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Title Nordhoff Investments, Inc. v. Zenith Electronics Corporation

Date 2001

Subject Other\Concurring

Contents

Page 1

12 of 52 DOCUMENTS

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

Nos. 00-2249 and 00-2250

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

258 F.3d 180; 2001 U.S. App. LEXIS 13864; 46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

January 23, 2001, Argued

June 21, 2001, Filed

PRIOR HISTORY: **1 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. DISPOSITION: Affirmed. CASE SUMMARY:

PROCEDURAL POSTURE: Appellants, minority shareholders in debtor corporation, sought review of an order of the United States District Court for the District of Delaware approving the Bankruptcy Court's order con- firming debtor's bankruptcy and restructuring plan.

OVERVIEW: Debtor contended that the challenges posed to its restructuring plan were "equitably moot" because the plan had already been substantially consum- mated, had been relied upon by various parties, and would be very difficult to retract. The district court reviewed the relevant considerations and found the challenges equi- tably moot. The court of appeals agreed with the district court's mootness determination acknowledging that it was required to accept the lower court's findings of fact unless they bore no rational relationship to the supporting data. Further, the appellate court found the mootness deter- mination involved a discretionary balancing of equitable and prudential factors rather than the limits of the federal court's authority under U.S. Const. art. III, and reviewed the decision for abuse of discretion. The appellate court noted that the appellants conceded that the plan had been

substantially consummated, and that they did not, at any time, seek a stay of the bankruptcy proceedings, and con- cluded that the district court appropriately balanced the elements of the equitable mootness test and did not abuse its discretion.

OUTCOME: The district court's confirmation of debtor's bankruptcy and restructuring plan was affirmed where 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 challenges to the plans.

LexisNexis(R) Headnotes

Civil Procedure > Trials > Bench Trials

HN1 The United States Court of Appeals for the Third Circuit will accept a district court's findings of fact unless they are completely devoid of a credible evidentiary basis or bear no rational relationship to the supporting data. Civil Procedure > Appeals > Standards of Review > Abuse of Discretion

Civil Procedure > Justiciability > Mootness

HN2 Where a mootness determination involves a dis- cretionary balancing of equitable and prudential factors rather than the limits of the federal court's authority under U.S. Const. art. III, the United States Court of Appeals for the Third Circuit will review that decision generally for abuse of discretion.

Bankruptcy Law > Practice & Proceedings > Appeals

HN3 A bankruptcy appeal should be dismissed as moot

258 F.3d 180, *; 2001 U.S. App. LEXIS 13864, **1;

46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

Page 2

when, even though effective relief could conceivably be fashioned, implementation of that relief would be in- equitable.

Bankruptcy Law > Practice & Proceedings > Appeals

HN4 Five factors are to be considered when conduct- ing an equitable mootness analysis upon review of a bankruptcy and/or restructuring plan: (1) whether the reorganization plan has been substantially consummated,

(2) whether a stay has been obtained, (3) whether the re- lief requested would affect the rights of the parties not before the court, (4) whether the relief requested would affect the success of the plan, and (5) the public policy of affording finality to bankruptcy judgments.

Bankruptcy Law > Practice & Proceedings > Appeals

HN5 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. The doctrine is limited in scope and should be cautiously applied. Bankruptcy Law > Practice & Proceedings > Appeals

HN6 The substantial consummation factor is the "fore- most consideration" in an equitable mootness analysis, especially when the plan involves intricate transactions or where investors have relied on the confirmations of the plan. The Bankruptcy Code defines "substantial consum- mation" to mean: (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. 11

U.S.C.S. § 1101(2).

Bankruptcy Law > Practice & Proceedings > Adversary

Proceedings

HN7 Given the nature of bankruptcy confirmations, it is obligatory upon appellant to pursue with diligence all available remedies to obtain a stay of execution of the objectionable order, if the failure to do so creates a situa- tion rendering it inequitable to reverse the orders appealed from.

Bankruptcy Law > Practice & Proceedings > Appeals

HN8 High 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 the fi- nality of the transaction. 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 on the plan as implemented. Evidence > Witnesses > Expert Testimony

HN9 Courts have broad discretion not only to admit

expert witnesses, but also to weigh their testimony.

COUNSEL: Arnold S. Albert, Esq. (Argued), Albert

& Schulwolf, Washington, DC. Thomas G. Macauley, Esq., Zuckerman, Spaeder, Goldstein, Taylor & Kolker, Wilmington, DE, Counsel for Nordhoff Investments, Inc., Appellant at No. 00-2250.

Thomas D. Schneider, Esq., Philadelphia, PA, Counsel for Official Committee of Equity Security Holders, Appellant at No. 00-2249.

James H.M. Sprayregen, Esq., Ilana S. Rubel, Esq., David J. Zott, Esq. (Argued), Kirkland & Ellis, Chicago, IL. Laura D. Jones, Esq., Pachulski, Stang, Ziehl, Young & Jones, Wilmington, DE. Eric S. Kurtzman, Esq., Pachulski, Stang, Ziehl, Young & Jones, Los Angeles, CA, Counsel for Appellee Zenith Electronics Corporation.

JUDGES: BEFORE: NYGAARD, ALITO, and FUENTES, Circuit Judges. ALITO, Circuit Judge, con- curring in the judgment.

OPINIONBY: NYGAARD

OPINION:

*182 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 **2 ap- proving 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.

HN1 We accept the lower court's findings of fact "unless they are 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).

Furthermore, "because the HN2 mootness determi- nation 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 ordinary review principles we review that decision gen- erally for abuse of discretion." In re Continental Airlines,

91 F.3d 553, 560 (3d Cir. 1996) (en banc); see also In re

258 F.3d 180, *182; 2001 U.S. App. LEXIS 13864, **2;

46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

Page 3

PWS Holding, 228 F.3d 224, 235-36 (3d Cir. 2000). We find no such **3 abuse of discretion and therefore will affirm.

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 af- ter Zenith's CEO personally met with executives from Microsoft, Intel, General Instruments, and other leaders in the electronics industry.

Zenith continued to suffer losses and LGE proposed 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 approx-

imately $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 consid- eration; 3) issuing new Zenith stock to LGE **4 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 mil- lion in additional debt owed to LGE in exchange for $135 million of new debt and ownership of the Zenith tele- vision plant in Reynosa, Mexico; 6) refinancing of debt owed to a consortium of banks led by Citicorp; 7) no al- teration of debt owed to trade creditors; and 8) releasing LGE, Zenith directors and officers, and the 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 effective. Despite the reduced face value of their claim, the bond- holders overwhelmingly voted in favor of the plan. LGE and secured lenders,

258 F.3d 180, *183; 2001 U.S. App. LEXIS 13864, **4;

46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

Page 4

*183 including Citibank, also approved the plan. Zenith met often with the Equity Committee during this time and provided the Committee with all of the information 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, **5 a significant mi- nority shareholder in Zenith, and the Equity Committee, which represented the interests of the other minority shareholders, both opposed the plan and were represented by counsel at the two-day proceedings. Over Nordhoff and the Equity Committee's objections, the Bankruptcy Court approved Zenith's request for an expedited hear- ing. The primary point of contention concerned compet- ing 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, appear- ing 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 cal- culated by Solomon. Nordhoff and the Equity Committee attempted to discredit Solomon by presenting evidence that Solomon had a conflict of interest based upon its pre- vious relations with Zenith and would receive a $1 million award if Zenith's plan was successful.

The Bankruptcy Court ultimately accepted Solomon's valuation over Ernst and Young's and **6 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 appropriately; 4) Zenith's disclosure statement contained a wealth of infor- mation, the plan was approved by SEC, and it complied

with nonbankruptcy law and the Bankruptcy Code; 5) the

"shareholders are receiving the value of their interests un- der 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 required 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 received the Bankruptcy Court's opinion on November 3. Zenith im- mediately made the required changes and submitted **7 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 Nordhoff 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 learned that the order had been signed via the Court's pub- lic web cite on November 5. On November 9, Zenith offi- cials faxed a letter to Nordhoff and the Equity Committee stating that they "understand that the court signed the confirmation 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 confir- mation order to Nordhoff and the Equity Committee the same day. Nordhoff and

258 F.3d 180, *184; 2001 U.S. App. LEXIS 13864, **7;

46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

Page 5

*184 the Equity Committee filed notices of appeal to the Bankruptcy Court on November 12. At no point, how- ever, 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 throughout the proceeding that Zenith intended to implement the plan immediately upon approval. As **8 a result, much of the plan was executed 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 fa- cility syndicated by Citicorp; 2) Zenith entered into a new

$60 million credit 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 bondhold- ers 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 were then allocated to the fractional holders. Zenith management has since been replaced by LGE management, and the Zenith executives who **9 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 record, and the plan provisions releasing LGE and Zenith's directors from po-

tential liability. The District Court dismissed the appeal as equitably moot.

II. Discussion

At least one Bankruptcy Court has characterized "eq- uitable mootness" as a misnomer: "There is nothing eq- uitable about the equitable mootness doctrine. . . . The matter is moot out of necessity, not application of equi- table 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 con- firmation should preclude further judicial proceedings has led to the unfortunate confusion between equitable moot- ness and constitutional mootness"). We do not entirely agree. One inequity, in particular, **10 that is often at issue is the effect upon innocent third parties. When transactions following court orders are unraveled, third parties not before us who purchased securities in reliance on those orders will likely suffer adverse effects.

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 reor- ganization 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 jeop- ardized 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 con- firmation, the investors

258 F.3d 180, *185; 2001 U.S. App. LEXIS 13864, **10;

46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

Page 6

*185 committed their capital and consummated the plan. Continental then moved to dismiss the trustees' ap- peal on grounds of equitable mootness. The District Court granted the motion and dismissed the appeal. We affirmed, stating that such " HN3 an appeal **11 should . . . be dismissed as moot when, even though effective 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 HN4 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 affect the rights of the parties not before the court,

(4) whether the relief requested would affect the success of the plan, and

(5) the public policy of affording finality to bankruptcy judgments.

91 F.3d at 560. As we stated in PWS Holding, these

"factors are given varying weight, depending on the par- ticular circumstances, but the foremost consideration is whether the reorganization plan has been substantially consummated." 228 F.3d at 236. In effect, HN5 the eq- uitable mootness doctrine prevents a court from unscram- bling complex bankruptcy reorganizations when the ap- pealing party should have acted before the plan became

**12 extremely difficult to retract. We have noted, how- ever, 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 moot-

ness doctrine against these facts.

A. Substantial Consummation of the Plan

As we stated in Continental Airlines, HN6 the sub- stantial consummation factor is the "foremost considera- tion" in an equitable mootness analysis, especially when the plan "involves intricate transactions . . . or where in- vestors 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 property proposed by the plan to be trans- ferred;

(B) assumption by the debtor or by the suc- cessor to the debtor under the plan of the business or of the management of all or sub- stantially all of the property dealt with by the plan; and

11 U.S.C. § 1101(2).

Appellants concede that the plan has been sub- stantially consummated. The Confirmation Order stated that the plan would be immediately **13 effective, and many of the key transactions were completed by November 9, 1999. On November 19, Zenith began ex- changing bonds in accordance with the plan, and by January 2000, the only 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 con- cluded, there can be little question that the plan has been substantially consummated.

Appellants claim, however, that the plan was "remark- able" 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

258 F.3d 180, *186; 2001 U.S. App. LEXIS 13864, **13;

46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

Page 7

*186 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 **14 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 before 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 numerous irrevoca- ble transactions, the merging of fifty-three debtors, the investment of $110 million in cash by two outside in- vestors, and the transfer of trade routes by foreign gov- ernments, the plan here is relatively simple. The District Court recognized that the assembly plant could be trans- ferred 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 reversed 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 that "they

**15 may have been sold, perhaps more 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 rea- soned 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' in- vestments" 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, there- fore, weighs heavily in favor of dismissal, at least to the extent that the court could not fashion relief that would not result in the dis- mantling 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 pru- dentially balanced the concerns. Although the plan here is not as complex as the plan in **16 Continental Airlines, it is hardly simple. The plan required eighteen months of negotiation between several parties regarding hundreds of millions of dollars, restructured the debt, assets, and man- agement of a major corporation, and successfully rejuve- nated 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 redistribution is unretractable. See In re UNR, 20 F.3d 766

(7th Cir. 1994); In re Public Serv. Co. of New Hampshire,

963 F.2d 469 (1st Cir. 1992). The District Court, there- fore, 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 confirmations, we have held that it HN7 "is obligatory upon appellant .

. . to pursue with diligence all available remedies to obtain

258 F.3d 180, *187; 2001 U.S. App. LEXIS 13864, **16;

46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

Page 8

*187 a stay 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 ren- dering 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); **17 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 there- fore incumbent on the Appellants to obtain a stay."); In re Chateaugay Corp., 988 F.2d at 326 ("The 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 in- equitable because the Appellant made no effort 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 **18 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 informa- tion until November 9, at which time much of the plan had been consummated. Zenith surely realized that the minority shareholders, whose shares were nullified with- out 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 from seeking a stay. First, although Zenith did not immediately provide notice to Nordhoff, it did provide immediate notice to the Equity Committee. Nordhoff was, at all times, a member of the Equity Committee, and therefore Appellants had an opportunity to bring a timely request for a stay before the plan was consummated. Second, Appellants were well aware that the plan was about to be confirmed. All relevant versions of the plan called for "Immediate Effectiveness," and the Bankruptcy Court conditioned its confirmation upon only minor modifications. Confirmation **19 was pending, the Equity Committee was immediately noti- fied when the modified plan was approved, and the con- firmation 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 op- portunity to do so immediately upon the approval of the plan. Third, 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 offered any justification for not seeking a stay between November 9 and November 19. "Therefore," the District Court concluded, "while the circumstances sur- rounding 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 determination that the failure to obtain a

258 F.3d 180, *188; 2001 U.S. App. LEXIS 13864, **19;

46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

Page 9

*188 stay weighed in favor of dismissing Appellants'

claims was within its discretion.

C. Reliance on Confirmation by Parties not Before the

Court **20

In addition to the first two elements of the doctrine of equitable mootness, we stated in Continental Airlines that " HN8 high 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 the finality 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 par- ties who are not before the reviewing court but who have acted in reliance 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 order: 1) the consortium of lenders headed by Citicorp; 2) Zenith's bondholders;

3) Zenith's retailers and distributors; 4) Zenith's ven- dors, 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' **21 status as the investors in Continental," who committed $450 million. To varying degrees, 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 review. Also, the lenders voted in favor of the plan and were represented by counsel at the proceedings below. Thus, the District Court found that Citicorp's $40 million advance on a $150 mil-

lion credit facility at least raised questions as to whether they should be viewed as "third parties not before the court." Second, the District Court found that the interests of the bondholders were "perhaps more strongly impli- cated." 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 bondhold- ers at the time of the bankruptcy filing or confirmation." Therefore, the District Court reasoned:

Many sales of those bonds may have oc- curred in the reliance on the creditworthiness of the reorganized debtor. Whether these re- liance **22 interests will be impaired de- pends upon the impact of appellate review on that creditworthiness. It would seem that the bondholders would likely be harmed only if reversal 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 regarding the retailers, distributors, and suppliers "some- what thin." Apparently, these parties entered into com- mitments with Zenith in reliance on the finality of the reorganization and allocated shelf space, production ca- pacity, and credit according to the confirmation, and the District Court found that "at least some of these unnamed entities are likely to be 'third parties' entitled to consider- ation 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 shareholder. Unlike the outside investors in Continental Airlines,

258 F.3d 180, *189; 2001 U.S. App. LEXIS 13864, **22;

46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

Page 10

*189 LGE would have incurred massive losses had it walked **23 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 for- mer shareholders would prefer to take the tax deduction instead of recovering their previous stock holding.

The District Court concluded that there "are third par- ties who have likely relied on confirmation of the plan and who could be harmed by reversal of the confirma- tion 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."

"Therefore," 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 moot- ness."

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 before the Bankruptcy Court and therefore are not, as Continental Airlines required, "non-adverse third parties who are not before the reviewing court. **24 " As Zenith points out, however, the requirement calls for parties to be be- fore the reviewing court, and while some of these parties may have been for the Bankruptcy Court, they are not before us now. See In Re Box Brothers, 194 B.R. at 42. Since these parties are not 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 determination that

"non-adverse third parties who are not before the review- ing court" relied on the confirmation and therefore merit some protection.

D. Whether the Relief Requested Would Affect the

Success of the Plan

We also consider whether Appellants' concerns could be remedied without unraveling the entirety of the plan or whether they seek to "knock the props out from under the authorization for every transaction that has taken place and create an unmanageable, uncontrollable situation for the Bankruptcy Court." Chateaugay Corp. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944, 952 (2d Cir. N.Y. 1993); see also **25 In Re Roberts 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 permitted: 1) LGE's emergence as the sole shareholder with no con- sideration 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 future rela- tionship between LGE and Zenith would be cast in doubt. Without 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 "in- termediate" 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 argument 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 from my papers, let me make it absolutely clear." Appellants seek **26 "nothing less than a

258 F.3d 180, *190; 2001 U.S. App. LEXIS 13864, **26;

46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

Page 11

*190 wholesale annihilation of the Plan," In re Manges,

29 F.3d at 1043, and this proposed relief would affect the re-emergence of the debtor as a revitalized entity." See In re 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 de- scribed 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 "rea- sonableness" of the Investors' reliance or the probability of either party succeeding on appeal. Rather, we should ask whether we want to encourage or discourage reliance 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 reorgani- zation, reflected in the code itself, clearly weighs in favor of encouraging such reliance. Indeed, **27 the importance of allow- ing approved reorganizations to go forward in reliance on bankruptcy court confirmation orders may be the central animating force be- hind the equitable mootness doctrine. Where, as here, investors and other third parties con- summate a massive reorganization in reliance on an unstayed confirmation order that, ex- plicitly and as a condition of feasibility, de- nied the claim for which appellate review is sought, the allowance of such appellate re- view would likely undermine public confi-

dence in the finality of bankruptcy confirma- tion orders and make successful completion of large reorganization like this more diffi- cult.

91 F.3d at 565 (citations omitted).

Here, unlike Continental Airlines, LGE is not an out- sider 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 ne- gotiate with several parties and recover from its decline. Likewise, a number of parties relied on the confirmation of the plan, and, as the District Court stated, reversal would be contrary to the public policy of encouraging **28 actions, by outsiders and investors alike, that facilitates successful reorganizations.

The District Court, therefore, did not abuse its discre- tion by determining that the public policy of promoting 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 insuf- ficient 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 consumma- tion, however, all parties were aware of the plan during its eighteen-month creation and were allowed to review relevant 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

258 F.3d 180, *191; 2001 U.S. App. LEXIS 13864, **28;

46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

Page 12

*191 engage their own experts or otherwise oppose the plan." We agree.

2. Solomon's Valuation

Appellants also complain that the Bankruptcy Court

**29 adopted Solomon's valuation despite conflicts of interest. First, HN9 courts have broad discretion not only to admit expert witnesses, but also to weigh their testi- mony. Kumho TireCo., Ltd. v. Carmichael, 526 U.S. 137,

153, 143 L. Ed. 2d 238, 119 S. Ct. 1167 (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 offered for its testi- mony at the confirmation hearing." We will not disturb these findings.

III. Conclusion

The District Court gave serious consideration to the is- sues of fundamental fairness that Zenith may have abused.

"Because the issues implicate the fairness of the process by which the plan was proposed **30 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 appro- priate. In particular, Appellants' failure to even seek a stay as the plan was being substantially - if not entirely -

consummated outweighs the courts concerns identified above."

The District Court accurately analyzed each of the factors of the equitable mootness test, appropriately bal- anced these elements, and concluded that the doctrine should apply to Appellants' claims. The District Court therefore did not abuse its discretion and we will affirm.

CONCURBY: ALITO

CONCUR:

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, 136 L. Ed. 2d 610,

117 S. Ct. 686 (1997), **31 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 com- mit 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 en- tirely consummated when the appellants finally learned 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

258 F.3d 180, *192; 2001 U.S. App. LEXIS 13864, **31;

46 Collier Bankr. Cas. 2d (MB) 802; 38 Bankr. Ct. Dec. 3

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*192 for a stay and have not provided an adequate explanation for their failure to do so. Under these circum- stances, I cannot say that the decision of the district court was an abuse of discretion. **32

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 standard of re- view. 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 re- view of bankruptcy court orders confirming reorganiza- tion plans. It thus places far too much power in the hands of bankruptcy judges.


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