On Appeal From the United States District Court For the District of Delaware (District of Delaware Civil No. 99-cv-00747) (District of Delaware Civil No. 00-cv-00399) (District Judge: Honorable Gregory M. Sleet)
Before: Becker, Chief Judge,*fn1 Barry and
BRIGHT,*fn2 Circuit Judges.
The opinion of the court was delivered by: Becker, Circuit Judge.
This appeal from the order of the District Court, dismissing the U.S. Trustee's (the "Trustee") appeal of the Bankruptcy Court's grant of certain professional fees and expenses incurred by the Unofficial Committee of Equity Security Holders (the "Unofficial Committee") in furtherance of its effort to have the Bankruptcy Court order the appointment of an official committee of equity security holders, presents important questions as to the scope of the equitable mootness doctrine. The District Court determined that the Trustee's appeal was equitably moot after analyzing the five prudential factors discussed in In re Continental Airlines, 91 F.3d 553, 560 (3d Cir. 1996) (en banc)[hereinafter Continental I]. We conclude that the District Court abused its discretion in making that determination for a number of reasons, the most significant of which was its decision that the first and most important Continental factor, i.e., whether the reorganization plan had been "substantially consummated," favored a finding of equitable mootness, even though a successful appeal would have only a minor impact on and, at all events, could not result in the unraveling of the plan. As we explained in Nordhoff Inv. Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 185 (3d Cir. 2001), the equitable mootness doctrine is to be applied only in order to "prevent[ ] a court from unscrambling complex bankruptcy reorganizations when the appealing party should have acted before the plan became extremely difficult to retract."
The District Court also abused its discretion in determining that even if equitable mootness does not apply to the Trustee's appeal, that appeal should be dismissed on the basis of "other equitable considerations." There is no jurisprudence in this Circuit that would allow a court to eschew exercise of its proper jurisdiction by refusing to entertain an appeal it has the power to hear on the basis of an ad hoc balancing of self-selected "equitable considerations," and we are not inclined to fashion such. We will therefore reverse the judgment of the District Court and remand for consideration of the Trustee's appeal. *fn3
I. Factual and Procedural Background
In August of 1999, the Zenith Electronics Corporation ("Zenith") filed a voluntary petition for bankruptcy under Chapter 11. The proposed reorganization plan was "prepackaged": the details had been negotiated in advance between Zenith and its principal shareholder, LG Electronics ("LGE"), which owned 58% of Zenith's stock and had lent millions of dollars to the company. The plan required, inter alia, canceling Zenith's stock for no consideration, issuing new Zenith stock to LGE in return for $200 million in debt relief, exchanging $103 million in bonds bearing interest at 6.25% for $50 million in new bonds bearing interest at 8.19%, refinancing of bank debt, and an extension by LGE to Zenith of $60 million in new credit.
Zenith's minority shareholders, whose shares were to be canceled under the plan, objected. The largest of these shareholders, Nordhoff Investments, opted to represent its own interests, and the remaining minority shareholders formed an unofficial committee of equity security holders to represent them. Three days after the bankruptcy petition was filed, the Unofficial Committee moved the Bankruptcy Court to order the appointment of an official committee of equity security holders under 11 U.S.C. § 1102(a)(2). However, at an August 27, 1999 hearing, the United States Trustee objected to the formation of an official committee, arguing that such a committee was unnecessary, as the company was insolvent and the stock of all the potential committee members was to be canceled under the reorganization plan. The Bankruptcy Court rejected this argument and ordered the Trustee to appoint the official committee. The Trustee complied, but also appealed this decision and moved the District Court for a stay pending its appeal of the order appointing the official committee. The District Court denied a stay, and the appeal of the appointment order remained pending.
The Bankruptcy Court then held an expedited hearing on confirmation of the proposed reorganization plan. Central to this hearing was a disagreement over the proper valuation of Zenith. Nordhoff and the Official Committee argued that the company was worth $1.05 billion, while the debtor's expert valued it at $300 million. The Bankruptcy Court agreed with the debtors, and on November 2, 1999, it approved the reorganization plan. The confirmation order included a provision dissolving all committees.
Ten days after the dissolution of the Official Committee, several professional advisors to the Unofficial and Official Committees, including two law firms and an accounting firm (the "Professionals"), applied for compensation and reimbursement of expenses out of the estate for work performed both for the Unofficial Committee in its efforts to obtain appointment of the Official Committee, and for the Official Committee after its September 8, 1999 formation. While Patricia Staiano, the Trustee, did not contest the fees sought for work on behalf of the Official Committee, she challenged the Professionals' request for fees relating to their work for the Unofficial Committee, arguing that this work did not meet the statutory requirement that the fee-seeking Professionals "make a substantial contribution" to the case. See 11 U.S.C. §§ 503(b)(3)(D), (b)(4). The Bankruptcy Court nonetheless granted the Professionals ...