Back in July, we touched on the doctrine of equitable mootness in the context of a bankruptcy settlement agreement. Last week, the Delaware District Court employed equitable mootness in its opinion dismissing a plan confirmation appeal in the Allied Nevada Gold Corp. bankruptcy. Unless an appellant can raise a valid confirmation appeal before substantial consummation of the Chapter 11 plan, equitable mootness favors dismissal.
Allied Nevada Gold Corp. and some of its affiliates filed Chapter 11 bankruptcies in March of 2015. Allied is a Nevada-based gold and silver producer. Allied had debts of around $690 million, with $340 million in secured debt and $350 million in unsecured debt. Throughout the cases, the equity committee and/or its individual members objected to Allied’s proposed reorganization. Their gripe was simple: They weren’t happy with a mere 10% equity stake in the reorganized debtor. They were convinced that the struggling company was worth more and, thus, that they were entitled to a greater distribution.
Although they were long on objections and other obstructive tactics, the shareholders were short on evidence. It didn’t help matters that some of them challenged deals that their committee had already consented to or sought relief (e.g., appointment of an examiner) that simply wasn’t appropriate (and even sought that same relief again after being told “No” the first time). Therefore, the Court adopted Allied’s enterprise valuation of between $200 and $300 million, agreed that equity was out of the money by at least $350 million, and confirmed Allied’s twice-amended plan as being in everyone’s best interest.
Plan consummation kicked-off on October 22, 2015 and triggered at least 9 post-confirmation transactions or events, including repayment of certain pre-petition debts; lease rejections; lien eliminations; organization of the new debtor and its board; $126.7 million in senior borrowing; $95 million in junior borrowing; issuance of new common stock to certain unsecured creditors; issuance of warrants to cancelled stockholders; and $1.8 million in administrative expense and cure claim payments.
Nevertheless, the equity committee and some of its individual members, all on a pro se basis, insisted on appealing plan confirmation to the District Court.
In response, Allied argued that the appeal should be dismissed by reason of equitable mootness. That is, the appeal should, as articulated last year by the Third Circuit in In re Tribune Media., be dismissed because deciding the appeal would “undermine the finality and reliability of consummated plans of reorganization.” In turn, Tribune lays out the burden and the factors for employing equitable mootness, at least in the Third Circuit.
Standard for Evaluating Equitable Mootness
As for the burden, the party raising equitable mootness has the burden of “overcoming the strong presumption” that confirmation appeals should be decided, even following substantial consummation.
As for the factors, the party raising equitable mootness will satisfy its burden if it establishes that (1) there’s been substantial consummation of the plan under 11 U.S.C. § 1101(2) and (2) ruling for the other party will “fatally scramble” the plan and/or “significantly harm third parties who justifiably relied on confirmation.” The Third Circuit’s approach is consistent with the Eleventh Circuit approach that we highlighted in July. See In re Club Assocs., 956 F 2d. 1065 (11th Cir. 1992) (asking whether the reorganization plan has been so substantially consummated that effective relief is no longer available).
Application of Equitable Mootness in Allied
Unfortunately for the equity holders, they had everything going against them on the equitable mootness factors. First, a finding of substantial consummation was not even a close call for the District Court. Filtering the 9 post-confirmation events through the language of § 1101(2), there was no question that the Allied plan was substantially consummated. Allied had transferred substantially all of its property under the plan. Allied’s successor had assumed the assets, management, and business of Allied. And plan distributions had commenced in material part.
Second, siding with the equity holders would have caused the plan to collapse. Similar to the JMC Memphis case, the Court emphasizes that the appellants had failed to obtain a stay pending appeal. “Indeed, the absence of a stay is so critical to the analysis that even the unsuccessful pursuit of a stay may favor a finding of equitable mootness.” That is because an un-stayed consummation can become a runaway train that is difficult to stop without prejudice. On the one hand, the Court emphasizes that the confirmed plan involved intricate and complex transactions; reflected a long-negotiated compromise between a host of constituencies (including the equity committee itself); and resulted in reasonable reliance by innocent third parties who were not before the Court on appeal. On the other hand, the Court emphasizes that respecting appellants’ gripe that the Bankruptcy Court botched the valuation would “topple” those delicate balances and compromises.
In light of those considerations, public policy demanded finality and the Court dismissed the appeals. The result speaks for itself so clearly that we’ll leave it at that.
UPDATE: On October 3, 2016, Brian Tuttle, one of the pro se shareholders, appealed the decision to the Third Circuit. We’ll monitor that appeal for any updates.