Constitutional mootness is a threshold question for determining whether a court has jurisdiction over an appeal. It arises from the “case or controversy” requirement under Article III of the U.S. Constitution – if no “case or controversy” exists for which the court may grant effective relief, the court lacks jurisdiction and must dismiss the appeal as moot. Specifically, constitutional mootness is characterized by the occurrence of an event during the pendency of an appeal that makes it impossible for the court to grant any effective relief to a moving party, even if that party were to prevail on appeal.

A recent decision entered by the United States District Court for the District Delaware, in Orange Cnty. Water Dist. v. Fairchild Corp. (In re Fairchild Corp.), No. 10-56 (GMS) (D. Del. Dec. 17, 2014), reinforced the heightened extent to which bankruptcy appeals of orders on lift stay motions are susceptible to constitutional mootness once a subsequent event terminates the automatic stay.

Background

In 2004, the Orange County Water District (“OCWD”) filed suit against the debtor in California Superior Court for allegedly releasing chemicals that contaminated groundwater in Orange County, California. When the debtor eventually filed for chapter 11 bankruptcy in March 2009, the yet unresolved California action was automatically stayed. Shortly after the bankruptcy filing, on May 26, 2009, the OCWD filed a motion for relief from the automatic stay to permit it to proceed with the litigation, arguing that the stay did not apply to the California action under section 362(b)(4) of the Bankruptcy Code because it involved the enforcement of the government’s “police and regulatory power.” The bankruptcy court disagreed, finding that the California action did not qualify for the section 362(b) exception to the automatic stay. Ultimately, on the eve of confirmation, the bankruptcy court entered an order on December 1, 2009, denying the OCWD’s lift stay motion.

On January 22, 2010, the OCWD timely appealed the bankruptcy court’s order denying the OCWD’s lift stay motion. Before the appeal could be heard, however, the bankruptcy court confirmed the debtor’s plan of liquidation on December 17, 2009, and the plan became effective on January 7, 2010. The confirmed plan included an injunction enjoining all parties from pursuing any outstanding claims or causes of action against the debtor.

District Court Analysis

Relying on legal principles consistently applied by courts in various jurisdictions with respect to appeals under similar circumstances, the district court found that the OCWD’s appeal must be dismissed as moot.

The district court established that an appeal from a bankruptcy court’s order granting or denying a lift-stay motion becomes moot when the automatic stay is subsequently lifted or terminated by operation of law. In this instance, the district court found that the automatic stay had been fully lifted by operation of law no later than the effective date of the debtor’s plan. Indeed, under section 362(c) of the Bankruptcy Code, the automatic stay terminated upon the entry of the order confirming the debtor’s plan of liquidation. Moreover, the debtor’s confirmed plan specifically stated that all stays imposed in the debtor’s chapter 11 cases would only remain in effect until the effective date. Thus, as of the date the appeal was heard, the automatic stay was no longer in place.

Based on its finding that the automatic stay had been terminated prior to date on which the appeal was heard – and, in the absence of the OCWD’s appeal of the confirmation order, would remain terminated regardless of whether the district court overturned the bankruptcy court’s order – the district court concluded that it was unable to grant any effective relief to the OCWD. Accordingly, the district court dismissed the appeal as moot and did not consider any of the OCWD’s remaining substantive arguments.

Takeaway

This case serves as a refresher on the application of constitutional mootness in the context of bankruptcy appeals. Parties appealing bankruptcy orders enforcing, or terminating, the automatic stay are particularly susceptible to having those appeals rendered constitutionally moot by virtue of subsequent case developments including the stay’s termination upon the confirmation of a plan.