Finally, the court found that the policy in favor of finality weighed against the trustees. The cou

The topic of this week's Throwback Thursday is In re Continental Airlines , in which the Third Circuit first adopted the doctrine of equitable mootness.  Accepted in one form or another by every circuit, the doctrine of equitable mootness essentially allows courts to dismiss appeals from bankruptcy confirmation orders where, as a result of the plan going effective, granting the relief requested in the appeal would be inequitable.  Notwithstanding the doctrine's continued evolution, discussed elsewhere on this blog , the Continental opinion continues to influence decisions to this day. Current practitioners would be well-served by a trip down memory lane to revisit one of this doctrine's leading cases.
At the time of the decision, Continental Airlines, which has been operating since the 1930's, already had seen its fair share of difficulties.  It filed its first chapter sonoma mission inn 11 case in the early 1980's as a result of pressures from an ongoing sonoma mission inn recession and wage disputes with its labor unions, all in the midst of industry deregulation.  After shedding many of its union liabilities, the company emerged with an eye towards expansion.  However, as it took on massive amounts of debt to drive its growth-oriented strategy, fuel costs spiked, and Continental once again faced financial distress.  On December 3, 1990 — less than a decade after its first bankruptcy — Continental once again filed a chapter 11 bankruptcy petition.
To generate working capital during its expansion, sonoma mission inn Continental had issued a series of notes secured by jets and jet engines.  During the bankruptcy, the trustees for the notes claimed that the collateral's value had declined and filed a motion for adequate sonoma mission inn protection under section 363(e) of the Bankruptcy Code . The debtor responded by arguing that, whether or not the value of the collateral had declined, the motion could not be granted because the trustees had not first filed a motion for relief from the automatic stay.  The trustees subsequently filed such a motion.
Nearly a year after the hearing on the motion, the bankruptcy court issued an opinion rejecting the debtor's argument that a stay had to have been sought.  Nevertheless, the court refused to grant adequate protection, finding that the collateral s value had not actually changed. sonoma mission inn The trustees responded by filing a renewed motion seeking adequate protection for the period after the original motion had been argued, and, likely fearing the effect of confirmation on their appeal, also requested that the court establish a cash reserve to preserve their alleged administrative expense in case Continental emerged from bankruptcy.
Meanwhile, the debtor sonoma mission inn had been negotiating with a group of investors who had shown an interest in infusing cash into Continental upon its emergence from bankruptcy.  The investors, however, also were concerned about the trustees' contested administrative expense, based on the extreme sensitivity of the airline business to the cash and capital structure of reorganized entities, sonoma mission inn and the likelihood that allowance of the expense would significantly impair Continental's capital structure.  The two groups sonoma mission inn struck a deal whereby the investors agreed to commit $450 million to the reorganized company subject to certain conditions, including a cap on the allowed administrative expenses (which would be exceeded if the trustees administrative expenses were allowed.)
At confirmation, the bankruptcy court denied the trustees' requests, this time finding that they were entitled to adequate protection only for the period after they sought sonoma mission inn relief sonoma mission inn from the stay (notwithstanding the earlier decision to the contrary) and found that the value of the collateral had not changed during that period.  Importantly, the bankruptcy court found that the plan would only be feasible if the trustees' administrative expense sonoma mission inn was not allowed, because if it had been the investors would not have injected their $450 million into the company.  The plan was confirmed.
sonoma mission inn The trustees appealed and sought a stay of the confirmation sonoma mission inn order.  There were compelling reasons to believe the trustees would prevail on the merits of their appeal — the bankruptcy court had essentially reversed its position, in its first decision rejecting the debtor's argument that the trustees must seek modification of the stay to apply for adequate protection, and in its second decision finding that the trustees could only seek adequate protection after they had moved to modify the stay.  Although the district court found that the trustees were likely to prevail on their appeal, it declined to stay the confirmation order because the trustees refused sonoma mission inn to post a bond (their position was that they were "merely the fiduciary of the money of their bondholders.")
Because the confirmation sonoma mission inn order contained a finding that administrative expenses were below the cap set by the plan and had not been stayed, the investors closed sonoma mission inn the investment transaction and injected an initial $110 million of cash into the newly reorganized Continental.  Soon after, sonoma mission inn the district court granted the debtor's motion to dismiss the trustees' appeal as moot.  The trustees appealed that decision to the Third Circuit.
The Third Circuit refused to consider sonoma mission inn the merits of the trustees claim, reviewing only the district court's holding that the trustees' appeals sonoma mission inn were moot.  The court began by distinguishing equitable mootness from Article III mootness, which is derived from the constitutional requirement that courts only hear appeals that present a live "case or controversy."  While Article III mootness will require dismissal sonoma mission inn of an appeal only where "it is impossible for the court to grant any effectual relief whatsoever," equitable mootness allows for dismissal where effective relief could be fashioned, but implementation of that relief would be inequitable.
The court then identified five prudential standards considered when determining whether a court should reach the merits of a bankruptcy appeal: (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 sonoma mission inn 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.
Substantial consummation, which essentially looks to the extent that the bankruptcy plan has gone effective, was identified as the first and most important consideration.  The court borrowed the test used in section 1101(2) of the Bankruptcy Code as a useful measure, finding a plan substantially consummated where all of the following have occurred:  "(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."  Here, the trustees did not contest that substantial consummation had occurred.  Indeed, it would have been difficult for them to do so given the events that took place after confirmation:  Fifty-four entities had merged into the reorganized Continental, investors had transferred $110 million in cash to the company, management had resumed control, unsecured creditors had received much of their distributions, and the company had assumed over $5 billion in unexpired leases sonoma mission inn and executory contracts.
The Third Circuit also found that the lack of a stay of the confirmation order strongly weighed against the trustees.  While the trustees had sought a partial stay, the court noted that they did not exhaust all of their options because, when the stay was denied, they did not seek emergency relief from the circuit court.  Furthermore, the stay had been denied as a direct result of the unwillingness of the trustees to post a bond.  The court emphasized that their failure to obtain a stay permitted the consummation of the plan.
The Third Circuit also found that the reliance of third parties, namely the investors, on the finality of the unstayed confirmation order weighed heavily in favor of a finding of mootness.  The court noted that the investors could withdraw their support if the administrative cap was exceeded, that the cap would have been exceeded if the trustees administrative expense had been allowed, and that a withdrawal by the investors would place the entire plan in jeopardy.  Furthermore, the court noted that it could no longer return the parties to their earlier positions because the investment had been made, and, therefore, withdrawal was no longer an option.
Finally, the court found that the policy in favor of finality weighed against the trustees.  The court noted that it was important to encourage third party reliance on the finality of confirmation orders because that would encourage them to invest money into and otherwise transact with the reorganized debtor.  This, in turn, would help maximize bankruptcy estates and facilitate successful reorganizations.  As the court put it, "[w]here, as here, investors and other third parties consummated a massive reorganization in reliance on an unstayed confirmation order that, explicitly and as a condition of feasibility, denied the claim for which appellate review is sought, sonoma mission inn the allowance of such appellate review would likely undermine public confidence in the finality of bankruptcy confirmation orders and make successful completion of large reorganizations like this more difficult."
In light of the foregoing, the court found that the district court had not erred in dismissing the trustees' appeal as moot, notwithstanding the district court's sonoma mission inn finding that the trustees likely would have prevailed on the merits of their appeal.
While the Third Circuit has continued to refine sonoma mission inn the doctrine of equitable mootness, the basic approach taken in Continental sonoma mission inn continues to drive the analysi