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LEXISNEXIS® A.S. PRATT® FEBRUARY/MARCH 2017

EDITOR’S NOTE: REFORM Steven A. Meyerowitz FINANCIAL CHOICE ACT (H.R. 5983) AS GUIDE TO POSSIBLE FINANCIAL REGULATORY REFORM, INCLUDING “DODD-FRANK REPEAL” Timothy P. Mohan and Robert E. LocknerSPLIT SIXTH CIRCUIT DISMISSES APPEAL FROM DETROIT’S CONFIRMED PLAN Michael L. CookTHIRD CIRCUIT ENFORCES POST-ACCELERATION MAKE-WHOLE PREMIUM Adam C. Harris, Lawrence V. Gelber, Michael L. Cook, and Lucy F. KweskinSOMETHING SMELLS FISHY AND IT ISN’T THE FISH: CHAPTER 11 TRUSTEE APPOINTED BY SOUTHERN DISTRICT OF NEW YORK BANKRUPTCY COURT IN CASE INVOLVING ANCHOVY FISHERIES Nicholas MessanaSHAKING THINGS UP: U.K. GOVERNMENT’S PROPOSALS FOR NEW CORPORATE INSOLVENCY TOOLKIT Graham Lane and Alexander RoyENGLISH COURT CLARIFIES DEFAULT RATE INTEREST ISSUES IN LBIE’S INSOLVENCY PROCEEDINGS Lindsay M. WeberAHMSA SUCCESSFULLY COMPLETES PROTRACTED CROSS-BORDER RESTRUCTURING Marc Abrams, Ji Hun Kim, and Christopher S. KoenigFROM A LITIGATION PERSPECTIVE … Terence G. Banich

Pratt’s Journal of BankruptcyLaw

VOLUME 13 NUMBER 2 FEB./MAR. 2017

Editor’s Note: ReformSteven A. Meyerowitz 55

Financial CHOICE Act (H.R. 5983) as Guide to Possible FinancialRegulatory Reform, Including “Dodd-Frank Repeal”Timothy P. Mohan and Robert E. Lockner 58

Split Sixth Circuit Dismisses Appeal from Detroit’s ConfirmedPlanMichael L. Cook 74

Third Circuit Enforces Post-Acceleration Make-Whole PremiumAdam C. Harris, Lawrence V. Gelber, Michael L. Cook, andLucy F. Kweskin 81

Something Smells Fishy and It Isn’t the Fish: Chapter 11 TrusteeAppointed by Southern District of New York Bankruptcy Court inCase Involving Anchovy FisheriesNicholas Messana 87

Shaking Things Up: U.K. Government’s Proposals for NewCorporate Insolvency ToolkitGraham Lane and Alexander Roy 91

English Court Clarifies Default Rate Interest Issues in LBIE’sInsolvency ProceedingsLindsay M. Weber 98

AHMSA Successfully Completes Protracted Cross-BorderRestructuringMarc Abrams, Ji Hun Kim, and Christopher S. Koenig 105

From a Litigation Perspective . . .Terence G. Banich 109

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Editor-in-Chief, Editor & Board ofEditors

EDITOR-IN-CHIEFSTEVEN A. MEYEROWITZ

President, Meyerowitz Communications Inc.

EDITORVICTORIA PRUSSEN SPEARS

Senior Vice President, Meyerowitz Communications Inc.

BOARD OF EDITORS

Scott L. BaenaBilzin Sumberg BaenaPrice & Axelrod LLP

Thomas W. CoffeyTucker Ellis & West LLP

Stuart I. GordonRivkin Radler LLP

Leslie A. BerkoffMoritt Hock & HamroffLLP

Michael L. CookSchulte Roth & Zabel LLP

Matthew W. LevinAlston & Bird LLP

Ted A. BerkowitzFarrell Fritz, P.C.

Mark G. DouglasJones Day

Patrick E. MearsBarnes & Thornburg LLP

Andrew P. BrozmanClifford Chance US LLP

Timothy P. DugganStark & Stark

Alec P. OstrowStevens & Lee P.C.

Kevin H. BuraksPortnoff Law Associates,Ltd.

Gregg M. FicksCoblentz, Patch, Duffy &Bass LLP

Deryck A. PalmerPillsbury Winthrop ShawPittman LLP

Peter S. Clark IIReed Smith LLP

Mark J. FriedmanDLA Piper

N. Theodore Zink, Jr.Chadbourne & Parke LLP

PRATT’S JOURNAL OF BANKRUPTCY LAW is published eight times a year by MatthewBender & Company, Inc. Copyright 2017 Reed Elsevier Properties SA., used under license byMatthew Bender & Company, Inc. All rights reserved. No part of this journal may be reproducedin any form—by microfilm, xerography, or otherwise—or incorporated into any informationretrieval system without the written permission of the copyright owner. For permission tophotocopy or use material electronically from Pratt’s Journal of Bankruptcy Law, please accesswww.copyright.com or contact the Copyright Clearance Center, Inc. (CCC), 222 RosewoodDrive, Danvers, MA 01923, 978-750-8400. CCC is a not-for-profit organization that provideslicenses and registration for a variety of users. For subscription information and customer service,call 1-800-833-9844.

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iii

Editor-in-Chief, Meyerowitz Communications Inc., 26910 Grand Central Parkway, No. 18R,Floral Park, NY 11005, smeyerowitz@meyerowitzcommunications.com, 718.224.2258. Materialfor publication is welcomed—articles, decisions, or other items of interest to bankers, officers offinancial institutions, and their attorneys. This publication is designed to be accurate andauthoritative, but neither the publisher nor the authors are rendering legal, accounting, or otherprofessional services in this publication. If legal or other expert advice is desired, retain theservices of an appropriate professional. The articles and columns reflect only the presentconsiderations and views of the authors and do not necessarily reflect those of the firms ororganizations with which they are affiliated, any of the former or present clients of the authorsor their firms or organizations, or the editors or publisher. POSTMASTER: Send address changesto Pratt’s Journal of Bankruptcy Law, LexisNexis Matthew Bender, Attn: Customer Service, 9443Springboro Pike, Miamisburg, OH 45342-9907.

iv

Split Sixth Circuit Dismisses Appeal fromDetroit’s Confirmed Plan

By Michael L. Cook*

This article discusses a recent U.S. Court of Appeals for the Sixth Circuitdecision affirming the district court’s dismissal of an appeal by a group ofpensioners from an order confirming Detroit’s Chapter 9 plan.

“Equitable mootness” prevented the U.S. Court of Appeals for the SixthCircuit from “unravel[ing] the entire Plan, . . . forc[ing] the City [Detroit]back into emergency oversight, and requir[ing] a wholesale recreation of thevast and complex web of negotiated settlements and agreements.”1 Affirmingthe district court’s dismissal of an appeal by a group of pensioners from an orderconfirming Detroit’s Chapter 9 plan (“Plan”), the Sixth Circuit agreed that thepensioners failed to “obtain a stay,” the Plan had “been substantially consum-mated,” and that “reversal of the Plan would adversely impact third parties andthe success of the Plan.”2 The pensioners had unsuccessfully challenged “the[Plan’s] reduction in their pensions” and, among other things, “a releaseprovision . . . [preventing] retirees from asserting claims against the State ofMichigan.”3

The dissenting Sixth Circuit judge forcefully argued that the majority had“brush[ed] aside the retirees’ legal claims[, leaving] them with the impressionthat their rights do not matter.”4 In the dissent’s view, equitable mootness is a“judicial invention with almost no legal basis.”5

RELEVANCE

The dissent conceded that “the doctrine of equitable mootness has beenadopted” not only by the Sixth Circuit, but also by “every other circuit to

* Michael L. Cook, of counsel at Schulte Roth & Zabel LLP and a member of the Board ofEditors of Pratt’s Journal of Bankruptcy Law, has served as a partner in the firm’s New York officefor the past 16 years, devoting his practice to business reorganization and creditors’ rightslitigation, including mediation and arbitration. He may be contacted at michael.cook@srz.com.

1 In re City of Detroit, 2016 U.S. App. LEXIS 17774, at *14, *17 (6th Cir. Oct. 3, 2016)(2-1).

2 Id. at *9.3 Id. at *8.4 Id. at *17–18.5 Id.

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consider its vitality . . . .”6 The doctrine prevents appellate courts from“unscrambling complex . . . reorganizations.”7 Nevertheless, appellate courtsrecently have been wrestling with the limits on this judicial doctrine, requiringthat an appellant must “diligently” seek a stay pending appeal, and that theappeals court must be able to grant effective relief without unraveling thereorganization plan, which would unfairly affect third parties.8 These courtshave expressed concern about whether the equitable mootness doctrine enablesparties to implement a questionable reorganization plan favoring certaincreditors over others without any oversight by an Article III court (a districtcourt or a Court of Appeals). The pensioners here argued, among other things,that Detroit could not, as a matter of Michigan law, impair their pension rightsin a municipal bankruptcy, but the bankruptcy court rejected that argument.9

Some judges also have been concerned whether the doctrine enables courts toabdicate their responsibilities. Courts still view equitable mootness as a limiteddoctrine.10

FACTS

The city of Detroit, in its huge “municipal bankruptcy under Chapter 9 ofthe Bankruptcy Code” (“Code”), had “crafted a complex network of settlementsand agreements with its thousands of creditors and stakeholders” that had beenincorporated in a comprehensive Plan confirmed by the bankruptcy court.Several municipal employee pensions opposed “any reduction in their benefits”and opposed confirmation of the Plan. As a result of agreements “by and amongthe City, the State of Michigan, and certain philanthropic foundations,” thePlan reduced the pensions here “by 4.5% and eliminated cost-of-livingincreases; reduced retiree healthcare coverage and eliminated dental, vision, andlife insurance,” among other things.11 The class of claimants that included theappealing pensioners “voted 73% in favor of accepting the Plan . . . .”12 The

6 Id. at *18.7 In re Nordhoff Invs. v. Zenith Elecs. Corp., 258 F.3d 180, 185 (3d Cir. 2001).8 See, e.g., Transwest Resort Properties, 801 F.3d 1162 (9th Cir. 2015) (2-1); One 2 One

Communications, LLC, 805 F.3d 428 (3d Cir. 2015); In re Tribune Media Co., 799 F.3d 272 (3dCir. 2015); and In re NICA Holdings, 810 F.3d 781 (11th Cir. 2015).

9 In re City of Detroit, 504. B.R. 191, 194–195 (Bankr. E.D. Mich. 2013).10 In re SemCrude, LP, 728 F.3d 314, 323 (3d Cir. 2013) (dismissal of appeal “should be the

rare exception and not the rule”). In re Pacific Lumber Co., 584 F.3d 229, 240 (5th Cir. 2009)(“equitable mootness should be applied with a scalpel rather than an axe”).

11 In re City of Detroit, supra note 1 at *3–4.12 Id. at *4.

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Sixth Circuit never discussed the substance of the pensioners’ objections, butstressed that “the Plan eliminated approximately $7 billion in debt and freedapproximately $1.7 billion in revenue for reinvestment in City services andinfrastructure . . . .”13

ANALYSIS

The Court of Appeals avoided any discussion of the merits of the underlyingappeal. Instead, it was “concerned with protecting the good faith relianceinterests created by implementation of the [City’s] plan from being undone. . . .”14 “Stated bluntly, equitable mootness negates appellate review of theconfirmation order or the underlying plan, regardless of the problems therein orthe merits of the appellant’s challenge.”15 The court’s “three-part test” looked atwhether the appellant had obtained a stay, whether the plan had been“substantially consummated,” and “whether the relief requested would signifi-cantly and irrevocably disrupt the implementation of the plan or dispropor-tionately harm the reliance interests of other parties not before the court.”16 Butthe “most important factor is whether the relief requested would affect therights of third parties or the overall success of the plan.”17

Applying these criteria, the court noted that the petitioners had not obtaineda stay, the plan had been substantially consummated (“numerous significant—even colossal—actions had been undertaken or completed, many irreversible”),and the requested “pension reduction would necessarily rescind” the basis of thePlan, “its $816 million in outside funding, and the series of other settlementsand agreements . . . , thereby unravelling the entire Plan and adverselyaffecting countless third parties, including, among others, the entire Citypopulation.”18 Finding that this case was “not a close call,” the court stressedthat the doctrine of equitable mootness was meant to apply to “exactly this typeof scenario . . . .”19 “Given the immensity of the Grand Bargain [underlyingthe Plan], even within this enormous bankruptcy, such a drastic action wouldunavoidably unravel the entire Plan, likely force the City back into emergency

13 Id.14 Id. at *6.15 Id. at *7.16 Id.17 Id.18 Id.19 Id.

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oversight.”20 Moreover, reasoned the court, the “harm to the City and itsdependents—employees and stakeholders, agencies and businesses and 685,000residents—so outweighs the harm to these [pensioners] that granting theirrequested relief and unravelling the Plan would be ‘impractical, imprudent, andtherefore inequitable.’”21

Equitable Mootness Viable

The court rejected the pensioners’ argument that equitable mootness is nolonger a viable doctrine. First, the U.S. Supreme Court has not yet abolishedthe doctrine, nor has any other Court of Appeals. Indeed, the equitablemootness doctrine “is the law of the Sixth Circuit.”22

Equitable Mootness Applies in Chapter 9

The court further rejected the pensioners’ argument that the equitablemootness doctrine did not apply in Chapter 9 cases. Other courts have, in fact,applied the doctrine to Chapter 9 cases, “with little analysis.”23 The onlydecision holding that equitable mootness does not apply in Chapter 9 cases,Bennett v. Jefferson County,24 is currently pending on appeal in the U.S. Courtof Appeals for the Eleventh Circuit. Municipal ratepayers there “claimed thatthe increase in rates—without vote or voter approval—violated the stateconstitution,” but the Sixth Circuit stressed that they were not creditors,investors or shareholders whose interest in the case was defined by the amountof their investment.25 Because the “potential harm to third-party relianceinterests from unravelling the Jefferson County plan would not outweigh theharm inflicted on those captive Ratepayer ‘creditors’ by allowing the plan’sdrastic rate increase to go unchallenged,” equitable mootness was not anappropriate doctrine in that case. Unlike the captive customers “like theRatepayers in Bennett, at risk of being subjected to an unlimited financialobligation, namely, a 365% rate increase to continue forever,” the pensioners inDetroit “were given a vote on the pension reduction and 73% of the Class voted

20 Id. at *8.21 Id. (quoting In re United Producers, Inc., 526 F.3d 942, 947 (6th Cir. 2008)).22 Id. at *9 (citing United Producers, 526 F.3d at 947, and In re Schwartz, 636 F. App’x 673

(6th Cir. 2016)).23 Id. at *9 (citing Alexander v. Barnwell Cnty. Hosp., 498 B.R. 550 (D.S.C. 2013); In re City

of Vallejo, 551 F. App’x 339 (9th Cir. 2013); and In re City of Stockton, 542 B.R. 261, 273–74(9th Cir. BAP 2015)).

24 518 B.R. 613 (N.D. Ala. 2014).25 In re City of Detroit, supra note 1 at 18.

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for it . . . .”26

The doctrine of equitable mootness, reasoned the court, is “outside of theCode entirely, both Chapters 11 and 9.”27 On the “particular facts of this case,”it said, “equitable mootness . . . applies ‘with greater force to the City’sChapter 9 Plan, which affects thousands of creditors and residents.’”28

Municipal Status Irrelevant

Nor does it matter whether the debtor is a business enterprise or amunicipality. “The fact that the debtor is a municipality, with state sovereignty,rather than a business enterprise does not reduce the municipal debtor’s rightsin bankruptcy”; in fact, “the opposite is true.”29 Here, the debtor “not only hadnumerous stakeholders and employees [but] also had over 100,000 creditorsand 685,000 residents relying on its Plan.”30 In this context, the equitablemootness doctrine is meant “to achieve finality in [the] bankruptcy [case] andto protect the good faith reliance interests created by implementation of thebankruptcy plan.”31

DISSENT

Judicial Abdication

Accusing the majority of “judicial abdication,” the dissent argued that themajority had extended “an already questionable prudential doctrine to a contextin which it has no place” in order “to avoid the merits of this case.”32 The retireepensioners in this case “spent their lives serving the people of Detroit throughboom and bust, and . . . feel that the City’s bankruptcy was resolved througha game of musical chairs in which they were left without a seat,” believing that“their rights were violated by the agreement that resulted in the settlement ofDetroit’s bankruptcy . . . .”33 According to the dissent, the district court andthe majority of the Sixth Circuit panel ensured that the pensioners’ claims “willnever be heard by an Article III judge,” something that is “no mere formality.”The protections of Article III ‘help to ensure the integrity and independence of

26 Id. at *11.27 Id. at *14.28 Id. at *15.29 Id.30 Id. at *13.31 Id. at *13.32 Id. at *16–17.33 Id. at *17.

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the Judiciary’ . . . and Article III supervision of bankruptcy judges is key to theconstitutionality of the bankruptcy-court system that adjudicated the retirees’claims.”34

Equitable Mootness Unjustified

First, argued the dissent, the Code does not justify the application of theequitable mootness doctrine here. The Sixth Circuit, it said, has “neverexamined the legal basis for” the doctrine. “Indeed, ‘[a]lthough the equitablemootness doctrine is embraced in every circuit, the rationale underlying thedoctrine is unsettled at best.’”35

Equitable Mootness Inappropriate

Equitable mootness is also an inappropriate prudential doctrine upsetting theconstitutional balance of the bankruptcy court system, argued the dissent.36

The doctrine is “nothing but a prudential doctrine of ‘judicially self-imposedlimits.’”37 “The problem with equitable mootness is not only that it cuts offentirely the right to appeal to an Article III court, but that ‘it effectivelydelegates the power to prevent that review to the very non-Article III tribunalwhose decision is at issue’ because ‘bankruptcy courts control nearly all of thevariables’ that are considered in assessing whether an appeal is equitablymoot.”38

Pensioners’ Objections Warrant Judicial Review

Finally, argued the dissent, there is no legal basis for applying the equitablemootness doctrine in Chapter 9 cases. Because the panel here was “bound by[6th Circuit] precedent applying the doctrine of equitable mootness, . . . it ishigh time for us to review the doctrine’s basis as a full court sitting on enbanc.”39 In the dissent’s view, the Plan here “is known to be subject tosignificant challenge on appeal,” but the majority has ensured that theappellants “may never have their claims heard by an Article III judge, . . . allin the name of protecting reliance interests.”40

34 Id.35 Id. at *21 (citing In re SemCrude, L.P., 728 F.3d 314, 317 (3d Cir. 2013) and quoting R.

Murphy, “Equitable Mootness Should Be Used As A Scalpel Rather Than An Axe In BankruptcyAppeals,” 19 J. Bankr. L & Pract. 1 Art. 2 (2010)).

36 Id. at *23.37 Id. (quoting Allen v. Wright, 468 U.S. 737, 751 (1984)).38 Id. at *25.39 Id. at *26.40 Id. at *29.

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COMMENT

The appealing pensioners in Detroit will most likely seek a petition forrehearing en banc. If that fails, in view of the recent spate of decisions debatingthe wisdom of the equitable mootness doctrine, they will most likely seekreview by the Supreme Court. Unfortunately, the Supreme Court, like many ofthe courts of appeals, will be in no hurry to review difficult cases, particularlywhen there is apparently no split among the circuits on the substantive meritsof this particular case.

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