District Court Dismisses Noteholders' Appeal of Confirmation Order as Equitably Moot
The United States District Court for the District of Delaware granted the debtors’ motion to dismiss an appeal filed by an ad hoc group of certain holders of subordinated debentures (“Noteholders”) finding that the appeal was equitably moot. While the Noteholders’ sought to overturn the debtors’ confirmed plan in order to obtain a reevaluation of the debtors’ assets and confirm their own plan, the district court found it to be determinative that the Noteholders’ failed to obtain a stay pending appeal and, in the meantime, the debtors’ confirmed plan was substantially consummated.
Confirmation of Debtors’ Plan of Reorganization
In 2009, Spansion LLC (“Debtors”) filed a reorganization plan, which proposed a total restructuring of Debtors’ capital structure and corporate governance. The Noteholders filed two objections to the proposed plan. During a five-day confirmation hearing, the bankruptcy court heard testimony from several valuation experts. On April 1, 2010, the bankruptcy court issued an opinion concluding that Debtors had an enterprise value between $872 million and $944 million, but finding that it could not confirm the proposed plan unless Debtors made certain changes. On the same day, Debtors filed a revised plan which included the required modifications (“Plan”). The Noteholders then objected to the Plan and proposed their own plan based on their valuation analysis. The following day, the bankruptcy court declined to revisit the valuation determination and approved the Plan (“Confirmation Order”).
Noteholders’ Appeal of the Confirmation Order
The Noteholders appealed the Confirmation Order and also filed an emergency motion for a limited stay pending appeal. The bankruptcy court denied the stay motion, but granted a temporary limited stay of certain actions under the Plan in order to allow the district court an opportunity to consider the requested stay. The Noteholders then filed an emergency motion in the district court, seeking a stay of the Confirmation Order. On May 19, 2010, the district court denied the emergency motion on the grounds that the Noteholders had failed to demonstrate that they were likely to prevail on appeal. Notably, the Noteholders did not appeal the emergency motion to the Third Circuit and failed to take any other action or prosecute or expedite their appeal. In the meantime, the district court referred the appeal to mediation on June 2, 2010. On January 11, 2011, after the parties had failed to report back to the court for seven months, the district court dismissed the appeal without prejudice for failure to prosecute under Federal Rule of Civil Procedure 41(a). Nevertheless, the district court permitted the Noteholders to revive their appeal by filing a brief by February 18, 2011, which they did so on that date.
Debtors’ Motion to Dismiss the Appeal
Significantly, in the meantime, the Plan became effective on May 10, 2010 (“Effective Date”) and Debtors proceeded to implement the Plan by completing a series of significant transactions. On February 22, 2011, shortly after the Noteholders filed their appellate brief, Debtors filed a motion to dismiss the Noteholders’ appeal (“Motion to Dismiss”), arguing that the appeal was equitably moot because the Plan had since been substantially consummated. Objecting to dismissal, the Noteholders argued that application of equitable mootness was inappropriate because the appeal affected only the bankruptcy court’s valuation determination and did not require the court to unravel the entire Plan.
Overview of the Doctrine of Equitable Mootness
Issuing its decision on the Motion to Dismiss, the district court began by explaining that, under the doctrine of equitable mootness, a bankruptcy appeal should be dismissed when implementation of the requested relief would be inequitable. In re Continental Airlines, 91 F.3d 553, 559 (3d Cir. 1996). In this regard, the district court observed that, in order to determine whether an appeal is equitably, moot, the court must consider: (1) whether the plan has been substantially consummated; (2) whether a stay has been obtained; (3) whether the relief requested would affect the rights of third parties; (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. In applying these factors, the district court further noted that the most important consideration was whether the plan has been substantially consummated. In re PWS Holding, Corp., 228 F.3d 224, 236 (3d Cir. 2000).
District Court Rules Plan Had Been Substantially Consummated
Considering first whether the Plan had been substantially consummated, the district court established that “substantial consummation” is defined as: (1) transfer of all or substantially all of the property proposed by the plan to be transferred; (2) assumption by the debtor or by the successor to the debtor under the plan of the business or the management of all or substantially all of the property dealt with by the plan; and (3) commencement of distribution under the plan. See 11 U.S.C. § 1101(2). Applying this standard, the district court resolved that the Plan had been substantially consummated because since the Effective Date, Debtors had taken numerous steps to implement the Plan, including: (1) granting options to purchase new shares of common stock; (2) closing a new $65 million revolving credit facility; (3) paying more than $633 million to holders of their prepetition senior secured notes; (4) cancelling all of the prepetition common stock and debt securities; (5) closing a public offering; (6) issuing $200 million in unsecured notes; (7) repaying $200 million of the credit facility; and (8) completing a rights offering resulting in $109 million in cash proceeds. The district court also found it to be significant that the Plan was the product of over fourteen months of negotiation and complex financial transactions, many of which had been implemented since the Effective Date, such that the Plan could not be “easily reversed.” Nordhoff Invs., Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 186 (3d Cir. 2001). In this regard, the district court rejected the Noteholders’ contention that the appeal would have no bearing on the Plan, finding instead that the appeal challenged issues in addition to valuation, including whether Debtors had satisfied the good faith requirements of § 1129(a). Regardless, the court noted that the issue of valuation had an “integral nexus” with the Plan such that it would cause “reversal or unraveling” of the reorganization. In re Genesis, 280 B.R. 339, 346 (D. Del. 2002). Accordingly, the district court held that the Plan had been substantially consummated and it would be inequitable to grant the Noteholders’ relief.
District Court Weighs Remaining Continental Factors in Favor of Equitable Mootness
Additionally weighing the remaining Continental factors in favor of equitable mootness, the district court determined that under the second factor, the Noteholders had not only failed to obtain a stay pending appeal, but had also failed to report the status of mediation or otherwise prosecute the appeal. Therefore, under the second Continental factor, the facts favored equitable mootness.
Furthermore, under the third factor regarding whether the appeal would substantially affect the rights of parties not before the court, the district court cited the fact that numerous third parties, including holders of new common stock, purchasers of Debtors’ publicly traded stock and senior noteholders had all relied on the Plan and a substantial modification to the Plan would certainly affect their rights. Similarly, under the fourth factor, the district court resolved that the appeal would affect the success of the Plan because it attacked the substance of the plan by challenging the bankruptcy court’s valuation and Debtors’ compliance with the good faith requirement in § 1129(a). Moreover, the district court found that the appeal sought to displace the plan with an alternate plan which would require the recovery of millions of dollars of payments already made to creditors.
Finally, in analyzing the fifth Continental factor addressing public policy, the district court determined that dismissal of the appeal was warranted, in light of the extensive negotiations, complex litigation, and numerous contracts between Debtors, their creditors and third parties who acted in reliance on the Plan. Therefore, weighing all five Continental factors in favor of equitable mootness, the district court concluded that dismissal of the Noteholders’ appeal was warranted.
District Court Dismisses Noteholders’ Appeal as Equitably Moot
Ultimately, the district court granted the Motion to Dismiss and dismissed the Noteholders’ appeal as equitably moot. The decision illustrates the difficulties associated with appealing a ruling made in connection with a confirmed plan in the absence of a stay pending appeal.
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