 6

11 U.S.C. § 1123(b)(6)……………………………………………………………………3, 14, 16

11 U.S.C § 1127(b)……………………………………………………………………………5, 13

SECONDARY SOURCES

G. Marcus Cole, A Calculus Without Consent: Mass Tort Bankruptcies, Future Claimants, and

The Problem of Third Party Non-Debtor “Discharge”,

84 Iowa L. Rev. 753, 757 (1999)………………………………………………………………...24

Joshua M. Silverstein, Hiding in Plain View: A Neglected Supreme Court Decision Resolves the

Debtate Over Non-Debtor Releases in Chapter 11 Reorganizations,

23 Emory Bankr. Dev. J. 13 (2010)…………………………………………………………...…24

Ryan M. Murphy, Equitable Mootness Should Be Used as a Scalpel Rather than an Axe in

Bankruptcy Appeals,

19 Norton J. Bankr. L. & Prac. 33, 33 (2010)……………………………………………………..8

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OPINIONS BELOW

The United States District Court of Moot entered an order affirming dismissal based on

equitable mootness grounds. The court stated that hearing the case would be improper because

the plan had been substantially consummated and dismissing the appeal would affect the debtor,

its creditors, third parties, and would go against the bankruptcy policy of finality. It further

affirmed that the permanent injunction, releasing a non-debtor from any claims by debtor’s

creditors, was proper and necessary to the success of the debtor’s reorganization. The Circuit

Court of Appeals for the Thirteenth Circuit affirmed the holding of the District Court. (R. at 14).

This appeal follows.

STATEMENT OF JURISDICTION

The formal statement of jurisdiction is waived pursuant to Competition Rule VIII.

STATUTORY PROVISIONS INVOLVED

The relevant statutory provisions involved in this case are listed below and reproduced in

Appendices A through E.

11 U.S.C. §105(a)

11 U.S.C. § 524(e)

11 U.S.C § 1101(2)

11 U.S.C. § 1123(b)(6)

11 U.S.C § 1127(b)

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STATEMENT OF THE CASE

Padco’s Batteries. Padco, Inc. (“Padco”) filed for chapter 11 following a catastrophic

effect by defective batteries on tablet computers, causing them to explode. (R. at 2). Gadget,

Inc. (Gadget), agreed to finance and support Padco’s reorganization.1 Id. However, Gadget was

unwilling to acquire Padco and invest in the new product line unless it could be certain that it

would be free of all liabilities arising or related to Padco. (R. at 3).

Chapter 11 Plan. In order to meet Gadget’s demand for immunity as the price of its

support, Padco’s plan included a permanent injunction that enjoined the victims of Padco’s

exploding batteries from bringing any claims against Gadget. (R. at 4). The order confirming

the chapter 11 plan (“plan”) included a permanent injunction, enjoining victims of the battery

defect from bringing claims, arising or related to the defect, against Gadget. (R. at 4). Creditors

with claims, such as Megan Kuzniewski (“Petitioner”), were placed in a class of unsecured

creditors where they were to receive a great portion of the bankruptcy distribution in comparison

to all other unsecured creditors. Id. Almost 80 percent of the class voted to accept the plan;

Petitioner objected. Id.

Petitioner Attacks the Plan. In addition to Petitioner’s rejection of the plan, Petitioner

objected to the confirmation of the plan, alleging that the bankruptcy code did not provide

authority for a bankruptcy court to approve a plan providing for injunctions against direct claims.

(R. at 4). Subsequently, the Bankruptcy Court of Moot held an evidentiary hearing concluding

that the permanent injunction was necessary to the success of the plan and nevertheless fair for

1 Gaget invested more than $500 million to redesign the Padco tablet; borrowed over $2.6 billion after merging

Gadget and Padco to develop new product lines, issuing publicly traded stocks and bonds that were bought and

sold by numerous investors on the market. (R. 2-3).

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the Petitioner and other creditors2. (R. at 5). The findings of facts were entered and the plan

became effective two days after entry of the confirmation order. Id.

Procedure. Following the plan confirmation, Petitioner requested and was denied a stay

by the Bankruptcy Court of Moot. (R. at 5). Thereafter, Petitioner appealed the denial to the

District Court of Moot and was once again denied. Id. Padco moved to dismiss Petitioner’s

appeal under the doctrine of equitable mootness and the District Court affirmed the dismissal.

(R. at 5). The Thirteenth Circuit Court of Appeals affirmed. (R. at 14). This appeal follows.

STANDARD OF REVIEW

“In evaluating a dismissal on equitable mootness grounds, a court of appeals reviews

factual findings for clear error and legal conclusions de novo.” Rev Op Group v. ML Manager

LLC (In re Mortgs. Ltd.), 771 F.3d 1211, 1214 (9th Cir. 2014); Grasslawn Lodging, LLC v

Transwest Resort Props., Inc. (In re Transwest Resort Props., Inc.), 801 F.3d 1161, 1168 (9th

Cir. 2015).

With respect to the non-debtor release, the bankruptcy and district courts’ conclusions of

law are reviewed de novo and findings of fact for clear error. Deutsche Bank AG, London

Branch v. Metromedia Fiber Network, Inc., 416 F.3d 136, 139 (2d Cir. 2005); ASM Capital, LP

v. Ames Dep’t Stores, Inc., (In re Ames Dep’t Stores, Inc.), 582 F.3d 422, 426 (2d Cir. 2009).

The questions presented here are questions of law. Thus, these arguments should be

reviewed de novo.

2 The court held that plaintiff received more compared to what she would have received had Padco resorted to a

Chapter 7 proceeding without Gadget’s financing and support. (R. at 5).

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SUMMARY OF THE ARGUMENT

The district court rightfully dismissed Petitioner’s appeal as being equitably moot. The

significance of the Equitable Mootness Doctrine is to prevent consummated chapter 11 plans

from being overturned under particular circumstances. The protection of overturning a plan

under this judicially created doctrine is not exclusively afforded to debtors, but it also protects

third-party non-debtors from being detrimentally affected. Additionally, federal district and

appellate courts have the authority to refuse to hear matters for which it has jurisdiction and

plenary power over; equitable mootness substantiates this notion as federal court need not

overturn a confirmed plan that has been substantially consummated. Finally, equitable mootness

supports the fundamental finality principle of chapter 11 confirmations. In bankruptcy proceedings,

affording finality to judgments of bankruptcy courts is the equitable component favoring reorganization

and the settlement of a debtor’s estate.

Additionally, the bankruptcy court acted within bounds of the Bankruptcy Code in

authorizing a permanent injunction, releasing a non-debtor from liability from third-party claims.

Sections 105 & 1123(b)(6) grant bankruptcy courts the power to authorize non-debtor releases

when needed for the success of the plan confirmation. Courts have held that a release of a

creditor’s claim is allowed only when the third party is essential, consensual, and fair to the plan.

As such, a release provision releasing a non-debtor from creditor claims is proper when it is the

very lynch pin of a debtor’s chapter 11 bankruptcy; the overwhelming majority of the

Petitioner’s class consented to the release; and it allowed the Petitioner to receive more money

than they would in any other plan. Lastly, the fairness of this plan supports the fresh start policy

for the debtor while providing the largest compensation paid to Petitioner and each of the class of

creditors.

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For these reasons, this Court should affirm the decision of the Court of Appeals for the

Thirteenth Circuit, holding that Petitioner’s claims against Padco be dismissed as being equitable

moot and that Padco’s release of Gadget from claims by Petitioner is proper under the

Bankruptcy Code.

ARGUMENT

I. THE THIRTEENTH CIRCUIT CORRECTLY EXERCISED THEIR

JURISDICTION TO DECLINE TO HEAR AN APPEAL FROM A

BANKRUPTCY ORDER USING EQUITTABLE MOOTNESS PRINCIPLES.

In this context, “mootness” is not an Article III inquiry as to whether a live controversy is

presented; rather, it is recognition by the appellate courts that there is a point beyond which they

cannot order fundamental changes in reorganization actions. See In re AOV Indus., Inc., 792 F.2d

1140, 1147 (D.C. Cir. 1986). Although the equitable mootness doctrine functions like an abstention

doctrine in the traditional, constitutional sense, it analogizes more generally to a prudential doctrine,

primarily focusing on principles of fairness and equity. The concept of “mootness” from a

prudential standpoint protects the interests of non-adverse third parties who are not before the

reviewing court, but who have acted in reliance upon the plan as implemented. Manges v. Seattle-

First Nat’l Bank (In re Manges), 29 F.3d 1034, 1039 (5th Cir. 1994).

In order to determine whether a case is equitably moot in this prudential sense, five interrelated

factors articulated by the Third Circuit’s approach in In Re SemCrude are considered in two

questions: (1) has the plan been substantially consummated; and (2) would the relief requested (a)

fatally scramble the plan or (b) significantly harm third parties who have justifiably relied upon the

confirmation order. Samson Energy Res. Co. v. SemCrude, L.P. (In re SemCrude, L.P.), 728 F.3d

314, 320-22 (3d Cir. 2013). The Bankruptcy Code defines substantial consummation as: (A)

transfer of all or substantially all of the property proposed by the plan to be transferred; (B)

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assumption by the debtor or by the successor to the debtor under the plan of the business or of the

management of all or substantially all of the property dealt with by the plan; and (C)

commencement of distribution under the plan. 11 U.S.C. § 1101(2). Substantial consummation

precludes modification of a plan. 11 U.S.C. § 1127(b). The court has adopted the “substantial

consummation” yardstick because it informs the court’s judgment as to when finality concerns and

the reliance interests of third parties upon the plan as effectuated have become paramount to a

resolution of the dispute between the parties on appeal. Search Mkt. Direct, Inc. v. Jubber (In re

Paige), 584 F.3d 1327, 1341 (10th Cir. 2009). In the context of the equitable mootness doctrine,

the appellate court must consider whether the remedy the appellants seek will affect the success of

the plan or alter the rights of third parties that have been achieved by its substantial consummation.

Id. at 1342.

It is important to note, however, that the merits of whether Petitioner’s appeal is equitably

moot is not the issue on appeal before this court and the Petitioner does not challenge the merits.

Instead, the issue is whether the Thirteenth Circuit had authority to be able to exercise their

jurisdiction in applying the doctrine at all. Because we are of the position that they do, appellate

courts have authority to deny to exercise their jurisdiction under unique circumstances such as

these. Accordingly, the court should affirm the decision of the Thirteenth Circuit because the

equitable mootness doctrine was created for ch.11 cases where allowing redress on appeal would be

inequitable and by allowing courts to exercise their jurisdiction based on equitable mootness

principles would adhere to the finality policy of the bankruptcy code.

A. The equitable mootness doctrine was intended for ch.11 cases where redress would be

inequitable against third party, non-debtors.

Although it is not clear when the term of equitable mootness first came into use, the concept

was applied some time after the enactment of the Bankruptcy Code in 1978. Early cases treated

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equitable mootness similarly to traditional Article III mootness, despite incorporating some

equitable factors. In re Eagle Picher Indus., Inc., 172 F.3d 48 (6th Cir. 1998) (discussing equitable

mootness in context of constitutional mootness); Bennett v. Veale, 60 F.3d 828 (6th Cir. 1995). It is

important to note that this doctrine is not based in statute, rather it is a doctrine that was judicially

created in recognition of the fact that it would be inequitable, in certain, special circumstances, to

overturn a confirmed plan of reorganization. In re Manges, 29 F.3d 1034, 1043 (5th Cir. 1994). It

arose out of a necessity to protect third party, non-debtors from unfairly unscrambling a confirmed

plan to their detriment. Furthermore, the doctrine is unique to bankruptcy proceedings where a

reversal of any confirmation orders “would knock the props out from under the authorization for

every transaction that has taken place, and would do nothing other than create an unmanageable,

uncontrollable situation for the Bankruptcy Court.” Trone v. Roberts Farms, Inc. (In re Roberts

Farms, Inc.), 652 F.2d 793, 797 (9th Cir. 1981). This judge-made doctrine was created to address

situations where redress would be possible if overturned, but would be inequitable to do so against

third party, non-debtors.

In Abrahams v. Hentz, the United States District Court for the Southern District of

California held that because a debtor failed to seek a stay of bankruptcy proceedings and a

settlement agreement reached substantial consummation as defined in § 1101(2), the debtor’s

appeal was equitably moot. Abrahams v. Hentz, 2013 WL 3147732 (S.D. Cal. 2013). Due to

Appellant’s failure to obtain a stay of the bankruptcy proceedings, Trustee commenced distribution

of assets pursuant to the settlement order, including to the creditors who were third parties not

before the Court. Id. The Trustee argued that granting Appellant relief would be inequitable

because Trustee had already transferred $500,000 from the estate to the Creditors in reliance on the

settlement agreement. Id. The Court agreed with Trustee and found that granting the Appellant

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relief would unravel the settlement agreement, thereby unfairly affecting the Creditors and innocent

third parties not before the Court. Id. (citing Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re

Thorpe), 677 F.3d 869, 882 (9th Cir. 2011).

Likewise, a case out of the United States District Court for the Southern District of New

York dismissed an appeal based on equitable mootness principles because the plan had been

substantially consummated, cataloging all of the steps that had been taken since the stay was

lifted and the plan went into effect. ACC Bondholder Grp. v. Adelphia Communs. Corp. (In re

Adelphia Communs. Corp.), 367 B.R. 84, 94 (S.D.N.Y. 2007). The court reasoned that under the

doctrine of equitable mootness, an appeal should be dismissed when, even though effective relief

could conceivably be fashioned, implementation of that relief would be inequitable. Id. at 91

(citing Deutsche Bank AG, London Branch v. Metromedia Fiber Network, Inc. (In re

Metromedia Fiber Network, Inc.), 416 F.3d 136, 144 (2d Cir. 2005)). This court further stressed

the importance of finality and reasoned that completed acts in accordance with an unstayed order

of the bankruptcy court must not thereafter be routinely vulnerable to nullification if a plan of

reorganization is to succeed. Chateaugay Corp. v. LTV Steel Co. (In re Chateaugay Corp.), 10

F.3d 944, 954 (2d Cir. 1993).

Similarly, Padco’s reorganized plan was confirmed in January of 2015, and between that

time and the district court’s affirmance of the plan in mid-2016, most unsecured creditors

received some stock in Gadget. (R. at 3). Both Gadget stock and bonds were publicly traded and

numerous parties have bought and already sold those securities since the plans confirmation date.

(R. at 3). The Petitioner is asking to reverse this already consummated plan and to do so would

unscramble a complicated, multi-party negotiation that has been finalized. This is the very

unscrambling that the equitable mootness doctrine was created to prevent, and various courts

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agree. In re Chateaugay Corp., 10 F.3d at 961. The doctrine further protects the ability for

creditors, third-party non-debtors and anyone down the line in a reorganized plan from reversal

and allows for the reliance on the finality of the substantially consummated plan to adhere to this

policy in bankruptcy. It is not concerned with the ability of inability to redress, but rather stresses

the importance of balancing fairness to all parties.

B. Appellate courts have authority to deny to exercise their jurisdiction under unique

circumstances.

Because Appellate courts function like federal courts, appellate courts do have the power to

decline to hear an appeal if special circumstances exist. The equitable mootness doctrine constitutes

“a judicial anomaly in that it permits a federal court to voluntary refrain from exercising jurisdiction

over an appeal that is indisputable ripe for adjudication simply on the ground that granting relief

would be ‘inequitable.’” 3 The unflagging obligation to hear a case on appeal is not a duty that is

absolute, but, rather, discretionary and should be applied narrowly where special circumstances

exist. Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716 (1996).

1. Courts deny jurisdiction when decisions of state law and policy are at risk.

In Quackenbush v. Allstate Ins. Co., a case out of the Supreme Court where an insurance

commissioner and trustee fought over assets of a bankrupt insurance company, sought a review of a

judgment from the United States Court of Appeals for the Ninth Circuit. Quackenbush, 517 U.S. at

711. The Court held a remand order was appealable as a final decision under 28 U.S.C. § 1291

because it put the litigants effectively out of court, it surrendered jurisdiction of a federal suit to a

state court, it presented an important issue separate from the merits, amounted to a refusal to

adjudicate the case in federal court, and could not be reviewed on appeal from a final judgment. Id.

3 Ryan M. Murphy, Equitable Mootness Should Be Used as a Scalpel Rather than an Axe in Bankruptcy Appeals, 19

Norton J. Bankr. L. & Prac. 33, 33 (2010).

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at 713. The court found that although Federal courts have an obligation to hear a case on appeal,

this duty is not absolute. Id. at 716; see Canada Malting Co. v. Paterson S. S., Ltd., 285 U.S. 413,

422 (1932). The proposition that a court having jurisdiction must exercise it, is not universally true

and many courts agree that protecting the authority of state law is essential to the preservation of

their power. Id.

Likewise, the Supreme Court in Burford v. Sun Oil Co., ruled that abstention was

appropriate where the questions of regulation of the oil industry by defendant, a state

administrative agency, so clearly involved basic problems of Texas policy that equitable

discretion should have been exercised to give the Texas courts the first opportunity to consider

them. Burford v. Sun Oil Co., 319 U.S. 315, 332 (1943). The Court found that the state

provided a well-organized system of regulation and review, to which the federal courts could

have made only a small contribution, and that delay, misunderstanding of local law, and needless

federal conflict with the state policy were certain to result from their intervention. Id. at 327. It

is particularly desirable to decline to exercise equity jurisdiction when the result is to permit a

state court to have an opportunity to determine questions of state law, which may prevent the

necessity of decision on a constitutional question. Chicago v. Fieldcrest Dairies, Inc., 316 U.S.

168, 173 (1942).

2. Unique circumstances apply where abstention is warranted by considerations of

whether a disruptive effect on policy would result.

Many federal courts have exercised their jurisdiction to deny to hear a case because of issues

that would disrupt policy problems of substantial public import whose importance transcends the

result in the case then at bar. La. Power & Light Co. v. City, 360 U.S. 25, 40 (1959). In some cases

. . . it is enough that exercise of federal review of the question in a case and in similar cases would

be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial

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public and policy considerations. Colo. River Water Conservation Dist. v. United States, 424 U.S.

800, 814 (1976). Some factors relevant to the decision for a federal court to dismiss proceedings in

favor of state court proceedings include a consideration of whether a court first assuming

jurisdiction over property may exercise that jurisdiction to the exclusion of other courts; assessing

the appropriateness of dismissal in the event of an exercise of concurrent jurisdiction. Moses H.

Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 15-16 (1983). A federal court may also

consider factors such as the inconvenience of the federal forum, the desirability of avoiding

piecemeal litigation, and the order in which jurisdiction was obtained by the concurrent forums. Id.

No one factor is necessarily determinative; a carefully considered judgment taking into account

both the obligation to exercise jurisdiction and the combination of factors counseling against that

exercise is required. Id. at 16.

It is no different than an application of factors required to render an appeal equitably moot

from a bankruptcy order. While carefully considering each factor, it is at the court’s discretion to

decide whether an appeal is moot and this power is vested in the federal courts as it is in the

appellate courts. The merits of an appeal are not barred at the appellate level. Their duty is to decide

what is fair and equitable under the circumstances and in this case under the circumstances of a

finalized, substantially consummated, multi-party negotiation. Undoing what has already been done

would substantially hinder Padco from becoming viable again.

C. By allowing courts to exercise equitable mootness principals, courts would adhere to

the finality policy of the bankruptcy code.

The equitable component to the mootness doctrine is rooted in the “court’s discretion in

matters of remedy and judicial administration,” not to determine a case on its merits. In re AOV,

792 F.2d at 1147 (quoting Chamber of Commerce v. United States Dep’t of Energy, 627 F.2d 289,

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291 (D.C. Cir. 1980)); In re Texaco, 92 Bankr. 38, 45 (S.D.N.Y. 1988). In bankruptcy proceedings,

the equitable component centers on the important public policy favoring orderly reorganization and

settlement of debtor estates by “affording finality to the judgments of the bankruptcy court.” Id.

(quoting In re Revere Copper & Brass, Inc., 78 Bankr. 17, 23 (S.D.N.Y. 1987)); In re Information

Dialogues, Inc., 662 F.2d 475, 477 (8th Cir. 1988). When a bankruptcy court confirms a plan, its

terms become binding on debtor and creditor alike. 11 U. S. C. §1327(a). Confirmation has

preclusive effect, foreclosing re-litigation of “any issue actually litigated by the parties and any

issue necessarily determined by the confirmation order. Bullard v. Blue Hills Bank, 135 S. Ct.

1686, 1692 (2015). Confirmation orders are enforceable and binding. United Student Aid Funds,

Inc. v. Espinosa, 559 U.S. 260, 262 (2010).

In In re City of Detroit, the court out of the 6th circuit found that equitable mootness is not

concerned with the court’s ability or inability to grant relief; it is concerned with protecting the

good faith reliance interests created by implementation of the bankruptcy plan from being

undone afterwards, noting also that no circuit has yet abolished equitable mootness and,

therefore, it remains a viable doctrine. Ochadleus v. City of Detroit (In re City of Detroit), 838

F.3d 792 800 (6th Cir. 2016).

The City of Detroit filed for municipal bankruptcy on July 18, 2013, pursuant to Chapter

9 of the Bankruptcy Code, 11 U.S.C. § 109(c). At the time of filing, the City had over $18 billion

in escalating debt, over 100,000 creditors, hundreds of millions of dollars of negative cash flow,

crumbling infrastructure (e.g., some 78,000 abandoned structures, half classified as “dangerous”;

another 66,000 blighted vacant lots; a crumbling water and sewer system; 40% nonfunctioning

streetlights; outdated computer systems and software), and could not provide “the basic police,

fire[,] and emergency medical services that its residents need[ed] for their basic health and

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safety.” In re City of Detroit, 504 B.R. 191, 192 (Bankr. E.D. Mich. 2013). In bankruptcy, the

City crafted a series of “intricate and carefully woven” settlements with almost all of its creditors

and stakeholders. Those settlements were memorialized in the Eighth Amended Plan for the

Adjustment of Debts of the City of Detroit Plan. After extensive hearings, the bankruptcy court

confirmed the Plan in a Confirmation Order dated November 12, 2014. In this case, the court

found that all three factors of the equitable mootness doctrine were met.

Because equitable mootness is “grounded in the notion that, with the passage of time

after a judgment in equity and implementation of that judgment, effective relief on appeal

becomes impractical, imprudent, and therefore inequitable.” See In re United Producers, 526

F.3d at 947. Equitable mootness negates appellate review of the confirmation order or the

underlying plan, regardless of the problems therein or the merits of the appellant’s challenge. In

re Made in Detroit, Inc., 414 F.3d 576, 581 (6th Cir. 2005). In Detroit, the creditors were able to

rely on the finality of the consummated plan and the court out of the 6th circuit determined that

this was far more important than granting relief, unscrambling the plan, and unfairly treating

third parties.

Likewise, Padco has emerged from bankruptcy as a successful enterprise. (R. at 7). That

success was achieved precisely because the parties to the reorganization could rely on the

confirmation order to seal their bargains and because numerous third parties could rely on the

debtor’s apparent emergence from bankruptcy to invest in the new enterprise, trade in its debt and

equity securities and enter into new transactions with it. (R. at 7). Too much has happened for this

court to now undo the plan and upset the settled expectations of those parties. (R. at 7). To upset

the already consummated, finalized plan would be to essentially depriving parties from relying on a

plan that would only then be reversed, shaken up, or changed and unscrambled. It is too unfair and

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too difficult, particularly in a Ch.11, to undo what has already been done. The interests of finality

and reliance are paramount to a Chapter 11 private business entity with investors, shareholders, and

employees, like Padco. Not to mention the classes of creditors that have already been divided and

set priority wise. Reversal of this confirmation order would undermine public confidence in the

finality of bankruptcy orders and make the successful completion of large reorganizations more

difficult. In short, the harm to Padco far outweighs the harm to the Petitioner. This is the scenario

that equitable mootness was designed to avoid.

Furthermore, while the bankruptcy code gives no mention on whether appellate courts have

authority to deny hearing an appeal based on equity and fairness, it does, however, embody a

strong policy of limiting judicial review at the appellate level. Section 1127(b) dramatically

curtails the court’s power to modify a plan after its confirmation and substantial consummation.

Market confidence in confirmation orders is simply too important to upset the confirmation order

and return this case to the Bankruptcy court. To do so would unravel the distributions and

transactions resulting from the plan so that a new plan could be negotiated. There is no way that

the court could have granted the Petitioner effective relief without creating chaos in the

Bankruptcy Court. (R. at 9).

II. THE BANKRUPTCY COURT ACTED WITHIN ITS AUTHORITY WHEN THE

COURT RELEASED THE PETITIONER’S CLAIM.

Gadget’s release was essential, consensual, and fair. Thus, the Bankruptcy Court acted

within its divested powers of the code to release Gadget from the Petitioner’s claim. The First,

Second, Third, Fourth, Sixth, Seventh, Eighth, and Eleventh Circuits have held that under 11

U.S.C. §105(a) a third party can be released when: (1) the third party makes an investment that is

so essential to the debtor’s reorganization that the plan would not exist without the investment;

(2) a majority of the number of creditors who hold two-thirds the debt agreed to the investment’s

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release; and (3) used to pay the class of creditors more money than they would receive in any

other plan.

A. The plain language of the Bankruptcy Code gives the Bankruptcy Court authority

to create releases.

The express statutory language of the Bankruptcy Code allows Bankruptcy Courts to create a

release through their general equitable power.4 There are two sections of the Bankruptcy Code

that gives the court the authority to create releases. First, there is 11 U.S.C. §105(a), which states

““[t]he Court may issue any order, process, or judgment that is necessary or appropriate to carry

out the provisions of [the Bankruptcy Code].” Accord Airadigm Communications, Inc. v. FCC

(In re Airadigm Communications, Inc.), 519 F.3d 640, 657 (7th Cir. 2008). Second, there is 11

U.S.C. §1123(b)(6) which allows broad discretion to include any other provision not inconsistent

with the Bankruptcy Code in the Chapter 11 plan. Id.

The Supreme Court and numerous courts have interpreted §105(a) to be a gap filler that gives

bankruptcy courts the power to create any release or order necessary that is not expressly

prohibited by the Bankruptcy Code. See United States v. Energy Res. Co., 495 U.S. 545, 549

(1990) (“The Code, however, grants the bankruptcy courts residual authority to approve

reorganization plans including ‘any . . . appropriate provision not inconsistent with the applicable

provisions of this title.’”); Accord Airadigm Communications, Inc., 519 F.3d 640, 657 (7th Cir.

2008). Thus, the bankruptcy court here had authority to release the Petitioner from suing Gadget

because the code is silent on the subject and the passive construction of 11 U.S.C. § 524(e) does

not expressly bar the court from doing so.

4 “It is well settled that bankruptcy court are courts of equity, empowered to invoke equitable principles to achieve

fairness and justice in the reorganization process.” Momentum Mfg. Corp. v. Employee Creditors Comm. (In re

Momentum Mfg. Corp.), 25 F.3d 1132, 1136 (2d Cir. 1994) (in holding that section 105(a) of the Code is

construed to liberally in enjoining actions that may get in the way of the reorganization process).

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The passive language used in the construction of 11 U.S.C. § 524(e) indicates that congress

did not intend to ban the Bankruptcy Court’s power to release a third party, such as Gadget, from

a creditor’s claim. It is the duty of the courts to “interpret the Code clearly and predictably using

well established principles of statutory construction.” RadLAX Gateway Hotel, LLC v.

Amalgamated Bank, U.S., 132 S. Ct. 2065, 2073 (2012). “[C]ourts must presume that a

legislature says in a statute what it means and means in a statute what is says . . .” Conn. Nat’l

Bank v. Germain, 503 U.S. 249, 253-54 (1992) (citing United States v. Ron Pair Enterprises,

Inc., 489 U.S. 235, 241-42 (1989)). Thus, the cardinal rule of statutory construction is to begin

with the express language of the statute. Germain, 503 U.S. at 253 (1992).

A case out of the seventh circuit concluded that the natural reading of §524(e) does not

foreclose a third-party release of a creditor claim. Accord Airadigm Communications, Inc. v.

FCC (In re Airadigm Communications, Inc.), 519 F.3d 640, 657 (7th Cir. 2008). The court in

Accord went as far as to say that “if Congress meant to include such a limit, it would have used

the mandatory terms ‘shall’ or “will” rather than the definitional term ‘does.’” Id. (emphasis

added). Therefore, interpreting §524(e) as an all-out ban on releases would be counter to the

well-established principles of statutory construction. Moreover, the Court reasoned §524(e) is

merely a savings clause used to preserve some rights lost after reorganization. Thus, a discharged

debt is still around, while a released debt is completely gone. Id. Thus, the circuit court held in

Accord that the bankruptcy court did not exceed its authority when it released a third party from

liability. Id. at 657.

Just as the Creditor’s in Accord, the Petitioner’s claim will be completely erased if

Gadget obtains its release. As it was said in Accord, a discharged debt still exists and may be

collected in some other way than by payment of the debtor. This is not the case here. If Gadget

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is released, the Petitioner will not be able to sue anyone. Thus, the entire debt will be completely

erased. This falls squarely into what Accord considers to be a release. Just as it was stated in

Accord, there is nothing in the code that expressly prohibits a release of this type. Therefore,

such a release is well in the equitable powers of the Bankruptcy Court given to them by §105(a),

a gap filler according to Supreme Court, and § 1123(b)(6).

The Petitioner in this case seeks to create and extract some type of unwritten policy from

§524(e) by stating that because §524(g and h) exist, congress meant for §524(e) to be an all out

ban on releases. However, this is flawed. §524(g and h) were created because products that were

used in the past had unforeseen consequences in the future. This is very similar to the facts here.

Padco is in the business of innovation; thus, it is clear that they will be using products that have

not been in existence before. Many of these products will have unforeseen consequences. By

setting a precedent that goes against the statutory construction of the code, companies may not

invest in bankrupt companies out of fear of future litigation. This will stagnate the economy.

That is why §524(e) was written passively and that is why the courts must interpret it by its plain

language. This plain language does not bar third party releases. Thus, the courts have the

authority to allow Gadget’s release.

The Bankruptcy Code gives Bankruptcy courts the authority to create third party releases

because there is nothing in the Bankruptcy code that expressly bans releases. The First, Second,

Third, Fourth, Sixth, Seventh, Eighth, and Eleventh Circuits all agree that 11 U.S.C. §105(a) and

11 U.S.C. §1123(b)(6) give Bankruptcy Courts the equitable power to release a third party. See

In re Dow Corning, 280 F.3d 648 (6th Cir. 2002); Deutsche Bank AG v. Metromedia Fiber

Network, Inc. 416 F.3d 136 (2nd Cir. 2005); In re Continental Airlines, 203 F.3d 203 (3d Cir.

2000); In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989); In re Master Mortgage Investment

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Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994). Even the Fifth Circuit allows such a power

in unusual circumstances. In re Zale Corporation. 62 F.3d 746 (5th Cir. 1995). Thus, it is clear

that the release given to Gadget by the Court is squarely within the authority given to them by

the Code.

B. Gadget’s release is essential, consensual, and fair to the reorganization plan.

The release provision releasing Gadget from creditor claims was proper because Gadget’s

investment was: (1) the very lynch pin of Padco’s chapter 11 bankruptcy; (2) consented to by an

overwhelming majority of the Petitioner’s class; and (3) allowed the Petitioner to receive more

money than they would in any other plan.

The majority of Circuits have held that a bankruptcy court may properly allow a third-

party release to be included in a chapter 11 plan of reorganization in appropriate circumstances.

See In re Dow Corning, 280 F.3d 648 (6th Cir. 2002); Deutsche Bank AG v. Metromedia Fiber

Network, Inc. 416 F.3d 136 (2nd Cir. 2005); In re Continental Airlines, 203 F.3d 203 (3d Cir.

2000); In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989); In re Zale Corporation. 62 F.3d 746

(5th Cir. 1995); In re Master Mortgage Investment Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo.

1994). While there is some debate on what exactly constitutes appropriate circumstances, a

common theme that arises out of all such cases is that the release was essential for the plan to

succeed; a majority of both the member and the amount owed consent to the release; and the

release was fair to both parties.

1. Gadget’s release was essential to the plan because without Gadget’s investment

Padco would not have the finances to perform a Chapter 11 Bankruptcy plan.

It has been held that a release is allowed when the third party’s contribution is essential to

the Chapter 11 plan. In essence, this means that the entire plan hinges on the third party’s

investment, thus making it the lynch pin of the plan. See In re Dow Corning, 280 F.3d 648 (6th

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Cir. 2002); Deutsche Bank AG v. Metromedia Fiber Network, Inc. 416 F.3d 136 (2nd Cir. 2005);

In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000); In re A.H. Robins Co., 880 F.2d 694 (4th

Cir. 1989); In re Zale Corporation. 62 F.3d 746 (5th Cir. 1995); In re Master Mortgage

Investment Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994). The Second Circuit found in

Deutsche Bank that while a third party’s contribution to the bankruptcy estate was substantial,

there was not adequate findings that the contribution was necessary to the plan itself. Deutsche

Bank AG, 416 F.3d at 142. In Deutsche Bank, a third party invested approximately $200 million

in debt forgiveness, stock, and cash into the debtor’s, a large communication company, chapter

11 reorganization plan. Id. at 141. In exchange, the third party would receive a comprehensive

release of liability from all claims of any nature related to the debtor. Id. at 141. This release

was approved in the Bankruptcy Court and affirmed at the district level in which the petitioners,

non-consenting creditors, appealed to the circuit court. One of the petitioners’ primary

challenges was that such a release was not authorized. Id. at 141. However, the court reasoned

that such a release is proper when the “release plays an important role in the debtor’s

reorganization plan.” Id. at 141 (quoting Drexel Burnham Lambert Trading Corp. v. Drexel

Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 960 F.2d 285, 293

(2d Cir. 1992) (emphasis added). Thus, the third party’s investment must be important to the

success of the debtor’s plan.

The Third circuit has also held that a release of a creditor’s claim is allowed only when

the third party is necessary and integral to the plan. In re Continental Airlines, 203 F.3d 203,

216 (3d Cir. 2000). Here the petitioners, whose claims were released, received no consideration

for such a measure. Id. at 215. In fact, the circuit court found nothing in the record show[ed] a

relationship between the creditor’s claim against the third-party and success of the reorganization

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plan. Id. at 215. Thus, the court held that while a release is allowed in certain circumstances,

the release here was not essential to the plan and therefore was not allowed.

As it was found in Deutsche Bank, a third party’s investment must be important to the

success of the debtor’s plan for a release of liability to be allowed. Gadget’s investment is not

only important to Padco’s plan, but it is also essential to their plan. It is undisputed that without

Gadget’s investment of $500 million, Padco’s reorganization plan would not even exist. While

Deutsche Bank did not have adequate findings to show that their third party’s investment was

important enough to the debtor’s plan, Gadget’s importance is undisputed. Gadget has even been

considered the lynch pin of Padco’s entire plan. Gadget has invested $500 million in cash and

stocks into Padco’s plan, more than double what was invested by Deutsche Bank’s third party. It

is also undisputed that had it not been for this substantial investment by Gadget, Padco would

have not been able to reorganize its company and create products that took over 60 percent of the

market shares. Instead, Padco would have had to liquidate its assets in a chapter 7 and close its

doors. There is insufficient proof that such an outcome would occur to Deutsche Bank’s debtor

if they did not receive the third party’s investment. Thus, it is clear that Gadget’s investment is

essential to Padco’s plan and, therefore, allows a release of Petitioner’s claim.

Moreover, there is clear, factual findings from the lower court that shows that Gadget’s

investment was the lynch pin of Padco’s reorganization plan. Unlike the third-party in

Continental Airlines, in which the court found they gave no consideration to the creditors, the

lower court here found that Gadget’s substantial investment is the sole reason that a class of

unsecured debtors like the Petitioner would receive any consideration for their debts. The

Petitioner and her entire class is an unsecured creditor. In any other plan the Petitioner’s entire

class would be one of the very last class to receive any consideration for their debts. Without

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Gadget’s $500 million investment, there would very little money to go around. Thus, it would be

highly probable that in any other plan Petitioner and her large class would not receive a penny.

It is also undisputed that this consideration is much more than the Petitioner may receive with

their novel and unprecedented theory of liability. Another stark contrast between the third-party

in Continental Airlines and Gadget is that, according to the record, Gadget’s investment has a

direct correlation to the success of Padco’s reorganization. Thus, Gadget’s investment meets the

necessity requirement laid out in Continental Airlines.

For these reasons, it is clear that Gadget’s investments are essential to the success of

Padco’s reorganization plan. Thus, it is firmly in the courts power to grant Gadget a release

against the Petitioner’s claims.

2. The class the Petitioner was placed in consented to the release of Gadget by an

overwhelming majority.

In a chapter 11 reorganization, creditors with similar debts and claims are placed into the

same class. This class of creditors will, in turn, vote within their class to either accept or reject

provisions of the reorganization plan, including third party releases. A plan, including third

party releases, are deemed to be accepted when more than half of the number of creditors who

hold more than two-thirds of the total debt have agreed to the plan. See 11 U.S.C. § 1126(c).

When an overwhelming majority of creditors who hold a personal injury claim vote in

favor of a plan that releases a third party from said claim, the fourth circuit holds that all

creditors in this class have consented. Menard-Sanford v. Mabey (In re A.H. Robins Co.), 880

F.2d 694, 697 (4th Cir. 1989). In a chapter 11 reorganization, creditors who held a personal

injury claim against the debtor and its third party were all put into their own class. Id. at 699.

No other creditor in this class, including the Petitioner, objected to being placed in such a class.

When the voting commenced, an overwhelming majority of approximately 90% of the class, in

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both creditors and amount held, voted in favor of the plan which included a release of the claim.

Id. at 698. For this reason, the court concluded that while the Petitioner did not vote in favor of

the plan, an overwhelming majority did. Thus, the entire class of creditors will be deemed to

consent to the release.

Just as the class of creditors in Menard-Sanford, an overwhelming majority of the

creditors in the Petitioner’s class voted in favor of the plan. In Padco’s reorganization, the

Petitioner was placed in a class of creditor’s who all had personal injury suits against Padco.

Similarly, the petitioner was in a class of creditors who all had personal injury suits against the

debtor. Neither the Petitioner here nor the Petitioner in Menard-Sanford objected to being

placed in this class. Furthermore, just as the class did in Menard-Sanford, an overwhelming

majority of creditors in the Petitioner’s class voted in favor of the reorganization plan and the

release of Gadget. According to the code, all that is needed for a class to accept a plan is 51% of

the creditors in the class and that 51% of creditors have control of 66% of the debt owed in the

class. Approximately 80% of all the creditors who held an overwhelming majority of the debt in

the Petitioner’s class voted in favor of the plan. This is well over the necessary number of votes

that are required to be deemed consenting. A similar situation was found in Menard-Sanford

with its majority reaching 90%. While the Petitioners themselves did not consent to the plan, an

overwhelming majority of the class did. This is yet another similarity to the case at bar, in which

an overwhelming majority of the Petitioner’s class consented. Thus, everyone in the class is

considered consenting, just as it was found in Menard-Sanford.

Gadget’s release is consensual. An overwhelming majority of creditors who held an

overwhelming amount of debt consented to Gadget’s release. By allowing one Petitioner to

extort an entire plan when the majority has consented would be against bankruptcy principles.

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Therefore, the Petitioner’s class and everyone in it will be deemed to consent to Gadget’s

release.

3. Gadget’s release was fair because it allowed the Petitioner and other creditors in

their class to receive more money than they would have in any other plan.

One of the major pillars of bankruptcy is that while the plan provides a fresh start for the

debtor, it also provides the largest amount of money possible to pay each class of creditors. Thus,

a release is [more than] fair when the creditors who have released the third party receive more

money than they would in any other plan. In re Continental Airlines, 203 F.3d 203, 214 (3d Cir.

2000).

Allowing a creditor to receive reasonable consideration in exchange for a third party’s

release is paramount to fairness. In re Continental Airlines explains that a bankruptcy court

cannot release a creditor’s claims against a third party when the creditor has not received

reasonable consideration for such a claim. In re Continental Airlines, 203 F.3d 203, 214 (3d

Cir. 2000). In fact, the creditors, who had a claim that was very likely to succeed, received no

consideration at all for such a release. Id. at 215. The court reasoned that for a release to be

allowed, the third party’s contribution must be necessary and fair. Thus, to be fair required

reasonable consideration for the creditor’s claim.

Unlike In re Continental Airlines, the Petitioner here received reasonable consideration

for their claim. Gadget’s investment of $500 million dollars was not only the lynchpin of the

claim, but also the only reason that the Petitioner, an unsecured creditor, received money at all.

This is in stark contrast to In re Continental Airlines, because that case the creditors received

absolutely no consideration for their release of their claim. In addition, the creditors in In re

Continental Airlines actually had a claim that had precedent and merit. Unlike the Petitioner,

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whose novel theory of liability is a case with a mountain of precedent stacked against it, and

without Gadget’s substantial investment it is highly unlikely that the Petitioner and her entire

class would receive any money for their debts. Thus, it is clear that the Petitioner and her entire

class of creditors received more money than they would in any other plan. In fact, the Petitioner

herself does not dispute that she and her class received a consideration that “exceeded the value

of the direct claims that were being released.” Thus, there is no question that Gadget’s

investment was fair.

Gadget’s substantial investment provided the Petitioner with a premium that far exceed

any value he may receive out of any other plan. Thus, the court’s release was fair.

The release given by the court was essential, consensual, and fair to Padco’s

reorganization and its creditors. The release was essential. It is undisputed that without

Gadget’s substantial investment Padco could not have reorganized under chapter 11, but instead

would have to liquidate under chapter 7. Thus, making Gadget’s investment the very lynchpin of

Padco’s reorganization. It is also undisputed that almost 80% of the creditors in the Petitioner’s

class consented to the release. Thus, a necessary majority of the Petitioner’s class consented to

the release. The release was fair. It is also undisputed that the value given to the Petitioner and

her class far exceeds the amount the Petitioner would be given in any other plan. Thus, the

Bankruptcy court is allowed to release the Petitioner.

C. Not allowing the court to grant third party releases will not only harm everyone

involved in Padco’s plan, but will also stagnate the economy.

Not allowing the court to grant a third-party release will force Gadget to take back their 500

million dollar investment. This will in turn cause a large number of people to lose a significant

amount of money. Not only the many classes involved in a complex reorganization such as this

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one, but also countless investors who bought stock into Padco and Gadget.5 Moreover, this

precedent will cause a chilling effect on companies wishing to invest in struggling companies

and help raise them from the ashes. G. Marcus Cole, A Calculus Without Consent: Mass Tort

Bankruptcies, Future Claimants, and The Problem of Third Party Non-Debtor “Discharge,” 84

Iowa L. Rev. 753, 757 (1999). Without investments from companies like Gadget, companies like

Padco will have no other alternative but to liquidate their assets and close up shop. This will, in

turn, cost millions of people their jobs and send our economy on a downward spiral that will be

extremely difficult to escape.

In 2009, nearly 61,000 businesses filed for bankruptcy. And while this statistic is on the

decline, that is no doubt in part due to larger, more successful business’ willingness to invest.

However, if a precedent is set that disallows these businesses a safety net from easily foreseeable

litigation, none of these businesses will be willing to invest. Instead companies will stagnate out

of fear of litigation and millions will be affected.

Just as the United States was allowed to bailout banks without any fear of litigation in

order to save the American economy, so too should American businesses. Thus, not only do

Bankruptcy Courts have the power to create releases in rare cases such as this one here, but it is

also imperative that they do so.

One person should not be able to hold an entire company for ransom. That is why

Bankruptcy Courts have the authority to create releases of creditor’s claims against a non-debtor

when the investment from the non-debtor is essential, consensual, and fair to the plan.

5 “Since promotion of reorganizations is the central policy of chapter 11, releases may be defended on the that they

serve this cardinal rule.” Joshua M. Silverstein, Hiding in Plain View: A Neglected Supreme Court Decision

Resolves the Debtate Over Non-Debtor Releases in Chapter 11 Reorganizations, 23 Emory Bankr. Dev. J. 13

(2010) (author discusses that without third party releases, corporate insiders would be reluctant to fund

reorganizations, thus making continued operations impossible).

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Moreover, Gadget meets these requirements. Thus, for the reasons stated above, we ask for this

court to affirm the lower court’s decision.

CONCLUSION

For the foregoing reasons, Gadget respectfully requests this Court affirm the judgment of

the Court of Appeals for the Thirteenth Circuit.

Respectfully submitted,

Team R39

Counsel for Respondent

Date: January 23, 2017

Team R39

A

APPENDIX A

11 U.S. Code § 105 - Power of court

(a) The court may issue any order, process, or judgment that is necessary or

appropriate to carry out the provisions of this title. No provision of this title providing

for the raising of an issue by a party in interest shall be construed to preclude the

court from, sua sponte, taking any action or making any determination necessary or

appropriate to enforce or implement court orders or rules, or to prevent an abuse of

process.

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B

APPENDIX B

11 U.S. Code § 524 - Effect of discharge

(e) Except as provided in subsection (a)(3) of this section, discharge of a debt of the

debtor does not affect the liability of any other entity on, or the property of any

other entity for, such debt.

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C

APPENDIX C

11 U.S. Code § 1101 - Definitions for this chapter

(2) “substantial consummation” means— (A) transfer of all or substantially all of the property proposed by the plan to be

transferred; (B) assumption by the debtor or by the successor to the debtor under the plan of the

business or of the management of all or substantially all of the property dealt with by

the plan; and (C) commencement of distribution under the plan.

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D

APPENDIX D

11 U.S. Code § 1123 - Contents of plan

(b) Subject to subsection (a) of this section, a plan may—

(6) include any other appropriate provision not inconsistent with the applicable

provisions of this title.

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E

APPENDIX E

11 U.S. Code § 1127 - Modification of plan

(b) The proponent of a plan or the reorganized debtor may modify such plan at any time after

confirmation of such plan and before substantial consummation of such plan, but may not

modify such plan so that such plan as modified fails to meet the requirements of

sections 1122 and 1123 of this title. Such plan as modified under this subsection becomes the

plan only if circumstances warrant such modification and the court, after notice and a hearing,

confirms such plan as modified, under section 1129 of this title.