Supreme Court of the United States

Transcription

1 Docket No IN THE Supreme Court of the United States October Term, IN RE PADCO, INC. MEGAN KUZNIEWSKI, v. PADCO, INC., Debtor, Petitioner, Respondent On Writ of Certiorari to the United States Court of Appeals for the Thirteenth Circuit BRIEF FOR RESPONDENT Team R39 Counsel for Respondent Oral Argument Requested

2 QUESTIONS PRESENTED 1. Whether an appellate court has authority to decline to hear an appeal from a bankruptcy court order confirming a chapter 11 plan on prudential grounds using equitable mootness principles? 2. Whether a chapter 11 plan of reorganization can 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? ii

3 TABLE OF CONTENTS QUESTIONS PRESENTED... ii TABLE OF CONTENTS... ii TABLE OF AUTHORITIES... v OPINIONS BELOW... ix STATEMENT OF JURISDICTION... ix STATUTORY PROVISIONS INVOLVED... ix STATEMENT OF THE CASE...1 SUMMARY OF THE ARGUMENT...3 ARGUMENT...4 I. THE THIRTEENTH CIRCUIT CORRECTLY EXERCISED THEIR JURISDICTION TO DECLINE TO HEAR AN APPEAL FROM A BANKRUPTCY ORDER USING EQUITABLE MOOTNESS PRINCIPLES..4 A. The equitable mootness doctrine was created for chapter 11 cases where by allowing redress would be inequitable against third party, non-debtors... 5 B. Appellate courts have authority to deny to exercise their jurisdiction under unique circumstances Courts deny jurisdiction when decisions of state law and policy are at risk Unique circumstances apply where abstention is warranted by considerations of whether a disruptive effect on policy would result...9 C. By allowing court s to exercise equitable mootness principles, courts would adhere to the finality policy of the code...10 II. THE BANKRUPTCY COURT ACTED WITHIN ITS AUTHORITY GIVEN TO THEM BY THE CODE WHEN THE COURT RELEASED THE PETITIONER S CLAIM..13 A. The plain language of the Bankruptcy Code gives the Bankruptcy Court authority to create releases...14 iii

4 B. Gadget s release is essential, consensual, and fair to the reorganization plan Gadget s release was essential to the plan because without Gadget s investment Padco would not have the finances to perform a Chapter 11 Bankruptcy plan The class the Petitioner was placed in consented to the release of Gadget by an overwhelming majority Gadget s release was fair because it allowed the Petitioner and other creditors in their class to receive more money than they would have in any other plan 22 C. Not allowing the court to grant third party releases will not only harm everyone involved in Padco s plan, but will also stagnate the economy...23 CONCLUSION...25 APPENDIX A...A APPENDIX B...B APPENDIX C...C APPENDIX D...D APPENDIX E...E iv

5 TABLE OF AUTHORITIES UNITED STATES SUPREME COURT CASES Bullard v. Blue Hills Bank, 135 S. Ct (2015)...11 Burford v. Sun Oil Co., 319 U.S. 315 (1943).9 Canada Malting Co. v. Paterson S. S., Ltd., 285 U.S. 413 (1932).9 Colo. River Water Conservation Dist. v. United States, 424 U.S. 800 (1976)...10 Conn. Nat l Bank v. Germain, 503 U.S. 249 (1992)...15 La. Power & Light Co. v. City, 360 U.S. 25 (1959)...9 Moses H. Cone Mem l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)...10 Quackenbush v. Allstate Ins. Co., 517 U.S. 706 (1996).8 RadLAX Gateway Hotel, LLC v. Amalgamated Bank, U.S., 132 S. Ct (2012)...15 United States v. Energy Res. Co., 495 U.S. 545 (1990)...4, 14 United States v. Ron Pair Enterprises, Inc., 489 U.S. 235 (1989)...15 United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010)...11 v

6 UNITED STATES CIRCUIT COURT OF APPEALS CASES Accord Airadigm Communications, Inc. v. FCC (In re Airadigm Communications, Inc.), 519 F.3d 640, 657 (7th Cir. 2008)...14, 15 Bennett v. Veale, 60 F.3d 828 (6th Cir. 1995).6 Chamber of Commerce v. United States Dep t of Energy, 627 F.2d 289, 291 (D.C. Cir. 1980) Chateaugay Corp. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944 (2d Cir. 1993)...7, 8 Deutsche Bank AG v. Metromedia Fiber Network, Inc., 416 F.3d 136 (2nd Cir. 2005).Passim Drexel Burnham Lambert Trading Corp. v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 960 F.2d 285 (2d Cir. 1992)...18 In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989) , 20 In re AOV Indus., Inc., 792 F.2d 1140 (D.C. Cir.1986)..4, 10 In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000)...Passim In re Dow Corning, 280 F.3d 648 (6th Cir. 2002)...16, 17 In re Eagle Picher Indus., Inc., 172 F.3d 48 (6th Cir. 1998)...16 In re Information Dialogues, Inc., 662 F.2d 475 (8th Cir. 1988).11 In re Made in Detroit, Inc., 414 F.3d 576 (6th Cir. 2005).12 In re Texaco, 92 Bankr. 38 (S.D.N.Y. 1988)...10 In re Zale Corporation, vi

7 62 F.3d 746 (5th Cir. 1995).17, 18 Manges v. Seattle-First Nat l Bank (In re Manges), 29 F.3d 1034 (5th Cir. 1994)...4, 6 Momentum Mfg. Corp. v. Employee Creditors Comm. (In re Momentum Mfg. Corp.), 25 F.3d 1132 (2d Cir. 1994)...14 Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe), 677 F.3d 869 (9th Cir. 2011)... 7 Ochadleus v. City of Detroit (In re City of Detroit), 838 F.3d 792 (6th Cir. 2016).11 Rev Op Group v. ML Manager LLC (In re Mortgs. Ltd.), 771 F.3d 1211 (9th Cir. 2014).2 Search Mkt. Direct, Inc. v. Jubber (In re Paige), 584 F.3d 1327 (10th Cir. 2009)...5 Trone v. Roberts Farms, Inc. (In re Roberts Farms, Inc.), 652 F.2d 793 (9th Cir. 1981)...6 UNITED STATES DISTRICT COURT CASES Abrahams v. Hentz, 2013 WL (S.D. Cal. 2013) 6 ACC Bondholder Grp. v. Adelphia Communs. Corp (In re Adelphia Communs. Corp), 367 B.R. 84 (S.D.N.Y. 2007)...7 In re Revere Copper & Brass, Inc., 78 Bankr. 17 (S.D.N.Y. 1987)...11 UNITED STATES BANKRUTPCY COURT CASES In re City of Detroit, 504 B.R. 191, 192 (Bankr. E.D. Mich. 2013) 11 In re Master Mortgage Investment Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994) vii

8 FEDERAL STATUTES 11 U.S.C. 105(a)..3, 13, 14, U.S.C. 524(e) U.S.C 1101(2).. 5, 6 11 U.S.C. 1123(b)(6) 3, 14, U.S.C 1127(b) 5, 13 SECONDARY SOURCES G. Marcus Cole, A Calculus Without Consent: Mass Tort Bankruptcies, Future Claimants, and The Problem of Third Party Non-Debtor Discharge, 84 Iowa L. Rev. 753, 757 (1999)...24 Joshua M. Silverstein, Hiding in Plain View: A Neglected Supreme Court Decision Resolves the Debtate Over Non-Debtor Releases in Chapter 11 Reorganizations, 23 Emory Bankr. Dev. J. 13 (2010) Ryan M. Murphy, Equitable Mootness Should Be Used as a Scalpel Rather than an Axe in Bankruptcy Appeals, 19 Norton J. Bankr. L. & Prac. 33, 33 (2010)..8 viii

9 OPINIONS BELOW The United States District Court of Moot entered an order affirming dismissal based on equitable mootness grounds. The court stated that hearing the case would be improper because the plan had been substantially consummated and dismissing the appeal would affect the debtor, its creditors, third parties, and would go against the bankruptcy policy of finality. It further affirmed that the permanent injunction, releasing a non-debtor from any claims by debtor s creditors, was proper and necessary to the success of the debtor s reorganization. The Circuit Court of Appeals for the Thirteenth Circuit affirmed the holding of the District Court. (R. at 14). This appeal follows. STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. STATUTORY PROVISIONS INVOLVED The relevant statutory provisions involved in this case are listed below and reproduced in Appendices A through E. 11 U.S.C. 105(a) 11 U.S.C. 524(e) 11 U.S.C 1101(2) 11 U.S.C. 1123(b)(6) 11 U.S.C 1127(b) ix

10 STATEMENT OF THE CASE Padco s Batteries. Padco, Inc. ( Padco ) filed for chapter 11 following a catastrophic effect by defective batteries on tablet computers, causing them to explode. (R. at 2). Gadget, Inc. (Gadget), agreed to finance and support Padco s reorganization. 1 Id. However, Gadget was unwilling to acquire Padco and invest in the new product line unless it could be certain that it would be free of all liabilities arising or related to Padco. (R. at 3). Chapter 11 Plan. In order to meet Gadget s demand for immunity as the price of its support, Padco s plan included a permanent injunction that enjoined the victims of Padco s exploding batteries from bringing any claims against Gadget. (R. at 4). The order confirming the chapter 11 plan ( plan ) included a permanent injunction, enjoining victims of the battery defect from bringing claims, arising or related to the defect, against Gadget. (R. at 4). Creditors with claims, such as Megan Kuzniewski ( Petitioner ), were placed in a class of unsecured creditors where they were to receive a great portion of the bankruptcy distribution in comparison to all other unsecured creditors. Id. Almost 80 percent of the class voted to accept the plan; Petitioner objected. Id. Petitioner Attacks the Plan. In addition to Petitioner s rejection of the plan, Petitioner objected to the confirmation of the plan, alleging that the bankruptcy code did not provide authority for a bankruptcy court to approve a plan providing for injunctions against direct claims. (R. at 4). Subsequently, the Bankruptcy Court of Moot held an evidentiary hearing concluding that the permanent injunction was necessary to the success of the plan and nevertheless fair for 1 Gaget invested more than $500 million to redesign the Padco tablet; borrowed over $2.6 billion after merging Gadget and Padco to develop new product lines, issuing publicly traded stocks and bonds that were bought and sold by numerous investors on the market. (R. 2-3). 1

11 the Petitioner and other creditors 2. (R. at 5). The findings of facts were entered and the plan became effective two days after entry of the confirmation order. Id. Procedure. Following the plan confirmation, Petitioner requested and was denied a stay by the Bankruptcy Court of Moot. (R. at 5). Thereafter, Petitioner appealed the denial to the District Court of Moot and was once again denied. Id. Padco moved to dismiss Petitioner s appeal under the doctrine of equitable mootness and the District Court affirmed the dismissal. (R. at 5). The Thirteenth Circuit Court of Appeals affirmed. (R. at 14). This appeal follows. STANDARD OF REVIEW In evaluating a dismissal on equitable mootness grounds, a court of appeals reviews factual findings for clear error and legal conclusions de novo. Rev Op Group v. ML Manager LLC (In re Mortgs. Ltd.), 771 F.3d 1211, 1214 (9th Cir. 2014); Grasslawn Lodging, LLC v Transwest Resort Props., Inc. (In re Transwest Resort Props., Inc.), 801 F.3d 1161, 1168 (9th Cir. 2015). With respect to the non-debtor release, the bankruptcy and district courts conclusions of law are reviewed de novo and findings of fact for clear error. Deutsche Bank AG, London Branch v. Metromedia Fiber Network, Inc., 416 F.3d 136, 139 (2d Cir. 2005); ASM Capital, LP v. Ames Dep t Stores, Inc., (In re Ames Dep t Stores, Inc.), 582 F.3d 422, 426 (2d Cir. 2009). The questions presented here are questions of law. Thus, these arguments should be reviewed de novo. 2 The court held that plaintiff received more compared to what she would have received had Padco resorted to a Chapter 7 proceeding without Gadget s financing and support. (R. at 5). 2

12 SUMMARY OF THE ARGUMENT The district court rightfully dismissed Petitioner s appeal as being equitably moot. The significance of the Equitable Mootness Doctrine is to prevent consummated chapter 11 plans from being overturned under particular circumstances. The protection of overturning a plan under this judicially created doctrine is not exclusively afforded to debtors, but it also protects third-party non-debtors from being detrimentally affected. Additionally, federal district and appellate courts have the authority to refuse to hear matters for which it has jurisdiction and plenary power over; equitable mootness substantiates this notion as federal court need not overturn a confirmed plan that has been substantially consummated. Finally, equitable mootness supports the fundamental finality principle of chapter 11 confirmations. In bankruptcy proceedings, affording finality to judgments of bankruptcy courts is the equitable component favoring reorganization and the settlement of a debtor s estate. Additionally, the bankruptcy court acted within bounds of the Bankruptcy Code in authorizing a permanent injunction, releasing a non-debtor from liability from third-party claims. Sections 105 & 1123(b)(6) grant bankruptcy courts the power to authorize non-debtor releases when needed for the success of the plan confirmation. Courts have held that a release of a creditor s claim is allowed only when the third party is essential, consensual, and fair to the plan. As such, a release provision releasing a non-debtor from creditor claims is proper when it is the very lynch pin of a debtor s chapter 11 bankruptcy; the overwhelming majority of the Petitioner s class consented to the release; and it allowed the Petitioner to receive more money than they would in any other plan. Lastly, the fairness of this plan supports the fresh start policy for the debtor while providing the largest compensation paid to Petitioner and each of the class of creditors. 3

13 For these reasons, this Court should affirm the decision of the Court of Appeals for the Thirteenth Circuit, holding that Petitioner s claims against Padco be dismissed as being equitable moot and that Padco s release of Gadget from claims by Petitioner is proper under the Bankruptcy Code. ARGUMENT I. THE THIRTEENTH CIRCUIT CORRECTLY EXERCISED THEIR JURISDICTION TO DECLINE TO HEAR AN APPEAL FROM A BANKRUPTCY ORDER USING EQUITTABLE MOOTNESS PRINCIPLES. In this context, mootness is not an Article III inquiry as to whether a live controversy is presented; rather, it is recognition by the appellate courts that there is a point beyond which they cannot order fundamental changes in reorganization actions. See In re AOV Indus., Inc., 792 F.2d 1140, 1147 (D.C. Cir. 1986). Although the equitable mootness doctrine functions like an abstention doctrine in the traditional, constitutional sense, it analogizes more generally to a prudential doctrine, primarily focusing on principles of fairness and equity. The concept of mootness from a prudential standpoint protects the interests of non-adverse third parties who are not before the reviewing court, but who have acted in reliance upon the plan as implemented. Manges v. Seattle- First Nat l Bank (In re Manges), 29 F.3d 1034, 1039 (5th Cir. 1994). In order to determine whether a case is equitably moot in this prudential sense, five interrelated factors articulated by the Third Circuit s approach in In Re SemCrude are considered in two questions: (1) has the plan been substantially consummated; and (2) would the relief requested (a) fatally scramble the plan or (b) significantly harm third parties who have justifiably relied upon the confirmation order. Samson Energy Res. Co. v. SemCrude, L.P. (In re SemCrude, L.P.), 728 F.3d 314, (3d Cir. 2013). The Bankruptcy Code defines substantial consummation as: (A) transfer of all or substantially all of the property proposed by the plan to be transferred; (B) 4

14 assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and (C) commencement of distribution under the plan. 11 U.S.C. 1101(2). Substantial consummation precludes modification of a plan. 11 U.S.C. 1127(b). The court has adopted the substantial consummation yardstick because it informs the court s judgment as to when finality concerns and the reliance interests of third parties upon the plan as effectuated have become paramount to a resolution of the dispute between the parties on appeal. Search Mkt. Direct, Inc. v. Jubber (In re Paige), 584 F.3d 1327, 1341 (10th Cir. 2009). In the context of the equitable mootness doctrine, the appellate court must consider whether the remedy the appellants seek will affect the success of the plan or alter the rights of third parties that have been achieved by its substantial consummation. Id. at It is important to note, however, that the merits of whether Petitioner s appeal is equitably moot is not the issue on appeal before this court and the Petitioner does not challenge the merits. Instead, the issue is whether the Thirteenth Circuit had authority to be able to exercise their jurisdiction in applying the doctrine at all. Because we are of the position that they do, appellate courts have authority to deny to exercise their jurisdiction under unique circumstances such as these. Accordingly, the court should affirm the decision of the Thirteenth Circuit because the equitable mootness doctrine was created for ch.11 cases where allowing redress on appeal would be inequitable and by allowing courts to exercise their jurisdiction based on equitable mootness principles would adhere to the finality policy of the bankruptcy code. A. The equitable mootness doctrine was intended for ch.11 cases where redress would be inequitable against third party, non-debtors. Although it is not clear when the term of equitable mootness first came into use, the concept was applied some time after the enactment of the Bankruptcy Code in Early cases treated 5

15 equitable mootness similarly to traditional Article III mootness, despite incorporating some equitable factors. In re Eagle Picher Indus., Inc., 172 F.3d 48 (6th Cir. 1998) (discussing equitable mootness in context of constitutional mootness); Bennett v. Veale, 60 F.3d 828 (6th Cir. 1995). It is important to note that this doctrine is not based in statute, rather it is a doctrine that was judicially created in recognition of the fact that it would be inequitable, in certain, special circumstances, to overturn a confirmed plan of reorganization. In re Manges, 29 F.3d 1034, 1043 (5th Cir. 1994). It arose out of a necessity to protect third party, non-debtors from unfairly unscrambling a confirmed plan to their detriment. Furthermore, the doctrine is unique to bankruptcy proceedings where a reversal of any confirmation orders would knock the props out from under the authorization for every transaction that has taken place, and would do nothing other than create an unmanageable, uncontrollable situation for the Bankruptcy Court. Trone v. Roberts Farms, Inc. (In re Roberts Farms, Inc.), 652 F.2d 793, 797 (9th Cir. 1981). This judge-made doctrine was created to address situations where redress would be possible if overturned, but would be inequitable to do so against third party, non-debtors. In Abrahams v. Hentz, the United States District Court for the Southern District of California held that because a debtor failed to seek a stay of bankruptcy proceedings and a settlement agreement reached substantial consummation as defined in 1101(2), the debtor s appeal was equitably moot. Abrahams v. Hentz, 2013 WL (S.D. Cal. 2013). Due to Appellant s failure to obtain a stay of the bankruptcy proceedings, Trustee commenced distribution of assets pursuant to the settlement order, including to the creditors who were third parties not before the Court. Id. The Trustee argued that granting Appellant relief would be inequitable because Trustee had already transferred $500,000 from the estate to the Creditors in reliance on the settlement agreement. Id. The Court agreed with Trustee and found that granting the Appellant 6

16 relief would unravel the settlement agreement, thereby unfairly affecting the Creditors and innocent third parties not before the Court. Id. (citing Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe), 677 F.3d 869, 882 (9th Cir. 2011). Likewise, a case out of the United States District Court for the Southern District of New York dismissed an appeal based on equitable mootness principles because the plan had been substantially consummated, cataloging all of the steps that had been taken since the stay was lifted and the plan went into effect. ACC Bondholder Grp. v. Adelphia Communs. Corp. (In re Adelphia Communs. Corp.), 367 B.R. 84, 94 (S.D.N.Y. 2007). The court reasoned that under the doctrine of equitable mootness, an appeal should be dismissed when, even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable. Id. at 91 (citing Deutsche Bank AG, London Branch v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 144 (2d Cir. 2005)). This court further stressed the importance of finality and reasoned that completed acts in accordance with an unstayed order of the bankruptcy court must not thereafter be routinely vulnerable to nullification if a plan of reorganization is to succeed. Chateaugay Corp. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944, 954 (2d Cir. 1993). Similarly, Padco s reorganized plan was confirmed in January of 2015, and between that time and the district court s affirmance of the plan in mid-2016, most unsecured creditors received some stock in Gadget. (R. at 3). Both Gadget stock and bonds were publicly traded and numerous parties have bought and already sold those securities since the plans confirmation date. (R. at 3). The Petitioner is asking to reverse this already consummated plan and to do so would unscramble a complicated, multi-party negotiation that has been finalized. This is the very unscrambling that the equitable mootness doctrine was created to prevent, and various courts 7

17 agree. In re Chateaugay Corp., 10 F.3d at 961. The doctrine further protects the ability for creditors, third-party non-debtors and anyone down the line in a reorganized plan from reversal and allows for the reliance on the finality of the substantially consummated plan to adhere to this policy in bankruptcy. It is not concerned with the ability of inability to redress, but rather stresses the importance of balancing fairness to all parties. B. Appellate courts have authority to deny to exercise their jurisdiction under unique circumstances. Because Appellate courts function like federal courts, appellate courts do have the power to decline to hear an appeal if special circumstances exist. The equitable mootness doctrine constitutes a judicial anomaly in that it permits a federal court to voluntary refrain from exercising jurisdiction over an appeal that is indisputable ripe for adjudication simply on the ground that granting relief would be inequitable. 3 The unflagging obligation to hear a case on appeal is not a duty that is absolute, but, rather, discretionary and should be applied narrowly where special circumstances exist. Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716 (1996). 1. Courts deny jurisdiction when decisions of state law and policy are at risk. In Quackenbush v. Allstate Ins. Co., a case out of the Supreme Court where an insurance commissioner and trustee fought over assets of a bankrupt insurance company, sought a review of a judgment from the United States Court of Appeals for the Ninth Circuit. Quackenbush, 517 U.S. at 711. The Court held a remand order was appealable as a final decision under 28 U.S.C because it put the litigants effectively out of court, it surrendered jurisdiction of a federal suit to a state court, it presented an important issue separate from the merits, amounted to a refusal to adjudicate the case in federal court, and could not be reviewed on appeal from a final judgment. Id. 3 Ryan M. Murphy, Equitable Mootness Should Be Used as a Scalpel Rather than an Axe in Bankruptcy Appeals, 19 Norton J. Bankr. L. & Prac. 33, 33 (2010). 8

18 at 713. The court found that although Federal courts have an obligation to hear a case on appeal, this duty is not absolute. Id. at 716; see Canada Malting Co. v. Paterson S. S., Ltd., 285 U.S. 413, 422 (1932). The proposition that a court having jurisdiction must exercise it, is not universally true and many courts agree that protecting the authority of state law is essential to the preservation of their power. Id. Likewise, the Supreme Court in Burford v. Sun Oil Co., ruled that abstention was appropriate where the questions of regulation of the oil industry by defendant, a state administrative agency, so clearly involved basic problems of Texas policy that equitable discretion should have been exercised to give the Texas courts the first opportunity to consider them. Burford v. Sun Oil Co., 319 U.S. 315, 332 (1943). The Court found that the state provided a well-organized system of regulation and review, to which the federal courts could have made only a small contribution, and that delay, misunderstanding of local law, and needless federal conflict with the state policy were certain to result from their intervention. Id. at 327. It is particularly desirable to decline to exercise equity jurisdiction when the result is to permit a state court to have an opportunity to determine questions of state law, which may prevent the necessity of decision on a constitutional question. Chicago v. Fieldcrest Dairies, Inc., 316 U.S. 168, 173 (1942). 2. Unique circumstances apply where abstention is warranted by considerations of whether a disruptive effect on policy would result. Many federal courts have exercised their jurisdiction to deny to hear a case because of issues that would disrupt policy problems of substantial public import whose importance transcends the result in the case then at bar. La. Power & Light Co. v. City, 360 U.S. 25, 40 (1959). In some cases... it is enough that exercise of federal review of the question in a case and in similar cases would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial 9

19 public and policy considerations. Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 814 (1976). Some factors relevant to the decision for a federal court to dismiss proceedings in favor of state court proceedings include a consideration of whether a court first assuming jurisdiction over property may exercise that jurisdiction to the exclusion of other courts; assessing the appropriateness of dismissal in the event of an exercise of concurrent jurisdiction. Moses H. Cone Mem l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, (1983). A federal court may also consider factors such as the inconvenience of the federal forum, the desirability of avoiding piecemeal litigation, and the order in which jurisdiction was obtained by the concurrent forums. Id. No one factor is necessarily determinative; a carefully considered judgment taking into account both the obligation to exercise jurisdiction and the combination of factors counseling against that exercise is required. Id. at 16. It is no different than an application of factors required to render an appeal equitably moot from a bankruptcy order. While carefully considering each factor, it is at the court s discretion to decide whether an appeal is moot and this power is vested in the federal courts as it is in the appellate courts. The merits of an appeal are not barred at the appellate level. Their duty is to decide what is fair and equitable under the circumstances and in this case under the circumstances of a finalized, substantially consummated, multi-party negotiation. Undoing what has already been done would substantially hinder Padco from becoming viable again. C. By allowing courts to exercise equitable mootness principals, courts would adhere to the finality policy of the bankruptcy code. The equitable component to the mootness doctrine is rooted in the court s discretion in matters of remedy and judicial administration, not to determine a case on its merits. In re AOV, 792 F.2d at 1147 (quoting Chamber of Commerce v. United States Dep t of Energy, 627 F.2d 289, 10

20 291 (D.C. Cir. 1980)); In re Texaco, 92 Bankr. 38, 45 (S.D.N.Y. 1988). In bankruptcy proceedings, the equitable component centers on the important public policy favoring orderly reorganization and settlement of debtor estates by affording finality to the judgments of the bankruptcy court. Id. (quoting In re Revere Copper & Brass, Inc., 78 Bankr. 17, 23 (S.D.N.Y. 1987)); In re Information Dialogues, Inc., 662 F.2d 475, 477 (8th Cir. 1988). When a bankruptcy court confirms a plan, its terms become binding on debtor and creditor alike. 11 U. S. C. 1327(a). Confirmation has preclusive effect, foreclosing re-litigation of any issue actually litigated by the parties and any issue necessarily determined by the confirmation order. Bullard v. Blue Hills Bank, 135 S. Ct. 1686, 1692 (2015). Confirmation orders are enforceable and binding. United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 262 (2010). In In re City of Detroit, the court out of the 6 th circuit found that equitable mootness is not concerned with the court s ability or inability to grant relief; it is concerned with protecting the good faith reliance interests created by implementation of the bankruptcy plan from being undone afterwards, noting also that no circuit has yet abolished equitable mootness and, therefore, it remains a viable doctrine. Ochadleus v. City of Detroit (In re City of Detroit), 838 F.3d (6th Cir. 2016). The City of Detroit filed for municipal bankruptcy on July 18, 2013, pursuant to Chapter 9 of the Bankruptcy Code, 11 U.S.C. 109(c). At the time of filing, the City had over $18 billion in escalating debt, over 100,000 creditors, hundreds of millions of dollars of negative cash flow, crumbling infrastructure (e.g., some 78,000 abandoned structures, half classified as dangerous ; another 66,000 blighted vacant lots; a crumbling water and sewer system; 40% nonfunctioning streetlights; outdated computer systems and software), and could not provide the basic police, fire[,] and emergency medical services that its residents need[ed] for their basic health and 11

21 safety. In re City of Detroit, 504 B.R. 191, 192 (Bankr. E.D. Mich. 2013). In bankruptcy, the City crafted a series of intricate and carefully woven settlements with almost all of its creditors and stakeholders. Those settlements were memorialized in the Eighth Amended Plan for the Adjustment of Debts of the City of Detroit Plan. After extensive hearings, the bankruptcy court confirmed the Plan in a Confirmation Order dated November 12, In this case, the court found that all three factors of the equitable mootness doctrine were met. Because equitable mootness is grounded in the notion that, with the passage of time after a judgment in equity and implementation of that judgment, effective relief on appeal becomes impractical, imprudent, and therefore inequitable. See In re United Producers, 526 F.3d at 947. Equitable mootness negates appellate review of the confirmation order or the underlying plan, regardless of the problems therein or the merits of the appellant s challenge. In re Made in Detroit, Inc., 414 F.3d 576, 581 (6th Cir. 2005). In Detroit, the creditors were able to rely on the finality of the consummated plan and the court out of the 6 th circuit determined that this was far more important than granting relief, unscrambling the plan, and unfairly treating third parties. Likewise, Padco has emerged from bankruptcy as a successful enterprise. (R. at 7). That success was achieved precisely because the parties to the reorganization could rely on the confirmation order to seal their bargains and because numerous third parties could rely on the debtor s apparent emergence from bankruptcy to invest in the new enterprise, trade in its debt and equity securities and enter into new transactions with it. (R. at 7). Too much has happened for this court to now undo the plan and upset the settled expectations of those parties. (R. at 7). To upset the already consummated, finalized plan would be to essentially depriving parties from relying on a plan that would only then be reversed, shaken up, or changed and unscrambled. It is too unfair and 12

22 too difficult, particularly in a Ch.11, to undo what has already been done. The interests of finality and reliance are paramount to a Chapter 11 private business entity with investors, shareholders, and employees, like Padco. Not to mention the classes of creditors that have already been divided and set priority wise. Reversal of this confirmation order would undermine public confidence in the finality of bankruptcy orders and make the successful completion of large reorganizations more difficult. In short, the harm to Padco far outweighs the harm to the Petitioner. This is the scenario that equitable mootness was designed to avoid. Furthermore, while the bankruptcy code gives no mention on whether appellate courts have authority to deny hearing an appeal based on equity and fairness, it does, however, embody a strong policy of limiting judicial review at the appellate level. Section 1127(b) dramatically curtails the court s power to modify a plan after its confirmation and substantial consummation. Market confidence in confirmation orders is simply too important to upset the confirmation order and return this case to the Bankruptcy court. To do so would unravel the distributions and transactions resulting from the plan so that a new plan could be negotiated. There is no way that the court could have granted the Petitioner effective relief without creating chaos in the Bankruptcy Court. (R. at 9). II. THE BANKRUPTCY COURT ACTED WITHIN ITS AUTHORITY WHEN THE COURT RELEASED THE PETITIONER S CLAIM. Gadget s release was essential, consensual, and fair. Thus, the Bankruptcy Court acted within its divested powers of the code to release Gadget from the Petitioner s claim. The First, Second, Third, Fourth, Sixth, Seventh, Eighth, and Eleventh Circuits have held that under 11 U.S.C. 105(a) a third party can be released when: (1) the third party makes an investment that is so essential to the debtor s reorganization that the plan would not exist without the investment; (2) a majority of the number of creditors who hold two-thirds the debt agreed to the investment s 13

23 release; and (3) used to pay the class of creditors more money than they would receive in any other plan. A. The plain language of the Bankruptcy Code gives the Bankruptcy Court authority to create releases. The express statutory language of the Bankruptcy Code allows Bankruptcy Courts to create a release through their general equitable power. 4 There are two sections of the Bankruptcy Code that gives the court the authority to create releases. First, there is 11 U.S.C. 105(a), which states [t]he Court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]. Accord Airadigm Communications, Inc. v. FCC (In re Airadigm Communications, Inc.), 519 F.3d 640, 657 (7th Cir. 2008). Second, there is 11 U.S.C. 1123(b)(6) which allows broad discretion to include any other provision not inconsistent with the Bankruptcy Code in the Chapter 11 plan. Id. The Supreme Court and numerous courts have interpreted 105(a) to be a gap filler that gives bankruptcy courts the power to create any release or order necessary that is not expressly prohibited by the Bankruptcy Code. See United States v. Energy Res. Co., 495 U.S. 545, 549 (1990) ( The Code, however, grants the bankruptcy courts residual authority to approve reorganization plans including any... appropriate provision not inconsistent with the applicable provisions of this title. ); Accord Airadigm Communications, Inc., 519 F.3d 640, 657 (7th Cir. 2008). Thus, the bankruptcy court here had authority to release the Petitioner from suing Gadget because the code is silent on the subject and the passive construction of 11 U.S.C. 524(e) does not expressly bar the court from doing so. 4 It is well settled that bankruptcy court are courts of equity, empowered to invoke equitable principles to achieve fairness and justice in the reorganization process. Momentum Mfg. Corp. v. Employee Creditors Comm. (In re Momentum Mfg. Corp.), 25 F.3d 1132, 1136 (2d Cir. 1994) (in holding that section 105(a) of the Code is construed to liberally in enjoining actions that may get in the way of the reorganization process). 14

24 The passive language used in the construction of 11 U.S.C. 524(e) indicates that congress did not intend to ban the Bankruptcy Court s power to release a third party, such as Gadget, from a creditor s claim. It is the duty of the courts to interpret the Code clearly and predictably using well established principles of statutory construction. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, U.S., 132 S. Ct. 2065, 2073 (2012). [C]ourts must presume that a legislature says in a statute what it means and means in a statute what is says... Conn. Nat l Bank v. Germain, 503 U.S. 249, (1992) (citing United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, (1989)). Thus, the cardinal rule of statutory construction is to begin with the express language of the statute. Germain, 503 U.S. at 253 (1992). A case out of the seventh circuit concluded that the natural reading of 524(e) does not foreclose a third-party release of a creditor claim. Accord Airadigm Communications, Inc. v. FCC (In re Airadigm Communications, Inc.), 519 F.3d 640, 657 (7th Cir. 2008). The court in Accord went as far as to say that if Congress meant to include such a limit, it would have used the mandatory terms shall or will rather than the definitional term does. Id. (emphasis added). Therefore, interpreting 524(e) as an all-out ban on releases would be counter to the well-established principles of statutory construction. Moreover, the Court reasoned 524(e) is merely a savings clause used to preserve some rights lost after reorganization. Thus, a discharged debt is still around, while a released debt is completely gone. Id. Thus, the circuit court held in Accord that the bankruptcy court did not exceed its authority when it released a third party from liability. Id. at 657. Just as the Creditor s in Accord, the Petitioner s claim will be completely erased if Gadget obtains its release. As it was said in Accord, a discharged debt still exists and may be collected in some other way than by payment of the debtor. This is not the case here. If Gadget 15

25 is released, the Petitioner will not be able to sue anyone. Thus, the entire debt will be completely erased. This falls squarely into what Accord considers to be a release. Just as it was stated in Accord, there is nothing in the code that expressly prohibits a release of this type. Therefore, such a release is well in the equitable powers of the Bankruptcy Court given to them by 105(a), a gap filler according to Supreme Court, and 1123(b)(6). The Petitioner in this case seeks to create and extract some type of unwritten policy from 524(e) by stating that because 524(g and h) exist, congress meant for 524(e) to be an all out ban on releases. However, this is flawed. 524(g and h) were created because products that were used in the past had unforeseen consequences in the future. This is very similar to the facts here. Padco is in the business of innovation; thus, it is clear that they will be using products that have not been in existence before. Many of these products will have unforeseen consequences. By setting a precedent that goes against the statutory construction of the code, companies may not invest in bankrupt companies out of fear of future litigation. This will stagnate the economy. That is why 524(e) was written passively and that is why the courts must interpret it by its plain language. This plain language does not bar third party releases. Thus, the courts have the authority to allow Gadget s release. The Bankruptcy Code gives Bankruptcy courts the authority to create third party releases because there is nothing in the Bankruptcy code that expressly bans releases. The First, Second, Third, Fourth, Sixth, Seventh, Eighth, and Eleventh Circuits all agree that 11 U.S.C. 105(a) and 11 U.S.C. 1123(b)(6) give Bankruptcy Courts the equitable power to release a third party. See In re Dow Corning, 280 F.3d 648 (6th Cir. 2002); Deutsche Bank AG v. Metromedia Fiber Network, Inc. 416 F.3d 136 (2nd Cir. 2005); In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000); In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989); In re Master Mortgage Investment 16

26 Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994). Even the Fifth Circuit allows such a power in unusual circumstances. In re Zale Corporation. 62 F.3d 746 (5th Cir. 1995). Thus, it is clear that the release given to Gadget by the Court is squarely within the authority given to them by the Code. B. Gadget s release is essential, consensual, and fair to the reorganization plan. The release provision releasing Gadget from creditor claims was proper because Gadget s investment was: (1) the very lynch pin of Padco s chapter 11 bankruptcy; (2) consented to by an overwhelming majority of the Petitioner s class; and (3) allowed the Petitioner to receive more money than they would in any other plan. The majority of Circuits have held that a bankruptcy court may properly allow a third- party release to be included in a chapter 11 plan of reorganization in appropriate circumstances. See In re Dow Corning, 280 F.3d 648 (6th Cir. 2002); Deutsche Bank AG v. Metromedia Fiber Network, Inc. 416 F.3d 136 (2nd Cir. 2005); In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000); In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989); In re Zale Corporation. 62 F.3d 746 (5th Cir. 1995); In re Master Mortgage Investment Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994). While there is some debate on what exactly constitutes appropriate circumstances, a common theme that arises out of all such cases is that the release was essential for the plan to succeed; a majority of both the member and the amount owed consent to the release; and the release was fair to both parties. 1. Gadget s release was essential to the plan because without Gadget s investment Padco would not have the finances to perform a Chapter 11 Bankruptcy plan. It has been held that a release is allowed when the third party s contribution is essential to the Chapter 11 plan. In essence, this means that the entire plan hinges on the third party s investment, thus making it the lynch pin of the plan. See In re Dow Corning, 280 F.3d 648 (6th 17

27 Cir. 2002); Deutsche Bank AG v. Metromedia Fiber Network, Inc. 416 F.3d 136 (2nd Cir. 2005); In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000); In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989); In re Zale Corporation. 62 F.3d 746 (5th Cir. 1995); In re Master Mortgage Investment Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994). The Second Circuit found in Deutsche Bank that while a third party s contribution to the bankruptcy estate was substantial, there was not adequate findings that the contribution was necessary to the plan itself. Deutsche Bank AG, 416 F.3d at 142. In Deutsche Bank, a third party invested approximately $200 million in debt forgiveness, stock, and cash into the debtor s, a large communication company, chapter 11 reorganization plan. Id. at 141. In exchange, the third party would receive a comprehensive release of liability from all claims of any nature related to the debtor. Id. at 141. This release was approved in the Bankruptcy Court and affirmed at the district level in which the petitioners, non-consenting creditors, appealed to the circuit court. One of the petitioners primary challenges was that such a release was not authorized. Id. at 141. However, the court reasoned that such a release is proper when the release plays an important role in the debtor s reorganization plan. Id. at 141 (quoting Drexel Burnham Lambert Trading Corp. v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 960 F.2d 285, 293 (2d Cir. 1992) (emphasis added). Thus, the third party s investment must be important to the success of the debtor s plan. The Third circuit has also held that a release of a creditor s claim is allowed only when the third party is necessary and integral to the plan. In re Continental Airlines, 203 F.3d 203, 216 (3d Cir. 2000). Here the petitioners, whose claims were released, received no consideration for such a measure. Id. at 215. In fact, the circuit court found nothing in the record show[ed] a relationship between the creditor s claim against the third-party and success of the reorganization 18

28 plan. Id. at 215. Thus, the court held that while a release is allowed in certain circumstances, the release here was not essential to the plan and therefore was not allowed. As it was found in Deutsche Bank, a third party s investment must be important to the success of the debtor s plan for a release of liability to be allowed. Gadget s investment is not only important to Padco s plan, but it is also essential to their plan. It is undisputed that without Gadget s investment of $500 million, Padco s reorganization plan would not even exist. While Deutsche Bank did not have adequate findings to show that their third party s investment was important enough to the debtor s plan, Gadget s importance is undisputed. Gadget has even been considered the lynch pin of Padco s entire plan. Gadget has invested $500 million in cash and stocks into Padco s plan, more than double what was invested by Deutsche Bank s third party. It is also undisputed that had it not been for this substantial investment by Gadget, Padco would have not been able to reorganize its company and create products that took over 60 percent of the market shares. Instead, Padco would have had to liquidate its assets in a chapter 7 and close its doors. There is insufficient proof that such an outcome would occur to Deutsche Bank s debtor if they did not receive the third party s investment. Thus, it is clear that Gadget s investment is essential to Padco s plan and, therefore, allows a release of Petitioner s claim. Moreover, there is clear, factual findings from the lower court that shows that Gadget s investment was the lynch pin of Padco s reorganization plan. Unlike the third-party in Continental Airlines, in which the court found they gave no consideration to the creditors, the lower court here found that Gadget s substantial investment is the sole reason that a class of unsecured debtors like the Petitioner would receive any consideration for their debts. The Petitioner and her entire class is an unsecured creditor. In any other plan the Petitioner s entire class would be one of the very last class to receive any consideration for their debts. Without 19

29 Gadget s $500 million investment, there would very little money to go around. Thus, it would be highly probable that in any other plan Petitioner and her large class would not receive a penny. It is also undisputed that this consideration is much more than the Petitioner may receive with their novel and unprecedented theory of liability. Another stark contrast between the third-party in Continental Airlines and Gadget is that, according to the record, Gadget s investment has a direct correlation to the success of Padco s reorganization. Thus, Gadget s investment meets the necessity requirement laid out in Continental Airlines. For these reasons, it is clear that Gadget s investments are essential to the success of Padco s reorganization plan. Thus, it is firmly in the courts power to grant Gadget a release against the Petitioner s claims. 2. The class the Petitioner was placed in consented to the release of Gadget by an overwhelming majority. In a chapter 11 reorganization, creditors with similar debts and claims are placed into the same class. This class of creditors will, in turn, vote within their class to either accept or reject provisions of the reorganization plan, including third party releases. A plan, including third party releases, are deemed to be accepted when more than half of the number of creditors who hold more than two-thirds of the total debt have agreed to the plan. See 11 U.S.C. 1126(c). When an overwhelming majority of creditors who hold a personal injury claim vote in favor of a plan that releases a third party from said claim, the fourth circuit holds that all creditors in this class have consented. Menard-Sanford v. Mabey (In re A.H. Robins Co.), 880 F.2d 694, 697 (4th Cir. 1989). In a chapter 11 reorganization, creditors who held a personal injury claim against the debtor and its third party were all put into their own class. Id. at 699. No other creditor in this class, including the Petitioner, objected to being placed in such a class. When the voting commenced, an overwhelming majority of approximately 90% of the class, in 20

30 both creditors and amount held, voted in favor of the plan which included a release of the claim. Id. at 698. For this reason, the court concluded that while the Petitioner did not vote in favor of the plan, an overwhelming majority did. Thus, the entire class of creditors will be deemed to consent to the release. Just as the class of creditors in Menard-Sanford, an overwhelming majority of the creditors in the Petitioner s class voted in favor of the plan. In Padco s reorganization, the Petitioner was placed in a class of creditor s who all had personal injury suits against Padco. Similarly, the petitioner was in a class of creditors who all had personal injury suits against the debtor. Neither the Petitioner here nor the Petitioner in Menard-Sanford objected to being placed in this class. Furthermore, just as the class did in Menard-Sanford, an overwhelming majority of creditors in the Petitioner s class voted in favor of the reorganization plan and the release of Gadget. According to the code, all that is needed for a class to accept a plan is 51% of the creditors in the class and that 51% of creditors have control of 66% of the debt owed in the class. Approximately 80% of all the creditors who held an overwhelming majority of the debt in the Petitioner s class voted in favor of the plan. This is well over the necessary number of votes that are required to be deemed consenting. A similar situation was found in Menard-Sanford with its majority reaching 90%. While the Petitioners themselves did not consent to the plan, an overwhelming majority of the class did. This is yet another similarity to the case at bar, in which an overwhelming majority of the Petitioner s class consented. Thus, everyone in the class is considered consenting, just as it was found in Menard-Sanford. Gadget s release is consensual. An overwhelming majority of creditors who held an overwhelming amount of debt consented to Gadget s release. By allowing one Petitioner to extort an entire plan when the majority has consented would be against bankruptcy principles. 21