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In re Semcrude L.P.

United States Court of Appeals, Third Circuit

August 27, 2013

In re: SEMCRUDE, L.P., et al., Reorganized Debtors
v.
SEMCRUDE, L.P., et al. Luke Oil Company, C & S Oil/Cross Properties, Inc., Wayne Thomas Oil and Gas and William R. Earnhardt, Co., Appellants SAMSON ENERGY RESOURCES COMPANY, et al.

Argued February 19, 2013

Appeal from the United States District Court for the District of Delaware (D.C. Civil Action No. 1-09-cv-00994) District Judge: Honorable Leonard P. Stark

Hartley B. Martyn, Esquire Martyn & Associates Duane D. Werb, Esquire (Argued) Werb & Sullivan Counsel for Appellants

Yolanda C. Garcia, Esquire Martin A. Sosland, Esquire (Argued) Vance L. Beagles, Esquire Weil, Gotshal & Manges L. Katherine Good, Esquire John H. Knight, Esquire Richards, Layton & Finger One Rodney Square Counsel for Appellees

Before: AMBRO, FISHER, and JORDAN, Circuit Judges

OPINION

AMBRO, Circuit Judge

We revisit equitable mootness, a judge-made abstention doctrine that allows a court to avoid hearing the merits of a bankruptcy appeal because implementing the requested relief would cause havoc.[1] As many courts have noted, though its name suggests mootness in the constitutional sense, that is where the similarity between the doctrines ends. See, e.g., In re UNR Industries, Inc., 20 F.3d 766, 769 (7th Cir. 1994). Mootness is a threshold issue that prevents a federal court from hearing a case where there is no live case or controversy as required by Article III of our Constitution. Honig v. Doe, 484 U.S. 305, 317 (1988). Equitable mootness, in contrast, does not ask whether a court can hear a case, but whether it should refrain from doing so because of the perceived disruption and harm that granting relief would cause.[2] Official Comm. of Unsecured Creditors of LTV Aerospace and Defense Co. v. Official Comm. of Unsecured Creditors of LTV Steel Co. (In re Chateaugay Corp.), 988 F.2d 322, 325 (2d Cir. 1993).

Equitable mootness comes into play in bankruptcy (so far as we know, its only playground) after a plan of reorganization is approved. Once effective, reorganizations typically implement complex transactions requiring significant financial investment. Following confirmation of a plan by a bankruptcy court, an aggrieved party has the statutory right to appeal the court's rulings. Nonetheless, if debtors or others believe granting the requested relief would disrupt the effected plan or harm third parties, they may seek to dismiss the appeal as equitably moot. Their contention is that even if the implemented plan is imperfect, granting the relief requested would cause more harm than good.

Courts have rarely analyzed the source of their authority to refuse to hear an appeal on equitable mootness grounds.[3] The most plausible basis is found in federal common law. See UNR, 20 F.3d at 769. The Bankruptcy Code forbids appellate review of certain un-stayed orders, see 11 U.S.C. §§ 363(m), 364(e), and restricts post-confirmation plan modifications, see id. § 1127. Though these provisions arguably express a policy favoring the finality of bankruptcy decisions, the Code does not expressly limit appellate review of plan confirmation orders. In re Pac. Lumber Co., 584 F.3d 229, 240 (5th Cir. 2009); UNR, 20 F.3d at 769. Courts have filled this gap by declining to hear appeals where they perceive that the interests of finality outweigh those of the appealing party.

Because we have already approved the doctrine (though narrowly in a 7-6 en banc ruling), In re Continental Airlines, 91 F.3d 553, 568 (3d Cir. 1996) (en banc) ("Continental I"), we need not detour ourselves to consider whether federal common law can support its use. Its judge-made origin, coupled with the responsibility of federal courts to exercise their jurisdictional mandate, obliges us, however, to proceed most carefully before dismissing an appeal as equitably moot.

Turning to the specifics of this appeal, Appellants are four Oklahoma producers (collectively, the "Appellants")[4]that supplied oil and gas to SemCrude, L.P. and related entities (collectively, the "Debtors" or, following reorganization, the "Reorganized Debtors") on credit. Shortly after Debtors petitioned for bankruptcy, Appellants filed a complaint contending that they retained property and statutory lien rights in those commodities. On multiple occasions, Appellants asserted—either in objecting to the Bankruptcy Court's rulings or in seeking interlocutory appellate review—that their claims against Debtors could not be discharged without affording them the opportunity to litigate their claims in an adversary proceeding. Yet they have never been given that opportunity.

Following confirmation of Debtors' reorganization plan, which constitutes a final judgment in bankruptcy cases, In re PWS Holding Corp., 228 F.3d 224, 235 (3d Cir. 2000), Appellants appealed to the District Court. Again they were turned away, this time because their appeal was deemed equitably moot.

They now appeal to us. Because we agree that the evidentiary record does not support dismissal of that appeal for equitable mootness, we reverse the District Court's order and remand for it to hear the merits of Appellants' appeal.

I. Background

Debtors were (and continue to be following reorganization) a midstream oil and gas business engaged in the gathering, transportation, storage, and marketing of crude oil and other petroleum products. In July 2008, they filed voluntary petitions under Chapter 11 of the Bankruptcy Code. Numerous producers (the "Producers"), like Appellants, had supplied oil and gas to Debtors on credit prior to their filing for bankruptcy. In the Bankruptcy Court, these Producers asserted a variety of claims against Debtors entitling them to receive distributions from the proceeds of the oil and gas ahead of other creditors. Debtors and Appellants disagreed about the appropriate mechanism for resolving these claims.

Debtors filed a motion to establish global procedures. They entitled the Producers to file one representative proceeding for each state in which they supplied oil and gas to Debtors. All interested parties had the right to brief, and present oral argument on, their claims. Regardless whether a Producer participated, however, the legal rulings from the representative action would be binding on it.

Appellants objected to these procedures. They argued that the Federal Rules of Bankruptcy Procedure entitled them to an adversary proceeding on their claims. About the same time, they filed a complaint asserting their individual claims against Debtors and seeking class certification to assert those of similarly situated Producers in Oklahoma.

The Bankruptcy Court granted Debtors' motion to implement their proposed resolution procedures and stayed Appellants' adversary proceeding. After filing an unsuccessful motion for reconsideration with the Bankruptcy Court, Appellants sought leave from the District Court to file an interlocutory appeal challenging the procedures. That Court—noting that "the question of whether [Appellants] will, in fact, be bound by the[] outcome [of the representative proceedings] can be litigated at a later date"—declined to hear the appeal. In re SemCrude, L.P., 407 B.R. 553, 557 (D. Del. 2009).

Several representative proceedings—asserting rights under Oklahoma, Texas, Kansas, New Mexico, and Wyoming law—were subsequently filed. Other Producers based in Oklahoma (but not Appellants) filed a representative proceeding asserting that they retained property interests and statutory liens in the oil and gas they supplied to Debtors. The Bankruptcy Court granted summary judgment against the Oklahoma-based Producers. In re SemCrude, L.P., 407 B.R. 140 (Bankr. D. Del. 2009). It similarly rejected the claims of Producers from Kansas and Texas. In re SemCrude, L.P., 407 B.R. 82 (Bankr. D. Del. 2009) (Kansas); In re SemCrude, L.P., 407 B.R. 112 (Bankr. D. Del. 2009) (Texas). Recognizing the novelty of these issues, however, the Court sua sponte certified direct appeals to our Court under 28 U.S.C. § 158(d)(2).

Before we heard these appeals (or the Bankruptcy Court issued rulings in the other representative proceedings), Debtors, their senior secured lenders, and an Official Producers Committee reached a settlement that purported to resolve the claims of all the Producers (the "Producer Settlement").[5] Debtors subsequently filed a reorganization plan incorporating the terms of the Producer Settlement. Among other things, the settlement provided over $160 million in distributions to the Producers in exchange for the discharge of their claims. It also required the voluntary dismissal of all adversary proceedings and other litigation related to the Producers' claims.

Appellants were not involved in negotiating the Producer Settlement and did not expressly agree to its terms. Through its incorporation into the reorganization plan, the settlement nonetheless set the cash distributions they would receive, though they were able to obtain a waiver of the requirement that they dismiss their adversary proceeding.

The plan placed Appellants, along with other claimants, into classes of similarly situated creditors, and gave them the opportunity to vote on and object to the reorganization plan. The requisite majority of claimants in each of these classes voted to accept the plan. Two of the Appellants voted for it, and two abstained from voting. All four of the Appellants, however, filed objections to the plan asserting that they should be permitted to proceed with their adversary proceeding. Following ...


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