No. 16-412 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 TO THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT BRIEF FOR PETITIONER Team Number P7 Counsel for Petitioner Oral Argument Requested
QUESTIONS PRESENTED 1. Whether an appellate court can bypass their Constitutional Article III jurisdictional requirement to hear a live case or controversy by using equitable mootness for that reason alone when Kuzniewski filed multiple stays and appealed a final order in bankruptcy court? 2. Whether a chapter 11 plan of reorganization of a debtor in possession can permanently enjoin creditors direct claims against a third party non-debtor without the debtor s consent where no provision is made in the plan for full payment of the enjoined claims? i
TABLE OF CONTENTS QUESTIONS PRESENTED TABLE OF AUTHORITIES OPINIONS BELOW STATEMENT OF JURISDICTION CONSTITUTIONAL AND STATUTORY PROVISIONS STATEMENT OF THE CASE SUMMARY OF THE ARGUMENT STANDARD OF REVIEW ARGUMENT I. THE LOWER COURT ERRED IN REFUSING TO HEAR KUZNIEWSKI S APPEAL BASED ON THE JUDGE-MADE DOCTRINE OF EQUITABLE MOOTNESS WHERE ITS EXERCISE OF JURISDICTION IS GROUNDED IN THE CONSTITUTION. A. The Lower Court Erroneously Denied Hearing an Appeal Based on the Faulty Notion that Equitable Mootness Should be Applied, though the Court Could Provide a Remedy, and the Courts Denial Perpetuated Inequities. B. The Lower Court Erroneously Denied Hearing Kuzniewski s Appeal There Is No Statutory or Constitutional Provision Defining Equitable Mootness or Describing Its Use. C. The Lower Court Erred in Denying Kuzniewski s Appeal Because Would be Unjust and Inequitable to Petitioner Where She is Deprived of the Fundamental Right to be Heard. II. THIRD PARTY NON-DEBTORS, SUCH AS GADGET, SHOULD NOT BE PERMITTED TO GROSSLY BENEFIT FROM THE PRIVILEGES OF THE BANKRUPTCY CODE WITHOUT SUBMITTING THEMSELVES TO THE SAFEGUARDS AND PROVISIONS THAT PREVENT MANIPULATION AND ABUSE. ii
A. This Court Should Reverse the Lower Court Because Discharges are Exclusively for Debtors Who Comply/Submit Themselves to the Bankruptcy Courts. B. This Court Should Reverse the Lower Court Because Statutory Discharges are Outside the Power of the Court. C. This Court Should Reverse the Lower Court Because Gadget s Third Party Non- Debtor Release is Still Invalid Due To the Lack of Factual Finding for Necessity In Extraordinary and Unusual Circumstances. III. BANKRUPTCY COURTS MUST COMMIT TO BALANCE THE EQUITIES OF ALLOWING A MERITORIOUS APPEAL TO BE HEARD AGAINST THE MANUFACTURING OF A CHAPTER 11 REORGANIZATION PLAN BY LARGE, SOPHISTICATED THIRD PARTY NON-DEBTORS IN UPHOLDING THE INTEGRITY OF THE BANKRUPTCY SYSTEM AND ADVANCING SOUND POLICY CONSIDERATIONS. A. Justice Demands and Equity Encourages the Appellant s Right to be Heard. B. Public Policy Promotes the Urgency to Resolve Inconsistencies Among The Circuits and Prevent Abuse of the Non-consensual Third Party Release by Non- Debtor Third Parties. CONCLUSION APPENDIX A APPENDIX B APPENDIX C APPENDIX D APPENDIX E APPENDIX F APPENDIX G iii
TABLE OF AUTHORITIES CONSTITUTIONAL AMENDMENTS UNITED STATES SUPREME COURT CASES UNITED STATES COURT OF APPEAL CASES UNITED STATES DISCTRICT COURT CASES UNITED STATES BANKRUPTCY APPELLATE PANEL CASES UNITED STATES BANKRUPTCY COURT CASES STATUES LEGISLATIVE MATERIALS BANKRUPTCY RULES SECONDARY SOURCES iv
OPINIONS BELOW The United States District Court for the District of Moot entered judgment in favor of Respondent, affirming their reorganization plan after adopting the Bankruptcy Court s proposed findings of facts and conclusions of law. R. 5. In doing so, the District Judge held that 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; further, the District Judge ruled in favor of Respondent stating that a chapter 11 plan of reorganization can permanently enjoin claims that non-consenting 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. The United States Court of Appeals for the Thirteenth Circuit affirmed. R. 14. On December 12, 2016, this Court granted Petitioner s writ of certiorari. R. 1. STATEMENT OF JURISDICTION The formal statement of jurisdiction is waived pursuant to Competition Rule VIII. CONSTITUTIONAL AND STATUTORY PROVISIONS The Constitutional provisions and federal statutes relevant to the facts of this case are listed below. These provisions and statutes are set forth in the appendices as follows: Appendix A: U.S. Constitution, Art. III, 2 Appendix B: 11 U.S.C. 105(a) Appendix C: 11 U.S.C. 524(a), (e) Appendix D: 11 U.S.C. 1101(2) Appendix E: 11 U.S.C. 1123(b)(6) Appendix F: 28 U.S.C. 158(a) Appendix G: 28 U.S.C. 1334 v
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STATEMENT OF THE CASE A. Procedural History This action is brought as a result of not one, not two, but three outright denials to be heard by the Bankruptcy Court of Moot, the District Court, and the Thirteenth s Circuit Court of Appeals, abruptly slamming the door to fairness and equity in Petitioner Megan Kuzniewski s face. Confronted with trouble on all fronts when their tablet computers exploded due to defective batteries, Padco, Inc. ( Padco ) filed chapter 11 bankruptcy in order to avoid liquidation. R. at 2. The chapter 11 plan of reorganization was confirmed by the Bankruptcy Court for the District of Moot in January 2015. R. at 3. The plan included, among other things, a permanent injunction enjoining direct claims that arose from or related to the defective batteries from being brought against Padco. R. at 4. Kuzniewski immediately requested a stay of the confirmation order, which was denied by the Bankruptcy Court. R. at 5. A second request for stay of the confirmation order was denied by the District Court. Id. Kuzniewski s appeal to the District Court for the District of Moot then followed. Id. Respondent Padco, Inc. moved to dismiss the appeal on grounds of equitable mootness. Id. An evidentiary hearing was held on June 15, 2016, and the District Court affirmed the appeal on grounds of equitable mootness two weeks later. 1 Id. The District Court s order, however, left unresolved the issue of Kuzniewski s challenge to the plan injunction. R. at 6. The Thirteenth Circuit Court of Appeals affirmed the lower court s decision to dismiss Kuzniewski s appeal, R. at 14, holding fairness and equity require dismissal of the appeal, R. at 8-9. Petition for certiorari was filed by Kuzniewski, and this court timely granted certiorari on December 12, 2016. R. at 2. 1 Although Kuzniewski requested the appeal, the record reflects that the District Court affirmed the appeal on equitable mootness grounds. R. at 5. As such, the facts are stated as reported in the record. 1
B. Factual History The Big BANG Buy-out This case centers around a merger of Padco, Inc. with Gadget, Inc. to effectuate a chapter 11 plan of reorganization. R. at 2. Several consumers found themselves victim to defective batteries in computer products manufactured by Padco which caused the products to explode. R. at 2. Appellant Megan Kuzniewski was one of the unfortunate victims. Tellingly, the defective batteries were developed by Padco when it was a subsidiary of Gadget. R. at 4. Padco filed bankruptcy in an effort to soothe the brewing financial troubles, as it was on the brink of liquidation. R. at 2. Up against negative publicity and several threatened law suits by victims of the unfortunate ordeal, R. at 3-4, Padco s operations were further frustrated in that it lacked sufficient capital to continue operating, R. at 2. The reorganization was a near failure, and the defective batteries in Padco s products earned it an irreparably damaged reputation. Id. Gadget was ready to pay to play, and Padco was at its mercy. Here appears Gadget to salvage the situation with financing and support, thus effectuating the reorganization plan at issue. Id. History repeats itself, as Gadget is a former parent company of Padco. R. at 7. Padco was free at last. The Price of Fairness at the Expense of Expediency $500 million dollars invested and additional borrowing of $2.6 billion dollars in public bond offerings later, Padco s troubles are sold to Gadget. R. at 2, 3. The reorganization plan manufactured by the third party non-debtor included a new suite of products compatible to the defective products, ranging from gadgets for the home to eyewear, watches, and accessories. R. at 3. GadgetPad was the new product line name, and here Padco emerged under its guise. Id. The birth of the new product line, however, was not the first rendezvous between Padco and Gadget: Gadget had been the 100% owner of Padco several years ago before Padco was spun 2
off as an independent company. R. at 4. It was during this time in this revolving relationship that the defective batteries were developed by Padco. R. at 4. Padco s operations called into question the lack of trust Gadget extended it at this time, and Gadget even saw fit to deal with Padco from a distance. See id. Indeed, the plan was successful, to say the least: almost 60% of the market share was captured by the new Gadget product line. R. at 3. The plan reunited the large sophisticated corporate debtor with the large public company, and this was just the beginning. See id. The main artery of the plan is a permanent injunction which enjoins victims from bringing direct claims that arise from or relate to the defective batteries. R. at 4. The plan included nonconsensual releases of the third party non-debtor Gadget, who is not before the court or a party to the bankruptcy proceeding. See R. at 2. In exchange, Gadget was relieved of all liability related to Padco. R. at 3. In fact, Gadget s CEO and main witness admitted its unwillingness to acquire and invest in the new product line unless it would be free of all liabilities related to Padco. Id. This was due in large part to the pre-bankruptcy relationship between the two which spoiled. See R. at 11. He further testified that Gadget was very concerned about claims arising from the Padco battery defect. Id. A lagniappe of larger bankruptcy distributions were paid to creditors at the mercy of the injunction, whether they consented to the lavish release bought for the price of Padco s support or not. Kuzniewski did not consent to the release. R. at 12. In exchange for surrendering their private right to pursue a claim against Gadget, creditors such as Kuzniewski were left with their hands tied to accept payments provided to the class of unsecured creditors. R. at 5. These payments seeped into the reorganization plan, leaving the enjoined claims unresolved and abandoning a full payment option from another source. R. at 12. Moreover, the plan did not 3
include the direct claims of the enjoined unsecured creditors. R. at 11, FN 3. Nonetheless, Gadget purchased the price of fairness at the expense of the enjoined victims justice. The 48 Hour Substantial Consummation She did all that she could here by seeking a stay. R. at 8, FN 2. Yet Megan Kuzniewski s attempts to pursue the stay where met with the obstacle of the third party non debtor and Respondent in this action, Gadget, Inc. Padco s chapter 11 reorganization plan, primarily financed by Gadget, its former parent company, R. at 7, was confirmed in January 2015, R. at 5. As the District Court noted, Kuzniewski was diligent in her efforts and immediately requested a stay of the confirmation order. R. at 5. She requested a stay of the confirmation order in both the Bankruptcy Court and the District Court of Moot. R. at 5. Both were denied. Id. Within 48 hours of entry of the confirmation order, the plan was substantially consummated. Id. Just like that, and the door is slammed in the face of the victims of impaired creditors whose claims were enjoined within this 48 hour consummation, including Kuzniewski. The court affirmed the confirmation order in mid-2016. Id. Kuzniewski went as far as to request an expedited appeal, yet to no avail. See R. at 3, FN 1. The request was denied due to the court s heavy criminal docket. Id. Padco moved to dismiss Kuzniewski s appeal on grounds of equitable mootness. Id. The appeal was confirmed on grounds of equitable mootness on June 30, 2016. 2 R. at 5. Another door is slammed in the face of Kuzniewski and the victims of impaired creditors, leaving them stripped of their right to be heard and abandoned in the bankruptcy system. It is at this crossroad that the present matter has stalled. 2 Supra, note 1. 4
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SUMMARY OF THE ARGUMENT Kuzniewski challenges the order confirming Padco, Inc. s chapter 11 plan of reorganization on the grounds of the court s failure to uphold its obligation to exercise appropriate jurisdiction over a case with a live case and controversy issue. First, the appeals court erred in refusing to hear Kuzniewski s appeal based on the prudential doctrine of equitable mootness where the court s exercise of jurisdiction is grounded in constitutional roots. Article III of the Constitution authorizes jurisdiction of federal courts to hear cases which involve a case and controversy. In addition, statutory framework grants Article III judges supervision over bankruptcy court decisions. The faulty notion of equitable mootness, however, runs interference with the appellate court s judicial obligation where courts are allowed to hang their hat on this discretionary tool without affording an appellant with a meritorious claim the right to be heard. The right to be heard on direct appeal is crucial to the appellate court s function. Further, there is little statutory support to implore the doctrine in spite of the courts inconsistent application across the circuits. Kuzniewski stood before the court up against the third party non-debtor Gadget with a live case that could properly be heard. Redress was available by the court. Yet, the appeals court declined to hear the appeal in spite of the obligation to do so. Therefore, the court erred in refusing to hear such appeal based on the prudential doctrine of equitable mootness where the court s exercise of jurisdiction is grounded in constitutional roots. Second, third party non-debtors, such as Gadget, should not be permitted to grossly benefit from the privileges of the bankruptcy code without submitting themselves to the safeguards and provisions that prevent manipulation and abuse in chapter 11 plan reorganization. The Bankruptcy Code provides a right of discharge exclusively for debtors who submit themselves to the bankruptcy process. Case law strongly supports the position that releases are to be granted only 6
to parties who properly submit themselves before the court. Only in exceptional circumstances will a third party non-debtor receive a release. In particular, nonconsensual third party releases breed tension in the bankruptcy system, as the integrity of the court is jeopardized when priorities of interested parties are downsized. Nonetheless, the doctrine of equitable mootness allows third party non-debtors to manipulate the plan reorganization process to their benefit and relieve themselves of the safeguards and provisions, all the while allowing the true debtor to successfully emerge as a born-again enterprise. In this matter, Gadget s liabilities were extinguished, and so were Kuzniewski s interests and right to be heard. Padco emerged under the guise of its former parent company Gadget, Gadget is released from all liability arising from or related to the defective batteries by way of the permanent injunction included in the plan of reorganization, and effectively receives a discharge of liability from a non-consenting creditor, although referred to as a release. Kuzniewski is essentially held hostage in the plan reorganization. Gadget was awarded the right to be free of all liabilities, and Kuzniewski was forced to surrender her right to be heard. Gadget should not be permitted to avail itself of the bankruptcy process on the account of prudential considerations in exchange for financial support to a plan reorganization, especially where it involves non-consensual releases. To do so would be to disturb the integrity of the bankruptcy system. As such, third party non-debtors, such as Gadget, should not be permitted to grossly benefit from the privileges of the bankruptcy code without submitting themselves to the safeguards and provisions that prevent manipulation and abuse in chapter 11 plan reorganization. Finally, courts must commit to balance the equities of allowing a meritorious appeal to be heard against the manufacturing of a chapter 11 reorganization plan by large, sophisticated third party non-debtors in upholding the integrity of the bankruptcy system and advancing sound policy considerations. Favorable policy considerations exist on both sides of the debate involving 7
equitable mootness. Corporations are allowed to emerge into the marketplace and rehabilitate its business with the financial support of large sophisticated companies who in turn rely on a plan s confirmation order. Creditors supposedly receive larger distributions as a class in plan reorganizations as opposed to pursuing a direct claim against the debtor. Courts must give consideration, however, in balancing the interests of impaired creditors against the fairness and equity of a plan reorganization bought at the price of the non-consensual third party non-debtor release. STANDARD OF REVIEW A district court s decision that a case is equitably moot should be reviewed according to de novo standards. In re Phila Newspapers, LLC, 690 F.3d 161, 167-8. Because a district court sits as an appellate court to review a bankruptcy court, we review a bankruptcy court's legal determinations de novo, its factual findings for clear error, and its exercises of discretion for abuse thereof. " Id. at 168. Since, Kuzniewski has limited her challenge to the purely legal question of whether an appellate court has any authority to decline to hear an appeal on equitable mootness grounds, this court s review is restricted to conclusions of law. R. at 6. Thus, there are no factual findings to consider, and this case should be reviewed de novo. ARGUMENT I. THE LOWER COURT ERRED IN REFUSING TO HEAR KUZNIEWSKI S APPEAL BASED ON THE PRUDENTIAL DOCTRINE OF EQUITABLE MOOTNESS WHERE ITS EXERCISE OF JURISDICTION IS GROUNDED IN CONSTITUTIONAL ROOTS. A. The Lower Court Erroneously Denied Hearing an Appeal Based on the Faulty Notion that Equitable Mootness Should be Applied, Though the Court Could Provide A Remedy And The Courts Denial Perpetuated Inequities. 8
The lower court erroneously denied hearing an appeal based on the faulty notion that equitable mootness should be applied, though the court lacked authority to deny hearing the appeal because there is no written definition of equitable mootness in the U.S. Constitution, or statutes, the case is still a live case, and the court may be able to provide some remedy. Furthermore, 35 years after its initial use in bankruptcy proceedings, equitable mootness is still not applied uniformly across the circuits. Thus, the lower court erred when it used equitable mootness. The lower courts continued use of the judge made doctrine of equitable mootness departs from mootness as defined by the constitution and this court. Article III, 2, is the case and controversy clause of the U.S. Constitution. It states that, The judicial power shall extend to all cases, in law and equity, arising under this Constitution, the laws of the United States, and treaties made, or which shall be made, under their authority;--to all cases affecting ambassadors, other public ministers and consuls;--to all cases of admiralty and maritime jurisdiction;--to controversies to which the United States shall be a party;--to controversies between two or more states;--between a state and citizens of another state;--between citizens of different states;-- between citizens of the same state claiming lands under grants of different states, and between a state, or the citizens thereof, and foreign states, citizens or subjects. Courts reinforced the constitutional meaning of mootness in Mills v. Green. Mills v. Green, 159 U.S. 651 (November 25, 1985). This court reasoned that, the duty of this court, as of every other judicial tribunal, is to decide actual controversies by a judgment which can be carried into effect, and not to give opinions upon moot questions or abstract propositions, or to declare principles or rules of law which cannot affect the matter in issue in the case before it. Id. at 653. The court continued that, [ ] when, pending an appeal from the judgment of a lower court, and without any fault of the defendant, an event occurs which renders it impossible for this court, it should decide the case in favor of the plaintiff, to grant him any effectual relief whatever, the court 9
will not proceed to a formal judgment, but will dismiss the appeal. Mills v. Green, 159 U.S. 651, 653 (November 25, 1985). However, bankruptcy courts have veered from the original meaning of mootness and instead erroneously applied the moot theory, where a court cannot hear a case, to other cases where the courts simply do not want to hear a case. Equitable mootness is a way for an appellate court to avoid deciding the merits of an appeal. In re Phila. Newspapers, LLC, 690 F.3d 161, 168. The court continued that, In this uncommon act, a court dismisses an appeal even if it has jurisdiction and can grant relief if "implementation of that relief would be inequitable." Id. The courts invoked strong language to show its disdain for the overuse of mootness in its courts when it described the term "mootness" as a misnomer and stated that, Unlike mootness in the constitutional sense, where it is impossible for a court to grant any relief, "mootness" here is used "as a shortcut for a court's decision that the fait accompli of a plan confirmation should preclude further judicial proceedings." Id. As evidenced by Mrs. Kuzneiwski s mandatory participation in a class with fellow potential litigants and as defined in 11 U.S. Code 101 5(A)(B), Mrs. Kuzneiwski had a claim, thus a live case and controversy. R. at 5. This court reasoned that, the duty of this court, as of every other judicial tribunal, is to decide actual controversies by a judgment which can be carried into effect, and not to give opinions upon moot questions or abstract propositions, or to declare principles or rules of law which cannot affect the matter in issue in the case before it. It necessarily follows that when, pending an appeal from the judgment of a lower court, and without any fault of the defendant, an event occurs which renders it impossible for this court,it should decide the case in favor of the plaintiff, to grant him any effectual relief whatever, the court will not proceed to a formal judgment, but will dismiss the 10
appeal. And such a fact, when not appearing on the record, may be proved to extrinsic evidence. Mills v. Green, 159 U.S. 651, 653 (November 25, 1985). However, bankruptcy courts have veered from the original meaning of mootness and instead erroneously applied the moot theory, where a court cannot hear a case, to other cases where the courts simply do not want to hear a case. Equitable mootness is a way for an appellate court to avoid deciding the merits of an appeal. In this uncommon act, a court dismisses an appeal even if it has jurisdiction and can grant relief if "implementation of that relief would be inequitable." Continental I, 91 F.3d at 559(quoting In re Chateaugay Corp., 988 F.2d 322, 325 (2d Cir. 1993)). In re Phila. Newspapers, LLC, 690 F.3d 161, 168. The term "mootness" is a misnomer. Unlike mootness in the constitutional sense, where it is impossible for a court to grant any relief, "mootness" here is used "as a shortcut for a court's decision that the fait accompli of a plan confirmation should preclude further judicial proceedings." Id. Equitable mootness, Unlike Article III mootness, which causes federal courts to lack jurisdiction and so to have an inability to provide relief, equitable mootness is a judge-created doctrine that reflects an unwillingness to provide relief. Grasslawn Lodging, LLC v Transwest Resort Properties, Inc. (In re Transwest Resort Properties, Inc.), 801 F.3d 1161, 1167 (9 th Cir. 2015). The opposing counsel will use In re Continental to promote their position that equitable mootness is evident in the instant case. However, In re Continental is an example of equitable mootness struggling to define itself- a non-existent concept trying to gain traction. Though In re Continental feverently veers off the constraints of the constitution when it holds their case to be equitably moot, the court sill clearly define constitutional mootness. Continental does not contend that the appeals to the district court or to us were moot in the constitutional sense, implicating the case or controversy requirement of Article III, 1. In re Continental Airlines, 91 11
F.3d 553, 558. The court then points to cases where mootness is apparent stating, This is not a situation analogous to those where the Supreme Court determined that the appeals became moot because the law at issue was repealed, see Diffenderfer v. Central Baptist Church, 404 U.S. 412, 414-15, 30 L. Ed. 2d 567, 92 S. Ct. 574 (172); the subject of the election campaign controversy was no longer a candidate, see Golden v. Zwickler, 394 U.S. 103, 109-10, 22 L. Ed. 2d 113, 89 S. Ct. 956 (1969); or the railroad whose application for tariffs was contested withdrew that application, see A.L. Mechling Barge Lines, Inc. v. United States, 368 U.S. 324, 329-30, 7 L. Ed. 2d 317, 82 S. Ct. 337 (1961). Id. at 558. In re Continental continues to differentiate itself from this court by stating, Indeed, as the Supreme Court has recently explained, an appeal is moot in the constitutional sense only if events have taken place during the pendency of the appeal that make it "impossible for the court to grant 'any effectual relief whatever.'" 558. Church of Scientology v. United States, 506 U.S. 9, 12, 113 S. Ct. 447, 449, 121 L. Ed. 2d 313 (1992) (quoting Mills v. Green, 159 U.S. 651, 653, 40 L. Ed. 293, 16 S. Ct. 132 (1895)). We agree that An appeal is not moot "merely because a court cannot restore the parties to the status quo ante. Id. at 558. Rather, when a court can fashion 'some form of meaningful relief,' even if it only partially redresses the grievances of the prevailing party, the appeal is not moot." Id. at 558. The foundation of the term equitable mootness in bankruptcy is in the 1981 case, Trone v. Roberts Farms, Inc. (In re Roberts Farms, Inc.). Trone v. Roberts Farms, Inc. (In re Roberts Farms, Inc.), 652 F.2d 793. However, the idea of equitable mootness reaches even further back to Valley Nat'l Bank v. Trustee for Westgate-California Corp., 609 F.2d 1274. Roberts Farms was based in part on a since deleted bankruptcy provision, Bankruptcy Rule 805. However, that did not prevent the Ninth circuit s definition and application of equitable mootness reemergence in In re Continental Airlines, 91 F.3d 553. In this case, the court established 12
five elements to define when to determine a case equitably moot. They are, (1) whether the reorganization plan has been substantially consummated, (2) whether a stay has been obtained, (3) whether the relief requested would affect the rights of parties not before the court, (4) whether the relief requested would affect the success of the plan, and (5) the public policy of affording finality to bankruptcy judgments. Id. at 560. However, even in naming five factors, the court refused to be definite as to their weight and application. The court stated that, Although these five factors have been given varying weight, depending on the particular circumstances, the foremost consideration has been whether the reorganization plan has been substantially consummated. This is especially so where the reorganization involves intricate transactions, or where outside investors have relied on the confirmation of the plan. Id. at 560. Since In re Continental Airlines, the Ninth Circuit has tweaked its own 5 elemental test for equitable mootness in the case, Grasslawn Lodging, LLC v. Transwest Resort Properties Inc. (In re Transwest Resort Properties Inc.), 801 F.3d 1161, 1164, 74 C.B.C.2d 658 (9th Cir. 2015). The court reduced the previous 5 elements to 4. The court stated that it would, We will look first at whether a stay was sought, for absent that a party has not fully pursued its rights. If a stay was sought and not gained, we then will look to whether substantial consummation of the plan has occurred. Next, we will look to the effect a remedy may have on third parties not before the court. Finally, we will look at whether the bankruptcy court can fashion effective and equitable relief without completely knocking the props out from under the plan and thereby creating an uncontrollable situation for the bankruptcy court. 801 F.3d 1161, 1167 68. The court not only narrowed down the elements, but narrowed the meaning of some as well. No longer would a court simply look to see if a third party would be effected by a remedy, but a third party had to show that a, the specific relief sought must bear unduly on innocent third parties. Id. at 1169. This 13
was mirrored in First Southern National Bank v. Sunnyslope Hous. Ltd. Partnership (In re Sunnyslope Housing Ltd. Partnership) 818 F.3d 937 (9th Cir. 2016) when a the court held, creditor s appeal was not equitably moot despite the facts that funding for the reorganization plan had been furnished by an equity investment from a third-party investor and the plan had been substantially consummated. which states, Petitioner has an irrevocable right to have her case heard on its merits. U.S. Code 158 (a) The district courts of the United States shall have jurisdiction to hear appeals (1) from final judgments, orders, and decrees; (2) from interlocutory orders and decrees issued under section 1121(d) of title 11 increasing or reducing the time periods referred to in section 1121 of such title; and (3) with leave of the court, from other interlocutory orders and decrees; and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title. An appeal under this subsection shall be taken only to the district court for the judicial district in which the bankruptcy judge is serving. Additionally, 28 U.S. Code 158 (d) (1) states that, The courts of appeals shall have jurisdiction of appeals from all final decisions, judgments, orders, and decrees [ ]. Ms. Kuzniewski is in fact appeal a final order. Under this provision, the bankruptcy code provides no discretion. The word, shall connotes a duty. However, if the statutes were constructed with the word, may, then it would be discretionary. Opposing counsel will argue that the bankruptcy code allowed the lower courts to have discretion to deny hearing the case based on the premise of 28 U.S. Code 1334(c)(1) which states that, (Except with respect to a case under chapter 15 of title 11, nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 14
or arising in or related to a case under title 11. However, the District Court did not abstain from hearing Mrs. Kuzniewski s proceeding; they simply denied her request for a stay. R. at 5.Opposing counsel may also point to, 28 U.S. Code 1334(d) which states that, Any decision to abstain or not to abstain made under subsection (c) (other than a decision not to abstain in a proceeding described in subsection (c)(2)) is not reviewable by appeal or otherwise by the court of appeals under section 158(d), 1291, or 1292 of this title or by the Supreme Court of the United States under section 1254 of this title. Once again, the appellate court did not cite this statute as their rationale for not hearing the appeal. The lower court only cited equitable mootness. Opposing counsel may then turn to 11 U.S. Code 363(m) and 11 U.S. Code 364(e) as examples of the Bankruptcy intent to limit Bankruptcy Jurisdiction. However, both provisions are narrowly construed for very specific situations that are not applicable here. 11 U.S. Code 363(m) concerns the use, sale, or lease of property. It states, The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal. The statute specifically states that this provision only is applicable for this section, thus it is not applicable to another section of the Bankruptcy Code. Similarly, 11 U.S. Code 364(e) is specifically for obtaining credit. Although the provision states that, The reversal or modification on appeal of an authorization under this section to obtain credit or incur debt, or of a grant under this section of a priority or a lien, does not affect the validity of any debt so incurred, or any priority or lien so granted, to an entity that extended such credit in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and the incurring of such debt, or the granting of such priority or lien, were stayed pending appeal. It is not applicable in this case. It merely points out that if Congress intended to have a 15
bankruptcy code that limited reversal or modification of a plan under different scenarios, they would have been part of the code. Mrs. Kuzniewski was diligent at every opportunity to protect her rights. She was part of a group of creditors that vetoed to reject the initial plan. R. at 4. Mrs. Kuzniewski also objected to the confirmation of the plan. R. at 4. Her objection was overruled and Mrs. Kuzneiwski immediately requested a stay of the confirmation order by the Bankruptcy Court. R. at 5. Followed by her requesting a stay from the District Court of Moot. R. at 5. What more could Mrs. Kuzniewski do to protect her right to appeal a decision she did not agree with? 11 U.S. Code 1109 (b) states that, A party in interest, including the debtor, the trustee, a creditor s committee, an equity security holders committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter. One2One Communs., held that, "Though the finality of the Bankruptcy Court's decision necessarily will be disturbed, this Court has recognized an appealing party's statutory right to review of the [Bankruptcy] Court's decision. Further, the presumptive position remains that federal courts should hear and decide on the merits cases properly before them." 437. Even court cases that permit equitable mootness such as In re Roberts Farms, Inc., concede that a petitioner that has not sought a stay, harms their chances at appeal. (The failure to seek stays [ ] would justify dismissal of an appeal for lack of equity. at 798) In Re Roberts Farms Inc., the court reasoned that, [ ]Appellants have failed and neglected diligently to pursue their available remedies to obtain a stay of the objectionable orders of the Bankruptcy Court and have permitted such a comprehensive change of circumstances to occur as to render it inequitable for this court to consider the merits of the appeal. Though many would sight this case as the imitator of the 16
requirement that an appellant seek a stay, the court reached back to Valley Nat'l Bank v. Trustee for Westgate-California Corp., 609 F.2d 1274 for their rationale. There, the court reasoned that the appellants, [ ]failure to obtain, or even seek, a stay effectively precludes Woolsey and the Ashes from the equitable remedy they ask for. Valley Nat'l Bank v. Trustee for Westgate- California Corp., 609 F.2d 1274, 1283. Though the Bankruptcy Court stands on the premise that it strives to be a court of equity, in this matter, and at every turn, the Courts failed to preserve equity for the petitioner. The Appellate Court is denying the petitioner a chance at fairness and justice. The Appellate Court lacks the authority to deprive someone of their due process right, to hear a case on the merits, simply because it has determined, without hearing the case, that it would be too cumbersome, to hear a case. Following confirmation of a reorganization plan by a bankruptcy court, an aggrieved party has the statutory right to appeal the court's ruling. Once a bankruptcy appeal has been filed, federal courts have a 'virtually unflagging obligation' to exercise the jurisdiction conferred on them. One2One Communs., LLC v. Quad/Graphics, Inc., 805 F.3d 428, 433-434. Since confirmation orders are final orders, a party has a right to appeal. 28 USCS 158(a)(1). If a party has sought a stay from both the bankruptcy and district courts, the party's failure to appeal that decision to this court, will not, without more, render an appeal of the merits moot. In re Paige 1341. Petitioner was diligent in her duties to ensure to protect her right to appeal. She was 1. At the table during the bankruptcy conference and voted down the plan for her class 2. She sought a stay 3. She sought a second stay 4. She requested an expedited appeal. Whether a stay of implementation of the plan has been obtained is significant because: When an appellant does not obtain a stay of the implementation of a confirmation plan, the debtor will normally implement the plan and reliance interests will be created. Thus, the failure 17
to obtain a stay will count against the appellant in determining whether an appeal should be denied on equitable mootness grounds. The failure to seek a stay... is not necessarily fatal. Ochadleus v. City of Detroit (In re City of Detroit), 838 F.3d 792, 809 (6 th Cir. 2016) Equitable mootness has been unreasonably expanded from its constitutional mootness roots. Constitutional mootness does not extend itself to equitable mootness because there is no provision stated in the constitution, the bankruptcy code, or any other codified law that can be implemented in a Chapter 11 bankruptcy case. This case is still in the midst of a live controversy and the matter has not been settled between the parties. Therefore the case is not constitutionally moot and should be heard at the appellate level and judged on its merits. II. THIRD PARTY NON-DEBTORS, SUCH AS GADGET, GROSSLY BENEFIT FROM THE PRIVILEGES OF THE BANKRUPTCY CODE WITHOUT SUBMITTING ITSELF TO THE SAFEGUARDS AND PROVISIONS THAT PREVENT MANIPULATION AND ABUSE. A. This Court Should Reverse the Lower Court Because Discharges are Exclusively for Debtors Who Comply/Submit Themselves to the Bankruptcy Courts. The lower court erred in affirming Padco s chapter 11 plan of reorganization when it contained non-consensual third party releases which effectively operate as a discharge to which the Code reserves exclusively for debtors who submit themselves to the Bankruptcy Courts. Congress uniquely created to the Bankruptcy Code for the principle to allow ailing debtors rehabilitation, referred as the fresh start, accomplished by discharge provisions. A confirmed reorganization plan by a debtor filing for bankruptcy receives discharges from all of its debts, with certain exceptions not applicable here. When the debtor emerges from bankruptcy with a fresh start. The plan is binding on all of the debtor's creditors, including those that objected to the discharge. Congress made clear when enacting 11 U.S.C 524 provides the discharge of the 18
debtor does not affect co-debtors or guarantors. S. REP. 95-989, 81, 1978 U.S.C.C.A.N. 5787, 5867. Section 11 U.S.C. 524(e) embodies an important policy of the Bankruptcy Code that is, the protection of rights of creditors to pursue persons and entities who are jointly liable with a debtor who have not assumed the burdens of a debtor under the Bankruptcy Code. In re Digital Impact, Inc., 223 B.R. 1, 10 (Bankr. N.D. Okla. 1998). Congress did not intend to extend such benefits to third-party bystanders. See 3 Collier on Bankruptcy par. 524.01[3] at 524-16 (1st ed. 1990) (citing S.Rep. No. 989, 95th Cong., 2d Sess. 80-81). Third party non-debtor releases extinguish claims without providing the non-debtor's creditors the full protection the Code. The delicate balance between the rights of debtors and creditors that the Congress strives to keep equitable is in jeopardy. After a debtor completes the stringent bankruptcy process, the debtor is awarded a discharge. Pursuant to 524 of the Code, the discharge benefits the debtor alone; the liabilities of guarantors, sureties, joint tort-feasors, shareholders, directors, employees, and related entities are not impacted.. See 11 U.S.C. 524. Therefore, creditors are generally free to collect any deficiencies in bankruptcy payments and pursue independent claims on affiliated or co-liable parties. The specificity of rule 524(e) clearly states that when a debtor s liability is discharged in a bankruptcy proceeding, the release of liability is only for the debtor. The release of liability will not affect any other entities liability even if it is essentially the same debt. A discharge does not extinguish the debt itself, only enjoins suits to collect, recover or offset a debt as the personal liability of the debtor, interpreted to exclude merely nominal liability. See Matter of Edgeworth, 993 F.2d 51, 54 (5th Cir. 1993). The discharge of a debtor in 19
bankruptcy does not discharge the obligations of guarantors. In re Lowenschuss, 67 F.3d 1394, 1401 (C.A.9, 1995); In re American Hardwoods, Inc., 885 F.2d 621, 626 (C.A.9, 1989); Union Carbide Corp. v. Newboles, 686 F.2d 593, 595 (C.A.7, 1982). Moreover, 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. 11 U.S.C. 524(e). This section of the 1978 Bankruptcy Reform Act was a reenactment of 16 of the 1898 act, which stated that [t]he liability of a person who is a co-debtor with, or guarantor or in any manner a surety for, a bankrupt shall not be altered by the discharge of such bankrupt. Underhill v. Royal, 769 F.2d 1426, 1432 (C.A.9, 1985). Only relationships between debtors and their creditors can be affected by the bankruptcy court. Michigan Nat. Bank v. Laskowski, 580 N.W.2d 8, 9 (Mich. App. 1998). Accordingly, even after the bankruptcy proceeding, a creditor or claimant may still establish liability to a third party through the debtor as long as there is no collection against the debtor. See, e.g., In re Coho Resources, Inc., 345 F.3d 338, 342 (5th Cir.2003); Hall v. National Gypsum Co., 105 F.3d 225, 229 (5th Cir.1997); Matter of Edgeworth, 993 F.2d 51, 53 54 (5th Cir.1993); Feld v. Zale Corporation, 62 F.3d 746 (5th Cir.1995). These cases seem broadly to foreclose non-consensual non-debtor releases and permanent injunctions. In re P. Lumber Co., 584 F.3d 229, 252 (5th Cir. 2009). i. The court should reverse the lower court and equate the term release as a discharge since its effects are indistinguishable. A wolf in sheep s clothing will devour the heard, and invite more wolves. A permanent injunction against the enforcement of a judgment is a remedy distinguishable from discharge. 11 U.S.C. 524(a)(2), In re Am. Hardwoods, Inc., 885 F.2d 621, 626 (9th Cir. 1989). A discharge in bankruptcy is an involuntary release by operation of law of creditor claims against an entity (both asserted and unasserted), which is enforced by the court. In re Monroe Well Serv., Inc., 80 20
B.R. 324, 334 (Bankr.E.D.Pa.1987). Since a discharge is an extreme remedy, stripping a creditor of its claims against its will, it is a privilege reserved for those entities which file a petition under the bankruptcy code and abide by its rules. In re Arrowmill Dev. Corp., 211 B.R. 497, 503 (Bankr. D.N.J. 1997). A voluntary, consensual release is not a discharge in bankruptcy. As indicated above, a discharge is an involuntary release of a creditor's debt by operation of law. Here, Ms. Kuzniewski s voluntary action was when she joined the case as a claimant. See R at 3. Kuzniewski voluntarily voted to reject the plan, among the creditors in the class. R at 4. Kuzniewski also voluntarily objected to confirmation on the grounds that the injunction against direct claims was not a permissible plan provision under the Bankruptcy Code. Id. Under these facts, Ms. Kuzniewski is being stripped of her claim against her will. By operation of law and enforced by the court, the involuntary and non-consensual release is a discharge. ii. Non-Consensual Releases are Outside the Equitable Powers of Bankruptcy. Although, under 11 U.S.C. 105 a bankruptcy court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process. The Supreme Court has held that a bankruptcy court s equitable powers may not be applied in a manner inconsistent with the Code. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S. Ct. 963, 99 L. Ed. 2d 169 (1988). The general grant of equitable power contained in 105(a) cannot trump specific provisions of the Bankruptcy Code, and must be exercised within the parameters of the Code itself. See Id. 21
Furthermore courts have held, 105 does not create substantive rights that would otherwise be unavailable under the Code.In re Combustion Engineering, Inc., 391 F.3d 190, 236, 43 Bankr. Ct. Dec. (CRR) 271, Bankr. L. Rep. (CCH) P 80206 (3d Cir. 2004), as amended, (Feb. 23, 2005) (citations omitted). B. This Court Should Reverse the Lower Court Because Statutory Discharges are Outside the Power of the Court. Courts hold when the plain language of a statue make it clear that there is no specific authority to extend an injunction to include third-party against a non-debtor where the liability is alleged and sets out the specific requirements that must be met in order to permit inclusion the general powers of 105(a) cannot be used to achieve a result not contemplated by the more specific provisions. See generally Id. Because 105(a) should not be read without 105(d) (2) unless inconsistent with another provision of this title. Like this case, where there is no specific authority to extend an injunction to include MsK against the non-debtor, Parent company of the Debtor, where her tort liability is alleged against Parent company and the Code has set out the specific requirements that must be met in order to permit inclusion, A well-established canon of statutory interpretation succinctly captures the problem: [I]t is a commonplace of statutory construction that the specific governs the general. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065, 2070 71, 182 L. Ed. 2d 967 (2012). Congress has enacted a comprehensive scheme and has deliberately targeted specific problems with specific solutions. Id. The general/specific canon is perhaps most frequently applied to statutes in which a general permission or prohibition is contradicted by a specific prohibition or permission. Id. To eliminate the contradiction, the specific provision is construed as an exception to the general one. In re Pacific Lumber Co. Scopac were wholly owned by Palco when they filed for 22
bankruptcy, Palco transferred a substantial amount of assets to facilitate a sale of $867.2 million. Id. at 237. Palco and Scopac maintained separate corporate structures but were an integrated company. Id. After a year passed Scopac was forced to structure a plan; Indenture Trustee s plan covered the assets of Scopac and Creditor dissolved Palco s other entities withdrawn from bankruptcy to created new entities. Later during the voting approval of the plan, court made findings the classifications were odd. The class claims from creditors were that the class was artificially impair and in two other separate classes were organized to receive a majority of affirmative votes, as organized. The court found that plan shall not classify similar claims differently in order to gerrymander an affrimairive vote on reorganization plan. Greystone, 995 F.2d at 1279. Although the plan was substantially consummated and deemed equitably moot; the preliminary claim whether on the legality of the Non-Debtor release is not. In re P. Lumber Co., 584 F.3d 229, 251 (5th Cir. 2009). The court refers to the law that states discharge of a debt of a debtor does not, affect the liability of any other entity... 11 U.S.C. 524(e). Id. In a variety of contexts, this court has held that Section 524(e) only releases the debtor, not co-liable third parties. Id. See, e.g., In re Coho Resources, Inc., 345 F.3d 338, 342 (5th Cir.2003); Hall v. National Gypsum Co., 105 F.3d 225, 229 (5th Cir.1997); Matter of Edgeworth, 993 F.2d 51, 53 54 (5th Cir.1993); Feld v. Zale Corporation, 62 F.3d 746 (5th Cir.1995). Non-Debtors insist the release clause is part of their bargain because without the release clause neither company would have been willing to provide the plan's financing. Id. The proponents claim to have purchased is exculpation from any negligence that occurred during the course of the bankruptcy. In re P. Lumber Co., 584 F.3d 229, 252 (5th Cir. 2009). Any costs the released parties might incur defending against suits alleging such negligence are unlikely to swamp either these parties or the consummated reorganization. Id. 23