Bankruptcy and Beach: the perfect combo?
We’re attending ABI’s Southeast Bankruptcy Workshop, where, as one fellow attorney joked on the elevator, we are “going to class.” In one of the sessions, we heard about a case decided by the Eleventh Circuit on “equitable mootness” (h/t to Lori Vaughan for the reference). Curious, we looked it up and found a short but useful and interesting opinion on what to do to guarantee that your case will be dismissed as equitably moot. (In other words–what to never do as an attorney).
In JMC Memphis, LLC v. Soneet R. Kapila, 2016 WL 323833 (11th Cir. Jul. 21, 2016), the Eleventh Circuit, relying on the doctrine of equitable mootness, affirmed the district court’s rejection of appellant JMC Memphis LLC’s appeal of the bankruptcy court’s order approving a settlement agreement to which JMC was not a party.
JMC entered into a contract with Investments Australia to purchase an apartment complex. The complex had been damaged by several fires. The last of those fires occurred on September 22, 2012, after execution of the purchase contract but before the closing. Following that fire, JMC and Investments Australia agreed that Investments Australia would assign its rights under its insurance policy with International Hanover, Ltd. “in connection with the September 22, 2012 claim” to JMC as long as JMC pursued the fire claim itself. If no insurance was recovered, then Investments Australia would pay JMC $85,000.
Investment Australia filed a civil action against Hanover as to all fires on the complex, including the claim assigned to JMC. The lawsuit resulted in a settlement in which Hanover agreed to pay $750,000 in exchange for a full release of all claims, including the September 22 fire claim. As Edelsten, a member of Investment Australia, had filed a Chapter 7 prior to settlement, the settlement required approval by the bankruptcy court and Hanover also required an order from that court barring future claims by any party against Hanover arising under the insurance policy.
At the hearing, JMC objected, asserting that it was owed 100% of the proceeds of the settlement. The bankruptcy court approved the settlement, but required the trustee to escrow $100,000 pending resolution of JMC’s claim. The court found that JMC’s claim to the insurance proceeds was limited to those proceeds arising from the September 22 fire (i.e., the $85,000 agreed to by Investment Australia and JMC).
Importantly, JMC failed to seek a stay of the settlement approval order or object to the bankruptcy court’s order. Instead, it appealed to the district court. It did not seek a stay of the bankruptcy court’s order from the district court either. While the district court appeal was pending, the trustee went ahead and distributed the settlement proceeds to the two other members of Investments Australia, the mediator who oversaw the settlement, and Investments Australia’s attorney. The disbursements totaled $315,000 and represented 42% of the insurance proceeds. The district court dismissed the appeal under the doctrine of equitable mootness.
Overview of Equitable Mootness
Equitable mootness is a judicial doctrine in which the court declines to rule on an appeal. While the Eleventh Circuit has already set out the factors used to determine whether equitable mootness applies, see In re Club Assocs., 956 F 2d. 1065 (11th Cir. 1992), these factors are only various means used to answer the ultimate issue: can the court provide “effective judicial relief”? If the court cannot provide effective judicial relief, it will apply the doctrine of equitable mootness and refuse to consider the appeal.
Eleventh Circuit Decision
JMC appealed the dismissal to the Eleventh Circuit, which affirmed. The Eleventh Circuit faulted JMC for failing to exercise basic due diligence in protecting its interest. First, the Court noted that JMC made no attempt to pursue the claim after the assignment, particularly given that the assignment expressly required JMC, not Investments Australia, to pursue the claim. Second, JMC did not participate or contribute to Investments Australia’s effort to recover from Hanover. One can sense that the Eleventh Circuit viewed JMC as having been asleep at the switch.
Third, the Eleventh Circuit faulted JMC for failing to request a stay of execution from either the bankruptcy court or the district court, or even to formally object. The Eleventh Circuit emphasized that, by the time JMC appealed to the district court (the first time that JMC indicated that it disagreed with the bankruptcy court’s ruling), Hanover had already paid $750,000 to the trustee, who, in turn, issued nearly half of the proceeds in distributions.
Interestingly, however, the Eleventh Circuit noted that JMC’s failure was “significant to our decision—although not dispositive.” Thus, the Eleventh Circuit rejected a bright-line requirement that an appellant must request stay of a decision or formally object, although it appears that it would be an extraordinary case where the Eleventh Circuit would excuse an appellant’s failure to request a stay or object.
In seeking to avoid the consequences of its failure to prevent the consummation of the settlement agreement, JMC highlighted that it did not seek to unwind the disbursements to the mediator and Investments Australia. Nevertheless, the Eleventh Circuit refused to allow even a partial unwinding of the settlement agreement. “Granting such relief [against the other two principals of Investments Australia and the trustee] would necessarily reform the settlement agreement to reflect an agreement that no party intended/contemplated. . . It would be inappropriate at this state—particularly in light of JMC’s overall failure to exercise due diligence—for a court to unwind select portions of the settlement agreement.”
While the Eleventh Circuit continues to emphasize the high-level requirement for equitable mootness that any appellate court cannot grant effective judicial relief and the factors courts use to answer this question (for a good list of these factors, see In re Club Assocs., 956 F 2d. 1065 (11th Cir. 1992)), JMC highlights the Court’s unwillingness to exert itself for an appellant who has illustrated a substantial lack of due diligence. The requirement of due diligence on the part of the appellant is a requirement which is not implicated in the underlying “no effective judicial relief” requirement of equitable mootness but is a very real consideration nonetheless.