No MEGAN KUZNIEWSKI, PETITIONER V. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT

Transcription

1 No MEGAN KUZNIEWSKI, PETITIONER V. PADCO, INC., RESPONDENTS ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF FOR THE PETITIONER Anonymous Number: 44

2 QUESTIONS PRESENTED 1. Whether a chapter 11 plan of reorganization that permanently enjoin claims that nonconsenting creditors have against a non-debtor when the claims are not derivative of the debtor s claims against the non-debtor and no provision is made for full payment of the enjoined claims is prohibited. 2. Whether equitable mootness violates the Constitution when invoked by an appellate court to refuse to hear an appeal from a bankruptcy court order confirming a chapter 11 plan. i

3 PARTIES TO THE PROCEEDING Petitioner is Megan Kuzniewski. Respondent is Padco, Inc. ii

4 TABLE OF CONTENTS QUESTIONS PRESENTED... i PARTIES TO THE PROCEEDING... ii TABLE OF CONTENTS... iii TABLE OF AUTHORITIES... iv OPINIONS BELOW... viii JURISDICTION... viii CONSTITUTIONAL PROVISIONS... viii STATUTORY PROVISIONS INVOLVED... viii STATEMENT OF THE CASE... 1 SUMMARY OF ARGUMENT... 2 ARGUMENT... 3 I. A bankruptcy court should never grant a nondebtor release, as a bankruptcy court does not possess the jurisdiction to do so, 524(e) and Chapter 11 prohibit such a release, and the release violates bankruptcy policy A. A bankruptcy court does not possess the requisite jurisdiction to enjoin third party claims against nondebtor corporations in a chapter 11 bankruptcy, rendering the injunction invalid.2 B. The Fifth, Ninth, and Tenth Circuits correctly interpret the Bankruptcy Code as prohibiting the use of nondebtor releases under any circumstance whatsoever, and those circuits that do approve of nondebtor releases only do so in rare cases, showing that even those courts that allow nondebtor releases only do so out of fear of starting the Chapter 11 process over again...7 i. The Fifth, Ninth, and Tenth Circuits correctly read 524(e), in conjunction with 524(g) and (h), as prohibiting the use of nondebtor releases.7 ii. The language of Chapter 11 prohibits the use of nondebtor releases 11 iii. Circuits that do allow nondebtor releases only do so after the satisfaction of rigorous requirements, showing a general fear of courts in having to redo the Chapter 11 process...12 C. The use of nondebtor releases violates bankruptcy policy 16 iii

5 TABLE OF CONTENTS, CONTINUED II. Equitable mootness, by allowing district courts to avoid hearing an appeal without a consideration of the merits, violates Article III of the Constitution and the duty of courts to exercise their jurisdiction. U.S. Const. art. III A. Even as a judge-made doctrine, equitable mootness does not empower federal courts to refuse to exercise their appellate jurisdiction over bankruptcy courts, as it is neither an extension of constitutional mootness nor a recognized abstention doctrine B. Far from authorizing as broad a principle as equitable mootness, statutes affirmatively prohibit it. As such, there are no gaps for courts to fill with equitable mootness...21 C. Bankruptcy policy and notions of equity demand that appellate courts not use equitable mootness to slam their doors before first considering the merits of a case Conclusion iv

6 TABLE OF AUTHORITIES STATUTES All Writs Act, 28 U.S.C. 1651(a).2 11 U.S.C. 105(a) U.S.C. 524(a) U.S.C. 524(e) U.S.C. 524(g) U.S.C. 524(h) U.S.C. 1122(a) U.S.C. 1123(a)(4) U.S.C. 1123(b) U.S.C. 1129(a)(1) U.S.C. 1129(a)(7)...11, U.S.C. 1129(b) U.S.C , 21, U.S.C , U.S.C U.S.C U.S.C U.S.C CASES ASM Capital, LP v. Ames Dep t Stores, Inc., 582 F.3d 422, 426 (2d Cir. 2009) 1, 6 In re Jevic Holding Corp., 787 F.3d 173, 179 (3d Cir. 2015).1, 6 Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734, (1931)...1, 2, 3, 4 Callaway v. Benton, 336 U.S. 132, (1949)..1, 6, 7 Steelman v. All Continent Corp., 301 U.S. 278, (1937)..2 Continental Ill. Nat l Bank & Trust Co. v. Chicago, Rock Island & Pac. Ry. Co., 294 U.S. 648, (1935)...3 In re Johns-Manville Corp., 68 B.R. 618 (Bankr. S.D.N.Y. 1986).3 Penn Gen. Cas. Co. v. Pennyslvania ex rel. Schnader, 294 U.S. 189, 195 (1935)..3 Stern v. Marshall, 564 U.S. 462, 487 (2011)...5 Parkview-Gem, Inc. v. Stein, 516 F.2d 807, 811 (8th Cir. 1975).7 Feldman v. Trustees of Beck Indus., Inc., 479 F.2d 410, 419 (2d Cir. 1973)..7 In re Magnus Harmonica Corp., 237 F.2d 867, 869 (3d Cir. 1956) 7 In re Pacific Lumber Co., 584 F.3d 229 (5th Cir. 2009).8 In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995)..8, 10 In re Western Estate Fund, Inc., 922 F.2d 592 (10th Cir. 1990)...8, 9, 11 Landsing Diversified Properties-II v. First Nat l Bank, 922 F.2d 592 (10th Cir. 1990) 8 Matter of Zale Corp, 62 F.3d 746, 760 (5th Cir. 1995)..8 In re Vitek, 51 F.3d 530, 536 n. 27 (5th Cir. 1995).8 In re American Hardwoods, 885 F.2d 621 (9th Cir. 1989).9 Megan Kuzniewski v. Padco, Inc., Case No (13th Cir. Oct. 1, 2016) (J. Manley, v

7 dissenting).10, 11, 12 In re Chicago Investments, LLC, 470 B.R. 32 (Bankr. D. Mass. 2012).13, 14 In re Metromedia Fiber Network, Inc. 416 F.3d 136 (2d Cir. 2005).13 In re Zenith Electronics, 241 B.R. 92 (Bankr. D. Del. 1999)..13, 15 National Heritage Foundation, Inc. v. Highbourne Foundation, 760 F.3d 344 (4th Cir. 2014)...13 In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002).13, 15 In re Ingersoll, 562 F.3d 856 (7th Cir. 2009) 13, 14, 15 In re U.S. Fidelis, Inc., 481 B.R. 503 (Bankr. E.D. Mo. 2012).13 In re Seaside Engineering & Surveying, Inc., 780 F.3d 1070 (11th Cir. 2015)...13, 15 In re Master Mortg. Inv. Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994).13, 14 In re M.J.H. Leasing, Inc., 328 B.R. 363 (Bankr. D. Mass. 2005)..13, 14 In re Mahoney Hawkes, LLP, 289 B.R. 285 (Bankr. D. Mass. 2002).13, 14 In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005)..14, 15 Behrmann v. National Heritage Foundation, 663 F.3d 704 (4th Cir. 2011).15 Local No. 93, Int l Ass n of Firefighters v. City of Cleveland, 478 U.S. 501, 529 (1986) 17 In re Semcrude, L.P., 728 F.3d 314 (3d Cir. 2013)... 17, 20 Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976)... 18, 20 Quackenbush v. Allstate Ins. Co., 517 U.S. 706 (1996) Cohens v. Virginia, 6 Wheat. 264, 404 (1821) Sprint Commc'ns, Inc. v. Jacobs, 134 S. Ct. 584, (2013) Stern v. Marshall, 564 U.S. 462, (2011)... 18, 24 Church of Scientology v. United States, 506 U.S. 9, 12 (1992) Mills v. Green, 159 U.S. 651, 653 (1895) In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir. 1994)... 19, 20, 21 In re Continental Airlines, 91 F.3d 553 (3d Cir. 1996) In re Healthco Int'l, Inc., 136 F.3d 45 (1st Cir.1998) In re Charter Commc'ns, Inc., 691 F.3d 476 (2d Cir.2012) In re U.S. Airways Grp., Inc., 369 F.3d 806 (4th Cir.2004) In re Pac. Lumber Co., 584 F.3d 229 (5th Cir.2009)... 20, 21 In re United Producers, Inc., 526 F.3d 942 (6th Cir.2008) In re President Casinos, Inc., 409 Fed.Appx. 31 (8th Cir.2010) In re Thorpe Insulation Co., 677 F.3d 869 (9th Cir.2012) In re Paige, 584 F.3d 1327 (10th Cir.2009) In re Holywell Corp., 911 F.2d 1539 (11th Cir.1990) Holywell Corp. v. Smith, 503 U.S. 47 (1992) In re AOV Indus., Inc., 792 F.2d 1140 (D.C.Cir.1986) In re One2One Communications, LLC, 805 F.3d 428 (3d Cir. 2015)... 20, 21, 22, 23 Younger v. Harris, 401 U.S. 37 (1971) Burford v. Sun Oil Co., 319 U.S. 315 (1943) R.R. Comm'n of Tex. v. Pullman Co., 312 U.S. 496 (1941) Lexmark Int l, Inc. v. Static Control Components, Inc., 134 S.Ct (2014) Russello v. United States, 464 U.S. 16 (1983) In re Tribune Media Co., 799 F.3d 272 (3d Cir. 2015) INS v. Chadha, 462 U.S. 919 (1983) vi

8 MISCELLANEOUS H.R. Rep. No , at (1977).2 Ralph Brubaker, Nondebtor Releases and Injunctions in Chapter 11: Revisiting Jurisdictional Precepts and the Forgotten Callaway v. Benton Case, 72 Am. Bankr. L.J. 1 (1998).7 Ralph Brubaker, Bankruptcy Injunctions and Complex Litigation: A Critical Reappraisal of Non- Debtor Releases in Chapter 11 Reorganizations, 1997 U. Ill. L. Rev. 959 (1997)...16, 17, 18 Nil Ghosh, Plan Accordingly: The Third Circuit Delivers a Knockout Punch with Equitable Mootness, 23 Norton J. Bankr.L. & Prac. 224 & n. 8 (2014) (collecting cases) See Brief of Bankruptcy Law Professors in Support of Granting the Petition for Certiorari at 11, Law Debenture Trust Co. of N.Y. v. Charter Commc'ns, Inc., U.S., 133 S.Ct. 2021, (2013). )..20 vii

9 OPINIONS BELOW The United States Court of Appeals for the Thirteenth Circuit s opinion holding that equitable mootness precludes an appeal of Padco, Inc. s chapter 11 plan of reorganization and that the use of a nondebtor release is valid is available at Megan Kuzniewski v. Padco, Inc., Case No (13th Cir. Oct. 1, 2016). STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. CONSTITUIONAL PROVISIONS INVOLVED The Congress shall have power to establish uniform laws on the subject of bankruptcies throughout the United States. U.S. CONST. art. I, 8, cl. 4. The judicial power of the United States, shall be vested in one Supreme Court, and in such inferior courts as the Congress may from time to time ordain and establish... U.S. CONST. art. III, 1. All Writs Act, 28 U.S.C. 1651(a) 11 U.S.C. 105(a) 11 U.S.C. 363(m) 11 U.S.C. 364(e) 11 U.S.C. 524(a), (e), (g), (h) 11 U.S.C. 1122(a) 11 U.S.C. 1123(a)(4), (b) 11 U.S.C U.S.C. 1129(a)(1), (7), (b) 11 U.S.C. 1334(c)-(a) STATUTORY PROVISIONS INVOLVED viii

10 STATEMENT OF THE CASE Shrouded by the blanket of a bankruptcy proceeding, a debtor company and its former parent company, now turned white knight, crafted a chapter 11 plan of reorganization that absolves both companies of any liability for their production of injurious exploding computers. R. at 2-4. Petitioner Megan Kuzniewski, and numerous potential plaintiffs like her, because of the actions of these companies and the holdings of the Thirteenth Circuit, can never seek redress from Gadget, Inc. ( Gadget ) for injuries caused by the defective products of these companies. Id. Debtor Padco, Inc. ( Padco ), a former subsidiary of Gadget, the absorbing corporation in this chapter 11 and former parent company of Padco, used bankruptcy to create a shield of immunity from perfectly plausible breach of fiduciary duty claims against Gadget by plaintiffs, like Petitioner Megan Kuzniewski. Id. Because of its production of exploding computers, Padco thrust itself into chapter 11 bankruptcy to escape the impending doom of liquidation. R. at. 2. Gadget, a former one-hundred percent owner of Padco during the time of the production of the defective product, offered a chapter 11 plan of reorganization, whereby Padco would be merged into Gadget. R. at 2-3. However, Gadget refused to merge with Padco without receiving absolute immunity against the impending plaintiffs claims against Gadget for breach of fiduciary duty. R. at 3-4. Thus, the plan included a permanent injunction enjoining the victims of the exploding product from brining claims against Gadget. R. at 4. To ensure the acceptance of the plan, the plan placed all potential plaintiffs into one class and enticed the members of the class to accept the plan by providing them with a larger distribution than other unsecured creditors. Id. Unfortunately, over the objections of over 20 percent of the members of the class, including Kuzniewski, the plan survived. Id. Kuzniewski objected to the plan based on the impermissibility of the injunction and the 1

11 unfairness of the plan as a whole. Id. The bankruptcy court applied a statistical analysis of the probability of payout on the potential plaintiffs claims against Gadget, and based its confirmation of the plan and the permanent injunction on this analysis, rather than allowing the plaintiffs to assert these claims and see their day in court. R. at. 5. The bankruptcy court also denied Kuzniewski s request for a stay of the confirmation. R. at 5. Kuzniewski then appealed to the District Court for the District of the State of Moot. R. at 5. After the District Court upheld the rulings of the bankruptcy court based on grounds of equitable mootness, Kuzniewski appealed to the Thirteenth Circuit. R. at. 6. After the Thirteenth Circuit affirmed the District Court, Kuzniewski appealed to the Supreme Court. R. at 6. 2

12 SUMMARY OF ARGUMENT The lower court erred by holding in Respondent s favor because the Bankruptcy Code and its interpretive case law do not allow the permanent enjoinment of non-consenting creditors, including Petitioner Megan Kuzniewski s, claims against a non-debtor, Gadget, when these claims are not derivative of the debtor s, Padco s, claims against Gadget and no provision is made for full payment of the enjoined claims. The Court reviews conclusions of law de novo, giving no deference to a lower court s conclusions of law. ASM Capital, LP v. Ames Dep t Stores, Inc., 582 F.3d 422, 426 (2d Cir. 2009); In re Jevic Holding Corp., 787 F.3d 173, 179 (3d Cir. 2015). A bankruptcy court does not possess the requisite jurisdiction to authorize a chapter 11 plan that forever enjoins third party claims against nondebtors. See Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734, (1931); Callaway v. Benton, 336 U.S. 132, (1949). The Fifth, Ninth, and Tenth Circuits expressly prohibit the use of nondebtor releases from third party claims under any circumstances, and the circuits that do allow the use of nondebtor releases only do so after the satisfaction of a strenuous test. The language of the Code itself prohibits the use of nondebtor releases of third party claims. Lastly, the use of nondebtor releases from third party claims is against bankruptcy policy. In addition to the issue of nondebtor release, the Court must determine the fate of the curious doctrine of equitable mootness. In re Continental Airlines, 91 F.3d 553, 567 (3d Cir. 1996) (Alito, J., dissenting). The lower court erred by refusing to hear the merits of Kuzniewski s appeal, not in their determination of what judgment should flow from the doctrine of equitable mootness, but in their use of the doctrine as a threshold question before considering the merits of the case. Courts have a duty to hear cases within their jurisdiction, and lacking a statutory basis, the doctrine s questionable evolution within federal common law does not carve it out as an exception. 1

13 In re One2One Commc'ns, LLC, 805 F.3d 428, 441 (3d Cir. 2015). Instead, application of equitable mootness violates the Constitution by allowing a bankruptcy court to escape the requirement of appellate review by an Article III judge, effectively delegat[ing] the power to prevent that review to the very non-article III tribunal whose decision is at issue. In re One2One Commc'ns, LLC, 805 F.3d 428, 445 (3d Cir. 2015). As such, equitable mootness is not saved by prudential justifications or higher notions of the goals of bankruptcy, as even its short history demonstrates much more is lost than gained from its invocation. ARGUMENT I. A bankruptcy court should never grant a nondebtor release, as a bankruptcy court does not possess the jurisdiction to do so, 524(e) and Chapter 11 prohibit such a release, and the release violates bankruptcy policy. A. A bankruptcy court does not possess the requisite jurisdiction to enjoin third party claims against nondebtor corporations in a chapter 11 bankruptcy, rendering the injunction invalid. Courts continue to incorrectly assert 105(a) of the Bankruptcy Code as the source validating nondebtor releases. 105(a) simply states, The court may issue any order, process or judgment that is necessary or appropriate to carry out the provisions of the Bankruptcy Code. Instead of giving a bankruptcy court blanket jurisdiction over all matters necessary or appropriate to carry out the provisions of the Bankruptcy Code, this provision actually simply gives to federal bankruptcy courts the powers of courts of equity granted to all federal courts in the All Writs Act. H.R. Rep. No , at (1977); Steelman v. All Continent Corp., 301 U.S. 278, (1937); Continental Ill. Nat l Bank & Trust Co. v. Chicago, Rock Island & Pac. Ry. Co., 294 U.S. 648, (1935). The All Writs Act states, All courts established by Acts of Congress may issue all writs necessary or appropriate in aid of their respective jurisdictions. 28 U.S.C. 1651(a). The clause in aid of their respective jurisdictions is correctly interpreted to afford the bankruptcy 2

14 court the ability to issue injunctions that do nothing more than protect its in rem, not in personam, jurisdiction over the selling of a debtor s assets free and clear of any liens, as stated in Manville and Hobbs Tie & Timber Co. In re Johns-Manville Corp., 68 B.R. 618, 625 (Bankr. S.D.N.Y 1986); Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734, (1931); Penn Gen. Cas. Co. v. Pennyslvania ex rel. Schnader, 294 U.S. 189, 195 (1935). This is the proper interpretation of the extent of a bankruptcy court s jurisdiction, or rather lack thereof, over approving nondebtor releases. The source of confusion regarding the proper scope of a bankruptcy court s subject matter jurisdiction comes from Manville, a case misinterpreted by several courts. In Manville, the bankruptcy court approved an injunction preventing any claimants seeking to bring suit against Manville, the debtor corporation, for asbestos-related tort injuries, after recognizing that Manville created a trust by which money was diverted to pay back injured parties. Manville, 68 B.R. at 624. An injunction of this sort, one that prevents future suits against the debtor because the claimants receive payments through a trust (referred to as equitable channeling injunctions because the claimants claims are channeled into this trust), is unquestionably legitimate. However, no legitimacy resides in an injunction that takes a step further one that prevents suits against a nondebtor corporation. Some courts, in their misinterpretation of Manville, unfortunately have allowed this second type of injunction. Understanding the court s rationale in Manville for the use of debtor releases additionally supports the prohibition of the use of nondebtor releases. The Manville court s rationale for the use of equitable channeling injunctions comes from the power of a bankruptcy court to permit the sale of assets free and clear of liens on those assets. Manville, 68 B.R. at 625; Hobbs Tie & Timber Co., 282 U.S. at ; Penn Gen. Cas. Co., 294 U.S. at 195. As the Supreme Court in Isaacs v. Hobbs Tie & Timber Co. stated, the jurisdictional 3

15 power of a bankruptcy court to ensure the sale of assets free and clear of liens: is but an application of the well recognized rule that when a court of competent jurisdiction takes possession of property through its officers, this withdraws the property from the jurisdiction of all other courts which, though of concurrent jurisdiction, may not disturb that possession; and that the court originally acquiring jurisdiction is competent to hear and determine all questions respecting title, possession and control of that property. 282 U.S. at Essentially, a bankruptcy court s power to effectuate the sale of an asset free and clear of liens on those assets provides that court with the power to issue an equitable channeling injunction against a debtor only, and this power is entirely rooted in concepts of exclusive in rem jurisidiction, not in personam jurisdiction. Thus, a bankruptcy court possesses the power to issue an injunction preventing any in rem actions from interfering with the free and clear sale of an asset because this type of injunction falls within the exclusive in rem jurisdiction that a bankruptcy court possesses over property of the estate. However, a bankruptcy court cannot prevent the assertion of in personam actions against any actual parties involved in the current bankruptcy proceeding. Thus, 105(a) allows a bankruptcy court to issue injunctions only in conformance with its requisite in rem jurisdiction. In this case, the bankruptcy court s approval of an injunction preventing any claimants, including Petitioner Megan Kuzniewski, from filing suit against Gadget violated the boundaries of its jurisdiction. While bankruptcy courts possess the power to approve an injunction that prevents the bringing of in rem actions by channeling them into a trust providing payments to any potential claimants, the claimants breach of fiduciary duty claims against Gadget are entirely rooted in an in personam action against Gadget and have nothing to do with Padco or the property of the estate. In other words, the claimants in personam suits do not interfere with the bankruptcy court s exclusive in rem jurisdiction over Padco s property of the estate because the claimants in 4

16 personam suit does not establish a claim to any specific property interest. Rather, the claimants in personam suit merely determines Gadget s personal obligations to the claimants, irrespective of what assets might be available to satisfy those obligations since Gadget now controls Padco. Gadget s release forever bars any claimant, including Petitioner Megan Kuzniewski, from bringing any action against Gadget based on Gadget s personal liability to these claimants. These in personam claims in no way encroach upon the bankruptcy court s exclusive in rem jurisdiction over Padco s property. As such, the bankruptcy court improperly extended its in rem jurisdiction over Padco s property into adjudicating in personam claims against Gadget. By review[ing] the tort law of the State of Moot and conclud[ing] that there was no support in the statutory or decisional law of Moot for Kuzniewski s novel tort theory, and by determin[ing] that there was little chance that Kuzniewski s theory of liability would be accepted, the bankruptcy court adjudicated on a matter of law beyond its jurisdictional authority. R. at 5. Lastly, Stern v. Marshall prohibits a bankruptcy court from entering a final judgment regarding state law claims, so a nondebtor release that prohibits the bringing of future state-law claims, the situation occurring in this case, is thus null and void. Stern v. Marshall, 564 U.S. 462, 487 (2011). Because the bankruptcy court did not possess the jurisdictional authority to issue an injunction of this sort, the appellate court erred in upholding the validity of this injunction. Reviewing decisions of law de novo, this Court should recognize that the bankruptcy court acted beyond its jurisdictional authority and should strike down the validity of Gadget s nondebtor release, and additionally forever bar the use of nondebtor releases in general, as any such injunction is invalid. ASM Capital, LP v. Ames Dep t Stores, Inc., 582 F.3d 422, 426 (2d Cir. 2009); In re Jevic Holding Corp., 787 F.3d 173, 179 (3d Cir. 2015). Moreover, courts that have approved the granting of nondebtor releases in a chapter 11 5

17 plan of reorganization seem to have forgotten the Supreme Court s precedent striking down the use of nondebtor releases in Callaway v. Benton. 336 U.S. 132, (1949). In Callaway v. Benton, dissenting minority shareholders of a railroad company, South Western Railroad Co., sought to block the sale of South Western s rail lines to another railroad company, Central of Georgia Railway Co., undergoing bankruptcy at the time. Id. at To do this, the minority shareholders brought suit in state court, seeking to enjoin South Western s sale of its line to Central. Id. The bankruptcy court actually permanently enjoined the state court suit, preventing the minority shareholder s suit from going forward. Id. The Supreme Court, reversing the actions of the bankruptcy court, did so after finding that the reorganization court did not possess the requisite jurisdiction to adjudicate the minority shareholder s dispute against South Western, the nondebtor, in Central s bankruptcy reorganization process, nor did the bankruptcy court possess the requisite jurisdiction to permanently enjoin the collateral nondebtor action. Id. at In fact, the Supreme Court explicitly stated in Callaway v. Benton: The [bankruptcy] statute does not give the court the right to require acceptance by a lessor not in reorganization of an offer for the purchase of its property.the fact that the [state] law may make acceptance of an offer less likely than would be the case if the offeree were incorporated elsewhere does not change the picture. We do not believe that Congress intended to leave to individual judges the question of whether state laws should be accepted or disregarded, or to make criterion to be applied the effect of the law upon the prospects of acceptance by the offeree. Id. at 141. Professor Brubaker reads this language to mean: In other words, the reorganization court could not permanently release and enjoin enforcement of these nondebtor rights and obligations in order to facilitate the debtor s reorganization efforts. Whatever rights a South Western shareholder had to veto a sale of South Western s assets to the debtor must remain intact, regardless of their impact upon the debtor s reorganization. Ralph Brubaker, Nondebtor Releases and Injunctions in Chapter 11: Revisiting Jurisdictional Precepts and the Forgotten 6

18 Callaway v. Benton Case, 72 Am. Bankr. L.J. 1, 59 (1998). Lower courts agree with Professor Brubaker s interpretation of Callaway v. Benton, continuously holding that a bankruptcy court does not possess the requisite jurisdiction to grant a nondebtor release. Parkview-Gem, Inc. v. Stein, 516 F.2d 807, 811 (8th Cir. 1975); Feldman v. Trustees of Beck Indus., Inc., 479 F.2d 410, 419 (2d Cir. 1973); In re Magnus Harmonica Corp., 237 F.2d 867, 869 (3d Cir. 1956). B. The Fifth, Ninth, and Tenth Circuits correctly interpret the Bankruptcy Code as prohibiting the use of nondebtor releases under any circumstance whatsoever, and those circuits that do approve of nondebtor releases only do so in rare cases, showing that even those courts that allow nondebtor releases actually frown upon them. i. The Fifth, Ninth, and Tenth Circuits correctly read 524(e), in conjunction with 524(g) and (h), as prohibiting the use of nondebtor releases. Under 524(e), discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt. Padco is the debtor. Gadget is any under entity under the terms of the Code. Under the rulings of the lower courts, the discharge of Padco s debts include the discharge of Gadget s debts, including Petitioner Megan Kuzniewski s potential breach of fiduciary duty claim. This is the exact result prohibited by the bankruptcy court. Under both the plain meaning and interpretation of 524(e), the discharge of Padco s debts does not include a discharge of Gadget s debts. The Fifth, Ninth, and Tenth Circuits all read 524(e) as prohibiting the use of nondebtor releases in a debtor s chapter 11 plan of reorganization under any circumstances whatsoever. The Fifth Circuit uses 524(e) as statutory authority for prohibiting the use of nondebtor releases, noting the actual language of the provision and the inclusion of 524(g) as evidence of this prohibition. In re Pacific Lumber Co., 584 F.3d 229, 252 (5th Cir. 2009). The Ninth Circuit continues this conclusion and takes it a step further, stating that 524(e) actually displaces 105(a), preventing courts from rationalizing use of a nondebtor release based on the grant of 7

19 equitable powers to a bankruptcy court under 105(a). In re Lowenschuss, 67 F.3d 1394, 1402 (9th Cir. 1995). The Tenth Circuit agrees with both circuits rationalizations. In re Western Estate Fund, Inc., 922 F.2d 592, (10th Cir. 1990). In fact, the Tenth Circuit prevents the tagalong discharge of third party debt. Landsing Diversified Properties-II v. First Nat l Bank, 922 F.2d 592, 600 (10th Cir. 1990). Here, Gadget is attempting to tag-along with Padco s chapter 11 discharge by discharging its own potential liability to Megan Kuzniewski. No matter what the situation, however, the three circuits above would automatically strike down the use of Gadget s nondebtor release in this case. As a matter of principle, a court must overturn a 105 injunction if it effectively discharges a nondebtor. Matter of Zale Corp, 62 F.3d 746, 760 (5th Cir. 1995); In re Vitek, 51 F.3d 530, 536 n. 27 (5th Cir. 1995). While a temporary stay prohibiting a creditor s suit against a nondebtor during the bankruptcy proceeding may be permissible to facilitate the reorganization process in accord with the broad approach to nondebtor stays under 105(a), the stay may not be extended post-confirmation in the form of a permanent injunction that effectively relieves the nondebtor from its own liability to the creditor. Western Real Estate Fund, 922 F.2d at ; In re American Hardwoods, 885 F.2d 621, (9th Cir. 1989). Not only does such a permanent injunction improperly insulate nondebtors in violation of 524(e), it does so without any countervailing justification of debtor protection. Western Real Estate Fund, 922 F.2d at ; American Hardwoods, 885 F.2d at Here, the injunction at issue effectively discharged Gadget s liability for breach of fiduciary duty to Megan Kuzniewski and various other claimants by preventing any of these claimants from ever bringing suit against Gadget. Under 524(a)(1-3), a discharge essentially acts as a permanent prohibition on a creditor from attempting to collect a debt owed by the debtor to 8

20 the creditor. Because Megan Kuzniewksi and other claimants like her can now never attempt to bring a lawsuit against Gadget to recover damages from Gadget s liability owed to them, the injunction at issue effectively discharged Gadget s debt owed to the claimants, the exact situation prohibited by 524(e). Respondents will attempt to argue that the words does not in 524(e) do not act as a full prohibition against the discharge of a nondebtor s debts. Instead, 524(e) allows the terms of the plan of reorganization to include provisions that can affect the liability of a nondebtor on certain debts. Respondents will argue that the debtor s discharge does not itself discharge any debts of the nondebtor. Rather, the actual provision in the plan is what discharges the nondebtor. However, this entire line of argument circumvents 524(e). Respondents entire argument rests on the weakness of the words does not, instead of the use of such language as shall not. Simply because the words does not connotate the allowance of a different means to discharge of a liability besides the actual power of a discharge, respondents would allow chapter 11 bankruptcy proceedings as a means for any nondebtor to immunize themselves from liability. Congress did not intend the use of chapter 11 plans of reorganization as vehicles for nondebtor corporations to immunize themselves from their own liabilities, especially potential lawsuits. Megan Kuzniewski v. Padco, Inc., Case No , 20 (13th Cir. Oct. 1, 2016) (J. Manley, dissenting); Lowenschuss, 67 F.3d at 1402 n. 4. That line of thought renders 524(e) entirely useless, calling into question Congress s implementation of such an easily circumvented Bankruptcy Code provision what purpose would 524(e) serve without preventing a discharge of a nondebtor s liability in a debtor s bankruptcy proceeding? Does not means what it says. Under no circumstances does a chapter 11 plan of reorganization affect the liability of a nondebtor involved in a chapter 11 plan of reorganization. 9

21 Otherwise, chapter 11 plans of reorganization act as adjudicators, allowing corporations to escape liability they otherwise would face in a court of law. Any argument implying weakness in the terms does not fails to understand the intention of Congress to prevent chapter 11 plans of reorganization from use by nondebtors as vehicles for discharge of their own debts and the prevention of the adjudication of lawsuits outside the bankruptcy process occurring in a chapter 11 bankruptcy. Megan Kuzniewski, Case No at 20; Lowenschuss, 67 F.3d at 1402 n. 4. Additionally, 524(g) and (h) support the assertion that under no circumstances may a nondebtor discharge its own liability through means of a debtor s chapter 11 bankruptcy proceeding. 524(g) and (h) essentially provide for the use of nondebtor releases in asbestosrelated lawsuits. Nondebtors, subject to 524(g) and (h), can include provisions of the sort that Gadget wishes to include because Congress created a specific carve out for these types of injunctions. Specifically, 524(g)(4)(A)(ii) uses the language notwithstanding the provisions of 524(e) when allowing the use of injunctions preventing third party liability. If 524(e) allowed the use of injunctions discharging nondebtors liabilities, Congress did not need to redundantly create specific provisions allowing the use of these kinds of injunctions for asbestos-related cases, nor would Congress explicitly include language disregarding 524(e) when applying 524 (g) and (h). Congress created 524(g) and (h) to allow for the use of injunctions discharging nondebtor liability in a debtor s chapter 11 because 524(e) prohibits the use of these types of injunctions. Lowenschuss, 67 F.3d at 1402 n. 4. Furthermore, the fact that Congress created an elaborate mechanism in 524(g) with enhanced voting majorities and other protections and then expressly limited its availability to one class of cases (asbestos cases), demonstrates that third party injunctions are not available in other cases. Megan Kuzniewski, Case No at 20; Lowenschuss, 67 F.3d at 1402 n. 4; Expressio unius est exclusio alterius. 10

22 ii. The language of Chapter 11 prohibits the use of nondebtor releases. Under 1123(b)(6), a chapter 11 plan of reorganization cannot include a term inconsistent with the applicable provisions of this title. 1129(a)(1) incorporates 524(e) into the requirements for a valid Chapter 11 bankruptcy. Thus, 524(e) falls within the applicable provisions of this title. Additionally, 1129(a)(1) prohibits confirmation of a plan that does not comply with applicable provisions of the Bankruptcy Code. Lowenschuss, 67 F.3d at Including a discharge of liability of a nondebtor in a plan of reorganization is both inconsistent with 524(e) and does not comply with the Code for the reasons discussed in the Section A. Additionally, 1123(b)(1-6) provides for the exclusive list of provisions that a chapter 11 plan may include. Under 1123(b)(3)(A), [A] plan may provide for the settlement or adjustment of any claim or interest belonging to the estate. Conversely, this means that a plan may not provide for the settlement or adjustment of any claim or interest that does not belong to the estate. Megan Kuzniewski s, and every other potential plaintiffs claims, against Gadget are not property of the estate and thus cannot be settled or adjusted by the plan. Megan Kuzniewski, Case No at 22. Even assuming that the injunction would not be inconsistent with the applicable provisions of chapter 11 or the Code in general, while 1123(b)(6) does permit the inclusion of any other appropriate provision in the plan, the use of the word other means that the chapter 11 plan can still include provisions of the sort not listed in 1123(b)(1-5). However, this also means that if the provision is of the sort encompassed by the provisions in 1123(b)(1-5), that provision is governed by the language of 1123(b)(1-5). Because 1123(b)(3) provides for the settlement or adjustment of any claim and limits the allowance of settlements or adjustments of claims only to a claim or interest belonging to the debtor or to the estate, an injunction 11

23 discharging a nondebtor from liability in a lawsuit is prohibited. A nondebtor s, Gadget s, liability in a lawsuit is a claim that cannot be settled or adjusted because it is a claim belonging to a third party, Megan Kuzniewski and other potential plaintiffs, and not to the debtor or estate, and because the scope of settling or adjusting claims falls entirely within the allowances and prohibitions of 1123(b)(3). i. Circuits that do allow nondebtor releases only do so under unusual circumstances or in satisfaction of a strenuous multi-factored test, and the circumstances of this case do not warrant such a nondebtor release. Even the circuits that allow the use of nondebtor releases only do so under exceptional circumstances, as the majority in this case pointed out that non-consensual release provisions should rarely be approved. R. at 12. The First, Second, Third, Fourth, Sixth, Seventh, Eighth, and Eleventh Circuits all use a variation of the same strenuous and cautionary multi-factored test, taking into account such factors as: 1) whether there is identity of interest between the debtor and nondebtor; 2) whether the nondebtor has contributed substantial assets to the debtor s reorganization; 3) whether the release and corresponding injunction are essential to the debtor s reorganization; 4) whether the impacted class, or classes, voted overwhelmingly to accept the plan; 5) whether the plan provides a mechanism to pay for all, or substantially all, of the claims of the class or classes affected by the injunction; 6) whether the plan provides an opportunity for those claimants who choose not to settle to recover in full; 7) whether a court made a record of specific factual findings that support its conclusions; 8) whether the release is fair to the nondebtor; 9) whether the release is necessary to the reorganization plan; and 10) whether truly unusual circumstances exist. In re Chicago Investments, LLC, 470 B.R. 32, 107 (Bankr. D. Mass. 2012); In re Metromedia Fiber Network, Inc. 416 F.3d 136, 142 (2d Cir. 2005); In re Zenith Electronics, 241 B.R. 92, (Bankr. D. Del. 1999); National Heritage Foundation, Inc. v. Highbourne 12

24 Foundation, 760 F.3d 344, 348 (4th Cir. 2014); In re Dow Corning Corp., 280 F.3d 648, (6th Cir. 2002); In re Ingersoll, 562 F.3d 856, (7th Cir. 2009); In re U.S. Fidelis, Inc., 481 B.R. 503, 519 (Bankr. E.D. Mo. 2012); In re Seaside Engineering & Surveying, Inc., 780 F.3d 1070, 1078 (11th Cir. 2015). Exploring the cases from the circuits that do allow nondebtor releases even further shows an extreme reluctance by these circuits to approve of nondebtor releases. This hesitance speaks to the invalid nature of a nondebtor release. The First and Eighth Circuits only allows the use of nondebtor releases if numerous requirements are satisfied. First, the factors stated in In re Master Mtg. Inv. Fund, which include factors one through five above, must be balanced or a nondebtor release is invalid. In re Master Mortg. Inv. Fund, Inc., 168 B.R. 930, (Bankr. W.D. Mo. 1994); In re Chicago Investments, LLC, 470 B.R. 32, 107 (Bankr. D. Mass. 2012); In re M.J.H. Leasing, Inc., 328 B.R. 363, 369 (Bankr. D. Mass. 2005); In re Mahoney Hawkes, LLP, 289 B.R. 285, 300 (Bankr. D. Mass. 2002). Second, a nondebtor release may only be approved under 105(a) when it is appropriate and necessary to carry out the chapter 11 plan. Master Mortg. Inv. Fund, 168 B.R. at ; Chicago Investments, 470 B.R. at 107; M.J.H. Leasing, 328 B.R. at 369; Mahoney Hawkes, LLP, 289 B.R. at 300. Third, enjoining a nondebtor involves an extraordinary exercise of discretion, so only exceptional circumstances afford the granting of a nondebtor release. Master Mortg. Inv. Fund, 168 B.R. at ; Chicago Investments, 470 B.R. at 107; M.J.H. Leasing, 328 B.R. at 369; Mahoney Hawkes, LLP, 289 B.R. at 300. The Second and Seventh Circuits share similar disdain for the approval of nondebtor releases. The seminal case from the Second Circuit, In re Metromedia Fiber Network, Inc., adopted by the Seventh Circuit in In re Ingersoll, Inc., imposes several strenuous requirements for the approval of a nondebtor release. Metromedia Fiber Network, 416 F.3d at 142; Ingersoll, 562 F.3d 13

25 at First, truly unusual circumstances must exist, and a nondebtor release may only be approved in rare circumstances, which is especially true when the release provides blanket immunity. Metromedia Fiber Network, 416 F.3d at 142; Ingersoll, 562 F.3d at Second, the nondebtor release itself must be important to the chapter 11 plan, and the scope of the nondebtor release must be necessary to the chapter 11 plan. Metromedia Fiber Network, 416 F.3d at 142; Ingersoll, 562 F.3d at Third, because 105(a) does not create any substantive rights, a nondebtor release may only be approved when appropriate and necessary. Metromedia Fiber Network, 416 F.3d at 142; Ingersoll, 562 F.3d at The Metromedia court expounded on its reluctance to grant a nondebtor release, stating that the only explicit authorization in the Bankruptcy Code for a nondebtor release comes from 524(g), which only authorizes such releases in asbestos-related cases. Metromedia Fiber Network, 416 F.3d at 142; Ingersoll, 562 F.3d at Additionally, the court noted that a nondebtor release is a device that lends itself to abuse, since a nondebtor can shield itself from liability to third parties. Metromedia Fiber Network, 416 F.3d at 142; Ingersoll, 562 F.3d at The Third Circuit continues the previous circuits disdain for nondebtor releases. In re Zenith Electronics Corp. is the seminal case in the Third Circuit, imposing several requirements for the approval of a nondebtor release. First, the nondebtor release must be fair to the nondebtor. Zenith Electronics, 241 B.R. at Second, the nondebtor release must be necessary to the chapter 11 reorganization. Zenith Electronics, 241 B.R. at Third, a court must balance factors one through five of the first paragraph of this section. Zenith Electronics, 241 B.R. at Fourth, a court may only issue and enforce a nondebtor release under certain limited circumstances supported by specific factual findings. Zenith Electronics, 241 B.R. at Lastly, the Fourth, Sixth, and Eleventh Circuits emphasize the previous circuits disdain 14

26 for nondebtor releases by imposing a strict test that must be satisfied for the approval of a nondebtor release. The seminal case used in these circuits is Dow Corning, 280 F.3d at A court must point toward certain factors that reflect a finding of unusual circumstances. Dow Corning, 280 F.3d at The factors that exude unusual circumstances include factors one through seven in the first paragraph of this section. Dow Corning, 280 F.3d at Seemingly all factors must be satisfied in order for a court to grant a nondebtor release. Dow Corning, 280 F.3d at Additionally, the Fourth Circuit stated that even so, nondebtor releases should be granted cautiously and infrequently. Behrmann v. National Heritage Foundation, 663 F.3d 704, 712 (4th Cir. 2011). The Eleventh Circuit mirrors the Fourth Circuit s warning, stating that a nondebtor release may be issued only when such an order is fair and equitable under all the facts and circumstances, and that such nondebtor releases should not be issued lightly. In re Seaside Engineering & Surveying, Inc., 780 F.3d 1070, 1076 (11th Cir. 2015). The circuits that approve of nondebtor releases only do so after the strenuous satisfaction of numerous elements, with cautionary language at every turn. Most of the cases allowing the use of nondebtor releases come from district or appellate courts, showing that the chapter 11 plan had already been approved of and utilized by the debtor. The implication of this seems to be that the circuits that do approve of nondebtor releases only do so because of a sense of an inability to act. Essentially, courts are forced into accepting the use of a nondebtor release, as the denial of one in these situations usually means starting from scratch, an extremely difficult endeavor. The cautionary language of all courts in this situation seem to suggest that the court s approval of the nondebtor release is a one-time allowance resulting in murky legal justification for doing so even that one time. In the end, it is not a stretch of the imagination to conclude that all of these circuits would have denied the use of the nondebtor release in all of these chapter 11 plans had these 15

27 circuits been in the position of the bankruptcy court to do so, as evidenced by the strenuous requirements imposed by each circuit and the cautionary language each circuit uses when speaking of nondebtor releases in general. C. The use of nondebtor releases violates bankruptcy policy. Three main policy considerations justify the prohibition of the use of nondebtor releases: facilitating compromise and settlement, maintaining creditor equality, and providing for debtor rehabilitation. Ralph Brubaker, Bankruptcy Injunctions and Complex Litigation: A Critical Reappraisal of Non-Debtor Releases in Chapter 11 Reorganizations, 1997 U. Ill. L. Rev. 959, (1997). Those who seek in turn to justify the use of nondebtor releases based on these three policy justifications fail to understand the true implications of nondebtor releases on these fundamental bankruptcy policies. Nondebtor releases cannot be justified under the guise of facilitating compromise and settlement. Compromise and settlement cannot be done without the voluntary undertaking of both parties involved: Parties who choose to resolve litigation through settlement may not dispose of the claims of a third party without that party s agreement. Local No. 93, Int l Ass n of Firefighters v. City of Cleveland, 478 U.S. 501, 529 (1986). A nondebtor release forces third parties to settle, thus violating the basic legal rules behind compromise and settlement. Thus, in actuality, nondebtor releases harm the ability of those nondebtors to engage in their right to compromise and settle with opposing parties by forcing nondebtors to accept the terms proposed by opposing parties with no voice of opposition. The provisions of the Bankruptcy Code provide for a general sense of the protection of a creditor s best interests and creditor equality. See Bankr. Code 1122(a), 1123(a)(4), 1129(a)(7), 1129(b). As Professor Brubaker notes, by injecting discharge of creditors nondebtor claims into 16

28 a process constructed for treatment of creditors claims against the debtor, non-debtor releases actually upset the Bankruptcy Code s design for creditor equality and permit creditors without valuable non-debtor rights to take value away from creditors with valuable non-debtor rights. Brubaker, Bankruptcy Injunction, 1997 U. Ill. L. Rev. at 981. Thus, creditors without valuable non-debtor rights make out better than creditors with valuable non-debtor rights without any sort of consideration of creditor equality. Proponents of non-debtor releases cannot have it both ways. If creditor equality notions require consideration of creditors rights against non-debtors in an attempt to assure equal treatment, then those non-debtor rights must also be considered in assessing substantial similarity of creditors rights for purposes of appropriate classification. Id. at 985. Creditors with valuable non-debtor rights must be considered and protected to truly adhere to the Code s requirement of creditor equality. Lastly, because a corporation is a fictional legal entity, unlike a human being, a corporation needs no fresh start in the same sense as an individual. Id. at Additionally, only Chapter 7 and 13 of the Code embody the fresh start justification, not Chapter 11. Id. at A corporation is a fictional legal entity, holding no individual person liable for its debts. Id. at In other words, a corporation can dissolve without any effect. Thus, the policy of a fresh start does not apply to a corporation. II. Equitable mootness, by allowing district courts to avoid hearing an appeal without a consideration of the merits, violates Article III of the Constitution and the duty of courts to exercise their jurisdiction. U.S. Const. art. III 1. 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, In re Semcrude, L.P., 728 F.3d 314, 317 (3d Cir. 2013) violates the virtually unflagging obligation of federal courts to hear cases within their jurisdiction, lacks a statutory 17

29 basis, and fails to qualify as one of the clearly defined abstention exceptions. Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976). The obligation of a district court, presented with an appeal from a bankruptcy court, to hear the merits of the case has common law, statutory, and Constitutional underpinnings. The Court has unequivocally established the presumption that 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 (1996). Indeed, Federal courts have no more right to decline the exercise of jurisdiction which is given, than to usurp that which is not given. Cohens v. Virginia, 6 Wheat. 264, 404 (1821); Sprint Commc'ns, Inc. v. Jacobs, 134 S. Ct. 584, (2013). More specifically, federal district courts have original and exclusive jurisdiction of all cases under title U.S.C. 1334(a). Further, parties before a bankruptcy court may appeal final judgments to the district court, which reviews the appeal under traditional appellate standards. See 158(a); Stern v. Marshall, 564 U.S. 462, (2011). Because of the presumption that courts must exercise their jurisdiction, proponents of equitable mootness must begin their search for a legal basis for the doctrine from a serious deficit, one that is not cured by either federal common law or statute. A. Even as a judge-made doctrine, equitable mootness does not empower federal courts to refuse to exercise their appellate jurisdiction over bankruptcy courts, as it is neither an extension of constitutional mootness nor a recognized abstention doctrine. Equitable mootness is not properly understood as a carve out to the presumption that courts should hear cases properly before them. Bankruptcy decisions are subject to traditional appellate standards such as Article III s case and controversy requirement, which requires that some form of relief be possible as a condition for a court to exercise jurisdiction of a matter. U.S. Const. art. III 1. Consistent with the presumption that jurisdiction be exercised, the Court has 18