Team R27

Team R27 Counsel for Respondents

Team R27

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 RESPONDENT _________

Team R 27

Counsel for the Respondent January 23, 2017

i

QUESTIONS PRESENTED

1. Under the Bankruptcy Code and Article III of the Constitution, can an appellate court

dismiss an appeal of a chapter 11 confirmation order as equitably moot where prudential

concerns weigh in favor of affording finality to the bankruptcy judgement and the relief

sought would both threaten the debtor’s success and inequitably harm third parties that

relied on the confirmation order?

2. Under the broad authority granted in sections 105(a) and 1123(b)(6) of the Bankruptcy

Code, does a bankruptcy court have the power to release non-consenting third parties

from non-debtors in a chapter 11 plan when the release is necessary and appropriate to

the successful reorganization?

Team R27

ii

TABLE OF CONTENTS QUESTIONS PRESENTED ............................................................................................................ i TABLE OF CONTENTS ................................................................................................................ii TABLE OF AUTHORITIES ........................................................................................................ iv OPINIONS BELOW ....................................................................................................................viii STATEMENT OF JURISDICTION............................................................................................viii STATUTORY PROVISIONS ........................................................................................................... STATEMENT OF THE CASE ........................................................................................................1 SUMMARY OF THE ARGUMENT .............................................................................................5 ARGUMENT ..................................................................................................................................7 I. THE THIRTEENTH CIRCUIT CORRECTLY HELD THAT THE DISTRICT

COURT HAD THE AUTHORITY TO DECLINE TO HEAR AN APPEAL FROM A BANKRUPTCY COURT ORDER CONFIRMING A CHAPTER 11 PLAN ON EQUITABLE MOOTNESS GROUNDS. .......................................................................7 A. Overwhelming prudential concerns engrained in bankruptcy jurisprudence

require the dismissal of an appeal as equitably moot. ............................................9

B. The doctrine of equitable mootness is deeply rooted in the policies of the Bankruptcy Code. .................................................................................................... 14

C. The doctrine of equitable mootness is not unconstitutional. ................................ 16

II. THE THIRTEENTH CIRCUIT CORRECTLY HELD THAT NON-

CONSENSUAL THIRD PARTY RELEASES MAY BE INCLUDED CHAPTER 11 PLANS. ........................................................................................................................... 19 A. Third party releases may be necessary and appropriate to a reorganization

plan.. ........................................................................................................................... 20

B. Third party releases are authorized by various sections of the Code. ................ 23

1. Sections 105 and 1126 of the Code expressly grant broad equitable powers to the bankruptcy court to facilitate successful reorganizations. ..................................23

Team R27

iii

2. The bankruptcy courts power to issue third party releases is not restricted by any provision of the Code. .........................................................................................25

CONCLUSION ............................................................................................................................. 28 APPENDIX A ............................................................................................................................... 29 APPENDIX B ............................................................................................................................... 30 APPENDIX C ............................................................................................................................... 31 APPENDIX D ............................................................................................................................... 32 APPENDIX E ............................................................................................................................... 33 APPENDIX F ............................................................................................................................... 34 APPENDIX G ............................................................................................................................... 35

Team R27

iv

TABLE OF AUTHORITIES

UNITED STATES SUPREME COURT CASES

Celotex Corp. v. Edwards, 514 U.S. 300 (1995) .................................................................................................................24

Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 821 S. Ct. 1236 (1976) ..................................................................................... 12

Commodity Futures Trading Com v. Schor, 478 U.S. 833, 850 (1986) ........................................................................................................ 18

Fair Assessment in Real Estate Assn., Inc. v. McNary, 454 U.S. 100, 120 (1981) ........................................................................................................ 13

Lexmark Int'l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377 (2014) ................................................................................................ ........... 12

Local Loan Co. v. Hunt, 292 U.S. 234, 240 (1934) ........................................................................................................ 13

Marrama v. Citizens Bank, 549 U.S. 365, 375 (2007) ........................................................................................................ 10

Pepper v. Litton, 308 U.S. 295 (1939) ................................................................................................................ 23

Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd., 507 U.S. 380, 389 (1993) ........................................................................................................ 13

Quackenbush v Allstate Ins Co, 517 U.S. 706, 717 (1996) ........................................................................................................ 13

Sprint Communs., Inc. v. Jacobs, 134 S. Ct. 584, 586 (2013) ...................................................................................................... 12

Susan B. Anthony List v. Driehaus, 134 S. Ct. 2334, 2347, (2014) ................................................................................................. 12

Stern v. Marshall, 564 U.S. 462, 131 S. Ct. 2594 (2011) ..................................................................................... 17

United States v. Energy Resources Co., Inc., 495 U.S. 545 (1990) .......................................................................................................... 23, 24

United States v. Little Lake Misere Land Co., Inc., 412 U.S. 580, 593 (1973) ........................................................................................................ 16

Vision-Park Properties, LLC v. Seaside Eng'g & Surveying, LLC, 136 S. Ct. 109 (2015) .............................................................................................................. 19

Young v. United States, 535 U.S. 43, 50 (2002) ............................................................................................................ 13

Zivotofsky v. Clinton, 566 U.S. 189 (2012) ................................................................................................................ 12

UNITED STATES COURT OF APPEALS CASES

Behrmann v. Nat'l Heritage Found.,

663 F.3d 704 (4th Cir. 2011) .................................................................................................. 20

Team R27

v

Boston & Maine Corp. v. Chicago Pacific Corp., 785 F.2d 562 (7th Cir. 1986) ....................................................................................................7

In re A.H. Robins Co., Inc., 880 F.2d 694 (4th Cir. 1989) ...................................................................................... 19, 21, 26

In re Airadigm Commc'ns, Inc., 519 F.3d 640 (7th Cir. 2008) .......................................................................... 19, 21, 22, 24, 26

In re Am. Hardwoods, Inc., 885 F.2d 621 (9th Cir. 1989) .................................................................................................. 25

In re AOV Indus., Inc., 792 F.2d 1140, 1147-48, 253 U.S. App. D.C. 186 (D.C. Cir. 1986) ..................................9, 13

In re Bodenheimer, Jones, Szwak, & Winchell LLP, 592 F.3d 664, 668 (5th Cir. 2009) ............................................................................................9

In re Charter Commc'ns, Inc., 691 F.3d 476, 481 (2d Cir. 2012)..............................................................................................8

In re Chateaugay Corp., 988 F.2d 322, 325 (2d Cir. 1993)..............................................................................................8

In re Club Assocs., 956 F.2d 1065, 1069 (11th Cir. 1992) .................................................................................... 10

In re Cont’l Airlines, 91 F.3d 553 (3d Cir. 1996)................................................................................8, 11, 12, 16, 19

In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002) ................................................................................ 19, 20, 24, 25

In re Healthco Int'l, Inc., 136 F.3d 45, 48 (1st Cir. 1998) .................................................................................................8

In re Ingersoll, Inc., 562 F.3d 856 (7th Cir. 2009) .................................................................................................. 20

In re Iowa R.R., 840 F.2d 535 (7th Cir. 1988) ....................................................................................................7

In re Kaiser Aluminum Corp., 456 F.3d 328, 339 (3d Cir. 2006)............................................................................................ 10

In re Lett, 632 F.3d 1216, 1225-26 (11th Cir. 2011) .................................................................................9

In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005)........................................................................................ 19, 20, 27

In re Pac. Lumber Co., 584 F.3d 229, 240 (5th Cir. 2009) ......................................................................................8, 14

In re Paige, 584 F.3d 1327, 1337 (10th Cir. 2009) ......................................................................................8

In re President Casinos, Inc., 409 F. App'x 31, 31-32 (8th Cir. 2010) ....................................................................................8

In re Seaside Eng'g & Surveying, Inc., 780 F.3d 1070 (11th Cir. 2015) .............................................................................................. 19

In re Specialty Equip. Co., 3 F.3d 1043 (7th Cir.1993) ..................................................................................................... 25

In re Thorpe Insulation Co., 677 F.3d 869, 880 (9th Cir. 2012) ............................................................................................8

Team R27

vi

In re United Producers, Inc., 526 F.3d 942, 947 (6th Cir. 2008) ............................................................................................8

In re UNR Indus., 20 F.3d 766, 770 (7th Cir. 1994) ................................................................................ 8, 11, 15

In re U.S. Airways Grp., Inc., 369 F.3d 806, 809 (4th Cir. 2004) ....................................................................................8

In re Winshall Settlor's Trust, 758 F.2d 1136 (6th Cir.1985) ................................................................................................. 24

Mac Panel Co. v. Va. Panel Corp., 283 F.3d 622, 625 (4th Cir. 2002) .......................................................................................... 10

Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973 (1st Cir. 1995) ..................................................................................................... 19

Nordhoff Investments, Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 185 (3d Cir. 2001)............................................................................................ 13

Ochadleus v. City of Detroit (In re City of Detroit), 838 F.3d 792, 798 (6th Cir. 2016) ......................................................................................8, 13

Official Comm.of Unsecured Creditors of Cybergenics Corp.ex rel. Cybergenics Corp. v. Chinery,

330 F.3d 548 (3d Cir. 2003).................................................................................................... 25 Republic Supply Co. v. Shoaf,

815 F.2d 1046, 1050 (5th Cir.1987) ....................................................................................... 26 Samson Energy Res. Co. v. SemCrude, L.P. (In re SemCrude, L.P.),

728 F.3d 314, 317-18 (3d Cir. 2013) ................................................................................ 16, 18 Stamp v. Insurance Co. of North America,

908 F.2d 1375 (7th Cir. 1990) ..................................................................................................7 Tribune Media Co. v. Aurelius Capital Mgmt., L.P.,

799 F.3d 272, 281 (3d Cir. 2015)..................................................... 7, 8, 11, 12, 14, 17, 18, 26 United Sav. Ass'n v. Timbers of Inwood Forest Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.),

808 F.2d 363 (5th Cir.1987) ................................................................................................... 27 Weingarten Nostat, Inc. v. Serv. Merch. Co.,

396 F.3d 737 (6th Cir. 2005) .................................................................................................. 15

UNITED STATES BANKRUPTCY COURT CASES

In re City of Detroit, 524 B.R. 147 (Bankr. E.D. Mich. 2014) .......................................................................... 22, 23

In re Chicago Investments, LLC, 470 B.R. 32 (Bankr. D. Mass. 2012) ...................................................................................... 19

In re Master Mortg. Inv. Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994) ............................................................................. 19, 20

In re Washington Mut., Inc., 442 B.R. 314, 347 (Bankr. D. Del. 2011) ............................................................................... 23

In re Zenith Electronics Corp., 241 B.R. 92 (Bankr. D. Del. 1999) ......................................................................................... 20

Team R27

vii

FEDERAL STATUTES & RULES 11 U.S.C. § 105(a) ............................................................................................................ 10, 23, 24 11 U.S.C. § 364(e) ........................................................................................................................ 15 11 U.S.C. § § 524(e) ..................................................................................................................... 25 11 U.S.C. § 1123(b)(6) ................................................................................................................. 24 28 U.S.C. § 157(b)(1) ................................................................................................................... 16 28 U.S.C. § 157(d) ........................................................................................................................ 17 28 U.S.C. § 158(a)(1) .................................................................................................................... 16 28 U.S.C. § 158(d)(1) ................................................................................................................... 16

SECONDARY AUTHORITIES

Elizabeth D. Lauzon, Validity of Non-Debtor Releases in Bankruptcy Restructuring Plans, 18 A.L.R. Fed. 3d Art. 2 (2016). .................................................................................................. 19

Matthew D. Pechous, Comment, Walking the Tight Rope and Not the Plank: A Proposed Standard for Second-Level Appellate Review of Equitable Mootness Determinations, 28 Emory Bankr. Dev. J. 547, 548 (2012). ....................................................................................7

Ryan M. Murphy, Equitable Mootness Should Be Used as a Scalpel Rather than an Axe in Bankruptcy Appeals, 19 Norton J. Bankr. L. & Prac., 33 (2010). .......................................... 14

Team R27

viii

OPINIONS BELOW

The Bankruptcy Court for the District of Moot entered an order confirming Padco’s

chapter 11 reorganization plan. R. at 4-5. Petitioner requested a stay of the confirmation order

which was denied by the Bankruptcy Court and then by the District Court. R. at 5. On appeal, the

District Court for the District of Moot granted Padco’s Motion to Dismiss on equitable mootness

grounds. The United States Court of Appeals for the Thirteenth Circuit affirmed the holding of

the District Court and held that (1) an appellate court has the authority to decline to hear an

appeal on equitable mootness grounds; and (2) a non-consensual third-party release of direct

claims against a non-debtor may be included in a chapter 11 plan. R. at 6, 7, 11. This Court

granted certiorari. R. at 1.

STATEMENT OF JURISDICTION

The formal statement of jurisdiction is waived pursuant to Competition Rule VIII.

STATUTORY PROVISIONS

The relevant statutory provisions involved in this case are listed below and reproduced in

Appendices A through G.

11 U.S.C. § 105. Power of court 11 U.S.C. § 363. Use, sale, or lease of property. 11 U.S.C. § 364. Obtaining credit. 11 U.S.C. § 524. Effect of discharge. 11 U.S.C. § 1123. Contents of plan. 11 U.S.C. § 1127. Modification of plan. 28 U.S.C. § 157. Procedures.

Team R27

1

STATEMENT OF THE CASE

This case demonstrates the 180-degree transformation that is possible when a struggling

company files for relief under chapter 11 of the Bankruptcy Code and receives support from the

judiciary in protecting a thriving reorganization plan. Padco, Inc. (Padco) is a company that

nearly faced liquidation due to a mass product liability with exploding batteries in their tablet

computers. R. at 2. Chapter 11 reorganization was Padco’s only hope. Their tainted reputation

and lack of sufficient capital, however, gravely endangered their reorganization effort. With their

reorganization plan on the verge of failure, Padco was saved by a large public company: Gadget,

Inc. (Gadget). Gadget saw potential in Padco and provided the financing and support to ensure a

successful reorganization.

Under the new reorganization plan, Padco merged into Gadget and together, they took the

tech industry by storm. Gadget agreed to invest over $500 million to redesign the Padco tablet

computer following the renaming of the tablet computer to “GadgetPad,” and for an entire suite

of products to be developed to supplement the tablet computer. R. at 2. Such products included a

new desktop computer line, an array of phones, wearable technology, and a home device that

manages home thermostats, sound systems, security systems, and lights. R. at 3. Development of

these lines was funded by Gadget borrowing $2.6 billion through a series of public bond

offerings, which took place after the reorganization plan was confirmed R. at 3. The plan was

remarkably successful, as the new Gadget product line earned almost 60 percent of the market

share for related products from the time the plan was consummated to the time it was affirmed

by the District Court. R. at 3.

The reorganization plan also classified Padco’s unsecured creditors into several different

classes with varying disbursements of cash and stock in Gadget. R. at 3. Most unsecured

Team R27

2

creditors received at least some stock in Gadget which, along with the Gadget bonds, are

publicly traded. R. at 3. Since the confirmation took effect, multiple parties have bought and sold

these securities. R. at 3.

Most importantly, the plan included a provision permanently enjoining creditors from

asserting any claims against Gadget that arose or were related to the battery defect. R. at 4. At

the time Padco’s defective battery was developed several years ago, Padco was a subsidiary of

Gadget. R. at 4. But, Gadget was careful not to interfere with any of Padco’s operations for fear

of incurring alter ego liability. R. at 4. Because Gadget fully owned Padco (before Padco

operated independently), the claims were based on Gadget’s non-interference theory: as a

controlling shareholder, Gadget had a duty to prevent their subsidiary from using a batteries they

knew or should have known were defective. R. at 4. One of Gadget’s chief concerns entering

into this reorganization plan was the liability they would be subject to for claims from the defect.

R. at 4. As suspected, several lawsuits were threatened against Gadget for direct liability.

Although no court was willing to adopt this theory, the possible claims were still very real and

substantial. As explained by Gadget’s CEO, this was a pressing concern. R. at 4. Gadget was

unwilling to merge with Padco, invest in the new product line, and assume the potential risk,

unless they were certain that they would have some form of immunity from Padco’s liabilities.

R. at 3.

Nonetheless, understanding the grievances of these potential claimants, Gadget and

Padco proposed a plan to address their concerns. In exchange for a permanent injunction of the

direct claims against Gadget, the claimants would be placed in a special class and receive a

larger distribution than all other unsecured creditors. R. at 4. As determined by the bankruptcy

court, this amount exceeded both the value of the direct claims and what they would have

Team R27

3

received in a chapter 7 liquidation. R. at 5. An overwhelming 80 percent of the class voted in

favor of accepting the proposed plan. R. at 4. Petitioner was in the minority that voted to reject

the plan. R. at 4.

In January, 2015, following an evidentiary hearing with detailed factual findings, the

Bankruptcy Court for the District of Moot, entered an order confirming the reorganization plan.

R. at 4-5. The Bankruptcy Court’s unchallenged factual findings are the following: the injunction

was essential to the plan and the settlement with Gadget was fair; Gadget’s financial

contributions to the plan exceeded the combined value of Padco assets and the value of Padco-

related claims against Gadget; each creditor in Petitioner’s class received a distribution that was

more than it would have received in a chapter 7 liquidation; no support for Petitioner’s novel tort

theory upon review of the tort law; little probability that Petitioner’s theory of liability would be

accepted; the premium provided to the class exceeded the value of the direct claims that were

being joined. R. at 5.

Petitioner requested a stay of the confirmation order which was denied from both the

Bankruptcy Court and the District Court. R. at 5. The plan subsequently became effective and,

two days after the confirmation order, the plan was “substantially consummated” within the

meaning of 11 U.S.C. § 1101(2). R. at 5. Still, Petitioner appealed to the District Court for the

District of Moot. R. at 5. Since the plan was “substantially consummated,” Padco moved to

dismiss the appeal as equitably moot. R. at 5. On June, 30, 2016, following an evidentiary

hearing at which Padco presented evidence in support of their motion, the District Court affirmed

the appeal on equitable mootness grounds. R. at 5.

Petitioner now appeals claiming the following: (1) an appellate court does not have the

authority to decline to hear an appeal on equitable mootness grounds (2) a non-consensual

Team R27

4

permanent injunction of direct claims against a non-debtor may not be included in a chapter 11

plan. R. at 6.

Team R27

5

SUMMARY OF THE ARGUMENT

This case presents the Court with two issues: (1) whether an appellate court has the

authority to decline to hear an appeal on equitable mootness grounds, and (2) whether a chapter

11 plan may include non-consensual release of direct claims against a non-debtor.

Equitable mootness is a universally accepted prudential doctrine which allows an

appellate court to dismiss an appeal from a bankruptcy court confirmation order where

implementation relief would be grossly inequitable. The doctrine furthers the fundamental

policies bankruptcy jurisprudence by protecting the legitimate expectation interests of innocent

third parties and respecting the finality of a well-developed and consummated reorganization

plan. Refusing to affirm the doctrine would endanger the debtors chances of reorganization and

undermine public confidence in the chapter 11 process. Equitable mootness is based on several

provisions of the Code which encourage courts to use their equitable powers to stay away from

consummated transactions in the interest of protecting debtors and creditors alike. The doctrine

also upholds separation-of-powers between the Article I and the Article III courts by keeping the

power to hear or decline an appeal with the Article III courts.

The bankruptcy court has the authority to issue a third-party release against non-

consenting creditors when such releases are appropriate and necessary to the reorganization plan.

Sections 105(a) and 1123(b)(6) of the Code approve the use of such releases by providing

expansive authority to the bankruptcy courts in using their equitable powers to guarantee

successful reorganizations. There is no current provision in the Code that expressly restricts

either of these sections. Even more, public policy requires the use of releases because the

safeguards they provide incentivize investors and others to participate in reorganization plans.

Team R27

6

Without such protections, reorganization plans would fail, leading to the cessation of the

business itself and the much more likely position that creditors are left with nothing.

For the these reasons, this Court should affirm the decision of the Thirteenth Circuit and

hold that prudential considerations allow an appellate court to dismiss an appeal under the

doctrine of equitable mootness, and that chapter 11 plans may include non-consensual third party

releases.

Team R27

7

ARGUMENT

A bankruptcy court’s factual findings are reviewed for clear error while conclusions of

law are subject to de novo review. Christopher v. Kendavis Holding Co. (In re Kendavis Holding

Co.), 249 F.3d 383, 385–86 (5th Cir. 2001). Since the Petitioner has limited her challenge to the

bankruptcy court’s authority, the present appeal involves conclusions of law. ASM Capital, LP v.

Ames Dep’t Stores, Inc., (In re Ames Dep’t Stores, Inc.), 582 F.3d 422, 426 (2d Cir. 2009).

Accordingly, the decisions of the Thirteenth Circuit are subject to de novo review.

I. THE THIRTEENTH CIRCUIT CORRECTLY HELD THAT THE DISTRICT COURT HAD THE AUTHORITY TO DECLINE TO HEAR AN APPEAL FROM A BANKRUPTCY COURT ORDER CONFIRMING A CHAPTER 11 PLAN ON EQUITABLE MOOTNESS GROUNDS.

“Bankruptcy separates the past and future of an enterprise, satisfying claims attributable to

yesterday's activities out of existing assets and thereby enabling business operations that have

positive value to carry on, unburdened by the sunk costs of blunders that are beyond recall.”

Boston & Maine Corp. v. Chicago Pacific Corp., 785 F.2d 562 (7th Cir. 1986); In re Iowa R.R.,

840 F.2d 535 (7th Cir. 1988); Stamp v. Insurance Co. of North America, 908 F.2d 1375 (7th Cir.

1990). The primary concern of bankruptcy is achieving a workable outcome for a diverse array

of stakeholders, and “the reliable finality of a confirmed and consummated plan allows all

interested parties to organize their lives around that fact.” Tribune Media Co. v. Aurelius Capital

Mgmt., L.P., 799, F.3d 272, 281 (3d Cir. 2015). Chapter 11 of the Code balances the interests of

parties by favoring a final resolution, allowing a debtor to quickly reemerge as a viable entity.

Matthew D. Pechous, Comment, Walking the Tight Rope and Not the Plank: A Proposed

Standard for Second-Level Appellate Review of Equitable Mootness Determinations, 28 Emory

Bankr. Dev. J. 547, 548 (2012). “Every incremental risk of revision on appeal puts a cloud over

the plan of reorganization, and derivatively over the assets of the reorganized firm.” In re UNR

Team R27

8

Indus., 20 F.3d 766, 770 (7th Cir. 1994). Thus, in the interest of ensuring that appeals do not

interfere with a debtor’s chances of successfully reorganizing, courts have established the

doctrine of equitable mootness.

Equitable mootness is a prudential doctrine whereby an appellate court elects not to reach

the merits of a bankruptcy appeal when the relief requested will undermine the finality and

reliability of a consummated plan of reorganization. Tribune, 799 F.3d at 277. Courts have held

that “an appeal should…be dismissed as equitably moot when, even though effective relief could

conceivably be fashioned, implementation of that relief would be inequitable.” In re Chateaugay

Corp., 988 F.2d 322, 325 (2d Cir. 1993). This differentiates it from mootness derived from

Article III of the Constitution, which is concerned with the “court’s ability or inability to grant

relief.” Ochadleus v. City of Detroit (In re City of Detroit), 838 F.3d 792, 798 (6th Cir. 2016);

See In re UNR Indus., 20 F.3d at 769 ("There is a big difference between inability to alter the

outcome (real mootness) and unwillingness to alter the outcome ('equitable mootness').").

While neither the Constitution, Bankruptcy Code, or Supreme Court have dispositively

endorsed the dismissal of an appeal based on this doctrine, every Circuit Court 1 has adopted the

doctrine due to concerns unique to bankruptcy proceedings. See In re Healthco Int'l, Inc., 136

F.3d 45, 48 (1st Cir. 1998); In re Charter Commc'ns, Inc., 691 F.3d 476, 481 (2d Cir. 2012); In

re Continental Airlines, 91 F.3d 553 (3d Cir. 1996); In re U.S. Airways Grp., Inc., 369 F.3d 806,

809 (4th Cir. 2004); In re Pac. Lumber Co., 584 F.3d 229, 240 (5th Cir. 2009); In re United

Producers, Inc., 526 F.3d 942, 947 (6th Cir. 2008); In re UNR Indus., 20 F.3d 766; In re

President Casinos, Inc., 409 F. App'x 31, 31-32 (8th Cir. 2010) (per curiam); In re Thorpe

Insulation Co., 677 F.3d 869, 880 (9th Cir. 2012); In re Paige, 584 F.3d 1327, 1337 (10th Cir.

1 The Federal Circuit does not hear bankruptcy appeals and thus, has not adopted the doctrine.

Team R27

9

2009); In re Lett, 632 F.3d 1216, 1225-26 (11th Cir. 2011); In re AOV Indus., Inc., 792 F.2d

1140, 1147-48, 253 U.S. App. D.C. 186 (D.C. Cir. 1986).

The doctrine is universally accepted in chapter 11 due to the equitable and prudential

necessities of consummated chapter 11 reorganization plans. In re Bodenheimer, Jones, Szwak,

& Winchell LLP, 592 F.3d 664, 668 (5th Cir. 2009). Plans of reorganization take months, and in

some cases years, to negotiate and finalize. They are often quite complex and contain hundreds

of moving parts to ensure successful reemergence of a debtor. To pull one thread and unravel an

entire plan can be grossly inequitable to the myriad of parties involved. Modifying a

reorganization plan cannot realistically be done without consequences to third parties, who in

reliance on the bankruptcy court’s order, took action under the plan. Furthermore, by the time a

case is heard by the appellate court, a debtor has already achieved most of what the plan has

required. Courts thereby invoke the doctrine because entertaining the appeal would threaten the

debtor’s emergence from bankruptcy and have negative consequences for those third parties

which have entered into agreements in reliance upon the finality of its emergence from

bankruptcy.

The Court of Appeals for the Thirteenth Circuit properly held that appellate courts are

permitted to decline to hear an appeal from a bankruptcy court confirmation order. Accordingly,

this Court should affirm the decision of the Thirteenth Circuit for three reasons. First, prudential

concerns heavily weigh in favor of protecting consummated plans. Second, equitable mootness is

supported by several sections of the Code. Lastly, the doctrine is consistent with Article III of the

Constitution.

A. Overwhelming prudential concerns engrained in bankruptcy jurisprudence require the dismissal of an appeal as equitably moot.

Team R27

10

In their traditional role, bankruptcy courts have been viewed as agents of equity. In re

Kaiser Aluminum Corp., 456 F.3d 328, 339 (3d Cir. 2006). To provide justice for all parties,

bankruptcy courts are granted broad authority to modify contractual relationships between

debtors and creditors, and to craft flexible remedies. Id. at 340; See also 11 U.S.C. § 105(a)

(authorizing bankruptcy courts to "take any action or make any determination necessary or

appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.");

See also Marrama v. Citizens Bank, 549 U.S. 365, 375 (2007) (“the broad authority granted to

bankruptcy judges to take any action that is necessary or appropriate ‘to prevent an abuse of

process’ described in § 105(a) of the Code”). In so doing, the bankruptcy judge must consider

principles such as equity, honesty, fairness, and justice. In re Kaiser 456 F.3d at 340. Equitable

mootness addresses the very concerns of “practicality and prudence” and is “grounded in the

notion that, with the passage of time after a judgment in equity and implementation of that

judgment, effective relief on appeal becomes impractical, imprudent, and therefore inequitable.”

Mac Panel Co. v. Va. Panel Corp., 283 F.3d 622, 625 (4th Cir. 2002). At its heart, equitable

mootness represents two of the fundamental policies of bankruptcy: finality of confirmation

orders and protection of multi-party expectations. In re Club Assocs., 956 F.2d 1065, 1069 (11th

Cir. 1992).

Finality of confirmation orders is a long-respected aspect of bankruptcy jurisprudence.

First, bankruptcy cases are resolved quicker than other general litigation because final judicial

action better preserves the value of the debtor’s assets, increases the chances for debtor’s

successful reorganization, and maximizes recoveries for creditors. Second, the particular need for

finality is essential in chapter 11 because the more the potential investors’ reliance interests are

protected, the more they will rely on bankruptcy judgments and pay more for the debtors’ assets

Team R27

11

than they would if the “assets could be snatched back or otherwise affected by subsequent

events.” In re UNR Indus., 20 F.3d at 770. Thus, “every incremental risk of revision on appeal

puts a cloud over the plan of reorganization, and derivatively over the assets of the reorganized

firm.” Id. To this end, the success of a confirmed chapter 11 reorganization plan depends on its

finality.

Even more compelling is the contention that good-faith reliance on the plan by numerous

third parties makes it imprudent to revise things. Since Padco’s plan went into effect, several

complex transactions, investments, and developments have occurred to ensure their successful

reorganization. Such transactions have included the merger of Padco into Gadget, shares of

Gadget being distributed to creditors, new stocks and bonds issued and traded on public

exchanges, and the creation of an entire new suite of products among other developments. R. at

2-4. Every third party that has dealt with Padco, both directly and indirectly, in these transactions

has a reliance interest on the consummated plan and the reemergence of Padco, protected by

court supervision. Tribune, 799 F.3d at 280. Courts have recognized that the strong public policy

in favor of facilitating successful reorganizations, reflected in the Code itself, weighs in favor of

encouraging such reliance. In re Continental Airlines, 91 F.3d at 565.

Granting relief to Petitioner would severely prejudice these third parties and may also

damage the integrity of chapter 11 reorganization plans. Allowing appellate review would

undermine public confidence and discourage investors’ reliance on the finality of bankruptcy

confirmation orders. If there remains a risk that the plan will be unraveled, investors lose their

incentive to put money into a reorganized entity. Reversal or modification of the confirmation

order would fundamentally alter the basis for the transactions entered into and unfairly bias the

rights of the third parties. Without equitable mootness, “it is hard to imagine that any complex

Team R27

12

plan would be consummated until all appeals are terminated” since “any dissenting creditor with

a plausible (or even not-so-plausible) sounding argument against plan confirmation could

effectively hold up emergence from bankruptcy for years … a most costly proposition.”

Tribune, 799 F.3d at 288-89. Altogether, such repercussions make the successful completion of

large reorganizations even more difficult. In re Continental Airlines, 91 F.3d at 565.

Although this Court has demonstrated a recent trend in dismissing cases based on

prudential grounds, emphasizing the need for courts to exercise their jurisdiction, equitable

mootness raises unique concerns that permit an exception to such holdings.

In Lexmark Int'l, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377 (2014), this

Court disapproved doctrines that permit courts to decline to decide claims on “prudential” rather

than statutory or constitutional grounds. This Court reasoned that these doctrines conflict with

the decision in Sprint Communs., Inc. v. Jacobs, 134 S. Ct. 584, 586 (2013) on the principle that

federal courts have a “virtually unflagging obligation” to hear and decide cases within its

jurisdiction. Lexmark, 134 S. Ct. at 1386. (quoting Colo. River Water Conservation Dist. v.

United States, 424 U.S. 800, 821 S. Ct. 1236 (1976)). This Court held similarly in Susan B.

Anthony List v. Driehaus, 134 S. Ct. 2334 (2014), declining to "resolve the continuing vitality of

the prudential ripeness doctrine," upon acknowledging its "tension with the Court's recent

reaffirmation of the principle that a federal court's obligation to hear and decide cases within its

jurisdiction is virtually unflagging." Id. at 2347. Zivotofsky v. Clinton, 566 U.S. 189 (2012)

illustrates another case where in emphasizing the narrowness of the judicial-question doctrine,

this Court recognized the responsibility of the Judiciary to decide cases properly before it.

While these cases clearly advocate for the exercise of jurisdiction, there are also long

established holdings in this Court that support the alternative. Such cases propose that federal

Team R27

13

courts may appropriately decline to exercise jurisdiction when a court “is asked to employ its

historic powers as a court of equity.” Fair Assessment in Real Estate Assn., Inc. v. McNary, 454

U.S. 100, 120 (1981) (Brennan, J., concurring); See Quackenbush v Allstate Ins Co, 517 US 706,

717 (1996). In addition, this Court has long recognized that "bankruptcy courts… are courts of

equity and apply the principles and rules of equity jurisprudence." Young v. United States, 535

U.S. 43, 50 (2002); See also Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd., 507 U.S. 380,

389 (1993) (noting that bankruptcy courts are "necessarily entrusted with broad equitable

powers”); See Local Loan Co. v. Hunt, 292 U.S. 234, 240 (1934) ("[C]ourts of bankruptcy are

essentially courts of equity, and their proceedings inherently proceedings in equity.").

The cases in support of exercising jurisdiction are not bankruptcy cases and are therefore

not illustrative as to the instant issue. The present case is a textbook example of when it is

appropriate to decline exercising jurisdiction based on equitable mootness. The doctrine of

equitable mootness was created exactly for this type of scenario: to "prevent a court from

unscrambling complex bankruptcy reorganizations" after "the plan has become extremely

difficult to retract." In re City of Detroit, 838 F3d at 799; See Nordhoff Investments, Inc. v.

Zenith Elecs. Corp., 258 F.3d 180, 185 (3d Cir. 2001). Even though Padco may not be entitled to

dismissal on Article III grounds, “common sense or equitable considerations may justify a

decision not to decide a case on the merits." In re AOV Indus., Inc., 792 F.2d at 1147. In order

for Padco to attain a successful reorganization plan, a series of comprehensive transactions and

agreements had to be made with several third parties. In the context of equitable mootness, no

more appropriate is it than the present case to allow a court to determine whether it is fair to

grant relief that will scramble the consummated plan and upset third parties’ legitimate reliance

Team R27

14

on the finality of such a plan. Tribune, 799 F.3d at 287. Undoing Padco’s confirmed and

consummated plan would do more harm to many than good for one. Id.

Here, the policy that bankruptcy reorganizations be final and courts should encourage

reliance on confirmed plans prevails. Following its successful emergence, Padco has

relinquished their tarnished reputation and merged with Gadget to dominate the technology

industry, “capturing almost 60 percent of the market share for similar products.” R. at 3. The

interest of Petitioner here is the comparatively weak contention that the case should be once

again heard on the merits. The implications of such a ruling can allow the appeal of one

interested party to clog the entire bankruptcy process, thereby impeding the debtor’s emergence

and potentially affecting the interest of hundreds of stakeholders. Ryan M. Murphy, Equitable

Mootness Should Be Used as a Scalpel Rather than an Axe in Bankruptcy Appeals, 19 Norton J.

Bankr. L. & Prac., 33 (2010).

B. The doctrine of equitable mootness is deeply rooted in the policies of the Bankruptcy Code.

Although there is no provision in the Code that expressly limits appellate review of plan

confirmation orders, there is also no provision that expressly forbids an appellate court from

declining to hear such appeals. In re Pac. Lumber Co., 584 F.3d at 240. Thus, equitable

mootness is a judicial doctrine, stemming from various provisions of the Code that limit the

ability of parties to interfere with settled expectation interests. The doctrine is applied

specifically in chapter 11 cases due to the provisions of the Code forbidding appellate review of

certain un-stayed orders and restricting post-confirmation plan modifications.

The Code describes two situations when the consummation of transactions provided for

in confirmation orders require dismissal of an appeal: 11 U.S.C. § 363(m) and 11 U.S.C. §

364(e). Section 363(m) “says that the reversal of an order authorizing the sale or lease of

Team R27

15

property of an estate ‘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.’ ” In re UNR Indus., 20 F.3d at 769 (quoting 11 U.S.C. § 363(m).

Section 364(e) similarly promotes reliance on confirmation orders by ensuring protection to

parties who extend credit to a debtor. This section provides that the reversal of an order to obtain

credit or incur debt “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” 11 U.S.C. § 364(e). Sections 363(m) and 364(e) stand for the

proposition that even when an appeal is not moot in a constitutional sense, certain appeals will

nonetheless be treated as moot due to the reliance of third parties. Both sections encourage

participation in bankruptcy by lenders and investors by ensuring finality to judgments which

approve sale and credit transactions. Weingarten Nostat, Inc. v. Serv. Merch. Co., 396 F.3d 737

(6th Cir. 2005).

Another section of the Code, 11 U.S.C. § 1127(b), “dramatically curtails the power of a

bankruptcy court to modify a plan of reorganization after its confirmation and ‘substantial

consummation’.” In re UNR Indus., 20 F.3d at 769. Section 1127(b) provides that after

substantial consummation of a plan, courts are prohibited from entertaining modifications of

such plan. Although § 1127(b) “does not place any limit on the power of the court of appeals,”

courts have reasoned that the intention underlying this section and § 363(m) are the same: to

preserve “interests bought and paid for in reliance on judicial decisions, and avoiding the pains

that attend any effort to unscramble an egg.” Id. Courts have interpreted each of these sections as

demonstrating a strong policy “that courts should keep their hands off consummated

Team R27

16

transactions.” Id. Furthermore, this policy is “so plain and so compelling that courts fill the

interstices of the Code with the same approach.” Id.

As suggested by the Seventh Circuit, federal courts may be required to create rules of federal

common law to fill statutory gaps in some circumstances. In re Cont’l Airlines, 91 F.3d at 570-

71; See, e.g., United States v. Little Lake Misere Land Co., Inc., 412 U.S. 580, 593 (1973)

(noting the "'power in the federal courts to declare, as a matter of common law or "judicial

legislation," rules which may be necessary to fill in interstitially or otherwise effectuate the

statutory patterns enacted in the large by Congress'") (citation omitted). “The inevitable

incompleteness presented by all legislation means that interstitial federal lawmaking is a basic

responsibility of the federal courts.” Little Lake Misere Land Co., 412 US at 593. Equitable

mootness is a model example of the responsibility of the federal court in addressing a deficiency

in the law. In an effort to affect the intent of Congress regarding appellate review of confirmation

orders, courts have filled the gap “by declining to hear appeals where they perceive that the

interest of finality outweigh those of the appealing party.” Samson Energy Res. Co. v. SemCrude,

L.P. (In re SemCrude, L.P.), 728 F.3d 314, 317-18 (3d Cir. 2013)

C. The doctrine of equitable mootness is not unconstitutional. Bankruptcy courts are given the authority under 28 U.S.C. § 157(b)(1) to "hear and

determine all cases under title 11 and all core proceedings arising under title 11 . . . subject to

review under section 158,” which provides that "the district courts of the United States shall have

jurisdiction to hear appeals… from final judgments, orders, and decrees" of bankruptcy courts,

and that "the courts of appeals shall have jurisdiction of appeals from all final decisions" of

district courts in such appeals. 28 U.S.C. §§§ 157(b)(1), 158(a)(1), 158(d)(1). The right of

Article III courts to review final determinations of bankruptcy courts is a fundamental element of

Team R27

17

the jurisdiction of Article I courts. See, e.g., Wellness Int'l Network, Ltd. v. Sharif, 135 S. Ct.

1932, 1944 (2015) ("allowing Article I adjudicators to decide claims submitted to them by

consent does not offend the separation of powers so long as Article III courts retain supervisory

authority over the process"). While this Court has required Article III supervision of bankruptcy

court determinations, the power of an appellate court to withdraw from hearing an appeal has

never been addressed. See, e.g., Stern v. Marshall, 564 U.S. 462, 131 S. Ct. 2594 (2011). The

claim that equitable mootness cuts off the right to review of Article III courts, raising an issue of

separation-of-powers, is misplaced.

First, equitable mootness does not remove the power of an Article III court to review

final determinations by an Article I court. Rather, the doctrine gives appellate courts the choice

of whether or not to abstain from hearing a case – a power expressed in § 157(d) of the Code.

Section 157(d) provides that “the district court may withdraw, in whole or in part, any case or

proceeding referred under this section… for any cause shown.” 28 U.S.C. § 157(d). The decision

not to hear a case based on the doctrine is ultimately made by the Article III courts, not the

bankruptcy court. Thus, there can be no concern over separation-of-powers when the power to

review cases remains with the Article III courts and no additional authority is granted to the

Article I courts. Equitable mootness simply allows courts to abstain from hearing a case due to

overwhelming policy concerns.

Second, every case criticizing equitable mootness on constitutional grounds has only

considered whether Congress can redirect adjudication from Article III to Article I courts. “Not

one of the cases relied on discusses whether an Article III court may abstain from hearing a case,

as the primary evil the cases address (congressional aggrandizement) is irrelevant.” Tribune, 799

F.3d at 285. (emphasis in original); See Wellness, 135 S. Ct. at 1944 ("Article III . . . bar[s]

Team R27

18

congressional attempts 'to transfer jurisdiction [to non-Article III tribunals] for the purpose of

emasculating' constitutional courts and thereby prevent[ing] 'the encroachment or

aggrandizement of one branch at the expense of the other.'" (quoting Commodity Futures

Trading Com v. Schor, 478 U.S. 833, 850 (1986) (emphasis added) (last two alterations in

original)); Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 83 (1982)

("The constitutional system of checks and balances is designed to guard against encroachment or

aggrandizement by Congress at the expense of the other branches of government.") (internal

quotation marks omitted). Such concern over equitable mootness is thus misconstrued. A

distinction must be made between Congress prohibiting review and the district courts exercising

their rights under § 157(d) to withdraw and decide not to hear a case. As explained by the Third

Circuit in Tribune:

Neither the personal rights nor the separation of powers guaranteed by Article III are infringed when Article III courts decline to hear a quite constricted class of cases seeking relief that would upend cases resolved and plans implemented (often years before) and/or would significantly harm third parties who relied on that resolution and implementation.

Tribune, 799 F.3d at 286. Since the Article III courts are given the right under the Code to opt

out of review and equitable mootness does not result in a transfer or prohibition of jurisdiction of

Article III courts, the doctrine raises no constitutional concerns.

Equitable mootness is a valid doctrine with equitable, statutory, and constitutional

support. Per the District Court’s application of the SemCrude factors, Petitioner’s appeal was

correctly dismissed as moot.2 Although Petitioner has not challenged the court’s application of

the factors, the appeal easily satisfies the test.

2 “The five interrelated factors articulated by that court boil down to two questions: (1) has the plan been substantially consummated; and, (2) would the relief requested (a) fatally scramble the plan or (b) significantly harm third parties who have justifiably relied upon the confirmation order.” R. at 10. SemCrude, 728 F.3d at 320-21.

Team R27

19

II. THE THIRTEENTH CIRCUIT CORRECTLY HELD THAT NON-CONSENSUAL THIRD PARTY RELEASES MAY BE INCLUDED CHAPTER 11 PLANS.

The Bankruptcy Code neither explicitly prohibits nor authorizes a court to enjoin non-

consenting creditors against non-debtor third parties. In re Dow Corning Corp., 280 F.3d 648

(6th Cir. 2002). Injunctions against non-consenting creditors in a bankruptcy are essentially

releases since the injunction acts like a release in substance and so the terms are used

interchangeably. In re A.H. Robins Co., Inc., 880 F.2d 694, 702 (4th Cir. 1989). As a result of the

lack of explicit statutory limitations, this issue has created some divergence among the circuits.

However, the compelling majority of the Circuit Court of Appeals believe the Bankruptcy Code

authorizes courts to grant non-consensual releases so long as it is appropriate and necessary to

carry out the reorganization. See In re Chicago Investments, LLC, 470 B.R. 32 (Bankr. D. Mass.

2012); In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005); In re Cont'l Airlines,

203 F.3d at 203; In re A.H. Robins, 880 F.2d at 694; In re Dow Corning, 280 F.3d at 648; In re

Airadigm Commc'ns, Inc., 519 F.3d 640 (7th Cir. 2008); In re Master Mortg. Inv. Fund, Inc., 168

B.R. 930 (Bankr. W.D. Mo. 1994); In re Seaside Eng'g & Surveying, Inc., 780 F.3d 1070 (11th

Cir.), cert. denied sub nom. Vision-Park Properties, LLC v. Seaside Eng'g & Surveying, LLC,

136 S. Ct. 109 (2015). Seven of the eight Circuit Court of Appeals believe there must be unique

circumstances for a court to approve releases, and four of the circuits refuse to adopt a complete

bar against the ability to grant releases. Elizabeth D. Lauzon, Validity of Non-Debtor Releases in

Bankruptcy Restructuring Plans, 18 A.L.R. Fed. 3d Art. 2 (2016). In fact, the First Circuit

“tacitly” refuses to hold that non-debtor releases are “never permissible”. See Monarch Life Ins.

Co. v. Ropes & Gray, 65 F.3d 973 (1st Cir. 1995). These circuits explain that this equitable relief

Team R27

20

derives its authority from the Bankruptcy Code itself and is necessary in certain circumstances.

Id.

The bankruptcy court has the affirmative power to issue non-consensual releases due to the

broad, equitable powers of the court provided in sections 105(a) and 1123(b)(6) of the

Bankruptcy Code. A bankruptcy court can release creditors from a non-debtor in a reorganization

plan when the release is necessary and appropriate for the reorganization.

A. Third party releases may be necessary and appropriate to a reorganization plan.

Due to the potential for abuse in approving non-consensual releases, courts have been

careful to only allow them in limited circumstances. Behrmann v. Nat'l Heritage Found., 663

F.3d 704, 712 (4th Cir. 2011). The majority view adopted by eight circuits has recognized that

potential abuse can be neutralized by setting a high bar to approve non-consensual releases. 3 The

common thread among all circuits is an intensive evaluation of the particular circumstances of

the case and nature of the reorganization itself. Id. at 711. The standard used is that the release

should be necessary and appropriate for a successful reorganization plan. Some common

elements of approved releases include narrow scope, essentiality, and fairness. In re Ingersoll,

Inc., 562 F.3d 856, 865 (7th Cir. 2009). As noted by the Thirteenth Circuit in the present case, a

court may consider whether the non-debtor’s participation to the plan is essential, whether the

support is conditional on a release of liability, whether the release limitation is narrow, and

whether the plan provisions are fair to all claimants. R. at 12.

3 The First and Eighth Circuits approve releases based on balancing the factors outlined in In re Master Mortg. Inv. Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994). The Second and Seventh Circuits balance the factors from In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005) to determine whether the release is appropriate and necessary (but ultimately are not dispositive) to the reorganization. The Third Circuit approves a release when it is fair to the non-debtor, necessary to the reorganization plan and the factual findings meet the factors in In re Zenith Electronics Corp., 241 B.R. 92 (Bankr. D. Del. 1999). Finally, the Fourth, Sixth and Eleventh Circuits approve releases based on the six-factor test in In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002).

Team R27

21

In In re A.H. Robins, the court eloquently explained what it means for a non-consensual

release to be “essential” to a reorganization plan. In re A.H. Robins, 880 F.2d at 701. The plan in

that case included an insurance settlement based on a mass product liability issue. Id. The court

held that the objecting creditors had to either resort to the plan or be barred from participating in

the reorganization. Id. The court reasoned that “permitting a suit by [the objecting creditors] in

violation of the Plan is a defeat of the Plan and a resulting defeat of the other creditors.” Id. at

702. Because there was a high risk that the reorganization plan would fall through without the

release, the bankruptcy court determined they had to use their equitable powers to ensure that

“substance will not give way to form” and “that technical considerations will not prevent

substantial justice”. Id.

Similarly, the release in the present case is appropriate because it is essential to the

reorganization plan. Like in In re A.H. Robins, Padco also had a mass product liability issue and

a viable reorganization plan with Gadget. As explained by Gadget’s CEO, had the court not

allowed a release of Padco’s non-consenting creditors, Gadget would not have participated in the

plan. The plan itself would have been defeated and the remaining creditors would have been

unjustly harmed. In addition, because 80 percent of Padco’s creditors voted for the plan and were

to receive more payments than they would have received otherwise, the Thirteenth Circuit

correctly applied substance-over-form to approve the release. As a result, the creditors as a whole

received a just result.

The Seventh Circuit in In re Airadigm approved a release because the release terms were

sufficiently narrow. In re Airadigm, 519 F.3d at 640. First, the release was not a blanket

immunity Id. at 652. The release was only applicable to claims arising out of or about the

reorganization and the release was subject to other parts of the plan that preserved some of the

Team R27

22

creditors rights. Id. Second, the trial court found adequate evidence that the debtor required the

release because the non-debtor would not have contributed funds without the release. Id.

The facts of In re Airadigm are analogous to the present case. First, the injunction in

Padco’s reorganization plan is limited to claims arising from Padco’s exploding batteries. R. at

12. Rather than having a ‘blanket immunity’ for any potential unlawful act, the terms of the

injunction are specified to this single action. R. at 12. Petitioner and other creditors alike still

have the right to sue Gadget for quite literally any other cause of action. R. at 12. Second, the

trial court found that Gadget would not have participated in the plan without a release and that

Padco relied on Gadget’s involvement for a successful reorganization. R. at 11.

Another consideration is if the non-debtor contributed substantially to the fund. Although

a chapter 9 case, in In re City of Detroit, 524 B.R. 147, 174 (Bankr. E.D. Mich. 2014), the court

approved a release against the non-debtor State because the State’s financial contributions to a

police retirement settlement was the “cornerstone” to the reorganization plan. Id. The release was

determined to be appropriate and necessary because without the contribution the other

settlements would have fallen through. Id.

In the present case, Padco’s irreparable reputation and lack of sufficient capital lead to

great struggle in their reorganization efforts. In fact, the reorganization plan was “on the verge of

failure” before Gadget became involved. R. at 2. Gadget contributed $500 million and raised

$2.6 billion for developing and enhancing product lines which was critical to the success of

Padco’s reorganization plan. R. at 3. In addition, the trial court found that Gadget’s financial

contribution was the “lynchpin” of the plan because it was critical to the financing and merger

structure. R. at 11. Like In re City of Detroit, the bankruptcy court here correctly found that the

injunction was essential to the plan. R. at 5.

Team R27

23

Another consideration is fairness to the creditors. In In re City of Detroit, part of the

court’s reasoning for approving the release was the fact that the creditors overwhelmingly

approved the plan and ultimately received a fair deal. Id. The police retirees, which were the

largest creditors, relied on the State’s involvement to salvage the value of their retirement fund,

and without the plan they knew they would have faced substantial loses. Id. Similarly, in In re

Washington Mut., Inc., 442 B.R. 314, 347 (Bankr. D. Del. 2011), the release of non-debtors was

necessary for the debtor’s reorganization because of the substantial funds received and the vast

majority of creditors approved the plan.

Similar to these cases, an overwhelming amount of the creditors (80 percent) here

approved the plan. R. at 4. The funds Gadget provided exceeded the combined value of Padco’s

assets and the value of the Padco-related claims against Gadget which was more than a chapter 7

liquidation would be able to distribute to the creditors R. at 5. Further, the separate class of

enjoined creditors were assessed a special premium payment fund compared to other non-

enjoined claimants to compensate for the injunction. R. at 5. The creditors were not only fully

paid based on the plan, but were also given a premium. Therefore, the plan looked appropriate

from both the creditor’s and the debtor’s perspective.

B. Third party releases are authorized by various sections of the Code. 1. Sections 105 and 1126 of the Code expressly grant broad equitable powers to the

bankruptcy court to facilitate successful reorganizations. As stated earlier, this Court has long established that the bankruptcy courts are courts of

equity and thus entrusted with the broad power of applying principles and rules of equity for both

debtors and creditors. Pepper v. Litton, 308 U.S. 295, 304 (1939); United States v. Energy

Resources Co., Inc., 495 U.S. 545, 549 (1990). Congress has expanded the court’s jurisdiction

and codified this broad equitable power in 11 U.S.C. § 105(a) which provides “the [bankruptcy

Team R27

24

court] may issue any order, process, or judgment that is necessary or appropriate to carry out the

provisions of this title”. Celotex Corp. v. Edwards, 514 U.S. 300, 328 (1995) (quoting 11 U.S.C.

§ 105(a); See also N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 55 (1982)

(“Congress has allowed bankruptcy judges the power… to issue all writs necessary in aid of the

bankruptcy court’s expanded jurisdiction”). Thus, with regard to § 105(a), a bankruptcy court is

statutorily authorized to use its broad equitable powers in granting reorganization plans. Section

1123(b)(6) of the Code also allows a court to include “any other appropriate provision not

inconsistent with the applicable provisions of this title” in a reorganization plan. This Court has

held that the bankruptcy court’s residual authority allows for the approval of reorganization plans

that include “any appropriate provision” not inconsistent with the Code. Energy Resources, 495

U.S. at 545 (Bankruptcy court had sufficient power to issue tax allocation order against IRS as

part of reorganization plan).

“As a forum for resolving large and complex mass litigations,” these two sections give

the bankruptcy court substantial power in organizing creditor-debtor relations to achieve

successful reorganizations, including the ability to “release third parties from liability to

participating creditors.” In re Dow Corning, 280 F.3d at 657; In re Airadigm, 519 F.3d at 652.

As long as the plan upholds creditor rights, “enjoining claims against a non-debtor so as not to

defeat reorganization is consistent with the bankruptcy court's primary function” and with the

Code. In re Dow Corning, 280 F.3d at 656–57.

The court’s broad equitable powers are also important as a public policy consideration.

The purpose of chapter 11 bankruptcy is to assist a business in consolidating its debts so it can

continue to operate while repaying creditors through a court approved plan. See In re Winshall

Settlor's Trust, 758 F.2d 1136, 1137 (6th Cir.1985) (“The purpose of chapter 11 reorganization is

Team R27

25

to assist financially distressed business enterprises by providing them with breathing space in

which to return to a viable state.”). To balance the interests of both parties is particularly

burdensome on the court when there are complex issues involved, especially since some

reorganization plans will always have objectors. This is likely why Congress enacted sections

such as 105(a) and 1123(b)(6): to provide bankruptcy courts with leeway to resolve complex

issues, facilitate a resolution, and avoid the bankrupt company from failing. See Official Comm.

of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d

548, 567 (3d Cir. 2003) (“We believe that the missing link is supplied by bankruptcy courts'

equitable power to craft flexible remedies”). The leading proponent of the minority view, the

Ninth Circuit, even contends that “section 105 permits the court to issue both preliminary and

permanent injunctions after confirmation of a plan to protect the debtor and the administration of

the bankruptcy estate.” In re Am. Hardwoods, Inc., 885 F.2d 621, 625 (9th Cir. 1989).

2. The bankruptcy courts power to issue third party releases is not restricted by any provision of the Code.

The bankruptcy courts are not restricted by traditional jurisprudence. Instead, they are

statutorily limited based on the enumerated provisions of the Code. In re Dow Corning., 280

F.3d at 658. The only challenge to whether third party releases are permitted by the Code lies

with 11 U.S.C. § 524(e). R. at 19. Section 524(e) provides that the “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 does not expressly restrict the court’s use of §

105(a) or § 1123(b)(6) to issue an injunction for several reasons.

First, the natural reading of the statutory language only describes the extent of a debtor’s

discharge. It does not itself prohibit the bankruptcy court’s authority to enjoin creditors from

bringing claims against a non-debtor. See In re Specialty Equip. Co., 3 F.3d 1043, 1047 (7th

Team R27

26

Cir.1993) (“This language does not purport to limit or restrict the power of the bankruptcy court

to otherwise grant a release to a third party.”); Republic Supply Co. v. Shoaf, 815 F.2d 1046,

1050 (5th Cir.1987). In plain terms, the release of Petitioner’s claims is not part of the discharge

and thus not subject to § 524(e) as the opposition incorrectly applies. R. at 14. In this case, the

bankruptcy court included the injunction provision within the reorganization plan. And, after the

confirmation of the plan, Padco received its discharge by operation of law. See 11 U.S.C. §

1141(d). R. at 14. Although in form the injunction acts like a release, allowing Gadget to have a

benefit of a bankruptcy without submitting itself to bankruptcy, “substance will not give way to

form” and “technical considerations will not prevent substantial justice”. In re A.H. Robins, 880

F.2d at 701. Nonetheless, Gadget does not receive the benefit of a discharge as the opposition

claims: it receives the benefit from the reorganization plan just as any third party may. Tribune

Media, 799 F.3d at 272. Since the scope of § 524 limits discharges, § 524(e) cannot limit the

reorganization plan.

Even the minority view in the Fifth Circuit has acknowledged that § 524 does not

specifically “preclude the discharge of a guaranty when it has been accepted and confirmed as an

integral part of reorganization.” Republic Supply, 815 F.2d at 1050. Had Congress used

compulsory language such as “shall” instead of “does,” the provision would read more like an

explicit prohibition. In addition, “it would have omitted the prepositional phrase “on, or ... for,

such debt,” ensuring that the “discharge of a debt of the debtor shall not affect the liability of

another entity”. In re Airadigm, 519 F.3d at 659.

Second, Congress has provided several clear examples of their intention to expressly

limit non-debtor releases. Section 524(g) and (h) of the Code, the only authority in the Code for

non-debtor releases, provide extensive rules and restrictions on non-debtor releases in asbestos

Team R27

27

cases. In re Metromedia, 416 F.3d at 142. Such provisions show that Congress was well aware of

release issues and that they affirmatively resolved them through the Code, but only for asbestos

cases. If Congress felt compelled to include all other cases, such as product liabilities, then they

would have reflected the limitation in additional subsections. But they did not. Section 524(e)

cannot be said to limit non-consensual releases.

Lastly, finding that the provision is impermissible would itself be a direct violation of the

Code and bad public policy because the Code provisions require the bankruptcy courts to provide

equitable relief. If sections 105(a) and 1123(b)(6) were limited by section 524(e), the court may

not be able to carry out the provisions of the Code. See United Sav. Ass'n v. Timbers of Inwood

Forest Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.), 808 F.2d 363, 373 (5th

Cir.1987) (en banc), aff'd, 484 U.S. 365 (1988) (stating that if chapter 11 plan does not have a

rehabilitative purpose, the “statutory provisions designed to accomplish the reorganizational

objectives become destructive of the legitimate rights and interests of creditors”). Without the

power to grant releases, a large amount of bankruptcy matters would go unresolved. Thus, when

a bankruptcy court confirms a reorganization plan that includes releases, it is likely done to

provide the most equitable approach.

This Court should find that the bankruptcy court has the statutory authority, derived from

§ 105(a) and § 1123(b)(6), to approve non-consensual releases because a release may be

appropriate and necessary to the reorganization plan.

Team R27

28

CONCLUSION

For the foregoing reasons, Padco respectfully respects this court affirm the judgement of

the court of appeals for the thirteenth circuit.

Respectfully submitted,

Team R27 Counsel for Respondent Date: January 23, 2017

Team R27

29

APPENDIX A

11 U.S.C. § 105. Power of court. (a) The 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.

Team R27

30

APPENDIX B

11 U.S.C. § 363. Use, sale, or lease of property. (m) 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.

Team R27

31

APPENDIX C 11 U.S.C. § 364. Obtaining credit. (e) 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.

Team R27

32

APPENDIX D 11 U.S.C. § 524. Effect of discharge. (a) A discharge in a case under this title--

(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under SECTION 727, 955, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived; (2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived; and (3) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect or recover from, or offset against, property of the debtor of the kind specified in section 541(a)(2) of this title that is acquired after the commencement of the case, on account of any allowable community claim, except a community claim that is excepted from discharge under section 523, 1228(a)(1), or 1328(a)(1), or that would be so excepted, determined in accordance with the provisions of sections 523(c) and 523(d) of this title, in a case concerning the debtor's spouse commenced on the date of the filing of the petition in the case concerning the debtor, whether or not discharge of the debt based on such community claim is waived.

… (e) Except as provided in subsection (a)(3) of this section, 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. … (g)(1)(A) After notice and hearing, a court that enters an order confirming a plan of reorganization under chapter 11 may issue, in connection with such order, an injunction in accordance with this subsection to supplement the injunctive effect of a discharge under this section. …

(4)(A)(i) Subject to subparagraph (B), an injunction described in paragraph (1) shall be valid and enforceable against all entities that it addresses.

(ii) Notwithstanding the provisions of section 524(e), such an injunction may bar any action directed against a third party who is identifiable from the terms of such injunction (by name or as part of an identifiable group) and is alleged to be directly or indirectly liable for the conduct of, claims against, or demands on the debtor to the extent such alleged liability of such third party arises by reason of--

… (h) Application to existing injunctions.--For purposes of subsection (g)--

(1) subject to paragraph (2), if an injunction of the kind described in subsection (g)(1)(B) was issued before the date of the enactment of this Act, as part of a plan of reorganization confirmed by an order entered before such date, then the injunction shall be considered to meet the requirements of subsection (g)(2)(B) for purposes of subsection (g)(2)(A), and to satisfy subsection (g)(4)(A)(ii), if--

Team R27

33

APPENDIX E 11 U.S.C. § 1123. Contents of plan. (a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall-- …

(6) provide for the inclusion in the charter of the debtor, if the debtor is a corporation, or of any corporation referred to in paragraph (5)(B) or (5)(C) of this subsection, of a provision prohibiting the issuance of nonvoting equity securities, and providing, as to the several classes of securities possessing voting power, an appropriate distribution of such power among such classes, including, in the case of any class of equity securities having a preference over another class of equity securities with respect to dividends, adequate provisions for the election of directors representing such preferred class in the event of default in the payment of such dividends;

… (b) Subject to subsection (a) of this section, a plan may--

(1) impair or leave unimpaired any class of claims, secured or unsecured, or of interests; (2) subject to section 365 of this title, provide for the assumption, rejection, or assignment of any executory contract or unexpired lease of the debtor not previously rejected under such section; (3) provide for--

(A) the settlement or adjustment of any claim or interest belonging to the debtor or to the estate; or (B) the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest;

(4) provide for the sale of all or substantially all of the property of the estate, and the distribution of the proceeds of such sale among holders of claims or interests; (5) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims; and (6) include any other appropriate provision not inconsistent with the applicable provisions of this title.

(c) In a case concerning an individual, a plan proposed by an entity other than the debtor may not provide for the use, sale, or lease of property exempted under section 522 of this title, unless the debtor consents to such use, sale, or lease. (d) Notwithstanding subsection (a) of this section and sections 506(b), 1129(a)(7), and 1129(b) of this title, if it is proposed in a plan to cure a default the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.

Team R27

34

APPENDIX F 11 U.S.C. § 1127. Modification of plan. (b) The proponent of a plan or the reorganized debtor may modify such plan at any time after confirmation of such plan and before substantial consummation of such plan, but may not modify such plan so that such plan as modified fails to meet the requirements of sections 1122 and 1123 of this title. Such plan as modified under this subsection becomes the plan only if circumstances warrant such modification and the court, after notice and a hearing, confirms such plan as modified, under section 1129 of this title.

Team R27

35

APPENDIX G 28 U.S.C. § 157. Procedures. (d) The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.