In The Supreme Court of the United States

Transcription

1 Docket No In The Supreme Court of the United States October Term, 2016 IN RE PADCO, INC., Debtor, MEGAN KUZNIEWSKI Petitioner, v. PADCO, INC., Respondent. On Writ of Certiorari from the United States Court of Appeals for the Thirteenth Circuit BRIEF FOR PETITIONER Team P18 Counsel for Petitioner Oral Argument Requested

2 QUESTIONS PRESENTED I. 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? II. 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? i

3 TABLE OF CONTENTS Questions Presented... i Table of Authorities... iv Opinions Below... viii Statement of Jurisdiction... viii Statutory Provisions Involved... viii Statement of the Case... 1 Summary of the Argument... 2 Standard of Review... 3 Argument... 4 I. EQUITABLE MOOTNESS IS AN IMPROPER AND UNCONSTITUTIONAL BASIS TO DISMISS A CLAIM IN BANKRUPTCY... 4 A. The doctrine of equitable mootness violates Article III of the Constitution...4 B. Equitable mootness violates the district courts duty to exercise jurisdiction over meritorious claims...8 C. The Bankruptcy Code provides no support for equitable mootness and instead suggests that it should be unavailable Section 1334(c) cannot grant authority for applying equitable mootness because it refers only to original jurisdiction, not appellate jurisdiction the forum in which equitable mootness applies Sections 363(m) and 364(e) do not support the broader doctrine of equitable mootness because they are narrowly tailored exceptions, applicable only to distinct transactions Section 1127(b) cannot support the doctrine of equitable mootness because it does not limit an appellate court s ability to alter a plan, nor does it grant authority to refuse to hear a claim before it 13 ii

4 D. Due to recent narrowing of recognized abstention doctrines, Supreme Court precedent suggests equitable mootness is unavailable as a tactic to escape the duty to exercise jurisdiction...14 E. Principles of equity and fairness are not offended by eliminating equitable mootness because the prudential concerns equitable mootness is designed to alleviate are properly addressed at the remedies stage...16 II. THE BANKRUPTCY CODE STRICTLY PROHIBITS THE PERMANENT INJUNCTION OF NONCONSENTING CREDITORS CLAIMS AND THE RELEASE OF NON-DEBTOR THIRD PARTIES IN A CHAPTER 11 PLAN OF REORGANIZATION A. Section 524(e) strictly prohibits the discharge of non-debtor third party releases B. A bankruptcy court's general equitable power outlined in section 105(a) is expressly limited by more specific provisions of the Bankruptcy Code, displacing its authority to discharge the liabilities of non-debtors C. Permanent injunctions allow non-debtors to receive debtor benefits of chapter 11, which may lead to abuse of the bankruptcy court Conclusion Appendix A... I Appendix B... II Appendix C... III Appendix D... IV Appendix E... X Appendix F... XI Appendix G... XII Appendix H... XIII Appendix I... XIV Appendix J... XIX iii

5 TABLE OF AUTHORITIES U.S. SUPREME COURT CASES Andrus v. Glover Const. Co., 446 U.S. 608 (1980) Burford v. Sun Oil Co., 319 U.S. 315 (1943) Cohens v. State of Virginia, 19 U.S. 264 (1821)...9 Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976)...9, 15 Lexmark Int l, Inc. v. Static Control Components, Inc. 143 S.Ct (2014)...15 McCarthy v. Bronson, 500 U.S. 136 (1991)...11 Railroad Comm n of Texas v. Pullman Co., 312 U.S. 496 (1941)...14 Russello v. United States, 464 U.S. 16 (1983) Spring Commc ns, Inc. v. Jacobs, 134 S.Ct. 584 (2013)...15 Stern v. Marshall, 564 U.S. 462 (2011)... 9, 10 TRW Inc. v. Andrews, 534 U.S. 19 (2001) United States v. Brockamp, 519 U.S. 347 (1997) United States v. Lovasco, 431 U.S. 783 (1977) United States v. Will, 449 U.S. 200 (1980)...5 iv

6 Wellness Int'l Network, Ltd. v. Sharif, 135 S. Ct (2015)...5 Younger v. Harris, 401 U.S. 37 (1971)...15 U.S. CIRCUIT COURT OF APPEALS CASES Airadigm Communications, Inc. v. FCC, 519 F.3d 640 (7th Cir. 2008)...21, 23, 24 American Hardwoods, Inc. v. Deutsche Credit Corp. (In re American Hardwoods, Inc.), 885 F.2d 621 (9th Cir. 1989)... passim ASM Capital, LP v. Ames Dep t Stores, Inc., (In re Ames Dep t Stores, Inc.), 582 F.3d 422 (2d Cir. 2009)...4 Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648 (6th Cir. 2002) Curreys of Nebraska, Inc. v. United Producers, Inc. (In re United Producers, Inc.), 526 F.3d 942 (6th Cir. 2008)...6 Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir. 2005)...17, 20, 22 First Union Real Estate Equity and Mortgage v. Club Assocs. (In re Club Assocs.), 956 F.2d 1065 (11th Cir. 1992)...6 Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944 (2d Cir.1993)...17 J. & G. Sales Ltd. v. Truscott, 473 F.3d 1043 (9th Cir. 2007)...4 Gillman v. Cont l Airlines (In re Cont l Airlines), 203 F.3d 203 (3d Cir. 2000)... passim Grasslawn Lodging, LLC v. Transwest Resort Properties, Inc. (In re Transwest Resort Properties, Inc.), 801 F.3d 1161 (9th Cir. 2015)...6 Hilal v. Williams (In re Hilal), 534 F.3d 498 (5th Cir. 2008)...6 v

7 Landsing Diversified Properties-II v. First Nat'l Bank (In re Western Real Estate Fund, Inc.), 922 F.2d 592 (10th Cir. 1990)... 18, 19, 26 MacArthur Co. V. Johns-Manville Corp., 837 F.2d 89 (2d Cir. 1988)...21 Manges v. Seattle-First Nat l Bank (In re Manges), 29 F.3d 1034 (5th Cir. 1994)...6 Menard-Sanford v. Mabey (In re A.H. Robins Co.), 880 F.2d 694 (4th Cir. 1989)...23 Nordhoff Investments, Inc. v. Zenith Elecs. Corp., 258 F.3d 180 (3d Cir. 2001)... 6, 7 In re One2One Commc'ns, LLC, 805 F.3d 428 (3d Cir. 2015)... passim Resorts Int l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394 (9th Cir. 1995)... passim In re Res. Tech. Corp., 430 F.3d 884 (7th Cir. 2005) R.I.D.C. Industrial Development Fund v. Snyder, 539 F.2d 487 (5th Cir. 1976)...21 SEC v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.) 960 F (2d Cir. 1992)...22 Samson Energy Resources Co. v Semcrude, L.P. (In re Semcrude, L.P.), 728 F.3d 314 (3d Cir. 2013)...4, 16 Underhill v. Royal, 769 F.2d 1426 (9th Cir. 1985)...19 Union Carbide Corp. v. Newboles, 686 F.2d 593 (7th Cir. 1982)...21 United States v. Wong Kim Bo, 472 F.2d 720 (5th Cir. 1972)...12 In re UNR Indus., Inc., 20 F.3d 766 (7th Cir. 1994)...4 vi

8 STATUTES AND RULES 11 U.S.C. 105(a) (2012) U.S.C. 363(m) (2012)...11, U.S.C. 364(e) (2012)...11, U.S.C. 524(e) (2012) U.S.C. 524(g) (2012) U.S.C. 524(h) (2012) U.S.C. 1101(2) (2012) U.S.C (2012) U.S.C. 1123(b)(6) (2012) U.S.C. 1127(b) (2012)...13, U.S.C (2012) U.S.C. 1129(a)(1) (2012) U.S.C. 157(b)(1) (2012)...8, U.S.C. 158 (2012)... passim 28 U.S.C. 1334(a) (2012)...8, U.S.C. 1334(b) (2012)...8, U.S.C. 1334(c) (2012)...8, U.S.C. 1334(d) (2012)...10, 11 vii

9 OPINIONS BELOW In January of 2015, the Bankruptcy Court in the District of Moot confirmed Respondent s chapter 11 plan, finding the disputed injunction essential to the reorganization. (R. at 4 5). After appeal, the District Court dismissed Petitioner s appeal on equitable mootness grounds. (R. at 5). The majority for the Circuit Court of Appeals for the Thirteenth Circuit affirmed the District Court s dismissal. (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 are listed below and reproduced in Appendices A through J. 11 U.S.C. 105, 363, 364, 524, 1101, 1109, 1123, 1127, 1126, 1129 (2012); 28 U.S.C. 157, 158, 1334 (2012). viii

10 STATEMENT OF THE CASE Padco, Inc. Enters Bankruptcy. Megan Kuzniewski ( Petitioner ) was injured when her computer tablet, manufactured by Padco, Inc. ( Padco or Respondent ), exploded due to a defective battery. (R. at 2, 4). Because this battery defect was a widespread incident, Padco found itself in chapter 11 bankruptcy, attempting to salvage a decimated reputation. (R. at 2). Due to Padco s bankruptcy, Petitioner instead brought a claim against Gadget, Inc. ( Gadget ), the 100% owner of Padco during the time of the defective batteries. (R. at 3 4). The disputed plan provision. As Padco faced almost certain liquidation, Gadget tentatively agreed to invest substantial capital to save the company. (R. at 2 3). However, Gadget was unwilling to provide its support without first guaranteeing its immunity from the liability connected to the defective batteries. (R. at 3 4). Consequently, a provision in the chapter 11 reorganization plan ( the plan ), permanently enjoined the tort victims from seeking recovery from Gadget. (R. at 3 4). Once the plan was confirmed, Gadget salvaged Padco by investing substantial capital, eventually creating a new line of products. (R. at 2 3). The new product line found success, capturing nearly 60% of the market share for similar products. (R. at 3). The creditors in this class of injured tort victims, including Petitioner, received distribution larger than other unsecured creditors. (R. at 4). However, Petitioner, along with 20% of the other creditors in the class, voted to reject the plan (R. at 4). Having no opportunity to receive full payment or a later resolution, Petitioner brought forward a claim challenging the wrongful permanent injunction provision. (R. at 3 4). Procedure. Petitioner objected to the confirmation of the plan because it permanently enjoined her claim, arguing the injunction was impermissible under the Bankruptcy Code. (R. at 4). Based on this objection, the Bankruptcy Court for the District of Moot ( the Bankruptcy 1

11 Court ) held an evidentiary hearing. (R. at 4-5). At the hearing, Petitioners request for a stay was denied and the Bankruptcy Court entered a confirmation order in January of (R. at 4 5). Just two days after the confirmation order, the plan was deemed substantially consummated. (R. at 5). On June 30, 2016, following Petitioner s appeal to the District Court, the district Judge dismissed her appeal on equitable mootness grounds. (R. at 5). Again, Petitioner timely appealed. (R. at 5 6). The Circuit Court of Appeals for the Thirteenth Circuit ( the Circuit Court ) affirmed the District Court s dismissal on equitable mootness grounds. (R. at 14). However, due to the dissent s adamant position, the majority further opined the Bankruptcy Court s order could be upheld on alterative grounds. (R. at 11). The majority interpreted the Bankruptcy Code to allow chapter 11 plans to release third parties from liability without the consent of affected creditors. (R. at 11). Conversely, the dissent found for Petitioner on both counts. (R. at 14). The dissent concluded equitable mootness was unavailable and the Bankruptcy Code does not allow third parties to escape liability to nonconsenting creditors. (R. at 15, 19). This appeal follows. SUMMARY OF THE ARGUMENT The District Court s use of equitable mootness to dismiss Petitioner s claim on prudential grounds was unconstitutional and improper. Under Article III of the constitution, Petitioner has the personal right to have her claim heard by an Article III judge. Equitable mootness usurps this right by allowing Article I bankruptcy judges actions to effectively eliminate Petitioner s right to an appeal in front of an Article III district judge. District courts improperly avoid their duty to exercise jurisdiction when they use equitable mootness to dismiss a case. A districts court s duty to hear cases which it has proper jurisdiction over is virtually unflagging and based in Supreme Court precedent and the Constitution. 2

12 Dismissing cases based on equitable mootness violates this duty and is therefore improper. Furthermore, the Bankruptcy Code grants jurisdiction to the district courts, but does not limit that jurisdiction except in two narrow circumstances. Those narrow limitations cannot be read to give way to the overly-broad doctrine of equitable mootness. Additionally, this Court has repeatedly narrowed abstention doctrine, illustrating a policy of requiring the courts to exercise jurisdiction and simultaneously undercutting support for equitable mootness. Last, the equitable and prudential concerns alleviated by equitable mootness are properly addressed at the remedies stage. There, the district judge can consider the interest of all the parties involved and issue equitable relief, instead of refusing to hear a meritorious case. The Bankruptcy Court wrongfully exercised its power under the Bankruptcy Code when it approved the provision that permanently enjoined Petitioner s claims against Gadget. This provided Gadget with a bankruptcy discharge. Therefore, 524(e) of the Bankruptcy Code applies and cannot be avoided. Section 524(e) strictly prohibits a bankruptcy court from approving any plan that permanently discharges a non-debtor third party from liability. Section 524(e) is supported throughout the Bankruptcy Code through its subsections, (g) and (h), and 1129(a)(1) and 1123(b)(6). These sections reiterate that a bankruptcy court may not approve a chapter 11 plan that is inappropriate or inconsistent with other provisions of the Bankruptcy Code. There is no exception nor any other provision, not even 105(a), that gives bankruptcy courts the power to approve the permanent injunction of nonconsenting creditor s claim. For these reasons, this Court should reverse the Bankruptcy Court s approval of the disputed provision and provide Petitioner with the proper opportunity to bring forward her claims. STANDARD OF REVIEW Since both issues brought before this court are limited to conclusions of law and 3

13 interpretations of the Bankruptcy Code, this Court exercises de novo review, giving no deference to the lower Courts conclusions. ASM Capital, LP v. Ames Dep t Stores, Inc., (In re Ames Dep t Stores, Inc.), 582 F.3d 422, 426 (2d Cir. 2009); J. & G. Sales Ltd. v. Truscott, 473 F.3d 1043, 1047 (9th Cir. 2007) ( We apply a de novo standard of review to... questions of statutory interpretation. ). ARGUMENT I. EQUITABLE MOOTNESS IS AN IMPROPER AND UNCONSTITUTIONAL BASIS TO DISMISS A CLAIM IN BANKRUPTCY. The District Court erred when it used equitable mootness to dismiss Petitioner s claim. Despite widespread use, equitable mootness violates constitutional rights established by Article III; it violates district courts duty to exercise its jurisdiction; it lacks statutory support in the Bankruptcy Code; and equitable remedies still satisfy the concerns of equity and fairness that equitable mootness considers. Equitable mootness differs greatly from real mootness: the former is a judge-made doctrine where a court determines it is unwilling to hear the merits of a case, where the latter is a court s inability to do so. In re UNR Indus., Inc., 20 F.3d 766, 769 (7th Cir. 1994). In other words, equitable mootness allows a court to avoid hearing the merits of a bankruptcy appeal because implementing the requested relief would cause havoc to a reorganization plan already effectuated. Samson Energy Resources Co. v Semcrude, L.P. (In re Semcrude, L.P.), 728 F.3d 314, 317 (3d Cir. 2013). However, the havoc is not caused by a court exercising its jurisdiction, it is instead caused by using equitable mootness and unfortunately, the litigants constitutional rights fall victim in its wake. A. The doctrine of equitable mootness violates Article III of the Constitution. Dismissing Petitioner s case based on equitable mootness violated her right to be heard by 4

14 an article III judge. Article III of the Constitution grants a litigant the personal right to have an Article III judge, who is independent of the domination of other branches of government, hear her case. Wellness Int'l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1944 (2015); see also United States v. Will, 449 U.S. 200, 218 (1980). Additionally, Article III of the Constitution is designed to stop Congress from transferring jurisdiction away from the judiciary. See Sharif, 135 S. Ct. at This prohibition ensures the separation of powers between the branches of government and is the structural purpose of Article III. Id. These well-established principles are safeguarded by the requirement that decisions and processes of Article I bankruptcy courts must be subject to the plenary review and supervisory authority of Article III district courts. Id. at ; see also 28 U.S.C. 158 (2012). When a district court refuses to examine the merits of a litigant s claim because of its unwillingness to do so, it effectually eliminates her right to be heard by an Article III judge. In re One2One Commc'ns, LLC, 805 F.3d 428, 444 (3d Cir. 2015) (Krause, J., concurring). Such a refusal destroys the requisite safeguard in place to make the bankruptcy courts orders constitutional Article III review. Id. A district court s use of equitable mootness usurps both the structural purpose of Article III and appellees constitutional right to have an Article III judge hear their claim. This usurpation occurs because equitable mootness allows claims to be eliminated not based on merit, but based on the actions of the Article I bankruptcy judge and the efforts of those parties driving a contested plan. See id. at Although Article III judges decide if equitable mootness is applied, their hands are effectively tied due to the prior actions of the bankruptcy judge. Id. at 445. This constraint drastically weakens the district courts requisite supervisory role. Id. Accordingly: 5

15 [B]ankruptcy courts control nearly all of the variables in the equation, including whether a reorganization plan is initially approved, whether a stay of plan implementation is granted, whether settlements or releases crucial to a plan are approved and executed, whether property is transferred, whether new entities (in which third parties may invest) are formed, and whether distributions (including to third parties) under the plan begin all before plan challengers reach an Article III court. Id. (emphasis added). Although different circuits implement different tests with varying factors to determine if equitable mootness should bar a claim, whether the plan is substantially consummated 1 remains a prominent consideration. Nordhoff Investments, Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 185 (3d Cir. 2001) (explaining that substantial consummation of the plan is a foremost consideration for equitable mootness); First Union Real Estate Equity and Mortgage v. Club Assocs. (In re Club Assocs.), 956 F.2d 1065, 1069 (11th Cir. 1992) (explaining that a central element to finding equitable mootness is weather the plan has been substantially consummated); see also Grasslawn Lodging, LLC v. Transwest Resort Properties, Inc. (In re Transwest Resort Properties, Inc.), 801 F.3d 1161, 1168 (9th Cir. 2015); Hilal v. Williams (In re Hilal), 534 F.3d 498, 500 (5th Cir. 2008); Curreys of Nebraska, Inc. v. United Producers, Inc. (In re United Producers, Inc.), 526 F.3d 942, 948 (6th Cir. 2008); Manges v. Seattle-First Nat l Bank (In re Manges), 29 F.3d 1034, 1039 (5th Cir. 1994). Because the bankruptcy court controls all the factors outlined above, substantial consummation is controlled by the debtor, the proponents of the plan, and the bankruptcy court. This widespread control effectively ensures equitable mootness will be applied in appeals to come, 1 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) 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). 6

16 especially when the bankruptcy judge denies a contesting party s motion to stay. This opportunistic lawyering has not gone unnoticed. Both then-circuit Justice Alito and Circuit Justice Krause have voiced: [W]hereas magistrate judges' and administrative agencies' decisions are at least subject to appellate review, equitable mootness not only allows bankruptcy court decisions to avoid review, but also enables bankruptcy judges to insulate their decisions from review at their discretion. In turn, opportunistic plan proponents can (and... regularly do) use this to their advantage. As then-judge Alito warned in Nordhoff Investments, our court's equitable mootness doctrine can easily be used as a weapon to prevent any appellate review of bankruptcy court orders confirming reorganization plans. It thus places far too much power in the hands of bankruptcy judges. In re One2One, 805 F.3d at 446 (Krause, J., concurring) (quoting Nordhoff Investments, 258 F.3d at 192 (Alito, J., concurring in the judgment)). As Circuit Justice Krause succinctly put, a motion to dismiss an appeal as equitably moot has become part of the plan. Proponents of reorganization plans now rush to implement them so they may avail themselves of an equitable mootness defense.... Id. at 446 (emphasis added) (footnote omitted). Unfortunately, these precise concerns have been realized in this case. Both Petitioner s constitutional right to have her claim adjudicated by an Article III judge, and the separation of power concerns that Article III protects against, have been undermined by an unconstitutional doctrine placing too much power in the hands of the bankruptcy court and those parties supporting the reorganization plan. Despite Petitioner s right to have her claim heard by an Article III judge, the Court of Appeals majority wrote, [w]e can only conclude that [Petitioner s] opposition is a strategic move designed to extort more than her fair share from the other creditors by threatening to blow up the reorganization plan. (R. at 13). Such a shortsighted statement not only fails to appreciate Petitioner s personal constitutional rights, her rights to appeal, right to raise issues, and her right 7

17 to vote against a plan under the Bankruptcy Code, but also fails to see which party has made strategic moves to gain an unfair advantage. See generally 11 U.S.C. 1109, 1126 (2012); 28 U.S.C. 158 (2012). Instead, Gadget and Respondent have moved strategically and swiftly to restrict, if not eliminate Petitioner s right to have her legitimate day in court. Just as Circuit Justice Krause predicted, Gadget and Respondent calculated equitable mootness into the reorganization plan. Gadget knew its massive financial involvement was the only thing keeping Padco afloat. With that bargaining power, Gadget influenced the implementation of the injunction, and ensured swift consummation of the plan. Regardless of Petitioner s diligent appeals, her requests were denied. Only two days passed before the plan was considered substantially consummated. This effectively eliminated her ability to successfully appeal the plan because of equitable mootness and eliminate her right to an Article III judge. As such, it becomes apparent the doctrine of equitable mootness, because of its improper distribution of power, exterminates appeals before they begin. This violates Petitioner s constitutional rights to be heard before an Article III judge. Equitable mootness also erodes the separation of powers that Article III aims to protect by granting too much authority to Article I bankruptcy judges. The Article I judge can propel the consummation of plan to a point where a contesting party s constitutional right evaporates because her appeal will be equitably moot. Therefore, the doctrine of equitable mootness should therefore be ruled unconstitutional and unavailable for dismissing meritorious claims. B. Equitable mootness violates the district courts duty to exercise jurisdiction over meritorious claims. Article III district courts are granted statutory jurisdiction over suits arising out of bankruptcy cases. 28 U.S.C. 157(b)(1), 158, 1334(a) (b) (2012); see also Gillman v. Cont l Airlines (In re Cont'l Airlines), 91 F.3d 553, 567 (3d Cir. 1996) (Alito, J. dissenting) (explaining 8

18 that the appellate courts have unquestionabl[e] statutory jurisdiction over issues arising out of bankruptcy court). Although statutory jurisdiction confers a duty upon district courts to hear meritorious appeals, this jurisdictional duty not to dismiss cases on prudential grounds has deeper roots roots established both by the Supreme Court, and Article III of the constitution. In 1821, Chief Justice Marshall discussed the duty of Article III courts to exercise their jurisdiction, writing: It is most true that this Court will not take jurisdiction if it should not: but it is equally true, that it must take jurisdiction if it should.... With whatever doubts, with whatever difficulties, a case may be attended, we must decide it, if it be brought before us. We have no more right to decline the exercise of jurisdiction which is given, than to usurp that which is not given. The one or the other would be treason to the constitution. Questions may occur which we would gladly avoid; but we cannot avoid them. All we can do is, to exercise our best judgment, and conscientiously to perform our duty. Cohens v. State of Virginia, 19 U.S. 264, 404 (1821) (emphasis added). The Supreme Court has since weighed in on this issue. Considering the purposes Article III stands for, the Supreme Court recently held if Congress confers judicial Power to entities outside of Article III, like Article I bankruptcy judges, Article III cannot protect the integrity of judicial decision[-]making nor can it support the separation of powers. Stern v. Marshall, 564 U.S. 462, 484 (2011). Equitable mootness is, as argued above, this type of conference of power to the non-article III bankruptcy judge and violates the constitution. This concern is basis for the virtually unflagging obligation of the federal courts to exercise the jurisdiction given to them. See Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976); see also In re One2One, 805 F.3d at 439 (Krause, J. concurring) (arguing that [d]ismissing appeals in the name of equitable mootness violates this duty). In Stern, the Supreme Court reiterated this duty to exercise jurisdiction, restating the long recognized principle that Congress cannot remove suits from the judiciary properly before it. Stern v. 9

19 Marshall, 564 U.S. 462, 484 (2011). Equitable mootness allows that removal. Accordingly, the Court wrote, [w]hen a suit is... brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts. The Constitution assigns that job... to the Judiciary. Id. (emphasis added). Equitable mootness erodes this duty to exercise jurisdiction a duty established through Supreme Court precedent, the Bankruptcy Code, and the principles of Article III by allowing district courts to dismiss suits not because they cannot hear the issue, but because they are unwilling. As such, equitable mootness undermines the duty to hear suits that Stern established, violates the duty exercise jurisdiction and should be ruled unconstitutional. C. The bankruptcy Code provides no support for equitable mootness and instead suggests that it should be unavailable. As established, the Bankruptcy Code explicitly bestows both original and appellate jurisdiction to the district courts. The Code does not, however, extinguish that duty through any provision nor does it support the implementation of the unmentioned doctrine of equitable mootness. See 28 U.S.C. 157(b)(1), 158, 1334(a) (b) (2012). Neither 157 nor 158 explicitly or implicitly grant the district court the ability to decline to exercise its appellate jurisdiction. 28 U.S.C. 157(b)(1), 158 (2012). Nor is any such authority for declining jurisdiction found in 1334(c), 363(m), 364(e) or 1127(b). 1. Section 1334(c) cannot grant authority for applying equitable mootness because it refers only to original jurisdiction, not appellate jurisdiction the forum in which equitable mootness applies. Section 1334(c) cannot be read to establish a basis for equitable mootness. When 1334 is read in its entirety, only the original jurisdiction conferred to the district courts is discussed. This is evidenced by subsections (a) and (b), where appellate jurisdiction is not mentioned. 28 U.S.C. 1334(a) (b) (2012). Since rules of statutory construction require examination of surrounding 10

20 language, it is clear the abstention granted to the district court via 1334(c) can only be referring to abstention from its original jurisdiction, not from its appellate jurisdiction. 11 U.S.C. 1334(a) (c) (2012); McCarthy v. Bronson, 500 U.S. 136, 139 (1991) ( statutory language must always be read in its proper context ); see also In re One2One, 805 F.3d at 442 (Krause, J. concurring). Moreover, if 1334(c) was the basis for equitable mootness, such an interpretation would render all appellate court reviews of equitable mootness invalid under 1334(d). Section 1334(d) provides that the decision of the district court to abstain under subsection 1334(c) is not reviewable by an appeals court. 28 U.S.C. 1334(d) (2012). However, every circuit court has maintained appellate jurisdiction when reviewing district courts decisions to exercise equitable mootness. In re One2One, 805 F.3d at 442 (Krause, J. concurring). Therefore, if equitable mootness found authority under 1334(c), the district courts decision to implement it could not be reviewed. Id. This result obviously contradicts precedent and the current interpretation of 1334 by all circuits. Therefore, equitable mootness cannot find support via 1334(c). Id.; 28 U.S.C (a) (d) (2012). 2. Sections 363(m) and 364(e) do not support the broader doctrine of equitable mootness because they are narrowly tailored exceptions, applicable only to distinct transactions. Admittedly, sections 363(m) and 364(e) of chapter 11 both bar appellate courts from reversing or modifying certain, explicit, completed transactions. 11 U.S.C. 363(m), 364(e) (2012). Each provision prohibits the reversal or modification on appeal of an explicit authorized transaction. Id. The provisions only limit appellate modification regarding the sales or leases of property, and the procurement of financing or granting of liens, respectively. Id. They are each one small exception to the overarching appellate jurisdiction granted to the district court by the 11

21 Bankruptcy Code. Id.; 28 U.S.C. 158(a) (2012). These provisions might look as if they support restricting overall appellate review. However, the precise nature of these provisions and cannons of statutory construction instead suggest the broad doctrine of equitable mootness is not supported by these provisions. See Cont'l Airlines, 91 F.3d at (Alito, J. dissenting). Utilizing the cannon of statutory construction expressio unius est exclusio alterius, 2 it becomes apparent these provisions do not support a strong policy of limiting judicial review as the Circuit Courts majority argues. Instead, these precise exceptions to appellate modification demonstrates Congress knew how and where to limit appellate interference when needed. In re One2One, 805 F.3d at 445 (Krause, J. concurring). The Supreme Court has realized, where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion. Russello v. United States, 464 U.S. 16, 23 (1983) (quoting United States v. Wong Kim Bo, 472 F.2d 720, 722 (5th Cir. 1972)). Similar to Russello, In United States v. Brockamp, the Supreme Court found that explicitly listing certain exceptions indicated Congress s intent to block courts from implementing other unmentioned, open-ended, equitable exceptions into a statute. 519 U.S. 347, 352 (1997); see also TRW Inc. v. Andrews, 534 U.S. 19, 29 (2001) (explaining the holding of Brockamp in a citation sentence). In other words, small, specific exceptions cannot be read to open the door to larger, overbroad, equitable exceptions. See Brockamp, 519 U.S. at 352. Equitable mootness is one of these unmentioned, open-ended, equitable exceptions, and should not be allowed. 2 Expression unius est exclusion alterius is defined as: A canon of construction holding that to express or include one thing implies the exclusion of the other, or of the alternative. Black's Law Dictionary (10th ed. 2014). 12

22 Respondent and the Circuit Court majority contend these narrow provisions suggest a policy of limiting review, where equitable mootness might fill in the gaps left by Congress. However, Brockamp specifically informs us that filling in the gaps is an improper way to interpret narrow exceptions. The gaps cannot be filled in by the unmentioned, open-ended equitable exception of equitable mootness. Cannons of statutory construction confirms this finding. Congress s exclusion of a broader limitation on appellate review was intentional as evidenced by including of similar, smaller exceptions to appellate review expressio unius est exclusio alterius. When employing the correct cannon of construction, and understanding sections 363(m) and 364(e) for what they are, purposeful, narrow exceptions to an overarching authority of review, it becomes clear they cannot be read to support the implementation of the much broader, equitable mootness doctrine. Sections 363(m) and 364(e) instead suggest Congress s intent to limit gapfilling, and Congress s ability to limit review where necessary. Additionally, sections 363(m) and 364(e) do not prevent an appellate court from hearing an appeal. In re One2One, 805 F.3d at 444 (Krause, J. concurring); 11 U.S.C. 363(m), 364(e) (2012). Those sections merely prevent granting remedies that disturb the specifically mentioned transactions in fact, remedies that do not disturb the specific transactions are not barred. In re One2One, 805 F.3d at 444 (Krause, J. concurring); 11 U.S.C. 363(m), 364(e) (2012). These remedial considerations are discussed below, and comport with the argument that equitable mootness should be unavailable. 3. Section 1127(b) cannot support the doctrine of equitable mootness because it does not limit an appellate court s ability to alter a plan, nor does it grant authority to refuse to hear a claim before it. Section 1127(b) of chapter 11 provides no support for equitable mootness. The section does not consider an appellate court s modification of a plan; it instead only discusses a party s 13

23 modification of the plan. 11 U.S.C. 1127(b) (2012); In re One2One, 805 F.3d at (Krause, J. concurring). The section only requires a party s modifications to happen before substantial consummation of such plan. 11 U.S.C. 1127(b) (2012). Nowhere in the section does it limit an appellate court s ability to do so, therefore this section cannot support equitable mootness principles. Id. D. Due to recent narrowing of recognized abstention doctrines, Supreme Court precedent suggests equitable mootness is unavailable as a tactic to escape the duty to exercise jurisdiction. The Equitable Mootness doctrine cannot survive as an extension of the narrow abstention doctrines. Abstention doctrines apply when circumstances permit a federal court to decline presiding over a case, even though it retains proper jurisdiction. In re One2One, 805 F.3d at 440 (Krause, J. concurring). For instance, a federal court will apply an abstention doctrine so a state court can resolve some or all of the dispute. Id. However, the Supreme Court has on several occasions explicitly recognized that abstention does not... involve the abdication of federal jurisdiction, but only the postponement of its exercise. Id. Where there is no other forum and no later exercise of jurisdiction, as with equitable mootness, relinquishing jurisdiction is not abstention, it is abdication. Id. The classic cases from which the various abstention doctrines are derived, are: when federal courts avoid decisions of federal constitutional questions where the case may be disposed of on questions of law, Railroad Commission of Texas v. Pullman Co., 312 U.S. 496 (1941); when abstention is utilized to avoid needless conflict with a state administering its own affairs, Burford v. Sun Oil Co., 319 U.S. 315 (1943); when abstention is invoked to avoid duplicative litigation, either in two different federal courts or in parallel proceedings in state and federal courts, Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976); and when federal courts 14

24 must refrain from hearing state constitutional challenges because exercising federal jurisdiction would be an improper intrusion on the right of a state to enforce its laws in its courts, Younger v. Harris, 401 U.S. 37 (1971). The trend throughout the past few years has been for the Supreme Court to repeatedly narrow the scope of abstention doctrines. In re One2One, 805 F.3d at 440 (Krause, J. concurring). Therefore, this Court should not recognize an expansive view of the abstention doctrine, which would erroneously encompass equitable mootness as a new abstention doctrine. The Court in Spring Communications, Inc. v. Jacobs refused to extend the three exceptional circumstances where Younger abstention is appropriate, and reaffirmed the federal courts obligations to hear and decide cases within their jurisdiction. 134 S.Ct. 584 (2013). Importantly, the Court in Lexmark International, Inc. v. Static Control Components, Inc. confirmed its disapproval of doctrines permitting courts to decline deciding claims on prudential rather than statutory or constitutional grounds. 143 S.Ct. 1377, 1386 (2014). In Lexmark, the Court warned that such doctrines conflict with the Court s recent reaffirmation in Spring Communications of the principle that a federal court s obligation to hear and decide cases within its jurisdiction is virtually unflagging. Id. As demonstrated, the Supreme Court has repeatedly narrowed the various abstention doctrines, therefore there is no logical analogue for equitable mootness among the abstention doctrines. Following this trend, equitable mootness contradicts the relatively limited abstention and mootness doctrines established under Supreme Court precedent. Specifically, the Lexmark Court reaffirmed a district courts duty to exercise its established jurisdiction, while condemning the use of prudential reasons to avoid exercising jurisdiction which is exactly what equitable mootness attempts to do. Given this narrow scope of abstention in Supreme Court jurisprudence, 15

25 the doctrine of equitable mootness should therefore be rejected. E. Principles of equity and fairness are not offended by eliminating equitable mootness because the prudential concerns equitable mootness is designed to alleviate are properly addressed at the remedies stage. The circuits widespread use of equitable mootness alone does not establish its validity. In re One2One, 805 F.3d at 449 (Krause, J. concurring). Instead, equitable relief at the remedies stage is an alternative to equitable mootness that does not suffer from prudential, statutory, and constitutional defects. Id. The prudential concerns equitable mootness attempts to cure can be resolved by fashioning an appropriate remedy after the merits of the case have been heard. Id.; Semcrude, 728 F.3d at 325 (citing Cont l Airlines, 91 F.3d at (Alito, J. dissenting)) ( consequences of a successful appeal are often more appropriately dealt with by fashioning limited relief at the remedial stage than by refusing to hear the merits of an appeal ). Just because it will be difficult to order divestures, damages, or undo a transaction, that does not make the challenges to the law moot once the plan is consummated. In re Res. Tech. Corp., 430 F.3d 884, (7th Cir.2005). Even despite consummating a transaction, equitable relief can reach a fair result. Id. at 886 ( Unscrambling a transaction may be difficult, but it can be done. ); see also In re One2One, 805 F.3d at 450 (Krause, J. concurring). When crafting equitable relief, courts can fashion a remedy that will not fully dismantle a plan and will limit or eradicate any harm to parties relying on the plan, instead of refusing to exercise jurisdiction. In re One2One, 805 F.3d at 449. In some cases, the interests of finality and protecting third parties will weigh against granting an appellant s requested relief in its entirety. Id. at 450. In these instances, examining the merits of the case first, and declining relief afterwards more accurately embodies equitable principles because all parties are considered when relief is rendered, instead of focusing on the parties that are benefited by the substantially consummated plan. 16

26 Finally, appellants would rather receive some fractional recovery, if full recovery is no longer an option, than suffer complete mootness of their appeal. Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944, 954 (2d Cir.1993). This is the more equitable outcome, because an appraisal of the merits is essential to the framing of an equitable remedy for all parties, not just those supporting the plan. Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In Re Metromedia Fiber Network, Inc.), 416 F.3d 136, 144 (2d Cir. 2005). An equitable remedy would not be a problem in this case. For instance, the District Court could allow only the 20% of creditors who did not approve of the plan to bring their tort claims. This remedy would hardly disrupt the plan, especially since Gadget has successful cornered 60% of the market share. This way, both parties interests are considered; Gadget is not inundated with all possible claims, and those creditors who wish to bring their tort claims are able too. With this remedy, equity is most served. II. THE BANKRUPTCY CODE STRICTLY PROHIBITS THE PERMANENT INJUNCTION OF NONCONSENTING CREDITORS CLAIMS AND THE RELEASE OF NON-DEBTOR THIRD PARTIES IN A CHAPTER 11 PLAN OF REORGANIZATION. Respondent s argument fails under the basic principles of Bankruptcy law. Petitioner cannot be enjoined from all claims against Gadget, Inc. because the Bankruptcy Court does not have such broad power to discharge liabilities of a non-debtor. Section 524(e) of the Bankruptcy Code provides the discharge of a debt of a debtor does not affect the liability of another entity on, or the property of any other entity for such debt. Many courts have held, even if enjoining the claims are "essential" to the reorganization, the equitable powers of the bankruptcy court are limited by 524(e). See Int l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394 (9th Cir. 1995). Section 524(e) expressly restricts the bankruptcy court s power to approve provisions that permanently enjoin all claims against a non-debtor third party. Id. 17

27 In the case at hand, Gadget has been discharged, not released as the Respondents attempt to argue. (R. at 19). Gadget has not simply been released from liability because there was no voluntary action on behalf of the creditor a release requires such voluntary action. See Black s Law Dictionary (10th ed. 2014). Therefore, Gadget instead received a bankruptcy discharge which is strictly prohibited under 524(e). (R. at 3). Although Gadget was unwilling to acquire Padco unless it could be certain it would be free of all liabilities, this does not rise to the rare circumstances required to permit a permanent injunction. (R. at 3). Only when a debtor, who has summited itself to the bankruptcy process may reap the benefits of a bankruptcy discharge; a discharge does not extend to a third party, like Gadget. See Landsing Diversified Properties-II v. First Nat'l Bank (In re Western Real Estate Fund, Inc.), 922 F.2d 592, 600 (10 th Cir. 1990); (R. at 20). A. Section 524(e) strictly prohibits the discharge of non-debtor third party releases. Bankruptcy courts have long debated whether a chapter 11 reorganization plan can contain a provision that releases the liabilities of non-debtor third parties. Modern developments in the chapter 11 process have had a significant impact on whether such releases are permitted. Courts have established the release of a non-debtor's liability violates the Bankruptcy Code and is beyond the power of the bankruptcy court. Resorts Int l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401 (9th Cir. 1995). Both the Ninth and Tenth Circuits Courts of Appeals have repeatedly held 524(e) of the Bankruptcy Code precludes bankruptcy courts from discharging liabilities of nondebtors. See Lowenschuss, 67 F.3d 1394; Western Real Estate Fund, Inc., 922 F.2d 592 ; Underhill v. Royal, 769 F.2d 1426 (9th Cir. 1985); American Hardwoods, Inc. v. Deutsche Credit Corp., 885 F.2d 621 (9th Cir. 1989). Section 524(e) is also incorporated into the chapter 11 requirements 18

28 by 1129(a)(1), which prohibits confirmation of a plan that does not comply with applicable provisions of the Bankruptcy Code. Lowenschuss, 67 F.3d at 1401; (R. at 21). Furthermore, Congress amended 524 to add subsections (g) and (h) to ensure that subsection (e) was not read as a mere savings provision. (R. at 20). Expressio unius est exclusio alterius applies when statutes contain specific exceptions, exemptions, and statutory sections that incorporate other sections by reference. Andrus v. Glover Const. Co., 446 U.S. 608, (1980). This means, absent evidence of contrary legislative intent, the explicit authority to enjoin claims in asbestos cases supports that section 524(e) denies such authority in any other, non-asbestos, case. Lowenschuss, 67 F.3d at Congress created an elaborate mechanism in section (g) that expressly limits non-debtor releases to only one class of cases: asbestos cases. Id. at 1402; (R. at 21). If Congress wanted to permit non-debtor releases, other than for asbestos cases, it would have done so. This demonstrates third party injunctions are not available in other cases. Additionally, despite 1123(b)(6) permitting a reorganization plan to include any... appropriate provision not inconsistent with the applicable provisions of this title, the language provides 1123(b)(6) applies only to matters not covered by a more specific provision in the Bankruptcy Code operating as a catch-all provision. 11 U.S.C. 1123(b)(6) (2012); (R. at 21). Because 524(g) provides a provision only permitting asbestos cases to be protected, Gadget s discharge is inconsistent with 524(e), 524(g), and 524(h) because it does not fall under the only explicitly stated class of cases that section (g) allows-asbestos. See 11 U.S.C. 524(g), 524 (h) (2012). Bankruptcy courts lack, with no exception, the power to confirm plans that release nondebtors third parties from liability because this release does not comply with applicable provisions 19

29 of the Bankruptcy Code. Lowenschuss, 67 F.3d at In Lowenschuss, the debtor s reorganization plan contained a provision that broadly released the debtor and connected persons or entities from all claims. Id. The Ninth Circuit held that the Global Release Provision was inappropriate because 524(e) specifically states a 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. Similarly, the court in Deutsche Bank AG v. Metromedia Fiber Network, Inc. stated the release of non-debtors is a device that lends itself to abuse because it may operate as a bankruptcy discharge arranged without a filing and without the safeguards of the Bankruptcy Code. 416 F.3d at 142. The debtor s in Metromedia Fiber Network, Inc. argued for a non-debtor release because the guarantors made a material contribution to the estate. Id. However, the court of appeals found no evidence the release was necessary to the plan. The court reasoned no case has tolerated non-debtor releases absent the finding of circumstances that may be characterized as unique and such releases have been appropriate only in rare cases The court found no unusual circumstances, holding a non-debtor release should not be approved and denied the release provision. Id. at A court cannot permanently enjoin a creditor from bringing a claim against a non-debtor guarantor of a contract liability. American Hardwoods, Inc., 885 F.2d at 625. The debtors in American Hardwoods sought to permanently enjoin creditors from suing the debtor s guarantors. Id. The court of appeals affirmed the bankruptcy court s denial of the debtor s request for a permanent injunction because it did not have power to discharge the liabilities of a bankrupt s guarantor. Also, there were no unusual circumstances warranting enjoining of the claims. Id. (citing Union Carbide Corp. 686 F.2d at 602). Furthermore, the court reasoned it can affect only the relationships of debtors and creditors, not the obligations of guarantors. Id at

30 (citing R.I.D.C. Industrial Development Fund v. Snyder, 539 F.2d 487, 490 n.3 (5th Cir. 1976)). In conclusion, the Bankruptcy Code only permits entities, like Padco, to discharge its debts so long as the interests of creditors are protected by a fair process. (R. at 20). Because Gadget has been discharged from all claims against it, it has received an improper discharge under 524(e). Therefore, the Bankruptcy Court violated the Bankruptcy Code when it approved Petitioner s permanent injunction and discharged Gadget from liability. B. A bankruptcy court's general equitable power outlined in section 105(a) is expressly limited by more specific provisions of the Bankruptcy Code, displacing its authority to discharge the liabilities of non-debtors. In attempt to escape 524(e), practitioners have turned to 105(a) for authority to release non-debtors from liability. Airadigm Communications, Inc. v. FCC, 519 F.3d 640, 656 (7th Cir. 2008). Section 105(a) of the Bankruptcy Code provides a court has broad equitable power to issue any order, process or judgment that is necessary or appropriate to advance a bankruptcy proceeding and matters related thereto. However, 105 is not an unlimited power, and it does not operate as an exception to 524(e). American Hardwoods, Inc., 885 F.2d at 626; Lowenschuss, 67 F.3d at Section 105(a) is expressly limited by more specific provisions of 524(e). American Hardwoods, Inc., 885 F.2d at 626. Although some theories permit non-debtor releases, it has only been done in extremely rare and limited circumstances. Id. Gadget s unwillingness to acquire Padco free of all its liabilities does not give rise to the rare circumstances required for a permanent injunction. (R. at 3). The Second Circuit held a bankruptcy court may issue an equitable release of third-party claims, but only when the injunction is necessary to carry out the plan. MacArthur Co. V. Johns- Manville Corp., 837 F.2d 89, 94 (2d Cir. 1988). The debtor in Johns-Manville Corp. was facing $1.9 billion in liability from over 52,000 asbestos-related tort liabilities. 21