In re: ZENITH ELECTRONICS CORPORATION, Debtor.
U.S. Trustee
v.
The Official Committee of Equity Security Holders (District of Delaware Civil No. 99-cv-00747).
U.S. Trustee
v.
The Unofficial Committee of Equity Security Holders (District of Delaware Civil No. 00-cv-00399).
Donald F. Walton, Acting United States Trustee for Region 3, Appellant.
No. 02-2078.
United States Court of Appeals, Third Circuit.
Argued April 7, 2003.
Filed May 21, 2003.
Robert D. McCallum, Jr., Assistant Attorney General, Colm F. Connolly, United States Attorney, William Kanter, Frank A. Rosenfeld, United States Department of Justice, Civil Division, Appellate Staff, Washington, DC, P. Matthew Sutko (Argued), Office of the General Counsel, Executive Office for United States Trustees, Washington, DC, Joseph J. McMahon, Jr., United States Department of Justice, Office of the Trustee, Wilmington, DE, for Appellants.
Harley J. Goldstein (Argued), Katten Muchin Zavis Rosenman, Chicago, Norman L. Pernick, J. Kate Stickles, Saul Ewing, LLP, Wilmington, for Appellees.
Before BECKER, Chief Judge,* BARRY and BRIGHT,** Circuit Judges.
OPINION OF THE COURT
BECKER, Circuit Judge.
This appeal from the order of the District Court, dismissing the U.S. Trustee's (the "Trustee") appeal of the Bankruptcy Court's grant of certain professional fees and expenses incurred by the Unofficial Committee of Equity Security Holders (the "Unofficial Committee") in furtherance of its effort to have the Bankruptcy Court order the appointment of an official committee of equity security holders, presents important questions as to the scope of the equitable mootness doctrine. The District Court determined that the Trustee's appeal was equitably moot after analyzing the five prudential factors discussed in In re Continental Airlines,
The District Court also abused its discretion in determining that even if equitable mootness does not apply to the Trustee's appeal, that appeal should be dismissed on the basis of "other equitable considerations." There is no jurisprudence in this Circuit that would allow a court to eschew exercise of its proper jurisdiction by refusing to entertain an appeal it has the power to hear on the basis of an ad hoc balancing of self-selected "equitable considerations," and we are not inclined to fashion such. We will therefore reverse the judgment of the District Court and remand for consideration of the Trustee's appeal.1
I. Factual and Procedural Background
A.
In August of 1999, the Zenith Electronics Corporation ("Zenith") filed a voluntary petition for bankruptcy under Chapter 11. The proposed reorganization plan was "prepackaged": the details had been negotiated in advance between Zenith and its principal shareholder, LG Electronics ("LGE"), which owned 58% of Zenith's stock and had lent millions of dollars to the company. The plan required, inter alia, cancelling Zenith's stock for no consideration, issuing new Zenith stock to LGE in return for $200 million in debt relief, exchanging $103 million in bonds bearing interest at 6.25% for $50 million in new bonds bearing interest at 8.19%, refinancing of bank debt, and an extension by LGE to Zenith of $60 million in new credit.
Zenith's minority shareholders, whose shares were to be canceled under the plan, objected. The largest of these shareholders, Nordhoff Investments, opted to represent its own interests, and the remaining minority shareholders formed an unofficial committee of equity security holders to represent them. Three days after the bankruptcy petition was filed, the Unofficial Committee moved the Bankruptcy Court to order the appointment of an official committee of equity security holders under 11 U.S.C. § 1102(a)(2). However, at an August 27, 1999 hearing, the United States Trustee objected to the formation of an official committee, arguing that such a committee was unnecessary, as the company was insolvent and the stock of all the potential committee members was to be canceled under the reorganization plan. The Bankruptcy Court rejected this argument and ordered the Trustee to appoint the official committee. The Trustee complied, but also appealed this decision and moved the District Court for a stay pending its appeal of the order appointing the official committee. The District Court denied a stay, and the appeal of the appointment order remained pending.
The Bankruptcy Court then held an expedited hearing on confirmation of the proposed reorganization plan. Central to this hearing was a disagreement over the proper valuation of Zenith. Nordhoff and the Official Committee argued that the company was worth $1.05 billion, while the debtor's expert valued it at $300 million. The Bankruptcy Court agreed with the debtors, and on November 2, 1999, it approved the reorganization plan. The confirmation order included a provision dissolving all committees.
Ten days after the dissolution of the Official Committee, several professional advisors to the Unofficial and Official Committees, including two law firms and an accounting firm (the "Professionals"), applied for compensation and reimbursement of expenses out of the estate for work performed both for the Unofficial Committee in its efforts to obtain appointment of the Official Committee, and for the Official Committee after its September 8, 1999 formation. While Patricia Staiano, the Trustee, did not contest the fees sought for work on behalf of the Official Committee, she challenged the Professionals' request for fees relating to their work for the Unofficial Committee, arguing that this work did not meet the statutory requirement that the fee-seeking Professionals "make a substantial contribution" to the case. See 11 U.S.C. §§ 503(b)(3)(D), (b)(4). The Bankruptcy Court nonetheless granted the Professionals $76,500 in fees and $867.15 in expenses for their work for the Unofficial Committee, and $437,250 in fees and $85,024.45 in expenses for their work for the Official Committee. The Trustee appealed this fee order to the District Court.
B.
The District Court dismissed the Trustee's appeal of the fee order on the basis of the doctrine of equitable mootness, under which "courts have held that `[a]n appeal should ... be dismissed as moot when, even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable.'" Continental I,
In addition, relying on language from a decision of the Court of Appeals for the Ninth Circuit, In re S.S. Retail Stores Corp.,
The Bankruptcy Court had jurisdiction under 28 U.S.C. §§ 157(a) and (b) and the District Court had jurisdiction to hear the Trustee's appeal of the Bankruptcy Court's order under 28 U.S.C. § 158(a). This Court has jurisdiction under 28 U.S.C. § 158(d). We review the District Court's legal determinations de novo and its factual determinations for clear error. See In re O'Brien Envtl. Energy, Inc.,
II. Equitable Mootness
A.
The primary question raised by this appeal is whether the District Court properly applied the doctrine of equitable mootness in dismissing the Trustee's appeal. In general terms, equitable mootness dictates that an appeal should be dismissed, even if a court has jurisdiction and is in a position to grant relief, if "`implementation of that relief would be inequitable.'" In re PWS Holding Corp.,
In Continental I, we enumerated five factors "that have been considered by courts in determining whether it would be equitable to reach the merits of a bankruptcy appeal."
(1) whether the reorganization plan has been substantially consummated, (2) whether a stay has been obtained, (3) whether the relief requested would affect the rights of parties not before the court, (4) whether the relief requested would affect the success of the plan, and (5) the public policy of affording finality to bankruptcy judgments.
Id. As we noted in PWS, "[t]hese factors are given varying weight, depending on the particular circumstances, but the foremost consideration is whether the reorganization plan has been substantially consummated."
In Continental I and later cases, this Court has provided guidance for applying these prudential factors in evaluating whether equitable mootness is appropriate. This is particularly true of the crucial first factor. Specifically, we made clear, in both Continental I and PWS, that the first factor does not merely entail a formalistic inquiry into whether the plan has been substantially consummated under the definition in the Bankruptcy Code.2 To be sure, satisfaction of the Bankruptcy Code definition is a first step in applying this factor, but it is not sufficient. In Continental I, for example, the plan had been substantially consummated under the Code definition; the investors' capital was in place and all elements of the plan had been completed. More significant to the Court's determination that the appeal was equitably moot, however, was the fact that "a reversal of the order confirming the Plan likely would put Continental back into bankruptcy." Continental I,
PWS is especially instructive on this point. In that case, as in Continental I, the plan had been substantially consummated under the Code definition. W.R. Huff Asset Management Co. appealed the District Court's order confirming the plan on a number of grounds, including the fact that it contained releases that may have violated the absolute priority rule of 11 U.S.C. § 1129(b)(2)(B)(ii). The debtors argued that Huff's appeal was equitably moot, because the reorganization had gone forward. As in Continental I, the key question addressed by the PWS panel was not simply whether the plan had been substantially consummated according to the Code definition, but rather whether "the appeal, if successful, would necessitate the reversal or unraveling of the entire plan of reorganization."
Because the panel determined that a successful appeal would not "`knock the props out from under the authorization for every transaction that has taken place,'" and that there were "intermediate options" short of undoing the entire plan, it declined to dismiss the appeal as equitably moot. Id. (quoting In re Chateaugay Corp.,
This Court's decision in Nordhoff Invs. Inc. v. Zenith Elecs. Corp.,
Although the plan here is not as complex as the plan in Continental Airlines, it is hardly simple. The plan required eighteen months of negotiation between several parties regarding hundreds of millions of dollars, restructured the debt, assets, and management of a major corporation, and successfully rejuvenated Zenith. Appellants have not offered any evidence that the plan could be reversed without great difficulty and inequity, and we have reason to believe that the bond redistribution is unretractable.
Id. On the ground that the appeal, if successful, would unravel a fairly complicated reorganization plan, the Nordhoff Court upheld the District Court's decision that the substantial consummation factor favored a finding of equitable mootness.
The application of the four other prudential factors is straightforward, keeping in mind that the factors "are given varying weight, depending on the particular circumstances," and that the first factor is "foremost," especially "`where the reorganization involves intricate transactions... or where outside investors have relied on the confirmation of the plan.'" In re PWS,
B.
In concluding that the Trustee's appeal was equitably moot, the District Court considered the five Continental factors, holding that the first two favored dismissal, the third and fourth favored allowing the appeal, and the fifth was neutral. We conclude that the District Court abused its discretion both in its consideration of the "substantial consummation" factor and in its overall application of the equitable mootness doctrine.
As explained above, the first, and most important factor does not call merely for a formalistic inquiry into whether the plan has been substantially consummated under the Bankruptcy Code definition. Rather, the critical question under the first factor is whether, if successful, the appeal might unravel the reorganization plan. As the District Court observed, it is clear that, in a definitional sense, the plan has been substantially consummated. By November 9, 1999, most of the relevant transactions were completed. This, however, was the extent of the District Court's discussion of this factor. In lieu of providing a complete analysis, the District Court referred to a more detailed explanation of why the plan was substantially consummated contained in a previous opinion regarding the Zenith bankruptcy. In re Zenith Electronics Corp.,
In that opinion, In re Zenith Electronics Corp.,
We therefore conclude that the District Court abused its discretion in determining that the "substantial consummation" factor favored dismissing the appeal as equitably moot. While the Court properly applied the remaining factors, the fact that it erred in applying the first factor, which is "foremost," led it wrongly to conclude that the appeal was equitably moot. Because only the second factor, whether a stay was obtained, even arguably favors a finding that the appeal is equitably moot, a proper balancing of the five factors necessitates allowing the appeal.4 We come to this determination not only on the basis of the individual factors themselves, however, but also because the underlying purpose of the equitable mootness doctrine, which exists to "prevent[] a court from unscrambling complex bankruptcy reorganizations when the appealing party should have acted before the plan became extremely difficult to retract," is not implicated here. Nordhoff,
III. The Impact of "Other Equitable Considerations"
In addition to finding it equitably moot, the District Court provided an alternate ground for its dismissal of the Trustee's appeal, holding that "other equitable considerations" dictate dismissal as well. In coming to the conclusion that even if equitable mootness does not apply here, the appeal should be dismissed, the District Court relied on the decision of the Court of Appeals for the Ninth Circuit in In re S.S. Retail Stores Corp.,
While the District Court relied on the logic of S.S. Retail Stores, that case does not represent the law of this Circuit. It is a general rule that when a court has jurisdiction to hear an appeal, it has a "virtually unflagging obligation" to exercise that jurisdiction. Colorado River Water Conservation Dist. v. United States,
The judgment of the District Court will be reversed and the case remanded for further proceedings.
Notes:
Notes
Judge Becker completed his term as Chief Judge on May 4, 2003
Honorable Myron H. Bright, United States Circuit Judge for the Eighth Circuit, sitting by designation
Appellees also assert that this appeal is constitutionally moot because the Unofficial Committee no longer exists and therefore this Court cannot grant "any effective relief" to the TrusteeSee In re Cantwell,
We also note that notwithstanding the confirmation order, the Bankruptcy Court specifically retained jurisdiction to act on "any request for payment of any Administrative Claim and the resolution of any and all objections to the allowance or priority of Claims...," thereby retaining jurisdiction over the matter of the fees at issue in this appeal. Appellant's Supplemental Brief, Exhibit A, p. 27.
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) 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)
The airline had entered into an agreement in which investors had committed $450 million to the reorganized entity. One of the conditions to this agreement was a limitation on the amount and nature of liabilities and administrative expenses attributable to the reorganized company. Continental's expert testified at the confirmation hearing that if the Trustees' administrative claims, which totaled approximately $117 million, were allowed, the total amount of administrative claims against the reorganized company would exceed the "cap" set by the Investors, "allowing the Investors to walk away from the deal."Continental I,
The size and intricacy of the plan weighed heavily in the en banc Court's determination that the Trustees' appeal was equitably moot. Specifically, "[w]ithout listing all ... transactions set forth by Continental in its brief, we note that among those are the distribution to unsecured creditors, the merger of 53 debtors other than Continental with and into Continental, the investment of $110 million in cash by Air Partners and Air Canada in the reorganized Continental, the transfer by foreign governments of various route authorities, and the assumption by the reorganized Continental of unexpired leases and executory contracts worth over $5.0 billion." Id. at 567. It was the fact that the Trustees' appeal might have unraveled this extremely complex reorganization plan, rather than the formal substantial confirmation of the plan, that led the Court to conclude that there were "no prudential considerations that would support an attempt by an appellate court, district or court of appeals, to fashion even a limited remedy for the Trustees." Id. at 567.
The "stay" factor cannot be given much weight in our consideration of this case because, as the Trustee's appeal would not necessitate an unraveling of the plan, there was little reason for the Trustee to have requested a stay. As one Court has noted, the "stay" factor is "largely duplicative of the `substantial confirmation' factor...."In re Zenith Electronics Corp.,
As for the remaining Continental factors, the District Court correctly concluded that the third and fourth factors — whether the requested relief would affect the rights of parties not before the court or would impact the success of the plan — militated against a finding of equitable mootness, while the fifth factor, the public policy of affording finality to bankruptcy judgments, was "arguably neutral." In re Zenith Electronics Corp.,
We are also unconvinced of the merit of the other equitable considerations relied upon by the District Court. We cannot see how the facts that no other party appealed the fee order, that the Trustee failed to explain why she declined to negotiate a solution to this problem with the Equity Committee, or that, under some circumstances, fairness may dictate the payment of fees, could weigh so heavily against the Trustee that a court would decline to entertain her appeal, despite its power to hear it