Appellate Court Reverses Chapter 11 Confirmation Order Based on Faulty Tax Ruling

The U.S. District Court for the Northern District of California recently issued two blistering opinions on appeals by the Internal Revenue Service (IRS) California Franchise Tax Board (FTB) (collectively, Tax Agencies) from a bankruptcy court's Chapter 11 plan confirmation order and a tax determination order. In the first decision, the court held the appeals were neither constitutionally nor equitably moot. In re Levandowski, 2023 WL 2503305 (N.D. Cal. Mar. 14, 2023), (Levandowski I). In the second opinion, the court reversed and remanded the bankruptcy court's order erroneously determining the debtor's tax liability (Tax Order) and the bankruptcy court's separate confirmation order on feasibility grounds "due to legal error [in] the Tax Order." In re Levandowski, 2023 WL 2495763 (N.D. Cal. Mar. 14, 2023) (Levandowski II). The court also remanded to the bankruptcy court for a reconsideration of its "setoff rights" finding in the confirmation order's discharge provision.

Relevance

Chapter 11 debtors routinely move to dismiss appeals from confirmation orders on mootness grounds, as was done in Levandowski I. The appellate courts have had to wrestle with the equitable mootness issue in the past decade as a result. See, e.g., In re Charter Communications, Inc., 691 F.3d 476, 482 (2d Cir. 2012) ("In this circuit, an appeal is presumed equitably moot where the debtor's plan of reorganization has been substantially consummated."); contra, In re Transwest Resort Properties, Inc., 801 F.3d 1161, 1169 (9th Cir. 2015); ("Reorganized debtors argue that substantial consummation creates a presumption that the appeal is moot …. Our Circuit's articulation of the equitable mootness test, however has not included such a presumption …. We must still consider whether, despite substantial consummation, we can fashion effective relief."); In re One 2 One Communications, LLC, 805 F.3d 428, 434 (3d Cir. 2015) ("The party seeking dismissal bears the burden to demonstrate that, weighing the relevant factors, dismissal is warranted."); In re VeroBlue Farms USA, Inc., 6 F. 4th 884, 885-884 (8th Cir. 2021)) (application of equitable mootness doctrine "exceptional"; remanded for further "inquiry").