A pair of recent decisions by the Ninth Circuit in In re Mortgages Ltd. underscore the power of the equitable mootness doctrine and the importance of obtaining stays of bankruptcy court orders to avoid having appeals of the orders deemed moot.

Equitable mootness is a judge-made doctrine applied when there has been a comprehensive change in circumstances or where a transaction would be difficult to unwind, and debtors, creditors and third parties have relied upon circumstances or transaction, making it inequitable for the appellate court to consider the merits of an appeal. As a result, equitable mootness can have the effect of protecting an erroneous decision by the lower court.

In Mortgages Ltd., the manager under a confirmed Chapter 11 plan of reorganization sought a declaration from the bankruptcy court that the manager had authority to sell property. A group of investors, which owned fractional interests in the property, objected. The bankruptcy court entered a judgment declaring that the manager had authority to sell the property. Armed with the judgment, the manager then sold properties to third party purchasers. A number of appeals then followed. (Read more about the Ninth Circuit decisions in Mortgages Ltd.)

In one of the Mortgages Ltd. decisions, the Ninth Circuit dismissed appeals from bankruptcy court orders authorizing the manager's sale of certain properties. In those appeals, the appellants had sought stays of the sale orders - without posting costly supersedeas bonds, but the stay requests were denied. In dismissing the appeals, the Ninth Circuit ruled that the appeals were equitably moot because no stays were obtained and third-party purchasers had purchased in good faith and in reliance on the unstayed bankruptcy court sale orders. (The Ninth Circuit dismissed still other appeals in Mortgages Ltd. because no stays of the underlying orders had been sought by the appellants.)

The twist in Mortgages Ltd. involves a companion appeal from the bankruptcy court judgment declaring that the manager had irrevocable authority to sell the subject properties over the investors' objections. There, the Ninth Circuit held the appeal was not equitably moot because the bankruptcy court could fashion an equitable remedy "without completely knocking the props out from under the [confirmed bankruptcy] plan." Specifically, the Ninth Circuit found that it could reverse and remand the declaratory judgment (which it did on procedural grounds) because doing so would only affect the manager's ability to act prospectively without unduly affecting innocent third parties who had purchased properties in reliance on the bankruptcy court's unstayed sale orders.

In a nutshell, the Ninth Circuit preserved the consummated property sales while reversing the judgment declaring that the manager had authority to sell the remaining properties.

The primary takeaway from the Mortgages Ltd. decisions is that appellants must seek and obtain stays of all orders related to bankruptcy sales, or risk having their appeals deemed equitably moot regardless of whether the sales should have been made in the first instance. Another lesson from the Mortgages Ltd. decisions is that while one appeal may be dismissed as moot, another related appeal may not be moot if the court can fashion a remedy that is equitable to all interested parties.