Deloitte & Touche LLP v. Aquila Biopharmaceuticals, Inc.

Citations: 214 B.R. 429; 1997 U.S. Dist. LEXIS 21888Docket: No. 94-43054-JFQ; Bankruptcy Appeal No. 96-40192; Adversary No. 96-40192-NMG

Court: District Court, D. Massachusetts; October 27, 1997; Federal District Court

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On September 3, 1996, Deloitte Touche, LLP appealed a Bankruptcy Court order confirming the Plan of Reorganization proposed by Cambridge Biotech, Inc. Aquila Pharmaceuticals, Inc., representing Biotech’s successor, filed a Motion to Dismiss the appeal due to mootness. In March 1996, Class Counsel, representing Biotech stockholders in a federal securities class action, initiated tort and contract claims against Deloitte in Massachusetts Superior Court. This representation was part of a settlement agreement approved in April 1996, which included Class Counsel representing Biotech in the state action against Deloitte. Deloitte objected to the Plan on the grounds that Biotech did not obtain Bankruptcy Court approval for Class Counsel's retention, arguing Class Counsel was adverse to Biotech and not disinterested as required by 11 U.S.C. § 327. The Bankruptcy Court found Deloitte lacked standing to object and ruled that Class Counsel met the disinterestedness requirement, but did not address other objections raised by Deloitte. Deloitte's request for a stay of the confirmation order was denied, leading to the appeal.

The memorandum outlines the standard for dismissing a bankruptcy appeal for mootness, which occurs when the appellate court cannot provide an effective remedy. The jurisdictional aspect of mootness prevents courts from deciding cases where no remedy is available. Deloitte claims the court could void Biotech's employment of Class Counsel, but the court lacks the authority to dismiss ongoing state court proceedings. Consequently, the appeal is deemed moot on jurisdictional grounds as the court cannot intervene in the state action.

Equitable mootness is a doctrine primarily aimed at promoting finality in bankruptcy sales to protect good faith purchasers, but it also applies to other bankruptcy-related situations. Substantial consummation of a reorganization plan creates a strong presumption against an appellate court's ability to provide an equitable remedy. Once a plan is substantially consummated, the opportunity for modifications ends, as the Bankruptcy Code limits the court's power to alter a confirmed plan only before substantial consummation. Additionally, failure to obtain a stay of a Bankruptcy Court’s confirmation order can result in dismissal of an appeal due to mootness. 

In this context, Deloitte argues that its appeal is not moot since the requested relief regarding Biotech’s employment of Class Counsel would not impact unrepresented third-party rights. However, this argument is countered by the Third Circuit's decision in *In re Continental Airlines*, which affirmed a mootness determination based on five factors: substantial consummation of the plan, whether a stay was obtained, the impact of the relief on absent parties, the effect on the plan's success, and public policy favoring finality. The Third Circuit emphasized that factors like substantial consummation and the lack of a stay carry more weight than the potential effects on third parties, suggesting that these elements are critical in assessing the equity of reaching the merits of a bankruptcy appeal.

The Third Circuit, in rejecting Deloitte's arguments similar to those made by the appellants in Continental Airlines, emphasized that overcoming the presumption of mootness established by a consummated plan requires a compelling justification. Deloitte's assertion that dismissing the appeal would undermine the integrity of the Bankruptcy Code was deemed unpersuasive. Deloitte contends that such a dismissal might lead debtors-in-possession to hire interested attorneys without court approval, potentially jeopardizing creditor interests. However, the court found that the necessity of prior court approval for attorney retention does not outweigh the overarching policy of finality in the Bankruptcy Code. Given that the Plan has been substantially executed, no stay of the confirmation order was sought by Deloitte, parties have changed their positions, and multiple transactions have occurred based on the order, Deloitte's appeal regarding the confirmation of Biotech’s reorganization plan is dismissed as moot. Consequently, Aquila’s Motion to Dismiss Appeal has been granted. The Plan involved spinning off Biotech’s biopharmaceutical business to Aquila, and Aquila argues that granting Deloitte's request would adversely affect third parties reliant on the confirmation order.