OPINION OF THE COURT
AMBRO, Circuit Judge.
We revisit equitable mootness, a judge-made abstention doctrine that allows a court to avoid hearing the merits of a bankruptcy appeal because implementing the requested relief would cause havoc.
Equitable mootness comes into play in bankruptcy (so far as we know, its only playground) after a plan of reorganization is approved. Once effective, reorganizations typically implement complex transactions requiring significant financial investment. Following confirmation of a plan by a bankruptcy court, an aggrieved party has the statutory right to appeal the court's rulings. Nonetheless, if debtors or others believe granting the requested relief would disrupt the effected plan or harm third parties, they may seek to dismiss the appeal as equitably moot. Their contention is that even if the implemented plan is imperfect, granting the relief requested would cause more harm than good.
Courts have rarely analyzed the source of their authority to refuse to hear an appeal on equitable mootness grounds.
Because we have already approved the doctrine (though narrowly in a 7-6 en banc ruling), In re Continental Airlines, 91 F.3d 553, 568 (3d Cir.1996) (en banc) ("Continental I"), we need not detour ourselves to consider whether federal common law can support its use. Its judge-made origin, coupled with the responsibility of federal courts to exercise their jurisdictional mandate, obliges us, however, to proceed most carefully before dismissing an appeal as equitably moot.
Turning to the specifics of this appeal, Appellants are four Oklahoma producers (collectively, the "Appellants")
Following confirmation of Debtors' reorganization plan, which constitutes a final judgment in bankruptcy cases, In re PWS Holding Corp., 228 F.3d 224, 235 (3d Cir.2000), Appellants appealed to the District Court. Again they were turned away, this time because their appeal was deemed equitably moot.
They now appeal to us. Because we agree that the evidentiary record does not support dismissal of that appeal for equitable mootness, we reverse the District Court's order and remand for it to hear the merits of Appellants' appeal.
I. Background
Debtors were (and continue to be following reorganization) a midstream oil and gas business engaged in the gathering, transportation, storage, and marketing of crude oil and other petroleum products. In July 2008, they filed voluntary petitions under Chapter 11 of the Bankruptcy Code. Numerous producers (the "Producers"), like Appellants, had supplied oil and gas to Debtors on credit prior to their filing for bankruptcy. In the Bankruptcy Court, these Producers asserted a variety of claims against Debtors entitling them to receive distributions from the proceeds of the oil and gas ahead of other creditors. Debtors and Appellants disagreed about the appropriate mechanism for resolving these claims.
Debtors filed a motion to establish global procedures. They entitled the Producers to file one representative proceeding for each state in which they supplied oil and gas to Debtors. All interested parties had the right to brief, and present oral argument on, their claims. Regardless whether a Producer participated, however, the legal rulings from the representative action would be binding on it.
The Bankruptcy Court granted Debtors' motion to implement their proposed resolution procedures and stayed Appellants' adversary proceeding. After filing an unsuccessful motion for reconsideration with the Bankruptcy Court, Appellants sought leave from the District Court to file an interlocutory appeal challenging the procedures. That Court — noting that "the question of whether [Appellants] will, in fact, be bound by the[ ] outcome [of the representative proceedings] can be litigated at a later date" — declined to hear the appeal. In re SemCrude, L.P., 407 B.R. 553, 557 (D.Del.2009).
Several representative proceedings — asserting rights under Oklahoma, Texas, Kansas, New Mexico, and Wyoming law — were subsequently filed. Other Producers based in Oklahoma (but not Appellants) filed a representative proceeding asserting that they retained property interests and statutory liens in the oil and gas they supplied to Debtors. The Bankruptcy Court granted summary judgment against the Oklahoma-based Producers. In re SemCrude, L.P., 407 B.R. 140 (Bankr. D.Del.2009). It similarly rejected the claims of Producers from Kansas and Texas. In re SemCrude, L.P., 407 B.R. 82 (Bankr.D.Del.2009) (Kansas); In re SemCrude, L.P., 407 B.R. 112 (Bankr.D.Del. 2009) (Texas). Recognizing the novelty of these issues, however, the Court sua sponte certified direct appeals to our Court under 28 U.S.C. § 158(d)(2).
Before we heard these appeals (or the Bankruptcy Court issued rulings in the other representative proceedings), Debtors, their senior secured lenders, and an Official Producers Committee reached a settlement that purported to resolve the claims of all the Producers (the "Producer Settlement").
Appellants were not involved in negotiating the Producer Settlement and did not expressly agree to its terms. Through its incorporation into the reorganization plan, the settlement nonetheless set the cash distributions they would receive, though they were able to obtain a waiver of the requirement that they dismiss their adversary proceeding.
The plan placed Appellants, along with other claimants, into classes of similarly situated creditors, and gave them the opportunity to vote on and object to the reorganization plan. The requisite majority of claimants in each of these classes voted to accept the plan. Two of the Appellants voted for it, and two abstained from voting. All four of the Appellants, however, filed objections to the plan asserting that they should be permitted to proceed with their adversary proceeding. Following a hearing, the Bankruptcy Court overruled their objections, approved the plan, and entered a confirmation order in October 2009.
Partly as a consequence of their failure to obtain a stay, the plan went into effect. On November 30, 2009 (the plan's effective date), several corporate restructuring transactions, the repayment of certain payment obligations, and the issuance of securities to those parties receiving equity distributions, were implemented.
Debtors sought to dismiss the appeal as equitably moot. Among other things, they argued that granting Appellants' requested relief would require unraveling the reorganization plan and harm numerous third parties. To avoid these feared outcomes, the District Court dismissed the appeal. In re SemCrude, L.P., No. 09 Civ. 994, 2012 WL 1836353 (D.Del. May 21, 2012). Appellants appeal, and ask us to vacate that order and remand with instructions to hear the merits of their appeal.
II. Jurisdiction and Standard of Review
The District Court had jurisdiction of this appeal under 28 U.S.C. §§ 158(a) and 1334. We have jurisdiction under 28 U.S.C. §§ 158(d) and 1291. We review the Court's equitable mootness determination for abuse of discretion.
III. The Equitable Mootness Doctrine
Following confirmation of a reorganization plan by a bankruptcy court, an aggrieved party has the statutory right to appeal the court's rulings. Once there is an appeal, there is a "virtually unflagging obligation" of federal courts to exercise the jurisdiction conferred on them. Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). Before there is a basis to forgo jurisdiction, granting relief on appeal must be almost certain to produce a "perverse" outcome — "chaos in the bankruptcy court" from a plan in tatters and/or significant "injury to third parties." In re Phila. Newspapers, LLC, 690 F.3d 161, 168 (3d Cir.2012) (citing Nordhoff Invs., Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 184 (3d Cir.2001); Continental I, 91 F.3d at 560-61). Only then is equitable mootness a valid consideration.
In determining whether an appellate court should dismiss an appeal on this ground, we assess five prudential factors:
Continental I, 91 F.3d at 560.
These factors, as we explained recently, are interconnected and overlapping. Phila. Newspapers, 690 F.3d at 168-69. "The second factor principally duplicates the first in the sense that a plan cannot be substantially consummated if the appellant
In practice, it is useful to think of equitable mootness as proceeding in two analytical steps: (1) whether a confirmed plan has been substantially consummated; and (2) if so, whether granting the relief requested in the appeal will (a) fatally scramble the plan and/or (b) significantly harm third parties who have justifiably relied on plan confirmation.
Substantial consummation is defined in the Bankruptcy Code to mean the
11 U.S.C. § 1101. Satisfaction of this statutory standard indicates that implementation of the plan has progressed to the point that turning back may be imprudent.
If this threshold is satisfied, a court should continue to the next step in the analysis. It should look to whether granting relief will require undoing the plan as opposed to modifying it in a manner that does not cause its collapse. See In re Zenith Elecs. Corp., 329 F.3d 338, 343-44 (3d Cir.2003) (appeal not equitably moot where disgorgement of professional fees would not unravel plan); United Artists Theatre Co. v. Walton, 315 F.3d 217, 228 (3d Cir.2003) (appeal not equitably moot where striking indemnification provision would allow the plan to stay otherwise intact); PWS, 228 F.3d at 236 (appeal not equitably moot where plan could go forward even if certain releases were struck from it). It should also consider the extent that a successful appeal, by altering the plan or otherwise, will harm third parties who have acted reasonably in reliance on the finality of plan confirmation. See In re Continental Airlines, 203 F.3d 203, 210 (3d Cir.2000) ("Continental II"); Continental I, 91 F.3d at 562.
We have never explicitly addressed which party bears the burden to prove that, weighing these factors, dismissal is warranted. Dismissing an appeal over which we have jurisdiction, as noted, should be the rare exception and not the rule. It should also be based on an evidentiary record, and not speculation. To encourage this, we join other Courts of Appeals in placing the burden on the party seeking dismissal. See, e.g., In re Lett, 632 F.3d 1216, 1226 (11th Cir.2011); In re Paige, 584 F.3d 1327, 1339-40 (10th Cir. 2009); In re Focus Media, Inc., 378 F.3d 916, 923 (9th Cir.2004).
IV. Applicability of Equitable Mootness
Before applying the prudential factors to this appeal, we note a preliminary issue raised by the parties. Federal Rule of Bankruptcy Procedure 7001 provides that certain bankruptcy matters — including, according to Appellants, their claims — must be resolved through adversary proceedings. Those proceedings, which approximate civil actions, provide similar procedural protections as the Federal Rules of Civil Procedure. 10 Collier on Bankruptcy ¶ 7001.01 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. rev.2013). The parties disagree on whether an appeal asserting a denial of these protections can be dismissed as equitably moot.
Appellants assert that the equitable mootness doctrine cannot preclude their appeal because they have a due process right to an adversary proceeding that overrides any interest in preserving the finality of confirmation orders. They rely on our decision in In re Mansaray — Ruffin, 530 F.3d 230 (3d Cir.2008), to support that argument. There, a debtor purported to invalidate a lien on her property by providing for it as an unsecured claim in her confirmed plan instead of filing an adversary proceeding. Id. at 243. Though confirmed plans are normally binding, 11 U.S.C. § 1327, we held that this did not preclude the creditor from seeking to enforce the lien in a subsequent action. Id. Where Rule 7001 "require[s] an adversary proceeding — which entails a fundamentally different, and heightened, level of procedural protections — to resolve a particular issue, a creditor has the due process right not to have that issue resolved without one." Id. at 242. "The mandatory nature" of this due process right "trump[s] [the] finality" of confirmed plans. Id. at 238. Appellants assert that their right to an adversary proceeding similarly overrides any finality interests promoted by the equitable mootness concept.
Debtors respond that the Supreme Court's decision in United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010), effectively overrules Mansaray. A creditor filed a motion in Espinosa seeking relief from a confirmation order on the ground that the debtor had attempted to discharge her student loan debt without filing an
Though this issue is intriguing, we need not, and do not, address it in this opinion. This is so because, no matter how we would resolve the issue, equitable mootness was not a proper shield here.
V. Application of the Equitable Mootness Factors
With that backdrop, we turn to this appeal. Based largely on a non-precedential decision of this Court, see In re SemCrude, L.P., 456 Fed.Appx. 167 (3d Cir.2012), the District Court found that the plan was substantially consummated. It also observed that Appellants had failed to seek or obtain a stay. We have no qualms with those determinations. However, it also found that granting relief to Appellants would undermine the reorganization plan confirmed by the Bankruptcy Court and harm third parties. Because the record does not support these latter, and crucial, findings, we hold that the Court abused its discretion in dismissing Appellants' appeal.
A. Substantial Consummation and Obtaining a Stay
The parties do not dispute, and we know no reason to disagree, that the reorganization plan has been substantially consummated, due in part to Appellants' failure to obtain a stay. Distributions have been made to creditors, financial transactions were put in place, and the Reorganized Debtors have emerged from bankruptcy as a financially sound, indeed thriving, oil and gas business. Though Appellants would have been wise to seek a stay to stop the prospect of equitable mootness in its tracks, their statutory right to appeal, as noted, is not premised on their doing so. We thus turn to whether granting them relief will have the feared outcomes — collapsing the plan and significantly injuring third parties who reasonably relied on its implementation — with which equitable mootness is ultimately concerned.
B. Success of the Plan
Debtors make the all-or-nothing assertion that
Debtors' Br. at 42-43 (emphases added).
These conclusions are unsupported by the evidence. It is important to understand Appellants' requested relief. They do not assert that the central compromise of the Producer Settlement is impermissible. They simply seek a ruling that the plan did not discharge their claims, and
Even if Appellants are successful on their claims — far from a certain result — the amounts involved will not require a sufficient redistribution of assets to destabilize the financial basis of the settlement. Appellants have already received $210,445.83 under the current plan. They claim that they are entitled to an additional $207,300.62. This is a relatively minor amount, less than 0.13% of the over $160 million designated for distribution to the Producers. It pales even more in the context of the entire reorganization plan, which involved over $2 billion. The amount sought by Appellants is roughly one-hundredth of one percent of that sum.
We also fail to see any indication that allowing Appellants to proceed with their claims would result in a deluge of other Producers filing their own adversary proceedings. Unlike with Appellants, we are unaware of any evidence in the record showing that other Producers objected to the discharge of their claims or asserted the right to an adversary proceeding. In return for distributions they received under the plan, other Producers were required to dismiss with prejudice any adversary proceedings they had filed. Absent their objecting at the time of plan confirmation to this dismissal requirement (as well as to the discharge of their claims), they cannot now attempt to restart those actions.
Debtors' best argument is that Appellants' adversary proceeding is a putative class action that theoretically could be financially significant enough to disrupt the litigation peace achieved by the settlement. The parties disagree as to the potential damages that could result from a successful class action. Debtors assert that it could require them to make payments of up to $81.7 million. Debtors' Letter at 2-3 (Mar. 8, 2013). Appellants counter that the payments would only approach around $40 million. Appellants' Letter at 2-3 (Mar. 20, 2013).
Regardless of the amount involved, the most we can say of Debtors' argument is that it asserts the finish without the steps to get there. No class has been certified. And assuming one is certified, we have little information about what it would look like. The claims of many putative class members, for example, may be precluded if they acquiesced to a representative proceeding in lieu of individual adversary proceedings, explicitly agreed to the Producer Settlement, or failed to object to the plan as impermissibly discharging their claims without an adversary proceeding. We cannot assume that allowing Appellants to seek class certification will risk unraveling the plan in the absence of more detailed information about the potential class claims. As then-Judge Alito explained, the
C. Injury to Third Parties
Debtors also assert that a successful appeal will harm third parties. In particular they have identified four groups they claim would be adversely affected: (1) lenders; (2) equity investors; (3) customers and suppliers; and (4) creditor constituencies. Debtors' Br. at 53-55. These groups entered into a variety of transactions and agreements in connection with the reorganization plan. Granting Appellants the relief they request, in Debtors' view, would harm these third parties by upsetting their expectation that plan confirmation was final. We address each group in turn.
We begin with the lenders, who provided exit financing for the Reorganized Debtors. According to Debtors,
Debtors' Br. at 54. This argument is counterintuitive. Why would these lenders terminate the credit facility if doing so would cause harm to themselves? Moreover, we have no evidence supporting the inference that they would take this action. Debtors' rely on an affidavit by Robert Fitzgerald — the Chief Financial Officer of the Reorganized Debtors' parent company, SemGroup Corporation ("SemGroup") — to support this argument. Appellants' App. at 627-28. That affidavit merely describes the credit facilities into which the Reorganized Debtors and the lenders entered. It says nothing about whether the lenders would seek to invalidate the loan agreements if Appellants are granted relief, let alone that they would have the legal right to do so.
We are also not persuaded that the equity investors will be materially harmed. As discussed, the amounts of Appellants' individual claims are relatively insignificant, and it is premature to assume that the putative class action will result in significantly greater financial exposure. Regardless of the potential amount, moreover, there is little reason to think that the Reorganized Debtors' financial well-being — and thus the prospects of their equity investors — would be threatened by granting Appellants relief. SemGroup has emerged from bankruptcy in robust financial health. According to its public securities filings, in March 2012 (shortly before the District Court dismissed Appellants' appeal as equitably moot), SemGroup had over $73 million in cash or cash equivalents, substantially more than the $50 million it was provided under the plan when it emerged from bankruptcy.
Harm to the final two groups — the Reorganized Debtors' customers and suppliers and the Debtors' creditors — appears lacking as well. According to Debtors, the customers and suppliers will be hurt because the Reorganized Debtors have assumed a variety of executory contracts and unexpired leases in an attempt to solidify these business relationships. However, they have not explained why granting Appellants relief would require them now to reject those agreements. Debtors contend the creditor constituencies will be harmed because granting relief would destabilize a series of settlements they have made with those constituencies. But the only settlement identified by Debtors is the Producer Settlement, and (as discussed) it does not appear that settlement will be imperiled.
D. Policy Considerations
Preserving the finality of plan confirmation to encourage parties to move forward with plan execution justifies forbearing the exercise of jurisdiction only where precluding the appeal will prevent a perverse outcome. As the Supreme Court has instructed on numerous occasions, "federal courts have a strict duty to exercise the jurisdiction that is conferred upon them by Congress." Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996) (collecting cases). The presumptive position remains that federal courts should hear and decide on the merits cases properly before them.
When equitable mootness is used as a sword rather than a shield, this presumption is upended. Appellants have repeatedly advanced the contention that they are entitled to an adversary proceeding. They filed a complaint to begin such a proceeding, objected to the rulings of the Bankruptcy Court disallowing it, and sought interlocutory appellate review in the District Court. Denying them review now — based on speculation of future harms — would be distinctly inequitable, the antithesis of the equity required for "mootness."
V. Conclusion
Dismissing an appeal as equitably moot should be rare, occurring only where there is sufficient justification to override the
FootNotes
Looking further out, SemGroup's financial future appears likely to remain stable. According to its Securities and Exchange Commission Quarterly Report for the period ended on March 31, 2013, by that time SemGroup's cash and cash equivalents exceeded $77 million and its working capital topped $142 million. SemGroup Corp., Quarterly Report (Form 10-Q) (May 9, 2013). And all this, of course, says nothing of liability insurance that the Reorganized Debtors may have to offset any future losses they do incur if Appellants ultimately win their adversary proceeding.
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