IN THE SUPREME COURT OF THE UNITED STATES … 43 no. 16-412 in the supreme court of the united...
Transcript of IN THE SUPREME COURT OF THE UNITED STATES … 43 no. 16-412 in the supreme court of the united...
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NO. 16-412
IN THE
SUPREME COURT OF THE UNITED STATES OF AMERICA
IN RE PADCO, INC., DEBTOR
MEGAN KUZNIEWSKI,
PETITIONER,
v.
PADCO, INC.,
RESPONDENT.
ON WRIT OF CERTIORARI FROM THE UNITED STATES COURT OF APPEALS FOR THE THIRTEENTH CIRCUIT
BRIEF FOR RESPONDENT
TEAM R 43 COUNSEL FOR RESPONDENT
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QUESTIONS PRESENTED
1. Whether an appellate court has authority to decline to hear an appeal from a bankruptcy court order confirming a Chapter 11 plan on prudential grounds using equitable mootness principles.
2. Whether a Chapter 11 plan of reorganization can permanently enjoin claims that non-consenting creditors have against a non-debtor when the claims are not derivative of the debtor’s claims against the non-debtor and no provision is made for full payment of the enjoined claims.
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TABLE OF CONTENTS QUESTIONS PRESENTED ......................................................................................................... i TABLE OF CONTENTS ............................................................................................................. ii TABLE OF AUTHORITIES ........................................................................................................v OPINIONS BELOW .................................................................................................................. viii
STATEMENT OF JURISDICTION ........................................................................................ viii
STATUTORY PROVISIONS ................................................................................................... viii
STATEMENT OF FACTS ............................................................................................................1
SUMMARY OF THE ARGUMENT ...........................................................................................3
ARGUMENT ..................................................................................................................................4
I. AN APPELLATE COURT HAS AUTHORITY TO DECLINE TO HEAR AN APPEAL FROM A BANKRUPTCY COURT ORDER CONFIRMING A CHAPTER 11 PLAN ON PRUDENTIAL GROUNDS USING EQUITABLE MOOTNESS PRINCIPLES. .............................................................................................4
A. The Third Circuit Established a Five-Factor Test to Determine Equitable
Mootness in In re Continental Airlines in 1996. This Five Factor Test Has Boiled Down to Two Analytical Questions in In re SemCrude in 2013. .............................5
1. Padco’s Reorganization Plan Has Been Substantially Consummated. ............ 5
2. Petitioner Requested a Relief Which Will Fatally Scramble Padco’s
Reorganization Plan and/or Which Will Significantly Harm Investors Who Have Justifiably Relied Upon Padco’s Confirmation Order. ............................7
i. Petitioner requested a relief which will fatally scramble Padco’s
reorganization plan. ..........................................................................................7
ii. Petitioner requested a relief which will significantly harm investors who have justifiably relied upon Padco’s confirmation order. .............................10
B. The Bankruptcy Code Embodies a Strong Policy of Limiting Judicial Review. .13
C. The Thirteenth Circuit Did Not Violate Article III of the Constitution When the Court Decided Not to Hear Petitioner’s Claim Under Equitable Mootness Grounds. .....................................................................................................................15
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II. A CHAPTER 11 PLAN OF REORGANIZATION CAN PERMANENTLY ENJOIN CLAIMS THAT PETITIONER HAS AGAINST GADGET WHEN THE CLAIMS ARE NOT DERIVATIVE OF PADCO’S CLAIMS AGAINST GADGET AND NO PROVISION IS MADE FOR FULL PAYMENT OF THE ENJOINED CLAIMS. .17
A. The Express Statutory Language of the Bankruptcy Code Authorizes the
Bankruptcy Courts to Issue Permanent Injunctions. .............................................17
1. Reading section 105(a) and section 1123(b)(6) of the Bankruptcy Code together authorizes the bankruptcy court to issue a permanent injunction to successfully carry out Padco’s reorganization plan. .........................................18
2. Section 524(e) of the Bankruptcy Code does not limit the bankruptcy court’s
authority to issue a permanent injunction to successfully carry out Padco’s reorganization plan. .............................................................................................21
B. A Permanent Injunction of Petitioner’s Claims Against a Gadget is Permissible
as long as this Permanent Injunction is both Necessary and Appropriate Under Unusual Circumstances. ............................................................................................23
CONCLUSION ............................................................................................................................28
APPENDICES APPENDIX A ................................................................................................................................. I APPENDIX B ................................................................................................................................ II APPENDIX C ............................................................................................................................... III APPENDIX D .............................................................................................................................. IV APPENDIX E ................................................................................................................................ V APPENDIX F .............................................................................................................................. VI APPENDIX G ............................................................................................................................. VII APPENDIX H ............................................................................................................................ VIII APPENDIX I ................................................................................................................................. X APPENDIX J ............................................................................................................................... XI APPENDIX K ............................................................................................................................. XII APPENDIX L ............................................................................................................................ XIII
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APPENDIX M .......................................................................................................................... XIV APPENDIX N ............................................................................................................................. XV
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TABLE OF AUTHORITIES
Statutory Provisions
11 U.S.C. § 105(a). ....................................................................................................... viii, 18, 19, I
11 U.S.C. § 1101(2). ................................................................................................................ viii, 5
11 U.S.C. § 1123(b)(6). ..................................................................................................... ix, 18, VI
11 U.S.C. § 1127(b). ......................................................................................................... ix, 13, VII
11 U.S.C. § 1129. ............................................................................................................ ix, 21, VIII
11 U.S.C. § 1141(a) ...................................................................................................................... 17
11 U.S.C. § 1141(d)(1). ............................................................................................................ ix, X
11 U.S.C. § 1144. ..................................................................................................................... ix, XI
11 U.S.C. § 363(m). .......................................................................................................... viii, 13, II
11 U.S.C. § 364(e). .......................................................................................................... viii, 13, III
11 U.S.C. § 524(e). .......................................................................................................... viii, 21, IV
28 U.S.C. § 157(b)(1). ...................................................................................................... ix, 15, XII
28 U.S.C. § 158(a)(1). ..................................................................................................... ix, 15, XIII
U.S. Supreme Court Cases
Gladstone, Realtors v. Bellwood,
441 U.S. 91 (1979) .................................................................................................................... 16
Stern v. Marshall,
564 U.S. 462 (2011). ................................................................................................................. 15
United States v. Energy Res. Co.,
495 U.S. 545 (1990) ...................................................................................................... 17, 18, 19
Warth v. Seldin,
422 U.S. 490 (1975) .................................................................................................................. 16
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U.S. Circuit Court of Appeals Cases
Airadigm Commuc’ns, Inc. v. FCC (In re Airadigm Commc’ns, Inc.),
519 F.3d 640 (7th Cir. 2008). ....................................................................................... 18, 21, 22
Bank of N.Y. Tr. Co. NA v. Official Unsecured Creditors’ Comm. (In re Pac. Lumber Co.),
584 F.3d 229 (5th Cir. 2009). ....................................................................................... 13, 14, 15
Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.),
280 F.3d 648 (6th Cir. 2002). ............................................................................................ passim
Deutsche Bank AG, London Branch v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Networks, Inc.),
416 F.3d 136 (2d Cir. 2005)..................................................................................... 5, 18, 19, XV
Feld v. Zale Corp. (In re Zale Corp.),
62 F.3d 746 (5th Cir. 1995) ...................................................................................................... 23
First Union Real Estate Equity & Mortg. Invs. v. Club Assocs. (In re Club Assocs.),
956 F.2d 1065 (11th Cir. 1992). .................................................................................... 5, 10, 12
Grasslawn Lodging, LLC v. Transwest Resort Props.,
801 F.3d 1161 (9th Cir. 2015). .......................................................................................... passim
In re Cont’l Airlines,
91 F.3d 553 (3d Cir. 1996), cert. denied, 519 U.S. 1057 (1997). ...................................... passim
In re Crystal Oil Co.,
854 F.2d 79 (5th Cir. 1988). ......................................................................................... 7, 8, 9, 11
In re Drexel Burnham Lambert Grp.,
960 F.2d 285 (2d Cir. 1992)................................................................................................ 17, 23
In re SemCrude,
728 F.3d 314 (3d Cir. 2013)............................................................................................... passim
In re Specialty Equip. Cos.,
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3 F.3d 1043 (7th Cir. 1993). ............................................................................................... 18, 21
In re UNR Indus.,
20 F.3d 766 (7th Cir. 1994). .............................................................................................. passim
Landsing Div. Props. v. First Nat’l Bank and Trust Co. of Tulsa (In re W. Real Estate Fund),
922 F.2d 592 (10th Cir. 1990) .................................................................................................. 23
MacArthur Co. v. Johns-Manville Corp.,
837 F.2d 89 (2d Cir. 1988)........................................................................................................ 18
Manges v. Seattle-First Nat’l Bank (In re Manges),
29 F.3d 1034 (5th Cir. 1994) .................................................................................................... 10
Menard-Sanford v. Mabey (In re A.H. Robins Co.),
880 F.2d 694 (4th Cir. 1989). ............................................................................................ passim
Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.),
677 F.3d 869 (9th Cir. 2012). ................................................................................................... 10
Republic Supply Co. v. Shoaf,
815 F.2d 1046 (5th Cir. 1987) .................................................................................................. 21
Resorts Int'l v. Lowenschuss (In re Lowenschuss),
67 F.3d 1394 (9th Cir. 1995) .................................................................................................... 23
Rev Op Grp. v. ML Manager LLC (In re Mortgs. Ltd.),
771 F.3d 1211 (9th Cir. 2014). ................................................................................................... 4
Rochman v. Ne. Util. Serv. Grp. (In re Pub. Serv. Co.),
963 F.2d 469 (1st Cir. 1992) ....................................................................................................... 8
SE Prop. Holdings, LLC v. Seaside Eng’g & Surveying (In re Seaside Eng’g & Surveying),
780 F.3d 1070 (11th Cir. 2015). ............................................................................. 23, 24, 25, 26
Templeton v. O’Cheskey (In re Am. Hous. Found.),
785 F.3d 143 (5th Cir. 2015). ..................................................................................................... 4
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U.S. District Court Cases
Master Mortg. Inv. Fund, Inc. v. Am. Nat’l Fire Ins. Co. (In re Master Mortg. Inv. Fund, Inc.), 168 B.R. 930 (Bankr. W.D. Mo. 1994). ................................................................................... XV
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OPINIONS BELOW
The bankruptcy court confirmed a Chapter 11 reorganization plan for Padco in January,
2015. R. at 3. After the bankruptcy court did not find any support for Petitioner’s novel tort
theory, Petitioner requested a stay of the confirmation order. R. at 5. The bankruptcy court
denied the stay requested. R. at 5.
Next, Petitioner requested a stay from the District Court for the District of Moot, but the
district court denied the request. R. at 5. Petitioner appealed to the district court. R. at 5. Padco
moved to dismiss the appeal. R. at 5. The district court affirmed the confirmation order and the
appeal on equitable mootness grounds on June 30, 2016. R. at 5.
Subsequently, Petitioner appealed to the United States Court of Appeals for the
Thirteenth Circuit. R. at 6. On October 1, 2016, the court of appeals decided and affirmed the
appeal on equitable mootness grounds. R. at 2. Petitioner filed a writ of certiorari with the
United States Supreme Court. R. at 1.
STATEMENT OF JURISDICTION
The formal statement of jurisdiction is waived pursuant to Competition Rule VIII.
STATUTORY PROVISIONS
The statutory provisions listed below are relevant to determine the present case. These
provisions are reproduced in Appendices A through N.
11 U.S.C. § 105(a).
11 U.S.C. § 363(m).
11 U.S.C. § 364(e).
11 U.S.C. § 524(e).
11 U.S.C. § 1101(2).
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11 U.S.C. § 1123(b)(6).
11 U.S.C. § 1127(b).
11 U.S.C. § 1129.
11 U.S.C. § 1141(d)(1).
11 U.S.C. § 1144.
28 U.S.C. § 157(b)(1).
28 U.S.C. § 158(a)(1).
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STATEMENT OF FACTS
Padco, Inc. (“Padco”) faced voluminous litigation after many of their tablet computers
exploded because of a battery defect. R. at 2. The defective batteries almost caused the
liquidation of Padco because the company lacked adequate capital to continue its business in the
face of such numerous lawsuits. R. at 2. In an attempt to reorganize, Padco filed for Chapter 11
reorganization. R. at 2. Gadget, Inc., (“Gadget”) provided over $500 million in financial support
to help Padco reorganize. R. at 2. Moreover, as part of the reorganization plan, Padco would be
merged into Gadget. R. at 2-3. After the plan of reorganization merging Padco into Gadget was
confirmed, Gadget borrowed an additional $2.6 billion from public bonds to redesign the
defective product but also created new products. R. at 3.
As part of the reorganization plan, unsecured creditors were divided into a number of
different classes. R. at 3. The plan classified Megan Kuzniewski (“Petitioner”) in a separate class
of unsecured creditors, which were provided with a larger bankruptcy distribution than other
unsecured creditors. R. at 3. Petitioner and the affected class received this larger distribution to
compensate them for their enjoined direct claims against Gadget. R. at 3. Furthermore, the
bankruptcy court found Petitioner and each creditor in her class “received a distribution that was
more than it would have received in a Chapter 7 liquidation.” R. at 5.
Petitioner argued that an injunction against Gadget was inappropriate and not permissible
under the Bankruptcy Code. R. at 4. Petitioner subsequently furthered novel tort theories relating
to Gadget’s pre-bankruptcy ownership of Padco. R. at 4. However, even while Padco was
Gadget’s subsidiary, Gadget kept its operations separate. R. at 4. Thus, after making specific
factual findings, the bankruptcy court confirmed the plan in 2015. R. at 3. The bankruptcy court
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determined the injunction was essential to the reorganization plan, fair to Gadget, and reasonable
to Petitioner. R.at 5.
Even though Petitioner voted to reject the proposed plan, eighty percent of Petitioner’s
class voted in favor of the proposed plan. R. at 4. Thus, the bankruptcy court determined that an
overwhelming majority of Petitioner’s class approved the reorganization plan. R. at 4. As to the
Petitioner’s tort claims, the bankruptcy court applied a probability discount of ninety percent to
those claims and determined that the premium provided to Petitioner’s class exceeded the value
of the direct claims that were being enjoined. R. at 5. Petitioner did not challenge these findings.
R. at 5. However, the possible claims asserted by Petitioner against Gadget were so large that
Gadget was concerned and unwilling to participate in the reorganization unless Gadget could be
certain it would be free of all liabilities related to the defective battery. R. at 3. At the
confirmation hearing, Gadget’s Chief Executive Officer, Naffie Lamin, testified as to Gadget’s
concern. R. at 3. Furthermore, the bankruptcy court found Gadget’s financial contributions to the
plan far exceeded the value of Padco’s assets and the value of any Padco-related claims against
Gadget. R. at 5.
Furthermore, two days after the confirmation order was entered by the Bankruptcy Court,
the reorganization plan became substantially consummated within the meaning of 11 U.S.C. §
1101(2). R. at. 5. From the time the plan was confirmed by the bankruptcy court to the time the
distict court affirmed the confirmation, Padco emerged from the bankruptcy and the
reorganization plan as a successful enterprise. R. at 3.
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SUMMARY OF THE ARGUMENT
An appellate court has the authority to decline to hear an appeal from a bankruptcy court
order confirming a Chapter 11 plan on prudential grounds using equitable mootness principles if
the plan has been substantially consummated, the relief sought would significantly harm
investors who have justifiably relied on the reorganization order, and the relief sought would
fatally scramble the plan. Additionally, an appellate court has the authority to decline to hear an
appeal from a bankruptcy court because the Bankruptcy Code embodies a strong policy limiting
judicial review. Although section 1127(b) of the Bankruptcy Code does not expressly preclude
an appellate court to review a case, an appellate court could supplement section 1127(b) with
equitable mootness principles to preclude itself from hearing a case. Furthermore, an appellate
court has the authority to decline to hear an appeal from a bankruptcy court because applying
prudential factors, such as equitable mootness, are not a violation of Article III of the
Constitution.
Moreover, a Chapter 11 plan of reorganization may include a permanent injunction of
claims not derivative of the debtor’s claims regardless of creditors objection. Despite the
reorganization plan not providing provisions for full payment of the enjoined claims, the express
statutory language of the Bankruptcy Code authorizes bankruptcy courts to issue permanent
injunctions under sections 105(a) and 1123(b)(6) for the success of the reorganization.
Furthermore, section 524(e) of the Bankruptcy Code does no limit bankruptcy courts from
issuing permanent injunctions as long as they are both necessary and appropriate under unusual
circumstances.
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ARGUMENT
This Court reviews a lower court’s findings of law de novo and exercises plenary review
over those questions. Templeton v. O’Cheskey (In re Am. Hous. Found.), 785 F.3d 143, 152
(5th Cir. 2015).
I. AN APPELLATE COURT HAS AUTHORITY TO DECLINE TO HEAR AN APPEAL FROM A BANKRUPTCY COURT ORDER CONFIRMING A CHAPTER 11 PLAN ON PRUDENTIAL GROUNDS USING EQUITABLE MOOTNESS PRINCIPLES.
“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.” In
re UNR Indus., 20 F.3d 766, 771 (7th Cir. 1994). “Equitable mootness is a prudential doctrine
by which a court elects not to reach the merits of a bankruptcy appeal.” Grasslawn Lodging,
LLC v. Transwest Resort Props., 801 F.3d 1161, 1167 (9th Cir. 2015). “An appeal is equitably
moot if the case presents transactions that are so complex or difficult to unwind that debtors,
creditors, and third parties are entitled to rely on the final bankruptcy court order.” Id. (citing
Rev Op Grp. v. ML Manager LLC (In re Mortgs. Ltd.), 771 F.3d 1211, 1215 n.2 (9th Cir.
2014)). Judge Easterbrook from the Seventh Circuit perfectly describes the definition of
“equitable mootness” as the “unwillingness to alter the outcome” of a bankruptcy case.1 In re
UNR Indus., 20 F.3d at 769; In re Cont’l Airlines, 91 F.3d 553, 559 (3d Cir. 1996), cert. denied,
519 U.S. 1057 (1997). “The test for mootness reflects a court’s concern for striking the proper
balance between the equitable considerations of finality and good faith reliance on a judgment
and the competing interests that underlie the right of a party to seek review of a bankruptcy court
1 Bankruptcy courts have invoked the equitable mootness doctrine in dismissing a complaint seeking revocation of plan confirmation under 11 U.S.C. § 1144 outside the appellate context. In re SemCrude, L.P., 728 F.3d 314, 317 n.1. (3d Cir. 2013).
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order adversely affecting him.” First Union Real Estate Equity & Mortg. Invs. v. Club Assocs.
(In re Club Assocs.), 956 F.2d 1065, 1069 (11th Cir. 1992). “Courts have held that ‘an appeal
should be dismissed as moot when, even though effective relief could conceivably be fashioned,
implementation of that relief would be inequitable.” Deutsche Bank AG, London Branch v.
Metromedia Fiber Network, Inc. (In re Metromedia Fiber Networks, Inc.), 416 F.3d 136, 143 (2d
Cir. 2005); In re Cont’l Airlines, 91 F.3d at 559; In re Club Assocs., 956 F.2d at 1065 (using a
holistic approach to equitable mootness). “If equitable mootness is limited in scope and
cautiously applied, this doctrine provides a vehicle whereby the court can prevent substantial
harm to numerous parties.” In re Cont’l Airlines, 91 F.3d at. 559.
A. The Third Circuit Established a Five-Factor Test to Determine Equitable Mootness in In re Continental Airlines in 1996. This Five Factor Test Has Boiled Down to Two Analytical Questions in In re SemCrude in 2013.
The Third Circuit relied on five2 prudential factors in In re Continental Airlines when
assessing equitable mootness; however, the same court reassessed the factors and merged them
into two analytical questions in In re SemCrude. In re SemCrude, 728 F.3d at 320-21. The court
balances: (1) if the plan has been substantially consummated; and (2) if so, would granting the
relief requested (i) fatally scramble the plan and/or (ii) significantly harm third parties who have
relied on the plan and are not present in front of the court. Id. at 321. The burden is on the party
seeking dismissal. Id. Therefore, the Thirteenth Circuit should implement the two analytical
questions in In re SemCrude to assess equitable mootness.
1. Padco’s Reorganization Plan Has Been Substantially Consummated.
“Whether one or another detail in a plan of reorganization could have been accomplished
better is precisely the sort of question that should not upset a substantially consummated plan of
2 Appendix M.
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reorganization.” In re UNR Indus., 20 F.3d at 771. The term “substantially consummated”3 has
been defined in the Bankruptcy Code. 11 U.S.C. § 1101(2). See In re SemCrude, 728 F.3d at
321; Transwest Resort, 801 F.3d at 1168. “A plan has reached substantial consummation when it
advances to the point that turning back may be imprudent.” In re SemCrude, 728 F.3d at 321.
The complexity of transactions involved in the reorganization are heavily weight in favor of not
upsetting the plan. In re Cont’l Airlines, 91 F.3d at 560.
The substantial consummation of a plan allows courts not to reverse a reorganization plan
under equitable mootness grounds. For instance, the Third Circuit held the plan in In re
SemCrude was substantially consummated because the distribution of assets had been made to
the creditors, financial transactions were put in place, and the Reorganized Debtors had emerged
from bankruptcy as a financially sound business. 728 F.3d at 323. To illustrate, in In re Cont’l
Airlines, the Third Circuit similarly held the plan was substantially consummated because
investors made a $450 million investment into the reorganized entity. 91 F.3d at 561.
Additionally, all elements of the plan, except distributions to the unsecured creditors, had been
completed, and a reversal of the order confirming the plan likely would put the appellee back
into bankruptcy. Id.
The plan has been substantially consummated when the transfer of all of the property
proposed by the plan has been transferred. Similar to In re SemCrude, in which the assets of the
plan had been distributed to the point of no return, Padco’s assets within the Plan had been fully
distributed. The bankruptcy court confirmed Padco’s reorganization plan in January of 2015,
and the district court affirmed the confirmation order in middle 2016. Padco’s reorganization
plan classified Padco’s unsecured creditors into a number of classes, some classes received a
cash payout of a percentage of their claims, others received a mixture of cash and stock in 3 Appendix E.
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Gadget, and some others received only stocks in Gadget. In addition, most of the unsecured
creditors received at least some stocks in Gadget. Also, both Gadget stock and the bonds are
publically traded and numerous parties have bought and sold those securities since the plan
confirmation. Lastly, like in In re Cont’l Airlines, where a reversal of the plan would put the
appellee bank into bankruptcy, reversing Padco’s reorganization plan would most likely put the
Padco-Gadget merged company in bankruptcy again. Therefore, Padco’s reorganization plan has
been substantially consummated, and the court properly decided not to disturbe Padco’s plan.
2. Petitioner Requested a Relief Which Will Fatally Scramble Padco’s Reorganization Plan and/or Which Will Significantly Harm Investors Who Have Justifiably Relied Upon Padco’s Confirmation Order.
Courts have applied jurisprudential principles of fairness and equity under the equitable
mootness doctrine. The strong public policy favors encouragement on reliance on the finality of
the bankruptcy court order, on the successful completion of large reorganizations, and on the
protection of innocent investors. In re Cont’l Airlines, 91 F.3d at 562, 565. Allowing an appeal
following a consummated reorganization diminishes the “reliance by third parties, and particular
investors, on the finality of the transaction.” Id. at 562. Thus, the Thirteenth Circuit properly
decided not to hear Petitioner’s claim under equitable mootness grounds in compliance with
public policy.
i. Petitioner requested a relief which will fatally scramble Padco’s reorganization plan.
The Court must “assess if the remedies completely knock the props out from under
the plan and thereby create an uncontrollable situation for the bankruptcy court.” In re
SemCrude, 728 F.3d at 323; Transwest Resort, 801 F.3d at 1175 (Smith, J., dissenting). A plan
of reorganization should be disturbed only for compelling reasons. In re UNR Indus., 20 F.3d at
769; In re Crystal Oil Co., 854 F.2d 79, 82 (5th Cir. 1988). However, the appeal is not moot if
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the court could grant a partial and equitable relief. In re UNR Indus., 20 F.3d at 1171; In re
Cont’l Airlines, 91 F.3d at 565. “The strong public policy in favor of maximizing debtors’
estates and facilitating successful reorganization, reflected in the [Bankruptcy] Code itself,
clearly weighs in favor of encouraging reliance.” In re Cont’l Airlines, 91 F.3d at 565. Courts
rely on the plan if reorganization makes it imprudent to revise the plan. In re UNR Indus., 20
F.3d at 769. Relying on the finality of bankruptcy court confirmation orders is one public policy
that courts must weight in favor of not disturbing the reorganization plan. In re Cont’l Airlines,
91 F.3d at 561; Rochman v. Ne. Util. Serv. Grp. (In re Pub. Serv. Co.), 963 F.2d 469, 471-71
(1st Cir. 1992) (concluding the “mootness doctrine facilitates the important public policy
favoring orderly reorganizations and settlement of debtor[‘s] estates by affording finality to the
judgments of the bankruptcy court”); Transwest Resort, 801 F.3d at 1173 (stating reassessing the
reorganization plan discourages potential investors from relying on the finality of bankruptcy
court confirmation orders) (Smith, J., dissenting).
Courts should not disturb a reorganization plan because reliance on a successful
reorganization plan is critical. To illustrate in In re UNR Indus., the Seventh Circuit held
undoing part of plan is possible, but has ramifications for the rest of the plan. 20 F.3d at 769.
Furthermore, the court concluded intervention of the court would decrease the reliance on the
reorganization plan because warrants for additional stock have been issued and are trading,
corporate acquisitions and divestitures have occurred, tax consequences have been realized, large
insurance settlements have been disturbed, and lawsuits have been dismissed. Id. For instance,
in In re Crystal Oil, the Fifth Circuit held the relief requested would tremendously impact the
plan and would be evidently inequitable for the court to consider the merits of the appellant’s
appeal. 854 F.2d at 82. Next, the court also concluded common sense and equitable
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considerations require dismissal of the appellant’s appeal. Id. at 81 (emphasis added). The
appellee made several concessions, approved a $2,000,000 payment to the appellant, approved a
$4,000,000 payment to the unsecured creditors, allowed its rights to be subordinated to the
purchasers of new bonds, and accepted a new note with lower interest rate in exchange for the
existing note, to prompt court’s approval of a reorganization plan. Id. The court reasoned it
cannot deprive the appellee of the benefits the appellee bargained for without jeopardizing the
entire plan should the appellee retract major concessions. Id.
Finality of bankruptcy court order is key to encourage the reliance on the
reorganization plan. Similar to In re UNR Indus. and In re Crystal Oil, where the Seventh and
Fifth Circuits respectively concluded that intervention of the court will deteriorate the reliance on
a reorganization plan, the Thirteenth Circuit carefully considers the effect of altering Padco’s
reorganization plan. The court takes into consideration the complicated multi-party negotiation
that resolved a wide array of business and legal issues affecting Padco. The court states the
plan’s terms reflect a large number of compromises by different interest groups, unsecured
creditors, new, innocent investors, Padco, Gadget, and Petitioner. Padco has emerged from
bankruptcy as a successful enterprise after obtaining a successful reorganization plan.
Additionally, parallel to In re Crystal Oil, where the appellee made several concessions in
reliance of the plan, Padco’s reorganization plan achieved success because the parties to the
reorganization were able to rely on the confirmation order to seal their bargains and because
numerous third parties could trust on Padco’s apparent rise from bankruptcy to invest in the new
Padco-Gadget. Also, the parties to Padco’s reorganization plan traded their debt and equity
securities and entered into new transactions with Padco-Gadget. Moreover, because Gadget
relied on Padco’s reorganization plan, Gadget invested more than $500 million to redesign the
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Padco tablet computer and borrowed an additional $2.6 billion through a series of public bond
offerings that took place after the confirmation of the reorganization plan. The court properly
addresses and concludes that a reversal of this confirmation order would undermine public
confidence in the finality of bankruptcy orders and would make the successful completion of
large reorganizations more difficult. Thus, the court carefully and rightfully concluded not to
invalidate the permanent injunction against direct claims not to knock the props out from under
Padco’s plan. By applying the equitable mootness doctrine, the Thirteenth Circuit has complied
with public policy and encouraged the reliance on the finality of bankruptcy court orders and
successful completion of large reorganizations.
ii. Petitioner requested a relief which will significantly harm investors who have justifiably relied upon Padco’s confirmation order.
“To reach the matter of a bankruptcy appeal after confirmation . . . , [the court considers]
the effect of the requested relief on the rights of parties not before the court.” In re Cont’l
Airlines, 91 F.3d at 565 (emphasis added). Specific relief sought “must bear unduly on innocent
third party not before the court.” Transwest Resort, 801 F.3d at 1169. The alteration of the plan
in question should not “affect third party[‘s] interests to such an extent that the change is
inequitable.” Id. (citing Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe
Insulation Co.), 677 F.3d 869, 882 (9th Cir. 2012)). Courts should question whether they want to
encourage or discourage reliance by investors and others on the finality of bankruptcy
confirmation orders. Id. “Courts preserve plans of reorganization unless a powerful reason
demands alteration.” In re UNR Indus., 20 F.3d at 770. Courts weight in favor of the protection
of reliance by innocent parties who are not in front of the reviewing court, but who have acted in
reliance upon the plan as implemented when a relief is requested. In re Cont’l Airlines, 91 F.3d
at 562; In re Club Assocs., 956 F.2d at 1069; Manges v. Seattle-First Nat’l Bank (In re Manges),
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29 F.3d 1034, 1039 (5th Cir. 1994) (citing In re UNR Indus, 20 F.3d at 769 (“concept of
mootness from a prudential standpoint protects the interests of non-adverse third parties who are
not before the reviewing court but who have acted in reliance upon the plan as implemented”));
In re Crystal Oil, 854 F.2d at 81-82.
The relief sought would be overwhelmingly bearing on innocent third parties who relied
on the reorganization plan and who are not before the court. For instance, like in In re Cont’l
Airlines, the Third Circuit held the distribution had affected innocent third parties, including
unsecured creditors, the merger of fifty-three debtors other than the appellee-debtor, the partners
and foreign company who invested $110 million in cash in the reorganized entity, foreign
governments transferred various route authorities, and the reorganized entity’s assumption of
unexpired leases and executory contracts worth over $5.0 billion. 91 F.3d at 567. To illustrate,
in In re UNR Indus., the Seventh Circuit determined since the plan went into effect, more than
15 million shares of the reorganized entity have been distributed to its creditors and prepetition
shareholders and were traded on public exchanges. 20 F.3d at 769. Additionally, the court
found if the allocation of insurance proceeds must be changed, there will be a sudden revaluation
of the shares of the reorganized entity, which current holders (innocent third parties) purchased
on the assumption that all asbestos payments would be borne by the Trust. Id.
Protecting the reliance of innocent third parties on the reorganization plan reinforces their
investments on a Chapter 11 reorganization. For instance, in In re UNR Indus., the Third Circuit
reasoned every incremental risk of revision on appeal of a reorganization plan “puts a cloud over
the plan and the assets of the reorganized entity.” 20 F.3d at 770. The court recognized by
protecting the interest of investors who acquire assets in reliance on a plan of reorganization, a
court increases the price the estate can realize and produces benefits for creditors in the
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aggregate. Id. To illustrate, in In re Club Assocs., the Eleventh Circuit held the relief sought by
the appellant would jeopardize the plan as a whole. 956 F.2d at 1071. Next, the court
determined the relief sought by the appellant would put the limited partners’ newly invested
funds at risk. Id. For example, in In re Cont’l Airlines, the Third Circuit held the investors
relied on the bankruptcy court’s confirmation order in making the decision to proceed to close
the transaction and an essential disallowance of the appellant’s adequate protection claim. 91
F.3d at 562-63. The court found the investors agreed to an “Investment Agreement” which limit
their exposure as a condition of their participation in the plan. Id. at 563. The court concluded
“no statute, rule, or precedent would deny investors the right to limit their investments on the
existence of conditions which they believe give the newly reorganized company a reasonable
opportunity to succeed.” Id. at 563.
Innocent investors not before the court should not be harmed by the relief sought.
Similar to In re UNR Indus., where the shares of the reorganized entity were traded in public
exchange, after Padco-Gadget merged, both the Gadget stock and the bonds were publically
traded and numerous innocent parties have bought and sold those securities since the
confirmation of Padco’s plan. In addition, like in In re Cont’l Airlines, where the court protected
innocent, unsecured creditors and investors from the relief sought, the relief requested by
Petitioner will harm Padco’s numerous, innocent unsecured creditors who received a mixture of
cash and/or stock in Gadget. Most unsecured creditors received at least some stock in Gadget.
Protection of innocent parties not before the court encourages the reliance of these parties
on courts’ confirmation orders. Parallel to In re Club Assocs., where relief sought would
jeopardize the reliance of third parties on the reorganization plan, the Thirteenth Circuit properly
recognizes the policy of protecting reliance parties is at least as strong for a plan’s financial
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sponsor like Gadget as it is for unrelated, innocent third parties. Similar to In re Cont’l Airlines,
where the investors negotiated the plan to limit their liabilities, eliminating the injunction and
permitting Petitioner’s claims to be asserted against Gadget would frustrate and undermine
Gadget’s expectations. Gadget is justifiably relying on Padco’s confirmation order. In addition,
numerous, innocent parties who are not before the court have purchased and traded in the debt
and equity securities of Gadget since confirmation. Their interests would be adversely affected
by a decision exposing Gadget to these direct claims. Thus, the relief Petitioner is seeking will
significantly harm innocent, unsecured creditors and investors who have justifiably relied upon
Padco’s confirmation order. By applying the equitable mootness doctrine, the Thirteenth Circuit
has complied with public policy and protected the reliance of innocent third parties not before
the court on bankruptcy court orders, the safety of their investments, and successful completion
of large reorganization.
Therefore, because the plan has been substantially consummated, the relief requested
would significantly harm innocent investors who have justifiably relied on the confirmation
order and would fatally scramble Padco’s reorganization plan, this Court should implement the
two analytical questions in In re SemCrude to find Petitioner’s claim equitably moot.
B. The Bankruptcy Code Embodies a Strong Policy of Limiting Judicial Review.
Several provisions of the Bankruptcy Code provide that courts should not disturbed a
consummated transaction or plan of reorganization. In re UNR Indus., 20 F.3d at 769. Sections
363(m) and 364(e) of the Bankruptcy Code limit the review of appellate courts on consummated
transactions, asset sales and post-petition financing, respectively. 11 U.S.C. §§ 363(m), 364(e).
See In re SemCrude, 728 F.3d at 317; Bank of N.Y. Tr. Co. NA v. Official Unsecured Creditors’
Comm. (In re Pac. Lumber Co.), 584 F.3d 229, 240 (5th Cir. 2009). Both sections protect good
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faith reliance parties from reversal on appeal. Additionally, section 1127(b) diminishes the
power of a bankruptcy court to alter a plan of reorganization after its confirmation and
substantial consummation. 11 U.S.C. § 1127(b). See In re UNR Indus., 20 F.3d at 769. Unlike
sections 363(m) and 364(e), section 1127(b) does not restrain the power of a court of appeals. In
re UNR Indus., 20 F.3d at 769; In re SemCrude, 728 F.3d at 318; In re Pac. Lumber, 584 F.3d at
240. Nevertheless, the courts applied section 1127(b) to preserve the interests bought and paid
for in reliance on the confirmation by good faith reliance parties. In re UNR Indus., 20 F.3d at
769.
The Bankruptcy Code restricts appellate review to protect good faith reliance parties
under sections 363(m). To illustrate, in In re UNR Indus., the Seventh Circuit interpreted the
language of section 363(m) to limit the appellate court review. 20 F.3d at 769. The court
concluded a transaction survives appellate review even if transaction should not have been
authorized in the first place. Id. However, the Bankruptcy Code does not limit appellate courts
to review confirmation orders under section 1127(b). For instance, in In re Pac. Lumber, the
Fifth Circuit held because the Bankruptcy Code does not expressly prohibit appellate courts from
reviewing the confirmation orders under section 1127(b), the court attempts to “strike the proper
balance between the quotable considerations of finality and good faith reliance on a judgment
and competing interests that underlie the right of a party to seek review of a bankruptcy order
adversely affecting him.” 584 F.3d at 240. Additionally, in In re SemCrude, the Third Circuit
held because the language in 1127(b) of the Code does not expressly limit the power of appellate
courts to review a confirmation order, courts have filled the gap by applying the prudential
factors of equitable mootness. 728 F.3d at 317-18. The court also considered the interests of
finality and the interests of the petitioning party as gap fillers. Id. at 318.
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The Bankruptcy Code embodies a strong policy of limiting judicial review when the plan
has been substantially consummated by filling in the gaps of section 1127(b) with the prudential
factors of equitable mootness. Similar to In re Pac. Lumber, where the court reasoned section
1127(b) of the Code did not expressly limit its power to review a confirmation order, the
Thirteenth Circuit properly determined section 1127(b) curtails its power to modify Padco’s plan
after confirmation and substantial consummation have taken effect. Like its sister court in In re
Pac. Lumber, where the court applied prudential factors to fill in the gaps of section 1127(b), the
Thirteenth Circuit equitably weights the prudential factors of equitable mootness, the interests of
finality in Padco’s plan, and the interests of Petitioner at stake to fill in the interstices and
concludes not to hear Petitioner’s claims after substantial consummation of Padco’s
reorganization plan. Thus, the Thirteenth Circuit properly interprets that it has the power to
review Petitioner’s claim under section 1127(b) of the Bankruptcy Code and rightfully
determines not to hear Petitioner’s claim under equitable mootness grounds.
C. The Thirteenth Circuit Did Not Violate Article III of the Constitution When the Court Decided Not to Hear Petitioner’s Claim Under Equitable Mootness Grounds.
The Bankruptcy Code grants bankruptcy courts the authority to enter appropriate
confirmation orders “subject to review” from Article III courts under 158 of title 28. 28 U.S.C. §
157(b)(1) (2015). Section 158(a)(1) gives district courts jurisdiction to hear appeals from final
orders. See id. § 158(a)(1). “Article III of the Constitution provides that the judicial power of
the United States may be vested only in courts whose judges enjoy the protections set forth in
that Article.” Stern v. Marshall, 564 U.S. 462, 503 (2011). Article III courts have the power to
adjudicate, render final judgments, and issue binding orders in traditional common law claims to
ordinary appellate review. Id. at 494. Article III courts have used prudential limitations when
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exercising appellate review. Gladstone, Realtors v. Bellwood, 441 U.S. 91, 99 (1979) (analizing
prudential limitations on a standing matter).
Article III courts have applied prudential principles when determining whethwe to hear or
not a case. For instance, in Bellwood, this Court held even when a case falls within
constitutional boundaries, a plaintiff may still lack standing under prudential principles. Id.
(emphasis added). Moreover, this Court determined Article III courts could avoid deciding a
case where no individual rights could have been vindicated. Id. at 99-100. This Court also
concluded “Congress may expand standing to the full extent permitted by Article III, so allowing
litigant by one ‘who otherwise would be barred by prudential standing rules.’” Id. (citing Warth
v. Seldin, 422 U.S. 490, 501 (1975)) (emphasis added).
Using the prudential rule of equitable mootness to decline hearing a case is within
appellate courts’ power. The Thirteenth Circuit did not violate Article III of the Constitution by
applying equitable mootness to Petitioner’s claim. This Court has recognized the need to apply
prudential factors even when a petitioner has asserted a violation of a right. Similar to Bellwood,
where this Court used prudential standing rules to decline to review a case, the Thirteenth Circuit
found necessary the application of prudential factors on the grounds of equitable mootness. The
court mirrored this Court’s ruling in Bellwood not to upset Padco’s reorganization plan. Thus,
the Thirteenth Circuit did not violate Article III of the Constitution by relying on equitable
mootness grounds to decline to hear Petitioner’s claim.
Therefore, an appellate court has the authority to decline to hear an appeal from a
bankruptcy court order confirming a Chapter 11 plan on prudential grounds using equitable
mootness principles if the plan has been substantially consummated, the relief requested would
significantly harm investors who have justifiably relied on the reorganization order, and the relief
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requested would fatally scramble the plan. In addition, an appellate court has the authority to
decline to hear an appeal from a bankruptcy court because the Bankruptcy Code embodies a
strong policy limiting judicial review after a plan has been substantially consummated and
because applying prudential factors, such as equitable mootness, are not in violation of Article III
of the Constitution.
II. A CHAPTER 11 PLAN OF REORGANIZATION CAN PERMANENTLY ENJOIN CLAIMS THAT PETITIONER HAS AGAINST GADGET WHEN THE CLAIMS ARE NOT DERIVATIVE OF PADCO’S CLAIMS AGAINST GADGET AND NO PROVISION IS MADE FOR FULL PAYMENT OF PETITIONER’S ENJOINED CLAIMS.
“The Bankruptcy Code does not explicitly prohibit or authorize a bankruptcy court [from
enjoining] a non-consenting creditor’s claims against a non-debtor to facilitate a reorganization
plan.” Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d
648, 656 (6th Cir. 2002). Nevertheless, bankruptcy courts have broad authority to modify
creditor-debtor relationships under a Chapter 11 plan of reorganization. Id. (citing United States
v. Energy Res. Co., 495 U.S. 545, 549 (1990)). “A court may enjoin a creditor from suing a
[non-debtor], provided the injunction plays an important part in the debtor’s reorganization
plan.” In re Drexel Burnham Lambert Grp., 960 F.2d 285, 293 (2d Cir. 1992); Menard-Sanford
v. Mabey (In re A.H. Robins Co.), 880 F.2d 694, 701 (4th Cir. 1989). Thus, the bankruptcy
court has the authority to permanently enjoin Petitioner from suing a non-debtor such as Gadget.
A. The Express Statutory Language of the Bankruptcy Code Authorizes the Bankruptcy Courts to Issue Permanent Injunctions.
“Bankruptcy courts are forums for resolving complex and large mass litigations and have
a statutory power to reorder creditor-debtor relations when needed to achieve a successful
reorganization.” See generally In re Dow Corning, 280 F.3d 648. “Bankruptcy courts do have
the power to conclude the legality of provisions, including releases, incorporated into a
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reorganization plan.” In re Specialty Equip. Cos., 3 F.3d 1043, 1045 (7th Cir. 1993). The
provisions of the confirmed plan “bind all creditors whether or not a particular creditor has voted
to accept the plan.” Id. at 1046 (citing 11 U.S.C. § 1141(a)). Thus, bankruptcy courts are able to
exercise broad equitable powers within the plans of reorganization themselves under section
105(a) and section 1123(b)(6) of the Bankruptcy Code and are not limited by section 524(e) of
the Bankruptcy Code.
1. Reading section 105(a) and section 1123(b)(6) of the Bankruptcy Code together authorizes the bankruptcy court to issue a permanent injunction to successfully carry out Padco’s reorganization plan.
The Bankruptcy Code states “[t]he court may issue any order, process, or judgment that is
necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a) (emphasis
added); Energy Res. Co., 495 U.S. at 549; In re Metromedia Fiber, 416 F.3d at 142; In re A.H.
Robins, 880 F.2d at 701; MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 93 (2d Cir.
1988). This section has been interpreted liberally to enjoin claims that might impede the
reorganization process. MacArthur, 837 F.2d at 93 (emphasis added). “Any power that a judge
enjoys under [section] 105 must derive ultimately from some other provision [such as section
1123(b)(6)] of the Bankruptcy Code.” In re Metromedia Fiber, 416 F.3d at 142; In re Dow
Corning, 280 F.3d at 656. “The Code grants the bankruptcy courts residual authority to approve
reorganization plans including ‘any [other] appropriate provision not inconsistent with the
applicable provisions of this title.’” 11 U.S.C. § 1123(b)(6); see also Energy Res. Co., 495 U.S.
at 549; Airadigm Commuc’ns, Inc. v. FCC (In re Airadigm Commc’ns, Inc.), 519 F.3d 640, 657
(7th Cir. 2008). “When a plan provides for the full payment of all claims, enjoining claims
against a non-debtor so as not to defeat reorganization is consistent with the bankruptcy court’s
primary function.” In re Dow Corning, 280 F.3d at 656 (citing In re A.H. Robins, 880 F.2d at
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701) (emphasis added). Nevertheless, even if a plan is consistent with the Bankruptcy Code, a
provision cannot be appropriate if it conflicts with another law the bankruptcy court should have
taken into consideration when exercising its discretion. Energy Res. Co., 495 U.S. at 586. See
also In re Metromedia Fiber, 416 F.3d at 141 (stating “section 105(a) does not allow the
bankruptcy court to create substantive rights that are unavailable under applicable law”).
Section 105(a) grants bankruptcy courts broad equitable powers to carry out provisions of
the Bankruptcy Code. For instance, in Energy Res. Co., this Court held a bankruptcy court had
the authority to order the petitioner (IRS) to apply payments to trust fund liabilities if the
bankruptcy court determined this designation was necessary for the success of the reorganization
plan. 495 U.S. at 548-49. This Court determined such action did not violate its broad power
under section 105(a). Id. at 551. In addition, this Court concluded restrictions, that provide a
priority for specified tax claims, make those tax debts non-dischargeable, and guarantee the
collection of the tax debt owed, on a bankruptcy court’s authority did not preclude the court from
issuing orders of the type on petitioner. Id. at 549, 550. The respondents argued tax payments
within a Chapter 11 reorganization were best characterized as voluntary; thus, the petitioner’s
own rules bind the petitioner to respect the debtor’s designation of tax payments if the
bankruptcy court deemed it fit for the success of the reorganization. Id. at 548.
Section 105(a) allows bankruptcy courts to issue orders to prevent interference with a
successful reorganization of a plan. For example, in In re A.H. Robins, the Fourth Circuit held
section 105(a) granted the power to the bankruptcy court to carefully design a reorganization
plan in conjunction with a settlement agreement for the satisfaction of the petitioners’ (class B
members who chose to opt-out for compensatory damages) claim. 880 F.2d at 700, 701. The
court concluded the permanent injunction was essential to the reorganization. Id. at 702. Thus,
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the court stated the petitioners had two choices, either resort to the source of funds provided for
them in the plan and the settlement agreement,4 or be prohibited from interfering with the
reorganization, including all the other creditors involved. Id.
Consistent with a bankruptcy court’s equitable powers, enjoining the claims against a
non-debtor so as to defeat the reorganization plan is consistent with sections 105(a) and
1123(b)(6). To illustrate, in In re Dow Corning, the Sixth Circuit held the bankruptcy court had
the authority to enjoin claims against third parties under sections 105(a) and 1123(b)(6) of the
Bankruptcy Code. 280 F.3d at 656-57. Additionally, the court also concluded the injunction
was not inconsistent with the Bankruptcy Code and was authorized under section 1123(b)(6). Id.
at 657. The court reasoned a bankruptcy court has considerable discretion to reorder creditor-
debtor relationship in order to achieve successful reorganization. Id.
In a Chapter 11, the bankruptcy court has the authority to enjoin Petitioner’s direct claim
against Gadget under the broad equitable power that sections 105(a) and 1123(b)(6) grant.
Similar to In re A.H. Robins and In re Dow Corning, where the Fourth and Sixth Circuits,
respectively, reasoned that bankruptcy courts, as courts of equity, are granted broad discretion
under sections 105(a) and 1123(b)(6) of the Bankruptcy Code to include permanent injunctions,
the Thirteenth Circuit properly concluded the bankruptcy court has the broad authority under the
language of sections 105(a) and 1123(b)(6) of the Code to issue a permanent injunction against
Petitioner’s non-derivative claims to ensure Padco’s successful reorganization. Therefore,
sections 105(a) and 1123(b)(6) of Chapter 11 of the Code properly allows the bankruptcy court
to issue a permanent injunction, in which, Petitioner is stopped to raise non-derivative claims
against Gadget for the success of Padco’s reorganization plan.
4 The In re A.H. Robins’s court also stated the doctrine of marshalling is analogous to the equitable power section 105(a) grants to bankruptcy courts because “a creditor has no right to choose which of two funds will pay his claim.” In re A.H. Robins, 880 F.2d at 701.
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2. Section 524(e) of the Bankruptcy Code does not limit the bankruptcy court’s authority to issue a permanent injunction to successfully carry out Padco’s reorganization plan.
The Bankruptcy Code states a “discharge of a debt of the debtor does not affect the
liability of any other entity on . . . such debt.” 11 U.S.C. § 524(e); In re Airadigm Commc’ns,
519 F.3d at 656. Section 524(e) works as a saving clause, limits the operation of other parts of
the bankruptcy code, and preserves rights that might be construed as lost after the reorganization.
519 F.3d at 656. Nevertheless, section 524(e) “does not purport to limit the bankruptcy court’s
powers to release a non-debtor from a creditor’s claims.” Id. See In re A.H. Robins, 880 F.2d at
702; In re Specialty Equip. Cos., 3 F.3d at 1047 (concluding the language of section 524(e) does
not purport to limit or restrict the power of the bankruptcy court to otherwise grant a release to a
non-debtor); Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1050 (5th Cir. 1987) (stating section
524(e) “does not by its specific words preclude the discharge of a guaranty when it has been
accepted and confirmed as an integral part of a plan of reorganization”). “If Congress would
have intended such a limit, [Congress] would have used the mandatory terms ‘shall’ or ‘will’
rather than definitional term ‘does.’” In re Airadigm Commc’ns, 519 F.3d at 656 (citing 11
U.S.C. § 1129(a) “[t]he court shall confirm a plan only if the following requirements are met . . .
.”) (emphasis added).
Section 524(e) does not preclude bankruptcy courts from releasing a non-debtors’
liabilities under a Chapter 11 reorganization plan. For instance, in In re Airadigm Commc’ns,
the Seventh Circuit held section 524(e) did not bar a release of liability of a non-debtor without
consent of creditors. 519 F.3d at 656. The court reasoned if Congress would have meant section
524(e) to act as a limitation on release of non-debtors’ liabilities, Congress would have used
mandatory language when writing section 524(e). Id. The debtor-appellee filed for a Chapter 11
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bankruptcy that included a provision releasing the non-debtor (financier) from all liability in
connection with the reorganization, except for willful misconduct. Id. at 655. Additionally, in In
re A.H. Robins, the Fourth Circuit held “section 524(e) need not be literally applied to limit the
power of the bankruptcy courts.” 880 F.2d at 702. The court reasoned section 524(e) should not
be construed to limit the equitable power of the bankruptcy court to enjoin claims against a non-
debtor, where such claims were accepted and confirmed as an integral part of the reorganization.
Id. Moreover, in In re Dow Corning, the Sixth Circuit held while the language of section 524(e)
explained the effect of a debtor’s discharge, section 524(e) did not prohibit the release of a non-
debtor. 280 F.3d at 657. The court concluded section 524(e) did not limit a bankruptcy court’s
power to enjoin non-consenting creditors’ claims in order to facilitate a Chapter 11 plan of
reorganization. Id. at 663.
Section 524(e) of the Bankruptcy Code does not prohibit the bankruptcy court from
permanently enjoining non-consenting creditors from bringing claims against a non-debtor.
Parallel to In re Airadigm Commc’ns, In re A.H. Robins, and In re Dow Corning, where the
Seventh, Fourth, and Sixth Circuits, respectively, did not read section 524(e) of the Bankruptcy
Code to limit the bankruptcy courts’ authority from releasing non-debtors, the Thirteenth Circuit
properly decided the language of section 524(e) did not limit the bankruptcy court’s broad power
to issue a permanent injunction. Furthermore, similar to In re A.H. Robins, where the court did
not interpret section 524(e) to limit the power of the bankruptcy courts’ to enjoin the entire
reorganization when the plan depended on a permanent injunction releasing non-debtors, the
Thirteenth Court properly concluded section 524(e) does not preclude the bankruptcy court from
exercising its equitable powers and permanently enjoining Petitioner’s claims against Gadget
because this injunction is an integral part of Padco’s reorganization plan. In sum, section 524(e)
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of a Chapter 11 of the Code does not preclude a bankruptcy court’s power to permanently enjoin
Petitioner’s non-derivative claims against Gadget for the success of Padco’s reorganization plan.
Therefore, because reading sections 105(a) and 1123(b)(6) of the Bankruptcy Code
together authorizes the bankruptcy court to issue a permanent injunction to successfully carry out
Padco’s reorganization plan and section 524(e) of the Bankruptcy Code does not limit the
bankruptcy court from issuing a permanent injunction to successfully carry out Padco’s plan, the
express statutory language of the Bankruptcy Code authorizes bankruptcy courts to issue
permanent provisions.
B. A Permanent Injunction of Petitioner’s Claims Against Gadget is Permissible as long as this Permanent Injunction is both Necessary and Appropriate Under Unusual Circumstances.
“The Bankruptcy Code gives bankruptcy courts the power to grant injunctions necessary
or appropriate to carry out the provisions of the Bankruptcy Code.” In re Dow Corning, 280
F.3d at 658 (emphasis added). Thus, because of this statutory grant of power, the bankruptcy
courts are not confined to traditional equity jurisprudence. Id. The majority of circuits, with the
exception of three,5 have held enjoining a non-consenting creditor’s claim is only appropriate in
unusual circumstances. Id. (emphasis added). See In re Drexel Burnham, 960 F.2d at 293
(stating release is proper only in rare cases). The First, Second, Third, Fourth, Sixth, Seventh,
Eighth, Eleventh, and District of Columbia Circuits have implemented different factors to
establish unusual circumstances. In re Dow Corning, 280 F.3d at 558. Some Circuits have
implemented a four-factor,6 a five-factor,7or a six-factor8 analysis. “The factors should be
5 Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746, 761 (5th Cir. 1995) (holding the bankruptcy court lacked the power to issue a permanent injunction); Resorts Int'l v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1396 (9th Cir. 1995) (concluding Federal bankruptcy law precluded the discharge of non-debtor liabilities); Landsing Div. Props. v. First Nat’l Bank and Trust Co. of Tulsa (In re W. Real Estate Fund), 922 F.2d 592, 595 (10th Cir. 1990) (reasoning a stay may not be extended post-confirmation in the form of a permanent injunction that effectively relieves the non-debtor from its own liability to the creditor). 6 Appendix N
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considered a non-exclusive list of considerations and should be applied flexibly, always keeping
in mind that such orders should be used cautiously and infrequently, and only where essential,
fair, and equitable.” SE Prop. Holdings, LLC v. Seaside Eng’g & Surveying (In re Seaside
Eng’g & Surveying), 780 F.3d 1070, 1079 (11th Cir. 2015). This Court should implement the
factors outlined by the Sixth Circuit in In re Dow Corning Corporation because these factors
encompass the rare circumstances a debtor, non-debtor, and a non-consenting creditor should
establish for the bankruptcy court to grant a permanent injunction. When applying the Dow
Corning test, the Sixth Circuit have found the second factor, non-debtor has contributed
substantial assets to the reorganization, third factor, injunction is essential to reorganization, and
fifth factor, plan provides a mechanism to pay for all, or substantially all, of the class or classes
affected by the injunction, to carry more weight than the other factors (first, fourth, and six).
To determine a permanent injunction as necessary and appropriate, a court should apply
the Dow Corning test. The second, third, and fifth factors heavily weight in favor of a permanent
injunction. For instance, in In re Dow Corning, the Sixth Circuit held when the factors where
present, the bankruptcy court may enjoin a non-consenting creditor’s claims against a non-
debtor. 280 F.3d at 658. The court considered the findings in the record produced by the
bankruptcy court did not establish unusual circumstances. Id. The court reviewed and
determined the release and injunction provisions of the plan were ambiguous to conclude they
were essential to the reorganization of plan. Id. at 659. The court also analyzed and concluded
the non-debtor would not make significant contributions to the reorganization plan. Id. Finally,
the court considered and concluded the plan did not ensure an opportunity or procedural
mechanism for classes who chose not to settle to recover in full. Id. at 659, 661.
7 Appendix N 8 Appendix N
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In addition, in In re Seaside Eng’g, the Eleventh Circuit held the bankruptcy court’s
decision in approving the non-debtor releases was necessary to ensure the debtor may continue to
operate as an entity. 780 F.3d at 1081. The court applied the Dow Corning test to determine
unusual circumstances and concluded the factors were present. Id. at 1079. The court reviewed
the second factor of the Dow Corning test and concluded the release of non-debtors had
contributed to the reorganized debtor with their labor. Id. at 1080. Additionaly, the court also
considered the third factor of the Dow Corning test and determined the injunction was essential
to the reorganization because without the bar order, the litigation would have likely continued
and bleed the non-debtor dry, frustrating the reorganization. Id. Finally, the court analyzed the
fifth factor of the Dow Corning test and decided the plan provided a mechanism to pay for all, or
substantially all, non-consenting creditors from the share of debtor. Id. at 1080-81.
A permanent injunction is permissible if the injunction is necessary and appropriate under
unusual circumstances. If the second, third, and fifth factors of the Dow Corning are present,
these factors weight heavily in favor of a permanent injunction. Similar to In re Seaside Eng’g,
where the Eleventh Circuit applied the second factor of the Dow Corning test and concluded the
release of the non-debtor had contributed to the reorganization of the debtor, the release of
Gadget had contributed to the reorganization plan of Padco. At the confirmation hearing,
Gadget’s Chief Executive Officer, Naffie Lamin, testified Gadget was very concerned about
claims arising from Padco battery defect. Those claims were so enormous that Gadget was
reluctant to acquire Padco and invest in the new product line unless Gadget could be confident
that it would be free of all liabilities related to Padco. In addition, because Gadget was release of
liability, Gadget invested more than $500 million to redesign the Padco tablet computer. Thus,
the release of Gadget’s liability contributed to the reorganization of Padco. Additionally, as in In
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re Seaside Eng’g, where the Eleventh Circuit applied the third factor of the Dow Corning test
and concluded the injunction was essential to the reorganization of the debtor, the injunction of
Petitioner’s claims was essential to the reorganization of Padco because Gadget would have not
acquired Padco and would have not invested in the new product line unless the permanent
injunction freeing Gadget of all liabilities related to Padco’s defective battery was issued.
Therefore, the permanent injunction of Petitioner’s claims was essential to the reorganization of
Padco. Moreover, parallel to In re Seaside Eng’g, where the Eleventh Circuit applied the fifth
factor of the Dow Corning test and concluded the plan provided a mechanism to pay for all, or
substantially all, non-consenting creditors from the share of debtor, the bankruptcy court
provided a mechanism to pay substantially all of Petitioner’s claims from Padco’s bankruptcy
estate. The plan of reorganization grouped Petitioner in a separate class of unsecured creditors
which were provided with a larger bankruptcy distribution than other unsecured creditors to
compensate them for their enjoined direct claims against Gadget. The bankruptcy court applied
a probability discount of ninety percent to those claims and concluded the premium provided to
the class surpassed the value of the direct claims that were being enjoined. Furthermore, the
bankruptcy court found Petitioner and each creditor in her class collected a distribution that was
more than they would have received in a Chapter 7 liquidation. Lastly, although the bankruptcy
courts do not give much deference to the additional factors of the Dow Corning test, those
factors are present in Padco’s circumstances. The bankruptcy court determined an
overwhelming majority of Petitioner’s class approved the reorganization plan. Although
Petitioner voted to reject the proposed plan, an overwhelming eighty percent of Petitioner’s class
voted in favor of the proposed plan. Thus, the Thirteenth Circuit should apply the Dow Corning
test to conclude a permanent injunction enjoining Petitioner from bringing claims against Gadget
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would have been necessary and appropriate to Padco’s successful reorganization because of the
unusual circumstances in this case.
Therefore, because the express statutory language of the Bankruptcy Code authorizes the
bankruptcy courts to issue permanent injunctions so long as the permanent injunction is both
necessary and appropriate under unusual circumstances, a Chapter 11 plan of reorganization can
permanently enjoin claims from non-consenting creditors against a non-debtor even when the
claims are not derivative of the debtor’s claims against the non-debtor and no provision is made
for full payment of the enjoined claims.
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CONCLUSION
Therefore, an appellate court has the authority to decline to hear an appeal from a
bankruptcy court, which includes a Chapter 11 plan of reorganization, on prudential grounds
using equitable mootness principles if the plan has been substantially consummated, the relief
requested would significantly harm investors who have justifiably relied on the reorganization
order, and the relief requested would fatally scramble the plan. Additionally, an appellate court
has the authority to decline to hear an appeal from a bankruptcy court because the Bankruptcy
Code embodies a strong policy limiting judicial review after a plan has been substantially
consummated and because applying prudential factors, such as equitable mootness, are not a
violation of Article III of the Constitution.
Lastly, a Chapter 11 plan of reorganization can permanently enjoin claims that non-
consenting creditors have against a non-debtor when the claims are not derivative of the debtor’s
claims against the non-debtor because the express statutory language of the Bankruptcy Code
authorizes bankruptcy courts to issue permanent injunctions as long as permanent provision is
both necessary and appropriate under unusual circumstances even when and no provision is
made for full payment of the enjoined claims.
This Court should affirm.
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APPENDIX A
11 U.S.C. § 105(a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out
the provisions of this title.
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APPENDIX B
11 U.S.C. § 363(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.
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APPENDIX C
11 U.S.C. § 364(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.
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APPENDIX D
11 U.S.C. § 524(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.
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APPENDIX E
11 U.S.C. § 1101(2)
“substantial consummation” means—(A) transfer of all or substantially all of the property
proposed by the plan to be transferred; (B) assumption by the debtor or by the successor to the
debtor under the plan of the business or of the management of all or substantially all of the
property dealt with by the plan; and (C) commencement of distribution under the plan.
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APPENDIX F
11 U.S.C. § 1123(b)(6)
Subject to this subsection (a) of this section, a plan may include any other appropriate provisions
not inconsistent with the applicable provisions of this title.
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APPENDIX G
11 U.S.C. § 1127(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 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.
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APPENDIX H
11 U.S.C. § 1129(a) (a) The court shall confirm a plan only if all of the following requirements are met:
(1) The plan complies with the applicable provisions of this title.
(2) The proponent of the plan complies with the applicable provisions of this title.
(3) The plan has been proposed in good faith and not by any means forbidden by law.
(4) Any payment made or to be made by the proponent, by the debtor, or by a person issuing
securities or acquiring property under the plan, for services or for costs and expenses in or in
connection with the case, or in connection with the plan and incident to the case, has been
approved by, or is subject to the approval of, the court as reasonable.
(5)(A)(i) The proponent of the plan has disclosed the identity and affiliations of any
individual proposed to serve, after confirmation of the plan, as a director, officer, or voting
trustee of the debtor, an affiliate of the debtor participating in a joint plan with the debtor, or
a successor to the debtor under the plan; and
(ii) the appointment to, or continuance in, such office of such individual, is consistent
with the interests of creditors and equity security holders and with public policy; and
(B) the proponent of the plan has disclosed the identity of any insider that will be
employed or retained by the reorganized debtor, and the nature of any compensation for
such insider.
(6) Any governmental regulatory commission with jurisdiction, after confirmation of the
plan, over the rates of the debtor has approved any rate change provided for in the plan, or
such rate change is expressly conditioned on such approval.
(7) With respect to each impaired class of claims or interests—
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(A) each holder of a claim or interest of such class—
(i) has accepted the plan; or
(ii) will receive or retain under the plan on account of such claim or interest property
of a value, as of the effective date of the plan, that is not less than the amount that
such holder would so receive or retain if the debtor were liquidated under chapter 7 of
this title on such date; or
(B) if section 1111(b)(c) of this title applies to the claims of such class, each holder of a
claim of such class will receive or retain under the plan on account of such claim property
of a value, as of the effective date of the plan, that is not less than the value of such
holder's interest in the estate's interest in the property that secures such claims.
(8) With respect to each class of claims or interests—
(A) such class has accepted the plan; or
(B) such class is not impaired under the plan.
(9) Except to the extent that the holder of a particular claim has agreed to a different
treatment of such claim, the plan provides that—
(A) with respect to a claim of a kind specified in section 507(a)(2) or 507(a)(3) of this
title, on the effective date of the plan, the holder of such claim will receive on account of
such claim cash equal to the allowed amount of such claim;
(B) with respect to a class of claims of a kind specified in section 507(a)(1), 507(a)(4),
507(a)(6), or 507(a)(7) of this title, each holder of a claim of such class will receive—
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APPENDIX I
11 U.S.C. § 1141(d)(1) Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan,
the confirmation of a plan—(A) discharges the debtor from any debt that arose before the date of
such confirmation, and any debt of a kind specified in , 502(h), or 502(i) of this title, whether or
not—(i) a proof of the claim based on such debt is filed or deemed filed under section 501 of this
title; (ii) such claim is allowed under section 502 of this title; or (iii) the holder of such claim has
accepted the plan; and (B) terminates all rights and interests of equity security holders and
general partners provided for by the plan.
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APPENDIX J
11 U.S.C. § 1144 On request of a party in interest at any time before 180 days after the date of the entry of the
order of confirmation, and after notice and a hearing, the court may revoke such order if and only
if such order was procured by fraud. An order under this section revoking an order of
confirmation shall—
(1) contain such provisions as are necessary to protect any entity acquiring rights in good
faith reliance on the order of confirmation; and
(2) revoke the discharge of the debtor.
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APPENDIX K
28 U.S.C. § 157(b)(1) (b)(1) Bankruptcy judges may hear and determine all cases under title 11 and all core
proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a)
of this section, and may enter appropriate orders and judgments, subject to review under section
158 of this title.
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APPENDIX L
28 U.S.C. § 158(a)(1) (a) The district courts of the United States shall have jurisdiction to hear appeals
(1) from final judgments, orders, and decrees;
(2) from interlocutory orders and decrees issued under section 1121(d) of title 11 increasing
or reducing the time periods referred to in section 1121 of such title; and
(3) with leave of the court, from other interlocutory orders and decrees;
and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered
in cases and proceedings referred to the bankruptcy judges under section 157 of this title. An
appeal under this subsection shall be taken only to the district court for the judicial district in
which the bankruptcy judge is serving.
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APPENDIX M
Equitable Mootness
In re Continental Airlines Five-Factor Test
Third Circuit five factor test: (1) reorganization plan has been substantially consummated; (2) a
stay has been obtained; (3) relief would affect the rights of parties not before the court; (4) relief
requested would affect the success of the plan; and (5) the public policy of affording finality to
bankruptcy judgments. In re Cont’l Airlines, 91 F.3d 553, 560 (3d Cir. 1996).
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APPENDIX N
Permanent Injunction Factors
In re Metromedia Fiber Four-Factor Test The Second Circuit applies four factors: (1) “the estate received substantial consideration; (2) the
enjoined claims were channeled to a settlement fund rather than extinguished; (3) the enjoined
claims would indirectly impact the debtor’s reorganization by way of indemnity or contribution;
and (4) the plan otherwise provided for the full payment of the enjoyed claims.” In re
Metromedia Fiber, 416 F.3d at 142.
In re Master Mortg. Inv. Fund, Inc. Five-Factor Test
The Bankruptcy Court for the Western District of Missouri distinguishes five factors: (1) identity
of the interest between debtor and the entities to be protected by the injunction; (2) non-debtor
has contributed substantial assets to the reorganization; (3) injunction is essential to the
reorganization; (4) creditor approval of the injunction; (5) plan provides for the payment of all,
or substantially all, of the claims of the class or classes affected by the injunction. Master Mortg.
Inv. Fund, Inc. v. Am. Nat’l Fire Ins. Co. (In re Master Mortg. Inv. Fund, Inc.), 168 B.R. 930,
935, 938 (Bankr. W.D. Mo. 1994).
In re Dow Corning Seven-Factor Test The Sixth Circuit employs seven factors: (1) identity of interests between the debtor and the third
party usually an indemnity relationship such that a suit against non-debtor is, in essence, a suit
against the debtor or will deplete the assets of the estate; (2) non-debtor has contributed
substantial assets to the reorganization; (3) injunction is essential to reorganization namely the
reorganization hinges on the debtor being free from indirect suits against parties who would have
indemnity or contribution claims against the debtor; (4) impacted class, or classes, has
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overwhelmingly voted to accept the plan; (5) plan provides a mechanism to pay for all, or
substantially all, of the class or classes affected by the injunction; (6) plan provides an
opportunity for those claims who choose not to settle to recover in full; and (7) bankruptcy court
made a record of specific factual findings that support its conclusion (the seven factor is not
consider a substantial factor, but a necessity for the success of the release). In re Dow Corning,
280 F.3d at 658.