After a plan of reorganization is confirmed by the bankruptcy court, the plan proponents often seek to consummate the confirmed plan as soon as possible by implementing a series of restructuring transactions.  The implementation process, or “going effective,” is often referred to as “scrambling the eggs.”  Once the eggs are scrambled, any pending appeal of the plan runs the risk of being dismissed as “equitably moot,” without any consideration of the merits raised in the appeal.

In In re SemCrude L.P., the Third Circuit Court of Appeals refined the equitable mootness doctrine to make it more difficult for reorganized companies to cut off appeals of confirmation orders.  In a decision written by Judge Thomas L. Ambro—a former Delaware bankruptcy practitioner recognized as one of the leading bankruptcy experts on the Third Circuit—the Third Circuit emphasized that federal courts have a “virtually unflagging obligation” to hear appeals and, therefore, dismissing an appeal on equitable mootness grounds “should be the rare exception.”

The primary takeaway of SemCrude is that if the issue under appeal is not integral to the foundation of the plan, or if the appellant presents intermediate remedies short of undoing the plan, courts in the Third Circuit will be required to hear confirmation appeals on their merits.

The Third Circuit joined the Ninth, Tenth, and Eleventh Circuits in placing the burden to prove that dismissal is warranted on the party seeking dismissal—typically, the plan proponents or the reorganized debtors.  In doing so, the Third Circuit rejected the approach of the Second Circuit, which places the burden on appellants to prove that the appeal is not equitably moot and should be heard on the merits.  The SemCrude court’s decision to split with the Second Circuit leaves an analytical rift in the approach to equitable mootness between two of the most important circuits for bankruptcy law.

The SemCrude decision does not change the primary purpose of the equitable mootness doctrine: protecting plan proponents and reorganized debtors from appeals that would unravel an entire reorganization.  However, in placing the evidentiary burden on the party seeking dismissal, the Third Circuit has made it clear that “Chicken Little” statements—unsupported assertions that an appeal will destroy the success achieved in the bankruptcy case—will not be sufficient to justify dismissal on equitable mootness grounds.

Appellants in at least one case have already cited to SemCrude in an effort to overcome an equitable mootness motion to dismiss.  In the Tribune bankruptcy case, certain bondholders appealed confirmation of the plan of reorganization arguing, among other things, that the global settlement embodied in the plan did not provide them with enough value to satisfy the requirements of Bankruptcy Rule 9019.  The appeal is still pending and, meanwhile, Tribune emerged from bankruptcy and subsequently filed a motion to dismiss the appeal as equitably moot.  After the SemCrude decision was issued, one of the appellants filed a letter with the Delaware District Court asserting that SemCrude “undercuts” the equitable mootness doctrine.  Tribune filed a response letter in support of dismissal, arguing that, unlike the relief sought in SemCrude, the relief sought by the appellants in Tribune would “gut the [settlement] and cause the [plan] to unravel.”

It remains to be seen how the Delaware District Court will apply the SemCrude decision in the Tribune case.  There is little doubt that the primary issue under appeal—the global settlement—is integral to the Tribune plan of reorganization.  However, the guidance from the Third Circuit suggests that, if it is at all possible to fashion a remedy on appeal without causing “chaos in the bankruptcy court from a plan in tatters,” the District Court should hear the appeal on the merits.

A more detailed analysis of the SemCrude decision is available in Chadbourne’s October 2013 International Restructuring NewsWire.