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The U.S. Court of Appeals for the Third Circuit recently addressed the tension that may exist between the needs of a bankrupt debtor attempting to reorganize and the rights of nondebtor litigants in In re Philadelphia Newspapers, 2012 U.S. App. LEXIS 15419 (3d Cir. July 26, 2012). The Third Circuit held that the U.S. District Court for the Eastern District of Pennsylvania abused its discretion in finding that an appeal had been rendered equitably moot as a result of substantial consummation of the Philadelphia Newspapers debtors’ Chapter 11 plan of reorganization and the appellants’ failure to seek a stay. The Third Circuit held that the doctrine of “equitable mootness” may not be applied merely when a plan has been substantially consummated, but instead requires that the appeal at issue would actually undermine that plan.

BACKGROUND

During the pendency of the Philadelphia Newspapers Chapter 11 cases in the U.S. Bankruptcy Court for the Eastern District of Pennsylvania, the debtors published an online editorial linking to certain articles published pre-petition by The Philadelphia Inquirer regarding the management of a charter school. The managers of the charter school alleged that the articles were defamatory and that the online editorial that linked to these pre-petition articles constituted a “republication” of the allegedly defamatory material, and filed administrative expense requests in the Bankruptcy Court against the debtors, in the amount of $1.8 million, for the alleged damages caused by such post-petition act.

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