In Serta Case, Fifth Circuit Doubles Down On Limitation Of Equitable Mootness Doctrine
March 2025
On December 31, 2024, the Fifth Circuit issued a unanimous decision in the chapter 11 cases of Serta Simmons Bedding, LLC rejecting a 2020 “uptier” transaction (the “2020 Uptier”) and excising certain indemnities from the plan. Much has been, and will be, written about the implications for the credit markets of the court’s rejection of the 2020 Uptier.1 Less discussed has been the Fifth Circuit’s narrow interpretation of the doctrine of equitable mootness, articulated en route to excising indemnity provisions related to the rejected 2020 Uptier. This decision represents a continuation of a trend toward narrowing the application of the doctrine in the Fifth Circuit, with some circuits—such as the Third Circuit—following suit, and yet others—such as the Second Circuit—continuing to double down on its application. Particularly if one reads the Supreme Court’s decision in MOAC Mall Holdings v. Transform2 as favoring a narrowing of prudential bankruptcy doctrines that foreclose meaningful appellate remedies, the Serta decision may set up equitable mootness for Supreme Court review in the near future.
On December 31, 2024, the Fifth Circuit issued a unanimous decision in the chapter 11 cases of Serta Simmons Bedding, LLC rejecting a 2020 “uptier” transaction (the “2020 Uptier”) and excising certain indemnities from the plan. Much has been, and will be, written about the implications for the credit markets of the court’s rejection of the 2020 Uptier.1 Less discussed has been the Fifth Circuit’s narrow interpretation of the doctrine of equitable mootness, articulated en route to excising indemnity provisions related to the rejected 2020 Uptier. This decision represents a continuation of a trend toward narrowing the application of the doctrine in the Fifth Circuit, with some circuits—such as the Third Circuit—following suit, and yet others—such as the Second Circuit—continuing to double down on its application. Particularly if one reads the Supreme Court’s decision in MOAC Mall Holdings v. Transform2 as favoring a narrowing of prudential bankruptcy doctrines that foreclose meaningful appellate remedies, the Serta decision may set up equitable mootness for Supreme Court review in the near future.
The Fifth Circuit’s Decision in Serta
Serta, one of the largest mattress companies in the world, entered into a series of transactions in 2016, culminating in the refinancing of over $2 billion in first and second-lien debt. The transactions failed to stave off the headwinds Serta continued to face, and in 2020, Serta entered into the 2020 Uptier, which involved the issuance of at least $1.075 billion in new super-priority loans, $875 million of which would consist of debt exchanged on a cashless basis for approximately $1.3 billion of existing term loans. Serta amended its 2016 credit agreement to permit the transaction, which was approved by a narrow majority of lenders. The minority lenders, who had not been permitted to participate in the transaction, challenged the validity of the issuance as outside the “open market purchase” provision in the 2016 credit agreement. After years of litigation in various courts, ultimately, the SDTX bankruptcy court upheld the transaction and confirmed Serta’s plan of reorganization.
Serta’s confirmed plan provided for indemnities to all creditors who held, as of the plan effective date in 2023, any of the super-priority debt issued in the 2020 Uptier. In two adversary proceedings, certain creditors, including the lenders who had been excluded from the 2020 Uptier (collectively, the “Appellants”) challenged the indemnity provisions as impermissible. The Appellants argued that the grant of the indemnities was not permitted (i) under Section 502(e)(1)(B), which disallows any contingent claim for reimbursement where the claiming entity is co-liable with the debtor, and (ii) under Section 1123(a)(4), which requires equal treatment for each claim in a particular class. Critically, as many debtors defending confirmed plans have done before, Serta and the parties that would have benefited from the indemnities (the “Appellees”) argued that the doctrine of equitable mootness should bar the Fifth Circuit’s review of the plan confirmation order.
Equitable mootness is a judge-made doctrine that considers whether it would be “impractical or inequitable to unscramble the eggs” after a plan has been confirmed and effectuated, effectively giving appellate judges a means to put a thumb on the scale in favor of the commercial need for finality and predictability in bankruptcy court orders.3 An order confirming a plan is a final order from which parties may appeal as of right, but market forces generally dictate that a confirmed plan should be implemented as quickly as possible. Often, in a matter of days or weeks after a confirmation order is entered by the bankruptcy court (and well before any appellate court is able to rule in the absence of a stay or highly expedited proceedings), money will go out the door to creditors, sales or mergers will be effectuated, existing debt instruments and equity interests will be cancelled, and new ones issued. As a result, in the event an appellate court overturns some aspect of the plan, there is a high likelihood that the reversal will affect parties other than the debtor and the appellant, such as other creditors who may have already received distributions, or holders of newly-issued securities. The doctrine of equitable mootness seeks to prevent these potentially costly and disruptive knock-on effects (especially as they may affect third parties), as a “kind of appellate abstention that favors the finality of reorganizations and protects the interrelated multi-party expectations on which they rest.”4
In its decision in Serta, the Fifth Circuit emphasized the discretionary nature of equitable mootness (contrasting it with “actual” mootness, which is not discretionary).5 To determine whether equitable mootness applies, the court, which has considered equitable mootness in depth numerous times before,6 employed a three-factor test: “(i) whether a stay has been obtained, (ii) whether the plan has been ‘substantially consummated,’ and (iii) whether the relief requested would affect either the rights of parties not before the court or the success of the plan.”7 The first two factors inform whether the background circumstances under which application of the doctrine of equitable mootness might be appropriate are present in a given case. If a stay of the bankruptcy court’s order approving the plan is in effect (factor (i)), then necessarily there should have been no actions taken in reliance of that order—the eggs have not yet been scrambled. If no stay is in place, but the plan has not been “substantially consummated” (factor (ii)), then the same analysis applies—the eggs may have been cracked in the bowl, but the yolks remain intact, and the order may be reversed without undue cost or disruption. Factor (iii) is the crux of the inquiry, asking if consummation of the plan has progressed to the point that the rights of third parties would be affected by an appellate reversal, or the success of the plan would be jeopardized.
With respect to the first factor, in Serta, the Fifth Circuit observed that although no stay had been granted, the appeal had been directly certified by the bankruptcy court under 28 U.S.C. § 158(d)(2). To decline to consider a properly certified appeal for reasons of equitable mootness, just because the lower court decision had not been stayed, would risk “thwart[ing]” the intent of Congress by “depriv[ing] the appellate court of jurisdiction over a properly certified appeal.”8 As to the second factor, the plan had gone effective. Despite the fact that the first two factors weighed in favor of the exercise of equitable mootness, the Fifth Circuit determined that it could “still exercise[] appellate review when only the third factor weighed against equitable mootness.”9 Specifically, it found that “the requested relief of excision [of the indemnity provisions] would not ‘affect either the rights of the parties not before the court or the success of the plan.’”10
Thus satisfied that the test counseled against application of equitable mootness, the court addressed the “heart” of Serta’s arguments: “unfairness.”11 As debtors often do in cases of appellate review of chapter 11 plans, the Serta debtors argued that it would be inequitable to overturn the challenged indemnities in a vacuum (i.e. without “letting [the parties] go back to the drawing board”). To this argument, the Fifth Circuit responded with a “full-throated rebuttal,” observing that, “if endorsed, [the debtors’ position] would effectively abolish appellate review of even clearly unlawful provisions in bankruptcy plans.”12 The court observed that as sophisticated parties, the debtors, and the lenders who benefited from the indemnities, could have anticipated that such controversial provisions might be challenged on appeal, and that the appellate court might ultimately excise the provisions in question.13 The court remarked that “[p]arties supporting such provisions could always argue they would have done things differently if they had known the provisions would later be excised,” and declined to “save [the Appellees] from the consequences of their actions.”14 The court additionally noted that the excision of the indemnities from the plan would benefit Serta going forward (by removing a “massive liability hanging over its head”)15, and suggested that the equitable mootness analysis could come out differently if the opposite were true.
Although not a departure from the Fifth Circuit’s precedents as interpreted by the Serta court, the court’s rejection of the Appellees’ arguments with respect to equitable mootness is notable for its vociferousness and its focus on the fairness inquiry. It echoes similarly skeptical views of equitable mootness arguments by the Third Circuit in particular, although not all courts share this skepticism.
In its decision in Serta, the Fifth Circuit emphasized the discretionary nature of equitable mootness (contrasting it with “actual” mootness, which is not discretionary).5 To determine whether equitable mootness applies, the court, which has considered equitable mootness in depth numerous times before,6 employed a three-factor test: “(i) whether a stay has been obtained, (ii) whether the plan has been ‘substantially consummated,’ and (iii) whether the relief requested would affect either the rights of parties not before the court or the success of the plan.”7 The first two factors inform whether the background circumstances under which application of the doctrine of equitable mootness might be appropriate are present in a given case. If a stay of the bankruptcy court’s order approving the plan is in effect (factor (i)), then necessarily there should have been no actions taken in reliance of that order—the eggs have not yet been scrambled. If no stay is in place, but the plan has not been “substantially consummated” (factor (ii)), then the same analysis applies—the eggs may have been cracked in the bowl, but the yolks remain intact, and the order may be reversed without undue cost or disruption. Factor (iii) is the crux of the inquiry, asking if consummation of the plan has progressed to the point that the rights of third parties would be affected by an appellate reversal, or the success of the plan would be jeopardized.
With respect to the first factor, in Serta, the Fifth Circuit observed that although no stay had been granted, the appeal had been directly certified by the bankruptcy court under 28 U.S.C. § 158(d)(2). To decline to consider a properly certified appeal for reasons of equitable mootness, just because the lower court decision had not been stayed, would risk “thwart[ing]” the intent of Congress by “depriv[ing] the appellate court of jurisdiction over a properly certified appeal.”8 As to the second factor, the plan had gone effective. Despite the fact that the first two factors weighed in favor of the exercise of equitable mootness, the Fifth Circuit determined that it could “still exercise[] appellate review when only the third factor weighed against equitable mootness.”9 Specifically, it found that “the requested relief of excision [of the indemnity provisions] would not ‘affect either the rights of the parties not before the court or the success of the plan.’”10
Thus satisfied that the test counseled against application of equitable mootness, the court addressed the “heart” of Serta’s arguments: “unfairness.”11 As debtors often do in cases of appellate review of chapter 11 plans, the Serta debtors argued that it would be inequitable to overturn the challenged indemnities in a vacuum (i.e. without “letting [the parties] go back to the drawing board”). To this argument, the Fifth Circuit responded with a “full-throated rebuttal,” observing that, “if endorsed, [the debtors’ position] would effectively abolish appellate review of even clearly unlawful provisions in bankruptcy plans.”12 The court observed that as sophisticated parties, the debtors, and the lenders who benefited from the indemnities, could have anticipated that such controversial provisions might be challenged on appeal, and that the appellate court might ultimately excise the provisions in question.13 The court remarked that “[p]arties supporting such provisions could always argue they would have done things differently if they had known the provisions would later be excised,” and declined to “save [the Appellees] from the consequences of their actions.”14 The court additionally noted that the excision of the indemnities from the plan would benefit Serta going forward (by removing a “massive liability hanging over its head”)15, and suggested that the equitable mootness analysis could come out differently if the opposite were true.
Although not a departure from the Fifth Circuit’s precedents as interpreted by the Serta court, the court’s rejection of the Appellees’ arguments with respect to equitable mootness is notable for its vociferousness and its focus on the fairness inquiry. It echoes similarly skeptical views of equitable mootness arguments by the Third Circuit in particular, although not all courts share this skepticism.
A Deepening Circuit Split on Equitable Mootness Doctrine
Courts in the majority of circuits apply tests that are substantively similar to Fifth Circuit’s two-factor test, outlined above.16 The Third and Fifth Circuits are generally more reticent to apply the doctrine, and emphasize that it must be employed with nuance rather than as a blunt instrument.17 In the landmark Tribune Media case, the Third Circuit declined to invoke the doctrine of equitable mootness where an appeal at issue would have had only a small economic effect on a substantially consummated plan, observing that equitable mootness should be applied “with a scalpel rather than an axe,” and chiding the lower court for “elevat[ing] finality over all other interests” in its application of the doctrine.18
The Second Circuit, by contrast, presumes that an appeal is equitably moot where a plan has been substantially consummated.19 To overcome this presumption, a litigant must show that five factors are met: “(i) effective relief can be ordered; (ii) relief will not affect the debtor’s re-emergence; (iii) relief will not unravel intricate transactions; (iv) affected third-parties are notified and able to participate in the appeal; and (v) [the] appellant diligently sought a stay of the reorganization plan.”20 As a result of the high bar set by the presumption, the Second Circuit is consistently more receptive to equitable mootness arguments than other circuit courts.21 Most recently, for example, the Second Circuit dismissed as equitably moot an appeal of an order in the Windstream Holdings chapter 11 case authorizing debtors to pay certain critical vendors.22 It held that the appellant had failed to overcome the presumption, chiefly because it had not exhausted its remedies to obtain a stay of the order to which it objected, and because granting the requested relief could threaten the plan of reorganization by causing “tens of millions of dollars in previously satisfied claims to spring back to life.”23
This split between the Second Circuit and others could garner Supreme Court review, particularly where the Supreme Court has recently shown an appetite for narrowing a similar doctrine that had the effect of foreclosing appellate review. In MOAC Mall Holdings v. Transform, the Supreme Court unanimously rejected the Second Circuit’s interpretation of Section 363(m) as creating a so-called “rule of statutory mootness” that bars appellate review. 24 Section 363(m) provides that a sale or lease assumed or assigned under Section 363(b) or (c), unless stayed pending appeal, remains valid if such sale or lease was entered into in good faith. In interpreting this provision, the Supreme Court reversed, holding that it was not a jurisdictional bar to appellate review.
Given that the Second Circuit’s Section 363(m) jurisprudence was premised on a statutory provision, and even that did not save it from reversal at the Supreme Court, whether equitable mootness—an entirely judge-made doctrine—could survive scrutiny (particularly in the expansive form favored by the Second Circuit) is a question for which plan proponents may not like the answer.
Takeaways from Serta Decision for Practitioners
The decision in Serta represents a further hardening of the Fifth Circuit’s already unsolicitous view of the equitable mootness doctrine. That view is on the rise. Already, a party to at least one case in a district court within the Third Circuit has pointed to the decision in support of arguments that equitable mootness does not bar courts’ review of certain plan release provisions.25 Even before the Fifth Circuit’s decision in Serta, equitable mootness was at its least persuasive in the context of disputes over the appropriate scope of releases, exculpations, or indemnifications, given that such provisions can be excised from a plan without altering distributions to creditors. Courts in the Third and Fifth Circuits and across the country, with the exception of those in the Second Circuit, are likely to continue to exercise skeptical caution in applying the doctrine of equitable mootness, particularly in circumstances in which the provision in question can be excised without unwinding plan implementation transactions or distributions. And, subject to a change brought about by Supreme Court intervention, this will continue to factor into debtors’ and plan sponsors’ venue considerations in favor of the bankruptcy courts in the Second Circuit. For now, as the legal landscape is in flux, debtors and other parties who support, or would benefit from, controversial plan provisions—especially, but not exclusively, releases, exculpations, and indemnifications—should not assume that their deals will be exempt from review the moment a plan goes effective.
Takeaways from Serta Decision for Practitioners
The decision in Serta represents a further hardening of the Fifth Circuit’s already unsolicitous view of the equitable mootness doctrine. That view is on the rise. Already, a party to at least one case in a district court within the Third Circuit has pointed to the decision in support of arguments that equitable mootness does not bar courts’ review of certain plan release provisions.25 Even before the Fifth Circuit’s decision in Serta, equitable mootness was at its least persuasive in the context of disputes over the appropriate scope of releases, exculpations, or indemnifications, given that such provisions can be excised from a plan without altering distributions to creditors. Courts in the Third and Fifth Circuits and across the country, with the exception of those in the Second Circuit, are likely to continue to exercise skeptical caution in applying the doctrine of equitable mootness, particularly in circumstances in which the provision in question can be excised without unwinding plan implementation transactions or distributions. And, subject to a change brought about by Supreme Court intervention, this will continue to factor into debtors’ and plan sponsors’ venue considerations in favor of the bankruptcy courts in the Second Circuit. For now, as the legal landscape is in flux, debtors and other parties who support, or would benefit from, controversial plan provisions—especially, but not exclusively, releases, exculpations, and indemnifications—should not assume that their deals will be exempt from review the moment a plan goes effective.
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