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In re Machne Menachem

March 31, 2008

IN RE: MACHNE MENACHEM, INC. DEBTOR.


The opinion of the court was delivered by: Judge Caputo

MEMORANDUM

Presently before the Court is Debtor-Appellant Machne Menachem Inc.'s appeal (Doc. 1) from Bankruptcy Judge John J. Thomas' October 5, 2006 decision, which confirmed the Modified Second Amended Plan of reorganization filed by Appellee Yaakov Spritzer. Spritzer moves to dismiss the appeal as equitably moot. (Doc. 67.) Because the Plan has been substantially consummated, because no stay has been obtained, because there is at least some reliance on the finality of the Plan by third parties not before this Court, because granting the relief Appellant requests would unravel the Plan, and because of the public policy favoring finality of bankruptcy judgments, Appellee's motion will be granted. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 158(a), which provides that the district courts of the United States have jurisdiction to hear appeals from final judgments, orders, and decrees of the bankruptcy court sitting within their respective judicial districts.

BACKGROUND

Appellant Machne Menachem, Inc., a not-for-profit corporation organized under the laws of New York, owns and operates a religious summer camp for Hasidic Jewish male children in Lackawaxen, Pike County, Pennsylvania. (Op. of John J. Thomas, United States Bankruptcy Judge, Sept. 6, 2006, Doc. 14-8, at 1 n.2.) Appellee Yaakov Spritzer was one of the original members of the Board of Directors of Appellant who, after litigation in the United States District Court for the Eastern District of New York, was removed from the Board of Directors. (Id.) Spritzer is also the proponent of the Modified Second Amended Plan of Reorganization ("Plan"), which he filed on December 19, 2005 and which Judge Thomas confirmed by Order of October 5, 2006. (Plan § 1.20.) In accordance with the Plan, a "New Entity," Summer Recreation for Children, Inc., ("SRFC") was formed by the Proponent, Spritzer, prior to the Plan's effective date. (Plan § 1.17). Among other things, the Plan called for all of Appellant's real property and tangible and intangible personal property to be sold and transferred to SRFC, of which Appellee Spritzer is the president and director. (Plan § 5.3; Decl. of Yaakov Spritzer, Apr. 20, 2007, Doc. 69 ¶ 5.). The Plan also provided that the discharge of Appellant's debts was "in full settlement and release of" Machne Menachem's estate's claims against its creditors, including Spritzer. (Plan § 4.5(c); see also id. §§ 2.2(c), 4.1(c), 4.3(b) and 4.4(c).)

By order of January 11, 2007 (Doc. 7), this Court denied Appellant's emergency motion to stay confirmation of the plan pending appeal (Doc. 6). On January 16, 2007, Appellant filed a renewed motion to stay pending appeal (Doc. 10), which I denied after a hearing at which I concluded that Judge Thomas did not abuse his discretion in denying Appellant's motion for a stay pending appeal. (Memorandum Order of January 18, 2007, Doc. 19.) On April 20, 2007, Appellant Spritzer filed the instant motion (Doc. 67) to dismiss Appellant's appeal as equitably moot. This motion is fully briefed and ripe for disposition.

LEGAL STANDARD

A district court hearing an appeal of a bankruptcy court order reviews the bankruptcy court's legal determinations de novo, its factual findings for clear error, and its exercise of discretion for abuse thereof. In re United Healthcare Sys., Inc., 396 F.3d 247, 249 (3d Cir. 2005).

DISCUSSION

Appellee Spritzer argues that Machne Menachem's appeal is barred by the principles of equitable mootness, under which "an appeal should be dismissed as moot when, even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable." In re Continental Airlines, 91 F.3d 553, 559 (3d Cir. 1996) (en banc) (affirming district court's dismissal of trustees' appeal as equitably moot ). Unlike constitutional mootness, equitable mootness is "a broader concept that has developed in bankruptcy law," and "the use of the word 'mootness' [is] a shortcut for the court's decision that the fait accompli of a plan confirmation should preclude further judicial proceedings." In re PWS Holding, 228 F.3d 224, 236 (3d Cir. 2000) (internal citation omitted). The doctrine of equitable mootness "prevents a court from unscrambling complex bankruptcy reorganizations when the appealing party should have acted before the plan became extremely difficult to retract." Nordhoff Invs. Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 185 (3d Cir. 2001) (holding district court did not abuse discretion in dismissing appeal from bankruptcy court as equitably moot). The doctrine, however, "is limited in scope and should be cautiously applied." In re PWS Holding, 228 F.3d at 236 (holding that an appeal should not have been dismissed for equitable mootness where the appeal sought "only alterations to the plan rather than an unraveling of the reorganization"). Equitable mootness involves "a discretionary balancing of equitable and prudential factors." Id. (quoting In re Continental Airlines, 91 F.3d at 560).

In Continental Airlines, the Third Circuit Court of Appeals adopted the doctrine of equitable mootness, and identified five (5) factors to be considered by courts in determining whether it would be equitable or prudential to reach the merits of a bankruptcy appeal:

(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 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.

Id. at 560. The court also noted that "[a]lthough these five factors have been given varying weight, depending on the particular circumstances, the foremost consideration has been whether the reorganization plan has been substantially consummated." Id.; see also In re Zenith Elecs. Corp., 329 F.3d 338, 340 (3d Cir. 2003) (describing the "substantially consummated" factor as "the first and most important Continental factor"). Consideration of the factors also will at times overlap, and the application of the equitable mootness doctrine employs balancing, practicality, and prudence, rather than rigid rules. See, e.g., In re PWS, 228 F.3d at 236; Mac Panel Co. v. Virginia Panel Corp., 283 F.3d 622, 625 (4th Cir. 2002).

I. Substantial Consummation

To assess whether a plan has been substantially consummated, the Court looks first at the Bankruptcy Code, which ...


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