In Re: Frontier Communications Corporation

Background

Frontier Communications Corporation filed for Chapter 11 bankruptcy protection on April 14, 2020. Summer Ridge Group Ltd., which held unsecured Frontier corporate bonds, filed several motions asking the Bankruptcy Court to dismiss the bankruptcy proceedings as fraudulent. The motions alleged that Frontier had improperly reduced the reported value of its assets through a goodwill impairment and had selectively repaid certain unsecured creditors before filing for bankruptcy.

Tsuei Yih Hwa, proceeding without a lawyer, filed a separate motion seeking the appointment of a Chapter 11 trustee or examiner to investigate possible accounting or bankruptcy fraud. Tsuei said he was an unsecured bondholder and shareholder but did not submit documents proving those claims to the Bankruptcy Court. He relied on Summer Ridge’s arguments and did not appear at the hearing on his motion.

The Bankruptcy Court disregarded Summer Ridge’s motions because Summer Ridge, a corporation, was attempting to proceed without counsel. The Bankruptcy Court denied Tsuei’s requests for a trustee under 11 U.S.C. § 1104(a)(1) and (a)(2), finding that he had not met his burden of proof and had not shown fraud, misconduct, or that a trustee would serve the interests of creditors or equity holders. The court deferred a decision on a possible examiner under § 1104(c)(2), directing Tsuei to schedule another hearing and clarify the scope of any investigation. Tsuei never scheduled that hearing.

Events During the Appeal

Tsuei appealed the Bankruptcy Court’s rulings. The district court previously denied his request for a stay while the appeal was pending, concluding that he had not shown irreparable injury, lacked standing to appeal Summer Ridge’s motions, could not appeal an examiner request that the Bankruptcy Court had not yet decided, and had not shown that a stay would serve the public interest.

After the appeal was fully briefed, Frontier notified the district court that its reorganization plan’s effective date had passed. As of April 30, 2021, the former Frontier had been dissolved, a reorganized entity had taken over its assets and operations, a new board had assumed control, and distributions under the plan had begun. Frontier’s senior unsecured noteholders received stock, new secured notes, and cash distributions under the plan.

Recusal Request

Tsuei filed a motion to change judges, which the court interpreted as a request for recusal. He argued that Judge McMahon was biased because the court had not decided his appeal within the time he believed Federal Rule of Civil Procedure 58 required.

The court denied the recusal motion. Judge McMahon explained that Rule 58 sets deadlines for entering judgment after a decision, not a deadline for deciding a bankruptcy appeal. The court also found that Tsuei had not shown bias and that the earlier ruling denying a stay reflected an assessment of the appeal’s likely success, not improper prejudice.

Equitable Mootness

The court applied the equitable-mootness doctrine. This doctrine allows a court to dismiss a bankruptcy appeal when granting relief would be impractical or unfair because the reorganization plan has already been carried out. It is different from constitutional mootness: the question is not necessarily whether the court lacks power to provide relief, but whether providing relief would improperly disrupt the completed reorganization.

Under Second Circuit law, an appeal is presumed equitably moot when a reorganization plan has been substantially consummated. Substantial consummation means that substantially all planned property transfers have occurred, the debtor or its successor has taken over the business or property covered by the plan, and distributions under the plan have begun.

A challenger must satisfy five factors to overcome that presumption: the court must still be able to grant effective relief; the relief must not undo the debtor’s reemergence as a reorganized company; it must not unravel completed transactions or create an unmanageable situation for the Bankruptcy Court; affected parties must have notice and an opportunity to participate; and the appellant must have diligently pursued available remedies to obtain a stay.

Application and Disposition

Judge McMahon concluded that Frontier’s plan had been substantially consummated. Frontier had reorganized into a new corporate entity, transferred its assets, replaced its board, begun trading under a new ticker, distributed plan consideration to senior unsecured noteholders, and converted debtor-in-possession financing into other forms of debt.

The court concluded that Tsuei could not overcome the presumption of equitable mootness. The requested appointment of a trustee or examiner was unlikely to provide effective relief because the former Frontier no longer existed and the Bankruptcy Code authorizes such appointments before confirmation of a plan. Granting relief would also risk undoing the reorganized company, disrupting completed transactions, and harming stockholders and others who relied on the plan’s completion. The court said Tsuei arguably acted diligently in seeking a stay, but he had to satisfy all five factors, and satisfying one factor was insufficient.

The court therefore denied Tsuei’s recusal motion and dismissed the appeal as equitably moot. It directed the Clerk to remove the matter from the list of open bankruptcy appeals and close the case.