In re: Anthony Scott Levandowski

Background

The United States, on behalf of the Internal Revenue Service, and the California Franchise Tax Board filed four appeals arising from Anthony Scott Levandowski’s Chapter 11 bankruptcy proceedings. The appeals were consolidated for administrative purposes under the lead case. The appeals concerned two bankruptcy-court orders entered on May 2, 2022: an order determining the tax effect of a settlement payment, and an order approving and confirming Levandowski’s disclosure statement and Chapter 11 plan.

The underlying dispute arose after Google obtained a judgment against Levandowski totaling $179,047,998.64. Levandowski filed for Chapter 11 bankruptcy after he could not afford the judgment. In litigation involving Google, Uber, and Levandowski, those parties reached a Global Settlement. Under the settlement, Uber was required to make an “indefeasible” payment to Google and pay the bankruptcy estate $2 million for distribution under the plan. The amount of the payment to Google was sealed.

The bankruptcy court directed Levandowski to seek a determination of the settlement’s tax consequences under 11 U.S.C. § 505. His motion asked the bankruptcy court to determine that the main Uber payment was not gross income for Levandowski, or alternatively to find that the plan was feasible without reserving funds for possible taxes. The Internal Revenue Service and the Franchise Tax Board opposed the motions. The bankruptcy court approved the settlement, granted the tax motion, and approved the plan.

The tax agencies appealed and sought stays pending appeal. The district court and the Ninth Circuit denied requests for a stay. The plan became effective on August 25, 2022. Property was transferred to the Residual Liquidation Trust, the Trustee assumed management, and distributions began. The Trustee then moved to dismiss the appeals as constitutionally moot and equitably moot. The opinion notes that the motion was ambiguous about whether it was brought by the Trustee alone or by the Trustee and Levandowski.

Legal standards

Constitutional mootness concerns the federal courts’ authority to decide only actual disputes. An appeal is not moot if the appellate court can provide the appellant any effective relief if the appellant prevails. Equitable mootness is a court-created doctrine under which a court may decline to reach the merits of a bankruptcy appeal when circumstances have changed so substantially that granting relief would be unfair. The party seeking dismissal bears a heavy burden under either theory.

For equitable mootness, the court considered four factors: whether the appellants diligently sought a stay, whether the plan had been substantially completed, what effect relief would have on innocent third parties, and whether the bankruptcy court could fashion relief without completely undoing the plan.

Constitutional mootness

The court held that the tax agencies had an injury sufficient to support standing. The tax order determined that the main Uber payment was not gross income and therefore prevented the agencies from imposing taxes on it. The confirmation order also failed to account for tax liability. According to the court, vacating those determinations could provide relief by allowing tax liability to be reconsidered.

The court rejected the Trustee’s argument that the appeals were moot because the indefeasible payment could not be clawed back. The agencies were not parties to the Global Settlement, and the appeals concerned the tax determination and the plan’s treatment of possible tax liability, not the settlement payment itself. The court stated that vacating the tax order could lead to a redetermination of tax liability and that reversing or materially modifying the plan could preserve the agencies’ rights. It therefore held that the appeals were not constitutionally moot and denied the motion on that basis.

Equitable mootness

The court found that the agencies acted diligently. They opposed the relevant bankruptcy-court motions, filed appeals within days of the orders, and sought stays from the bankruptcy court, the district court, and the Ninth Circuit. The court rejected the argument that the agencies’ failure to challenge the earlier settlement order made the appeals equitably moot. The settlement order did not itself determine whether the main Uber payment was gross income; that issue arose when the bankruptcy court required the separate tax motion. The first factor therefore did not favor dismissal.

The court found that the plan had been substantially consummated. The property to be transferred had been transferred, the Trustee had assumed management, and distributions had begun and included transferring more than 95 percent of the cash to be distributed to holders of Class 3 General Unsecured Claims. This factor favored equitable mootness, but the court stated that substantial consummation was not by itself decisive.

The court also rejected the Trustee’s assertion that the requested relief would unfairly harm innocent third parties. The court understood the agencies to seek vacatur of the tax determination and restoration of their ability to collect any resulting liability, rather than disgorgement of the main Uber payment. The Trustee had not submitted evidence identifying specific creditors, their claims, the amounts involved, or the extent of any reliance or harm. The court found that speculation about possible harm was insufficient. It also noted that the agencies had repeatedly raised their objections, so interested parties were on notice that the tax determination and the plan’s treatment of taxes could be challenged.

Finally, the court concluded that possible equitable relief remained available without completely undoing the plan. The plan could potentially be modified in part to account for tax rights, including by considering future earnings, income, or assets that had not been liquidated. Because the record did not establish the amount of any potential tax liability, the court could not conclude that no remedy existed. This factor therefore did not require dismissal.

Disposition

The court denied the Trustee’s motion to dismiss the appeals as moot. The order terminated Docket Number 48. The court expressly stated that it was not deciding the merits of the appeals in this order and that those issues would be addressed separately.