Nordhoff Investments, Inc. v. Zenith Electronics Corp. , 258 F.3d 180 ( 2001 )

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
6-21-2001
Nordhoff Inv Inc v. Zenith Elec Corp
Precedential or Non-Precedential:
Docket 00-2249
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Recommended Citation
"Nordhoff Inv Inc v. Zenith Elec Corp" (2001). 2001 Decisions. Paper 136.
http://digitalcommons.law.villanova.edu/thirdcircuit_2001/136
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Filed June 21, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 00-2249 and 00-2250
NORDHOFF INVESTMENTS, INC.
v.
ZENITH ELECTRONICS CORPORATION
JOHN D. MCLAUGHLIN, JR., Esq.,
Trustee
(D.C. No. 99-cv-00921)
OFFICIAL COMMITTEE/EQUITY SECURITY HOLDERS
v.
ZENITH ELECTRONICS CORPORATION
PATRICIA A. STAIANO,
Trustee
(D.C. No. 00-cv-00031)
NORDHOFF INVESTMENTS, INC.
v.
ZENITH ELECTRONICS CORPORATION
PATRICIA A. STAINO,
Trustee
(D.C. No. 00-cv-00032)
Official Committee/Equity
Security Holders,
Appellant at No. 00-2249
Nordhoff Investments, Inc.,
Appellant at No. 00-2250
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
(D.C. Nos. 99-cv-00921, 00-cv-00031 and 00-cv-00032)
District Judge: The Honorable Gregory M. Sleet
Argued January 23, 2001
BEFORE: NYGAARD, ALITO, and FUENTES,
Circuit Judges.
(Filed: June 21, 2001)
Arnold S. Albert, Esq. (Argued)
Albert & Schulwolf
1201 Connecticut Avenue, N.W.
Suite 850
Washington, DC 20036
Thomas G. Macauley, Esq.
Zuckerman, Spaeder, Goldstein,
Taylor & Kolker
1201 Orange Street
Suite 650, P.O. Box 1028
Wilmington, DE 19899
Counsel for Nordhoff Investments,
Inc., Appellant at No. 00-2250
Thomas D. Schneider, Esq.
Suite 616
1515 Market Street
Philadelphia, PA 19102
Counsel for Official Committee of
Equity Security Holders, Appellant
at No. 00-2249
2
James H.M. Sprayregen, Esq.
Ilana S. Rubel, Esq.
David J. Zott, Esq. (Argued)
Kirkland & Ellis
200 East Randolph Drive
Suite 6500
Chicago, IL 60601
Laura D. Jones, Esq.
Pachulski, Stang, Ziehl,
Young & Jones
919 North Market Street
P.O. Box 8705, 16th Floor
Wilmington, DE 19899
Eric S. Kurtzman, Esq.
Pachulski, Stang, Ziehl,
Young & Jones
10100 Santa Monica Boulevard
Suite 1100 Los Angeles, CA 90067
Counsel for Appellee
Zenith Electronics Corporation
OPINION OF THE COURT
NYGAARD, Circuit Judge:
This case presents the consolidated challenges by
Nordhoff Investments and the Official Committee of Equity
Holders to the District Court's order appr oving the
Bankruptcy Court's order confirming Zenith's bankruptcy
and restructuring plan. Zenith argues, as it did below, that
the challenges posed to its restructuring plan are "equitably
moot" because the plan has already been substantially
consummated, has been relied upon by various parties, and
would be very difficult to retract. The District Court
thoroughly reviewed all of the relevant considerations and
found the challenges equitably moot. We accept the lower
court's findings of fact "unless they ar e completely devoid of
a credible evidentiary basis or bear no rational relationship
to the supporting data," Moody v. Security Pacific Bus.
Credit, Inc., 971 F.2d 1056, 1063 (3d Cir. 1992).
3
Furthermore, "[b]ecause the mootness determination we
review here involves a discretionary balancing of equitable
and prudential factors rather than the limits of the federal
court's authority under Article III, using or dinary review
principles we review that decision generally for abuse of
discretion." In re Continental Airlines, 91 F.3d 553, 560 (3d
Cir. 1996) (en banc); see also In r e PWS Holding, 228 F.3d
224, 235-36 (3d Cir 2000). We find no such abuse of
discretion and therefore will affir m.
I. Background
Zenith has suffered critical losses over the past twelve
years. LG Electronics invested $360 million in Zenith
during that difficult period, increasing its holdings from five
percent to fifty-eight percent and occupying six of the
eleven seats on Zenith's Board of Directors by 1997. Zenith
attempted to find an outside investor willing to purchase its
business, but no buyers came forward after Zenith's CEO
personally met with executives from Micr osoft, Intel,
General Instruments, and other leaders in the electr onics
industry.
Zenith continued to suffer losses and LGE pr oposed a
major restructuring of Zenith's debt and equity in April of
1998. A special committee of Zenith's Board of Directors
negotiated with LGE and agreed to a plan. After forming
their own advisory committee and obtaining counsel from
legal and financial advisors, the bondholders also agreed to
the plan. The plan included: 1) exchanging appr oximately
$103 million in bonds bearing interest at 6.25 percent for
$50 million in new bonds bearing interest at 8.19 percent;
2) canceling Zenith's stock for no consideration; 3) issuing
new Zenith stock to LGE in exchange for $200 million of
debt relief forgiving debt owed to LGE; 4) LGE extending a
new $60 million credit facility to Zenith; 5) canceling
approximately $175 million in additional debt owed to LGE
in exchange for $135 million of new debt and ownership of
the Zenith television plant in Reynosa, Mexico; 6)
refinancing of debt owed to a consortium of banks led by
Citicorp; 7) no alteration of debt owed to trade cr editors;
and 8) releasing LGE, Zenith directors and officers, and the
4
Bondholder's Committee from potential liability to Zenith or
certain creditors.
Zenith submitted the plan to the Securities and
Exchange Commission. The SEC reviewed the plan for
twelve months and eventually declared it ef fective. Despite
the reduced face value of their claim, the bondholders
overwhelmingly voted in favor of the plan. LGE and secured
lenders, including Citibank, also approved the plan. Zenith
met often with the Equity Committee during this time and
provided the Committee with all of the infor mation that it
requested. Zenith then filed a Chapter 11 bankruptcy
petition and sought final court approval.
The plan was submitted to a Bankruptcy Court in the
District of Delaware. Nordhoff, a significant minority
shareholder in Zenith, and the Equity Committee, which
represented the interests of the other minority
shareholders, both opposed the plan and wer e represented
by counsel at the two-day proceedings. Over Nor dhoff and
the Equity Committee's objections, the Bankruptcy Court
approved Zenith's request for an expedited hearing. The
primary point of contention concerned competing
valuations of Zenith. Peter J. Solomon, Co. valued Zenith at
$300 million. That valuation was corroborated by the fact
that Zenith had been unable to sell at a related price, the
bondholders' agreement to reduce their claims, and other
relevant valuations. Ernst and Young, appearing on behalf
of the Equity Committee, valued Zenith at $1.05 billion,
which was based on a discount rate the "same as
Microsoft's" and a higher royalty rate than calculated by
Solomon. Nordhoff and the Equity Committee attempted to
discredit Solomon by presenting evidence that Solomon had
a conflict of interest based upon its pr evious relations with
Zenith and would receive a $1 million awar d if Zenith's
plan was successful.
The Bankruptcy Court ultimately accepted Solomon's
valuation over Ernst and Young's and decided that: 1)
"Zenith's Plan [was] proposed in good faith under the
general requirements of the bankruptcy code"; 2) the plan
was entirely fair; 3) LGE had acted appr opriately; 4)
Zenith's disclosure statement contained a wealth of
information, the plan was approved by SEC, and it
5
complied with nonbankruptcy law and the Bankruptcy
Code; 5) the "shareholders are r eceiving the value of their
interests under the plan--nothing"; 6) Solomon's valuation
was not tainted; and 7) this "reorganization is exactly what
chapter 11 of the Bankruptcy Code was designed to
accomplish."
The Bankruptcy Court conditionally confirmed the plan
and rejected Nordhoff and the Equity Committee's
objections on November 2, 1999. The Bankruptcy Court
permitted the release of all claims by Zenith, but refused to
allow the release of claims by creditors who did not vote in
favor of the plan. The Court therefore r equired Zenith to
delete any release by claimants who had not affirmatively
accepted the plan. The Court granted Zenith ten days to
make these modifications.
Nordhoff and the Equity Committee r eceived the
Bankruptcy Court's opinion on November 3. Zenith
immediately made the required changes and submitted the
amended plan to the Court on November 4. Zenith served
the Equity Committee with the amended plan on November
4, but, because of what they testified was an"oversight,"
Zenith officials did not serve Nordhof f with the amended
plan at this time. The Court signed the amended
confirmation order on November 5, but did not immediately
notify the parties. Nonetheless, Zenith lear ned that the
order had been signed via the Court's public web cite on
November 5. On November 9, Zenith officials faxed a letter
to Nordhoff and the Equity Committee stating that they
"understand that the court signed the confir mation order
on November 5." Zenith received a signed copy of the
confirmation on November 10 and faxed copies of the
amended plan and the Court's confirmation or der to
Nordhoff and the Equity Committee the same day. Nordhoff
and the Equity Committee filed notices of appeal to the
Bankruptcy Court on November 12. At no point, however,
did either Nordhoff or the Equity Committee seek to stay
the plan.
Both the proposed and final plan called for"Immediate
Effectiveness," and it was clear thr oughout the proceeding
that Zenith intended to implement the plan immediately
upon approval. As a result, much of the plan was executed
6
between November 5, when the Court confirmed, and
November 10, when Nordhoff was first officially notified.
The following transactions were completed by November 9:
1) Zenith replaced its debtor-in-possession credit facility
with a new $150 million facility syndicated by Citicorp; 2)
Zenith entered into a new $60 million cr edit facility with
LGE; 3) Zenith canceled old stock and issued new stock to
LGE; and 4) Zenith canceled certain debt owed to LGE,
issued new debt to LGE, and canceled some of the new
debt in exchange for the transfer of the Reynosa plant at a
later date. Zenith's bondholders, however, did not begin to
tender their $103.5 million in old bonds for $50 million in
new publicly traded instruments until November 19, 1999.
Nearly all of the bonds were exchanged by January 3, 2000,
and they have been subject to public trading ever since. If
bondholders did not own a sufficient amount of debt to
receive a new bond, their holdings were aggregated and
sold on the open market. The cash proceeds wer e then
allocated to the fractional holders. Zenith management has
since been replaced by LGE management, and the Zenith
executives who devised the plan have departed.
Nordhoff and the Equity Committee appealed to the
District Court, challenging the valuation of their shares, the
reliance on Solomon's valuation, the expedition of the
proceedings, the lack of evidentiary recor d, and the plan
provisions releasing LGE and Zenith's dir ectors from
potential liability. The District Court dismissed the appeal
as equitably moot.
II. Discussion
At least one Bankruptcy Court has characterized
"equitable mootness" as a misnomer: "Ther e is nothing
equitable about the equitable mootness doctrine. . .. The
matter is moot out of necessity, not application of equitable
principles. In a very real sense the doctrine is more
accurately denominated as ``prudential mootness.' " In re
Box Brother Holding Corp., 194 B.R. 32, 45 (Bankr. D. Del.
1996); see also PWS Holding, 228 F.3d at 235-36 (stating
that "the use of the word ``mootness' as a shortcut for a
court's decision that the fait accompli of a plan
confirmation should preclude further judicial proceedings
7
has led to the unfortunate confusion between equitable
mootness and constitutional mootness"). W e do not entirely
agree. One inequity, in particular, that is often at issue is
the effect upon innocent third parties. When transactions
following court orders are unraveled, thir d parties not
before us who purchased securities in r eliance on those
orders will likely suffer adverse ef fects.
We developed the equitable mootness doctrine in In re
Continental Airlines, 91 F.3d 553 (3d Cir . 1996) (en banc).
Continental Airlines involved a complex Chapter 11
reorganization premised upon a $450 million investment by
two outside parties. Trustees of creditors challenged the
plan due to the decline in value of the aircraft and jet
engines securing their investment. This challenge
jeopardized the plan because the investors had conditioned
their involvement upon the absence of such liability. The
Bankruptcy Court rejected the trustees' claim. The trustees
sought a stay, were denied, and appealed to the District
Court. Meanwhile, relying on the Bankruptcy Court's
confirmation, the investors committed their capital and
consummated the plan. Continental then moved to dismiss
the trustees' appeal on grounds of equitable mootness. The
District Court granted the motion and dismissed the
appeal. We affirmed, stating that such "an appeal should
. . . be dismissed as moot when, even though ef fective relief
could conceivably be fashioned, implementation of that
relief would be inequitable." Continental Airlines, 91 F.3d at
559 (citing In re Chateaugay Corp., 988 F.2d 322, 325 (2d
Cir. 1993)).
We held that five factors had to be considered when
conducting an equitable mootness analysis:
(1) whether the reorganization plan has been
substantially consummated,
(2) whether a stay has been obtained,
(3) whether the relief requested would af fect the rights
of the parties not before the court,
(4) whether the relief requested would af fect the
success of the plan, and
8
(5) the public policy of affording finality to bankruptcy
judgments.
Id. at 560. As we stated in PWS Holding , these "factors are
given varying weight, depending on the particular
circumstances, but the foremost consideration is whether
the reorganization plan has been substantially
consummated." 228 F.3d at 236. In ef fect, the equitable
mootness doctrine prevents a court from unscrambling
complex bankruptcy reorganizations when the appealing
party should have acted before the plan became extremely
difficult to retract. We have noted, however, that the
"doctrine is limited in scope and should be cautiously
applied . . . ." PWS Holding, 228 F .3d at 236.
We now consider the elements of the equitable mootness
doctrine against these facts.
A. Substantial Consummation of the Plan
As we stated in Continental Airlines, the substantial
consummation factor is the "foremost consideration" in an
equitable mootness analysis, especially when the plan
"involves intricate transactions . . . or wher e investors have
relied on the confirmations of the plan." 91 F.3d at 560.
The Bankruptcy Code defines "substantial consummation"
to mean:
(A) transfer of all or substantially all of the pr operty
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 pr operty
dealt with by the plan; and
(C) commencement of distribution under the plan.
11 U.S.C. S 1101(2).
Appellants concede that the plan has been substantially
consummated. The Confirmation Order stated that the plan
would be immediately effective, and many of the key
transactions were completed by November 9, 1999. On
November 19, Zenith began exchanging bonds in
accordance with the plan, and by January 2000, the only
9
portion of the plan remaining to be consummated was the
exchange of one percent of the bonds. By that time, all
property had been transferred, all managerial changes had
occurred, and virtually all of the distributions had been
made. As the District Court concluded, there can be little
question that the plan has been substantially
consummated.
Appellants claim, however, that the plan was
"remarkable" for how little it actually accomplished and
that it could be easily retracted. Since it did not contain
intricate transactions, Appellants claim, the plan could be
reversed in a manner equitable to all parties. Appellants
argue that although the plan involved debt and asset
evaluation of large sums, mere quantities do not rise to the
level of complexity found in Continental Airlines. Further,
Appellants claim that Zenith could have conducted the plan
under state law and without the approval of the
Bankruptcy Court. The only reason Zenith utilized
bankruptcy law, Appellants argue, was to eliminate
minority shareholders' rights and expedite the process.
Because the plan was simple and could be so easily
reversed, Appellants argue that it is appropriate for us to
reconsider the valuation question befor e the Bankruptcy
Court. If the Bankruptcy Court's valuation findings were
reversed, then a new trial could be conducted to determine
if LGE paid a fair price.
The District Court found Appellant's arguments"not
completely without merit." Compared to the plan in
Continental Airlines, which entailed numer ous irrevocable
transactions, the merging of fifty-thr ee debtors, the
investment of $110 million in cash by two outside
investors, and the transfer of trade routes by foreign
governments, the plan here is relatively simple. The District
Court recognized that the assembly plant could be
transferred back to Zenith, the exchange of debt for stock
could be reversed, and that since Citicorp had been the
major debtor to Zenith before, during, and after the
transaction its refinancing could be r eversed without great
difficulty. The District Court found the exchange of bonds,
however, to present "a more difficult problem." Since the
bonds are publicly traded, the District Court speculated
10
that "they may have been sold, perhaps mor e than once,"
and it would therefore be difficult, if not impossible, to
reverse the exchange. Further, "any such reversal would
almost certainly impact the rights of investors that were not
involved in the bankruptcy court proceedings." While
potentially difficult, the District Court nonetheless reasoned
that "the reversal of these transactions would not likely be
quite as daunting a task as the unmerging of 54 debtors
and the return of the outside investors' investments" as
would have been required in Continental Airlines. The
District Court concluded that
although some of the Plan transactions could
conceivably be "reversed," this would not be easy to
accomplish, and other transactions may not be
reversible at all. This factor, ther efore, weighs heavily
in favor of dismissal, at least to the extent that the
court could not fashion relief that would not r esult in
the dismantling of the plan.
We have no reason to find that the District Court abused
its discretion in making this determination. The Court
considered each of Appellants' arguments and prudentially
balanced the concerns. Although the plan her e is not as
complex as the plan in Continental Airlines, it is hardly
simple. The plan required eighteen months of negotiation
between several parties regarding hundr eds of millions of
dollars, restructured the debt, assets, and management of
a major corporation, and successfully rejuvenated Zenith.
Appellants have not offered any evidence that the plan
could be reversed without great difficulty and inequity, and
we have reason to believe that the bond r edistribution is
unretractable. See In re UNR, 20 F.3d 766 (7th Cir. 1994);
In re Public Serv. Co. of New Hampshir e, 963 F.2d 469 (1st
Cir. 1992). The District Court, therefor e, did not abuse its
discretion in its analysis of this factor of the equitable
mootness test.
B. The Failure to Obtain a Stay
Because of the nature of bankruptcy confir mations, we
have held that it "is obligatory upon appellant .. . to
pursue with diligence all available remedies to obtain a stay
11
of execution of the objectionable order (even to the extent of
applying to the Circuit Justice for relief. . . ), if the failure
to do so creates a situation rendering it inequitable to
reverse the orders appealed from." In re Highway Truck
Drivers & Helpers Local Union #107, 888 F .2d 293, 297 (3d
Cir. 1989); see also Continental Airlines , 91 F.3d at 566
("There was a clear possibility the [Appellants'] claims
would become moot after consummation of the plan, and it
was therefore incumbent on the [Appellants] to obtain a
stay."); In re Chateaugay Corp., 988 F.2d at 326 ("[T]he
party who appeals without seeking to avail himself of that
[stay] protection does so at his own risk."); In re Crystal Oil
Co., 854 F.2d 79, 82 (5th Cir. 1988) (finding a claim
inequitable because the Appellant made no ef fort to obtain
a stay); In re Roberts Farms, Inc. , 652 F.2d 793, 798 (9th
Cir. 1981) (dismissing an appeal for lack of equity because
the Appellant never applied to the bankruptcy court for a
stay); In re Grand Union Co. v. Saul, Ewing, Remick & Saul,
200 B.R. 101, 105 (Bankr. D. Del 1996). Appellants did not,
at any time, seek a stay. As the District Court determined,
this weighs heavily in favor of dismissing Appellants'
claims.
Appellants argue that because Zenith did not provide a
copy of the revised plan on November 4, and since much of
the plan was consummated by the time they received notice
on November 9, it was futile for them to seek a stay in an
attempt to prevent the plan from being substantially
consummated. The record does reflect that Zenith learned
on November 5 that the revised plan had been confirmed
but did not directly relay this infor mation until November
9, at which time much of the plan had been consummated.
Zenith surely realized that the minority shareholders,
whose shares were nullified without consideration, would
oppose the confirmation order. The District Court,
therefore, correctly characterized this "oversight" as
"suspicious."
As the District Court correctly reasoned, however, this
oversight did not foreclose Appellants fr om seeking a stay.
First, although Zenith did not immediately pr ovide notice to
Nordhoff, it did provide immediate notice to the Equity
Committee. Nordhoff was, at all times, a member of the
12
Equity Committee, and therefore Appellants had an
opportunity to bring a timely request for a stay before the
plan was consummated. Second, Appellants wer e well
aware that the plan was about to be confir med. All relevant
versions of the plan called for "Immediate Ef fectiveness,"
and the Bankruptcy Court conditioned its confir mation
upon only minor modifications. Confirmation was pending,
the Equity Committee was immediately notified when the
modified plan was approved, and the confir mation was
publically posted on November 5 on the Bankruptcy Court's
web site. If Appellants intended to seek a stay, these
circumstances afforded them the opportunity to do so
immediately upon the approval of the plan. Thir d, and most
importantly, both sets of Appellants were, by all accounts,
notified by November 9. The bond exchanging, the most
complex and irreversible element of the plan, did not begin
until November 19. Appellants have not offer ed any
justification for not seeking a stay between November 9 and
November 19. "Therefore," the District Court concluded,
"while the circumstances surrounding the appellant's
failure to obtain or even seek a stay suggests that this
factor should receive somewhat less weight than it
ordinarily would, it does still weigh in favor of a finding of
equitable mootness."
The District Court properly weighed the competing
considerations and therefore its deter mination that the
failure to obtain a stay weighed in favor of dismissing
Appellants' claims was within its discretion.
C. Reliance on Confirmation by Parties not
Before the Court
In addition to the first two elements of the doctrine of
equitable mootness, we stated in Continental Airlines that
"[h]igh on the list of prudential considerations taken into
account by courts considering whether to allow an appeal
following a consummated reorganization is the reliance by
third parties, in particular investors, on thefinality of the
transaction." 91 F.3d at 562. As we further explained, the
"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
13
on the plan as implemented." Id. (citing Manges v. Seattle-
First Nat'l Bank, 29 F.3d 1034, 1039 (5th Cir. 1994)).
The District Court considered the status of six parties
who Zenith alleged would have their interests undermined
by reversal of the confirmation or der: 1) the consortium of
lenders headed by Citicorp; 2) Zenith's bondholders; 3)
Zenith's retailers and distributors; 4) Zenith's vendors,
suppliers, and service providers; 5) LGE; and 6) Zenith's
former minority shareholders. The District Court found that
"none [of these parties] appear to merit the same ``outside
investor' status as the investors in Continental ," who
committed $450 million. To varying degr ees, however, the
District Court found that some of these parties merit
protection.
First, because Citicorp was a secured lender before,
during, and after the confirmation, it would not suffer an
adverse impact as a result of appellate r eview. Also, the
lenders voted in favor of the plan and were r epresented by
counsel at the proceedings below. Thus, the District Court
found that Citicorp's $40 million advance on a $150 million
credit facility at least raised questions as to whether they
should be viewed as "third parties not befor e the court."
Second, the District Court found that the inter ests of the
bondholders were "perhaps mor e strongly implicated."
Although the bondholders were not true outside parties "in
the sense that they could walk away from the deal," the
"bonds are publicly traded and the bondholders today may
not be the same investors as the bondholders at the time of
the bankruptcy filing or confirmation." Therefore, the
District Court reasoned:
Many sales of those bonds may have occurred in the
reliance on the creditworthiness of the r eorganized
debtor. Whether these reliance inter ests will be
impaired depends upon the impact of appellate r eview
on that creditworthiness. It would seem that the
bondholders would likely be harmed only if r eversal of
the confirmation order leads to the withdrawal of LGE's
support . . .
We agree that the bondholders maintain a third party
interest. Third, the District Court found Zenith's claims
14
regarding the retailers, distributors, and suppliers
"somewhat thin." Apparently, these parties entered into
commitments with Zenith in reliance on thefinality of the
reorganization and allocated shelf space, production
capacity, and credit according to the confirmation, and the
District Court found that "[a]t least some of these unnamed
entities are likely to be ``third parties' entitled to
consideration under the equitable mootness analysis." The
Court found the "potential harm to these parties, however,"
to be "somewhat speculative." Fourth, the District Court
found Zenith's attempt to characterize LGE as an outside
party "unpersuasive" since it was the majority shareholder
prior to bankruptcy and is now the sole shar eholder. Unlike
the outside investors in Continental Airlines , LGE would
have incurred massive losses had it walked away from the
deal. Fifth, the Court found Zenith's claims that the
minority shareholders may have taken tax deductions
based on their losses without merit since Zenith did not
produce any evidence that these former shareholders would
prefer to take the tax deduction instead of r ecovering their
previous stock holding.
The District Court concluded that there "ar e third parties
who have likely relied on confirmation of the plan and who
could be harmed by reversal of the confirmation order."
"Although these parties may not be properly characterized
as ``outside investors,' " the Court stated,"such investors
are not the only types of third parties given considerations
in an equitable mootness analysis." "Ther efore," the Court
concluded, "while this factor may not warrant quite as
much weight as it did in Continental, it does still weigh in
favor of a finding of equitable mootness."
Nordhoff also challenges the District Court on this issue
by claiming that all of the third parties, with the exception
of the retailers and suppliers, were befor e the Bankruptcy
Court and therefore are not, as Continental Airlines
required, "non-adverse third parties who are not before the
reviewing court." As Zenith points out, however, the
requirement calls for parties to be befor e the reviewing
court, and while some of these parties may have been for
the Bankruptcy Court, they are not befor e us now. See In
Re Box Brothers, 194 B.R. at 42. Since these parties are not
15
currently before us and relied on the plan confirmation,
they merit protection under the equitable mootness
doctrine.
Although these facts do not present the same extent of
reliance as found in Continental Airlines , this concern still
weighs against Appellants' challenges. The District Court
did not abuse its discretion in its deter mination that "non-
adverse third parties who are not befor e the reviewing
court" relied on the confirmation and therefore merit some
protection.
D. Whether the Relief Requested Would Af fect
the Success of the Plan
We also consider whether Appellants' concer ns could be
remedied without unraveling the entirety of the plan or
whether they seek to "knock the props out fr om under the
authorization for every transaction that has taken place
and create an unmanageable, uncontrollable situation for
the Bankruptcy Court." In re Chateaugay Corp., 10 F.3d at
952; see also In Re Robert Farms, 652 F.2d 793, 798 (9th
Cir. 1981).
Appellants challenge the valuation of Zenith, and this
price is the very centerpiece of the plan. As the District
Court noted, the agreed-upon valuation per mitted: 1) LGE's
emergence as the sole shareholder with no consideration
paid to the minority shareholders, and 2) the bondholders'
acceptance of new bonds worth roughly one half the value
of the old bonds. The plan would no longer be viable
without these agreements, and the futur e relationship
between LGE and Zenith would be cast in doubt. W ithout
LGE, Zenith would likely be forced to liquidate under
Chapter 7 since their recent recovery is contingent upon
the plan. Thus, Appellants do not challenge an
"intermediate" element of the plan that could be altered
while maintaining the overall integrity of the plan, as in
PWS Holding Corp., 228 F.3d 224.
Appellants explicitly indicated during oral ar gument that
it was their intention to dissolve the plan: "This is one of
[those plans] where the plan can and should be unravel'ed.
Okay? I do want to make that clear. Again, if it was vague
16
from my papers, let me make it absolutely clear ."
Appellants seek "nothing less than a wholesale annihilation
of the Plan," In re Manges, 29 F .3d at 1043, and this
proposed relief would affect the r e-emergence of the debtor
as a revitalized entity." See In r e Club Assocs., 956 F.2d
1065, 1069 (11th Cir. 1992). The District Court thus
properly found that this element of the equitable mootness
doctrine weighs against Appellants.
E. General Public Policy Affording Finality
to Bankruptcy Judgments
As the District Court stated, "the public policy of
affording finality to bankruptcy judgments is better
described as the lens through which the other equitable
mootness factors should be viewed." We described this
rationale in Continental Airlines:
Our inquiry should not be about the "reasonableness"
of the Investors' reliance or the probability of either
party succeeding on appeal. Rather, we should ask
whether we want to encourage or discourage r eliance of
investors and others on the finality of bankruptcy
confirmation orders. The strong public policy in favor
of maximizing debtor's estates and facilitating
successful reorganization, reflected in the code itself,
clearly weighs in favor of encouraging such r eliance.
Indeed, the importance of allowing approved
reorganizations to go forward in r eliance on bankruptcy
court confirmation orders may be the central
animating force behind the equitable mootness
doctrine. Where, as here, investors and other third
parties consummate a massive reorganization in
reliance on an unstayed confirmation or der that,
explicitly and as a condition of feasibility, denied the
claim for which appellate review is sought, the
allowance of such appellate review would likely
undermine public confidence in the finality of
bankruptcy confirmation orders and make successful
completion of large reorganization like this more
difficult.
91 F.3d 565 (citations omitted).
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Here, unlike Continental Airlines, LGE is not an outsider
but rather had independent financial incentive to facilitate
Zenith's recovery. It is therefore less necessary to encourage
LGE's reliance on the bankruptcy judgment in this case.
However, this plan did enable Zenith to negotiate with
several parties and recover from its decline. Likewise, a
number of parties relied on the confir mation of the plan,
and, as the District Court stated, reversal would be
contrary to the public policy of encouraging actions, by
outsiders and investors alike, that facilitates successful
reorganizations.
The District Court, therefore, did not abuse its discretion
by determining that the public policy of pr omoting the
finality of bankruptcy judgements also weighed in favor of
dismissing Appellants' appeals.
F. Other Considerations
1. Expedition of the Confirmation
Appellants further argue that expediting the plan's
confirmation was unfair since the Appellants had only one
month to prepare objections, and this was an insufficient
amount of time. In addition, Appellants complain that the
plan was consummated between November 4 and November
9, which was before Nordhoff knew of the confirmation.
Despite this final push toward consummation, however, all
parties were aware of the plan during its eighteen-month
creation and were allowed to review r elevant documents
and meet with the plan operatives. "Thus," as the District
Court stated, "despite expedited proceedings in the
Bankruptcy Court, Appellants cannot claim to have been
denied a meaningful opportunity to engage their own
experts or otherwise oppose the plan." We agree.
2. Solomon's Valuation
Appellants also complain that the Bankruptcy Court
adopted Solomon's valuation despite conflicts of interest.
First, courts have broad discretion not only to admit expert
witnesses, but also to weigh their testimony. Kumho Tire
18
Co., Ltd. v. Carmichael, 526 U.S. 137, 153 (1999). Second,
Solomon's valuation was corroborated by the fact that no
investors had accepted Zenith's offer to sell at a related
price, the bondholders' agreement to reduce the value of
their claims, and other relevant valuations. Third, the
margin of error between Solomon's valuation and Zenith's
solvency was $400 million. Fourth, the Bankruptcy Court
determined that Solomon's compensation was not a mere
"success fee," but rather was for a "substantial array of
services: investment banking advice, financial analysis,
operational restructuring, marketing, as well as valuation
analysis. The ``success fee' was not offer ed for its testimony
at the confirmation hearing." We will not disturb these
findings.
III. Conclusion
The District Court gave serious consideration to the
issues of fundamental fairness that Zenith may have
abused. "Because the issues implicate the fair ness of the
process by which the plan was proposed and confirmed,"
the District Court stated, "the court is somewhat reluctant
to preclude appellate review of those issues." "Although the
court will dismiss the appeals," it decided,"it does not do
so without some hesitation." The District Court concluded:
"Having considered and weighed the factors discussed
above, the court is convinced that dismissal of these
appeals on equitable mootness grounds is appr opriate. In
particular, Appellants' failure to even seek a stay as the
plan was being substantially - if not entir ely -
consummated outweighs the courts concerns identified
above."
The District Court accurately analyzed each of the factors
of the equitable mootness test, appropriately balanced
these elements, and concluded that the doctrine should
apply to Appellants' claims. The District Court ther efore did
not abuse its discretion and we will affir m.
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ALITO, Circuit Judge, concurring in the judgment:
I reluctantly concur in the judgment of the court. Under
In re Continental Airlines, 91 F .3d 553 (3d Cir. 1996) (en
banc), cert. denied sub nom. Bank of N.Y . v. Continental
Airlines, 519 U.S. 1057 (1997), I am afraid that we must
affirm the decision of the District Court holding that the
appeal is equitably moot. The District Court applied the
standard adopted in Continental Airlines , and although the
District Court's decision is debatable, it did not commit an
abuse of discretion.
In reaching this conclusion, I am primarily influenced by
the appellants' failure to seek a stay. It is disturbing that
Zenith, in a seeming attempt to moot any appeal prior to
filing, succeeded in implementing most of the plan before
the appellants even received notice that the plan had been
confirmed. However, the plan was not entirely
consummated when the appellants finally lear ned of the
bankruptcy court's order. Most notably, the exchange of the
old for the new bonds had still not been carried out. If the
appellants had promptly applied for a stay, with or without
posting a bond, when they finally got word of what the
bankruptcy court had done, I would view this appeal
differently. But the appellants never applied for a stay and
have not provided an adequate explanation for their failure
to do so. Under these circumstances, I cannot say that the
decision of the district court was an abuse of discr etion.
For the reasons explained in my dissent in Continental
Airlines, see 91 F.3d at 567-73, however, I continue to
disagree with the expansive version of the equitable
mootness doctrine that our court adopted in that case, as
well as with the abuse-of-discretion standar d of review. See
id. at 568 n.4 (Alito, J., dissenting). As this case shows, our
court's equitable mootness doctrine can easily be used as a
weapon to prevent any appellate review of bankruptcy court
orders confirming reorganization plans. It thus places far
too much power in the hands of bankruptcy judges.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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