Opinion of Interest – In re Nuverra Environmental Solutions, Inc.

In a recent decision in In re Nuverra Environmental Solutions, Inc., No. 18-3084, 2021 WL 50160 (3d Cir. Jan 6, 2021), a divided Third Circuit panel held that an appeal of a Chapter 11 plan confirmation order was equitably moot and that the dissenting unsecured creditor who filed the appeal, David Hargreaves, was not entitled to individualized relief.  Under the confirmed Chapter 11 plan in Nuverra, secured creditors did not receive payment in full and creditors that were holders of prepetition unsecured notes, including Hargreaves, received cash and securities equal to only six percent of the face value of their note claims, while trade creditors were entitled to be paid in full.  The plan proponents described the full payment to these unsecured trade creditors as a “gift” from the secured creditors, who were undersecured based on the debtors’ enterprise value under the plan.

Hargreaves objected to the plan on the basis that it improperly classified the note and trade claims and unfairly discriminated against claims of equal rank.  Following a hearing, the bankruptcy court confirmed the plan over Hargreaves’ objection on the basis that the “gift” to trade creditors from the secured creditors was not improper under the Bankruptcy Code’s priority scheme, and that the preferential treatment to trade creditors also was appropriate to maintain ongoing business relationships. Hargreaves appealed to the District Court and then moved for a stay of the confirmation order, but the stay request was denied.  The debtors substantially consummated the confirmed Chapter 11 plan and moved to dismiss the appeal on the basis of equitable mootness.  The District Court considered only whether Hargreaves was entitled to his proposed relief—being made whole—while leaving the plan in place.  The District Court concluded that Hargreaves could not be treated more favorably than the other members of his class and so it dismissed the appeal on equitable mootness grounds.  Hargreaves timely appealed to the Third Circuit.

A majority of the Third Circuit panel in Nuverra considered whether the appeal was equitably moot, which would be the case if the plan was substantially consummated and if granting the relief requested in the appeal would fatally scramble the plan or significantly harm third parties who justifiably relied on plan confirmation.  As the parties agreed that the plan had been substantially consummated, the court needed only to consider the second prong of this analysis.  But, in reaching its ruling, the court sidestepped the issue of whether the small sum requested by Hargreaves would frustrate the plan or prejudice other parties, and instead it considered whether Hargreaves could permissibly be made whole while other unsecured notes holders in the same class retained only their six percent dividend.  A majority of the panel concluded that such treatment was impermissible, as Hargreaves could not obtain greater benefits under the plan than other members of the same class of creditors, pursuant to Sections 1123(a)(4) and 1129(b)(1) of the bankruptcy code, and, accordingly, it dismissed the appeal.

Hargreaves argued, and the dissenting judge believed it was plausible, that the other unsecured notes creditors consented to the less favorable treatment by failing to object, and waived their unfair discrimination claims by failing to appeal.  The dissenting judge also believed that a less strict application of the equitable mootness doctrine would encourage appeals to be decided on their merits (as she intimated this case ultimately was, notwithstanding the majority’s framing), and would permit appeals courts to resolve important legal issues, including, as relevant to the Nuverra plan, whether the Supreme Court’s decision in Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), foreclosed the secured creditors’ “gifting” of payment in full to the unsecured trade creditors.  For now, application of the equitable mootness doctrine may make these important Chapter 11 plan issues difficult to resolve through circuit court appeals.