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Doctrine of Equitable Mootness for Bankruptcy Ruling ​

In this contract action, the issue at the heart of the case before the Second Department was the preclusive effect of a bankruptcy court ruling and the doctrine of “equitable mootness” which prohibits disturbing a bankruptcy plan already implemented.  The easiest way to convey the nature of the legal issues in the case is to quote the relevant discussions in the Second Department’s decision:

In light of authority holding that a court should apply the rules of res judicata followed in the jurisdiction that rendered the earlier decision …, we apply federal res judicata law in determining whether the doctrine of res judicata bars this action … .

Under federal res judicata law, subsequent litigation is prohibited if a prior court ruling ” was (1) a final judgment on the merits, (2) by a court of competent jurisdiction, (3) in a case involving the same parties or their privies, and (4) involving the same cause of action” … . This rule applies with full force to matters decided by the bankruptcy courts, including those concerning Chapter 11 reorganization … . Moreover, in the bankruptcy context, the court must also consider whether an independent judgment in a separate proceeding would ” impair, destroy, challenge, or invalidate the enforceability or effectiveness'” of the reorganization plan … .

The plaintiffs contend that there was no final judgment on the merits because the appeal from the 2009 New York bankruptcy court order was dismissed on the ground of equitable mootness. Equitable mootness is invoked to avoid disturbing a reorganization plan once implemented …. When a plan has been substantially consummated, an appeal should be dismissed unless several requirements, the most important of which is that the appellant sought a stay of confirmation, are satisfied … .

Here, the District Court dismissed the appeal from the 2009 New York bankruptcy court order because the Kmart reorganization plan had been implemented and RM 18 had failed to seek a stay of the confirmation. Once the appeal was dismissed as moot, the 2009 New York bankruptcy court order became final …. Since there was no vacatur of the 2009 New York bankruptcy court order, it has preclusive effect … . …[T]he plaintiffs may not maintain the present litigation, which challenges [the] final adjudication by a court of competent jurisdiction … .  RM 18 Corp. v Bank of NY Mellon Trust Co., N.A., 2013 NY Slip Op 01541, 2011-o9112, Index No 15992/10, 2nd Dept. 3-13-13

 

 

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