                                                                                                                           Opinions of the United
2006 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


3-1-2006

In Re: SLI Inc
Precedential or Non-Precedential: Non-Precedential

Docket No. 04-4231




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                                                                   NOT PRECEDENTIAL

                       UNITED STATES COURT OF APPEALS
                            FOR THE THIRD CIRCUIT


                                       No. 04-4231


           IN RE: SLI INC.; CHICAGO MINIATURE OPTOELECTRONIC
          TECHNOLOGIES INC.; ELECTRO-MAG INTERNATIONAL INC;
               CHICAGO MINIATURE LAMP SYLVANIA LIGHTING
            INTERNATIONAL, INC.; SLI LIGHTING PRODUCTS, INC.;
           SLI LIGHTING COMPANY; SLI LIGHTING SOLUTIONS, INC.
                               and CML AIR INC.,
                                        Debtors

                               OSRAM SYLVANIA, INC.,
                                          Appellant

                                             v.

             SLI, INC., CHICAGO MINIATURE OPTOELECTRONIC
       TECHNOLOGIES, INC.; ELECTRO-MAG INTERNATIONAL, INC.;
    CHICAGO MINIATURE LAMP SYLVANIA LIGHTING INTERNATIONAL,
     INC., SLI LIGHTING PRODUCTS, INC., SLI LIGHTING COMPANY, SLI
                LIGHTING SOLUTIONS, INC., and CML AIR, INC.


                       Appeal from the United States District Court
                               for the District of Delaware
                              (D.C. Civil No. 03-cv-00729)
                         District Judge: Honorable Kent Jordan


                                Argued January 26, 2006
                     Before: RENDELL and SMITH, Circuit Judges,
                              and IRENAS*, District Judge.


* Honorable Joseph E. Irenas, Senior District Judge for the District of New Jersey, sitting
by designation.
                                  (Filed: March 1, 2006)


Martin J. Weis
Dilworth Paxson
1735 Market Street
3200 The Mellon Bank Center
Philadelphia, PA 19103

Albert Solochek [ARGUED]
Howard, Solochek & Webber
324 East Wisconsin Avenue
Suite 1100
Milwaukee, WI 53202
  Counsel for Appellant

William H. Sudell, Jr. [ARGUED]
Daniel B. Butz
Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, DE 19899
  Counsel for Appellees


                               OPINION OF THE COURT


RENDELL, Circuit Judge

       Osram Sylvania, Inc. (“OSI”), an unsecured creditor of SLI, Inc. and certain

affiliates (“SLI” or “Debtor”), appeals from the District Court’s dismissal of its appeal of

the Bankruptcy Court’s order of confirmation of the Debtor’s plan of reorganization.

The District Court dismissed the appeal on the grounds of equitable mootness. Because

we find that the District Court did not abuse its discretion in applying equitable mootness


                                             2
to dismiss OSI’s case, we will affirm.

                                             I.

       On September 9, 2002, SLI filed a voluntary petition for relief under chapter 11 of

title 11 of the United States Code. On May 15, 2003, SLI filed a Second Amended Joint

Plan of Reorganization (the “Plan”) and related disclosure statement. The Bankruptcy

Court approved the disclosure statement and fixed June 19, 2003 as the date to consider

confirmation of the Plan.

       OSI was a prepetition unsecured creditor of SLI, holding a claim in the

approximate amount of $500,000. At the confirmation hearing, OSI objected to the

Plan’s feasibility and to the scope of the releases, injunctions, and exculpation and

limitation of liability provisions it contained. In addition, OSI argued that the Plan did

not adequately disclose the counterclaims SLI might assert against OSI, in violation of a

May 13, 2003 order of the Bankruptcy Court requiring such disclosure. SLI stated in

court filings only that it had counterclaims against OSI in “unknown” amounts. Despite

OSI’s objections, the Bankruptcy Court approved the Plan in a June 19, 2003

confirmation order (the “Confirmation Order”) and set June 30, 2003 as the effective

date of the Plan.

       On the effective date, participants who elected to take part invested $26 million in

equity in the Reorganized SLI. The Reorganized SLI entered into a term loan agreement

with several institutional investors (the “Investors”) and received $20 million. The sum


                                             3
of $20 million was paid to the DIP loan provider and all liens securing the DIP loan were

discharged. The stock of SLI was cancelled and delisted and the Reorganized Debtor

was incorporated. All of the interests in the Reorganized Debtor were distributed to Plan

participants. A litigation trust was formed and the sum of $1,475,000 was transferred to

the trust. The sum of $2,370,451 was paid under the key employee retention plan in

exchange for releases from the Plan. Since the effective date, SLI has also entered into a

new, secured loan agreement with Bank of America, replacing the term loan, which was

repaid in full.

       When OSI appealed the Confirmation Order to the District Court, SLI moved to

dismiss on the grounds of equitable mootness. In an October 5, 2004 order, the District

Court granted the motion to dismiss. OSI timely filed this appeal. We have jurisdiction

under 28 U.S.C. § 158(d) to review the District Court’s order dismissing OSI’s appeal.

                                             II.

       Because the mootness determination we review here involves a discretionary

balancing of equitable and prudential factors, we review the District Court’s decision for

abuse of discretion. In re Continental Airlines, 91 F.3d 553, 560 (3d Cir. 1996)

(Continental I). We accept the District Court’s findings of fact unless they are clearly

erroneous. Nordhoff Invs. Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 182 (3d Cir. 2001).

       “Under the doctrine of equitable mootness, an appeal should be dismissed, even if

the court has jurisdiction and could fashion relief, if the implementation of that relief


                                              4
would be inequitable.” In re PWS Holding Corp., 228 F.3d 224, 235-236 (3d Cir. 2000).

“In effect, the equitable mootness doctrine prevents a court from unscrambling complex

bankruptcy reorganizations when the appealing party should have acted before the plan

became extremely difficult to retract.” Nordhoff, 258 F.3d at 185.

      We have identified five prudential factors that we evaluate to determine if a

bankruptcy case is equitably moot:

             (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 the
             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.

Nordhoff, 258 F.3d at 185. District courts have the discretion to give varying weight to

these five factors, depending on the particular circumstances of the case before them.

PWS, 228 F.3d at 236; Continental I, 91 F.3d at 560. We have noted, however, that the

doctrine of equitable mootness “is limited in scope and should be cautiously applied.”

PWS, 228 F.3d at 236.

                                           III.

      Though the district courts have the discretion to give varying weight to the five

factors for equitable mootness, a court’s “foremost consideration” must be whether the

reorganization plan has been substantially consummated. PWS, 228 F.3d at 236. “This


                                            5
is especially so where the reorganization involves intricate transactions, or where the

outside investors have relied on the confirmation of the plan.” Continental I, 91 F.3d at

560-61 (citations omitted). We agree with the District Court that the Plan has been

substantially consummated and that, if successful, OSI’s appeal would unravel the Plan.

See In re Zenith Elecs. Corp., 329 F.3d 338, 346 (3d Cir. 2003). All of the property

required to be transferred under the Plan has been transferred, 11 U.S.C. § 1101(2)(A),

the Reorganized Debtor has assumed the management of the Debtor’s business, id. §

1101(2)(B), and all distributions required to be made under the Plan have been made, id.

§ 1101(2)(C). Furthermore, the stock of SLI was cancelled and new equity was issued

for the Reorganized Debtor. OSI contends that the Plan has not been substantially

consummated because the litigation trust and professional fee transfers were placed in

escrow, rather than directly distributed. The escrowed property, however, is irrelevant

for purposes of this analysis because it was irrevocably transferred in accordance with the

Plan.

        The second factor also weighs in favor of applying equitable mootness to OSI’s

appeal. Our previous cases in this area leave no doubt that an appellant risks the

application of equitable mootness if it fails to obtain a stay of execution of the

objectionable order. Nordhoff, 258 F.3d at 186-87. OSI “never applied for a stay and

ha[s] not provided an adequate explanation for [its] failure to do so.” Nordhoff, 258 F.3d

at 191-92 (Alito, J., concurring). Though the failure to seek a stay is not necessarily


                                              6
fatal, In re United Artists Theatre Co., 315 F.3d 217, 228 (3d Cir. 2003), it undoubtedly

“weighs heavily in favor of the [D]istrict [C]ourt’s declination to delve into the merits of

[OSI’s] appeal,” Continental I, 91 F.3d at 562.

       The potential harm to third parties from an appeal, measured under the third

factor, is central to whether the relief OSI seeks would be inequitable. Id. OSI argues

that there was little evidence in the record to substantiate a claim that the relief requested

would affect the rights of parties not before this Court. We disagree. The record shows

that there are several parties not before us whose rights would be affected by this appeal,

including new lenders, new contracting parties, new secured interest holders, new senior

management, and new unsecured creditors. In addition, numerous liens have been

released against SLI by secured creditors in reliance on the Plan. Thus, we cannot find

that the District Court abused its discretion by weighing this factor in favor of equitable

mootness.

       With respect to the fourth factor, OSI acknowledges that its request for a full

reversal of the Plan would “knock the props out from under” it. Zenith, 329 F.3d at 346.

OSI therefore proposes three forms of alternative relief that it believes would fix the Plan

without altogether unraveling it: (1) striking the releases and exculpation provisions; (2)

barring SLI from asserting claims against OSI that arose prior to confirmation but were

not disclosed in the Plan; and (3) remanding with instructions that the Plan be confirmed

in an order that is consistent with Official Form 15. OSI did not object to the form of the


                                              7
Confirmation Order before the Bankruptcy Court.

       As an initial matter, we note that the Confirmation Order stated that its provisions,

as well as those of the Plan, were “non-severable and mutually dependent.” This

undoubtedly militates against the partial modification of the Plan that OSI proposes.

Setting this problem aside though, each form of intermediate relief OSI proposes would

impair the success of the Plan.

       The District Court found that the releases by the Debtor and the Investors were

consideration for an investment of $20 million and a conversion of $325 million in

claims to equity. The record supports this factual finding. See Confirmation Order ¶ 27

at R-397-98 (noting that the releases are essential to implementing the Plan and

important to its overall objectives). Because they are consideration for investment that

was crucial to the Plan, the releases form an “‘integral nexus’ with the feasibility of the . .

. plan of reorganization.” In re Continental Airlines, 203 F.3d 203, 209 (3d Cir. 2000)

(Continental II). Likewise, OSI’s request that the Bankruptcy Court issue a new

confirmation order consistent with Form 15 is akin to a full reversal because it requires

the entirety of the Confirmation Order to be stricken.

       OSI’s other request – that SLI be prohibited from asserting counterclaims against

OSI that it did not disclose in the Plan – is simply not a valid “intermediate option” to

reversing the entire Plan. PWS, 228 F.3d at 236. There is no authority under which we

would preemptively strike future counterclaims SLI may have against OSI simply


                                              8
because SLI could not identify them more specifically in its disclosure. SLI did not

consciously attempt to hide the counterclaims, see Krystal Cadillac-Oldsmobile GMC

Truck, Inc. v. General Motors Corporation, 337 F.3d 314, 322-23 (3d Cir. 2003), or

solicit the support of the creditors generally, or OSI in particular, without disclosing the

potential for counterclaims against OSI, see Oneida Motor Freight, Inc. v. United Jersey

Bank, 848 F.2d 414, 418 (3d Cir. 1988). And given that SLI will only assert the

“unknown” counterclaims if OSI initiates litigation against it, we cannot see how OSI

would be unfairly surprised by the counterclaims. Under these circumstances, there is no

basis for modifying the Plan in the way OSI suggests.

       Finally, the District Court did not abuse its discretion in holding that the fifth

factor weighed in favor of dismissing the case. “[T]he importance of allowing approved

reorganizations to go forward in reliance on bankruptcy court confirmation orders may

be the central animating force behind the equitable mootness doctrine.” Continental I,

91 F.3d at 565. OSI argues that there are competing policy concerns that should take

priority here, including full disclosure in bankruptcy cases, reluctance to discharge

obligations of non-debtors, and respect for prior court decisions. OSI has not persuaded

the Court that these policy objectives outweigh our interest in promoting the finality of

the bankruptcy judgment at issue here.

                                             IV.

       We agree with the District Court’s determination that all five prudential factors we


                                              9
evaluate to determine if a bankruptcy case is equitably moot weigh in favor of dismissing

OSI’s appeal. Because the District Court did not abuse its discretion in holding the case

equitably moot, we will affirm.




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