Court: District Court, S.D. New York; January 27, 2014; Federal District Court
Appellants Eric Beeman, Jane Freij, and Robert Traktman, holders of unused Borders gift cards, challenge Bankruptcy Judge Martin Glenn's Second Distribution Order, which permits interim distributions under Borders Group, Inc.'s chapter 11 bankruptcy plan. They seek a direct appeal to the Court of Appeals and a stay on interim distributions pending their appeal. The backdrop of the case includes Borders' bankruptcy filing on February 16, 2011, and the subsequent authorization for customer programs, including gift cards. By June 2011, approximately 17.7 million gift cards with $210.5 million in unredeemed balances were outstanding.
Despite a Bar Date Order requiring timely proof of claims, Appellants failed to file their claims before the deadline. Borders' attempt to sell its business as a going concern was unsuccessful, leading to the sale of its stores and assets. Following the confirmation of the Plan on December 21, 2011, Appellants did not object or pursue any appeals until after confirmation when they sought to file untimely claims and certify a class of gift card holders. These requests were denied by Judge Glenn, who later approved the Trust's motion for interim distributions up to $75 million to general unsecured claims, despite Appellants’ objections and requests for a stay. Judge Glenn characterized Appellants' stay request as a collateral attack on the confirmed Plan, which would disrupt the Liquidating Trustee’s obligations and potentially lead to a significant redistribution of assets long after the Plan's confirmation.
Judge Glenn determined that the Appellants failed to satisfy the criteria for a stay pending appeal as outlined in Rule 8005 of the Federal Rules of Bankruptcy Procedure. Although the Appellants did not appeal the First Distribution Order, they requested Judge Carter to stay further distributions. While the appeals were pending, the Trust sought approval for a $25 million second interim distribution. The Appellants objected, emphasizing the need to preserve funds for potential gift card claims if Judge Carter reversed previous orders. They did not file a separate stay motion. During a hearing on May 22, 2013, Judge Glenn postponed a ruling, anticipating a swift decision from Judge Carter on the appeals. On the same day, Judge Carter dismissed the appeals as equitably moot, leading Judge Glenn to issue the Second Distribution Order the following day. The Appellants subsequently appealed, which was assigned to this Court on August 16, 2013. On August 19, Appellees indicated a desire to transfer the appeal to Judge Carter, but the Appellants opposed this, arguing for either direct appeal certification or dismissal of the appeal as equitably moot. After a hearing, the Appellants filed for direct certification and sought to stay further distributions until the Court of Appeals could rule. They framed the appeal around whether the second interim liquidation distributions to general unsecured creditors should be approved or stayed during the ongoing Second Circuit appeals. By September 30, 2013, the Trust had disbursed $91 million of the $100 million authorized under the interim orders, with a remaining cash balance of approximately $22.9 million.
Under section 158(d)(2), the Court of Appeals can hear appeals from final and interlocutory bankruptcy orders if certain conditions are met, which include the presence of an unresolved legal question or a matter of public importance that warrants immediate appeal. Certification for such appeals can be initiated by the bankruptcy or district court or requested by a party, but must occur within 60 days of the relevant order. The appellate court retains discretion to accept or decline jurisdiction after certification.
Rule 8005 outlines the procedure for requesting a stay pending an appeal of a bankruptcy judge’s order, emphasizing that such a motion should typically be presented to the bankruptcy judge first. If the request is made directly to the district court, the moving party must justify why it was not sought from the bankruptcy judge. Two primary reasons may justify bypassing the bankruptcy court: (1) the bankruptcy judge denied the stay, placing the burden on the appellant to demonstrate the judge’s error; or (2) seeking relief from the bankruptcy judge was impractical, requiring a demonstration of unavailability or the need for immediate relief that is unlikely to be granted.
If a party fails to appropriately seek a stay from the bankruptcy court, the district court lacks jurisdiction to consider the motion, leading to routine dismissals unless adequate justification is provided. Although Rule 8005 does not specify the criteria for granting a stay, courts in the Second Circuit generally apply the same standard as for stays of district court orders under Federal Rule of Appellate Procedure 8(a)(1)(A). The decision to grant a stay is at the district court's discretion and involves weighing four factors: (1) the likelihood of irreparable injury to the movant if a stay is not granted; (2) the potential for substantial injury to other parties if a stay is issued; (3) the movant's demonstration of a substantial possibility of success on appeal; and (4) the public interest implications.
A critical aspect is the showing of irreparable harm, which must be actual and imminent rather than speculative, as monetary damages alone do not qualify. There is a split among courts regarding whether the risk of an appeal becoming moot without a stay constitutes irreparable harm, with most courts rejecting this notion, while some, including those in the Second Circuit, accept it under certain circumstances. The assessment of irreparable harm is closely tied to the appellant's likelihood of success on the merits of the appeal.
The irreparable harm factor involves the doctrine of equitable mootness, which the Second Circuit applies when an appeal becomes ineffective due to changes occurring during its pendency. Equitable mootness is recognized in two scenarios: when an unstayed order has caused significant changes in circumstances or when a Chapter 11 plan has been substantially executed. The Second Circuit has established five "Chateaugay factors" to assess whether to dismiss an appeal as equitably moot:
1. The court can still provide effective relief.
2. Such relief will not hinder the debtor's revitalization.
3. Relief will not disrupt complex transactions or overwhelm the Bankruptcy Court.
4. Parties adversely affected by modifications have notice and the chance to participate.
5. The appellant has diligently sought a stay of the contested order, and failing to do so would render reversal inequitable.
Emphasis is placed on obtaining a stay from a plan confirmation order. Without a stay request, the court considers not only the feasibility of providing relief without undermining the plan but also fairness concerns.
To obtain a stay, the moving party must demonstrate that granting it will not cause significant harm to non-moving parties, indicating that the balance of harms favors the stay. The necessary showing of merit depends on the assessment of other stay factors, where a substantial possibility of success may suffice rather than a probability, especially in cases involving serious legal questions.
Public interest supports efficient bankruptcy administration, promoting compromises to minimize litigation and expedite estate management.
Regarding a direct appeal under Section 158(d)(2), a request for certification must be made within 60 days of the judgment or order. The Second Distribution Order was entered on May 23, 2013, making the deadline for a timely request July 22, 2013. The appeal wasn’t docketed until August 16, 2013, and the request for certification was raised only on August 29, 2013, rendering it time-barred. Additionally, there are no valid grounds for certification, as the Appellants claim certification under section 158(d)(2)(A)(iii) to materially advance the case.
Appellants argue that consolidating pending appeals would enhance efficiency, especially since the Second Circuit's decisions will influence this appeal. However, efficiency is not sufficient grounds for certification, as Borders' assets have been sold, the Plan confirmed, and the Trustee is actively pursuing claims and distributions. Consequently, certifying this appeal does not further the bankruptcy case.
Regarding the stay pending appeal, Appellants claim their objection to the Second Distribution Motion fulfills Rule 8005’s requirement for seeking a stay from the bankruptcy judge first. They assert their objection was a request to halt further distributions pending the resolution of merits, yet their actual request was for Judge Glenn to "delay" ruling until after Judge Carter's appeals were resolved. This request stemmed from the procedural status of those appeals and the timing of the Second Distribution Motion.
Judge Glenn agreed to postpone his decision on the Second Distribution Motion temporarily in consideration of Judge Carter's pending appeals. However, Appellants' objection only sought a stay related to the Second Distribution Motion, not a general stay on all future distributions, distinguishing the requests and necessitating that they first approach Judge Glenn or justify their failure to do so. Their request was linked to an appeal before Judge Carter, not the Second Circuit, and was made at a time when distributions were not mandated under the Plan and before significant distributions had occurred.
In considering motions for stays under Rule 8005, a district court’s role parallels that of an appellate court under Rule 8 of the Federal Rules of Appellate Procedure. By not presenting a blanket stay request to Judge Glenn, Appellants deprived the Court of his insights on the situation. Judge Glenn’s prior decision denying a stay suggests how he might rule on a second motion, and the Court should consider his analysis regarding the changed circumstances, including the timing, amount of distributions, and the satisfaction of unsecured creditors' claims. Therefore, Appellants’ request for a stay of all future distributions does not adhere to Rule 8005 and is denied.
Appellants have not demonstrated entitlement to a stay due to failure to establish irreparable harm or a substantial likelihood of success. They claim that gift card holders will suffer irreparable harm if a stay is not granted, as the estate may lack sufficient funds to pay their claims, rendering their appeals moot. However, Appellees argue that Appellants do not represent a class and that the Trust has adequate funds for individual claims. Even considering Appellants as a class, they have not proven irreparable harm, having not objected to or challenged the Plan post-confirmation. Appellants' counsel was retained only shortly before seeking a stay and had delayed in their actions. They first sought a stay on October 11, 2012, after the substantial consummation of the Plan, and did not act with diligence in pursuing their motion. The four-month delay in requesting a stay of the Second Distribution Order undermines claims of imminent harm, which appears to be a result of their own inaction. Additionally, Appellants acknowledge that there is no immediate threat of mootness, citing significant funds held by the Trust and potential recovery from pending actions. Consequently, they have not shown that a class of gift card holders would suffer irreparable harm from a denial of stay.
The Second Distribution Order authorized distributions under the Plan, with Judge Glenn's denial of Appellants’ stay motion indicating that halting interim distributions would significantly harm general unsecured claim holders by jeopardizing working capital, investment opportunities, and principal loss risks related to FDIC insurance. The relevance of these considerations remains uncertain, leaving this factor neutral regarding the stay.
Appellants claim a substantial likelihood of success in their appeals to the Second Circuit, arguing their legal interpretation of Constitutional Due Process merits de novo review and that equitable mootness does not apply to chapter 11 liquidation plans. However, they face significant hurdles, including the need for the Second Circuit to reverse Judge Carter's prior equitably moot dismissals and for the district court to favor them on the merits. Judge Carter's dismissal was based on the Plan's substantial consummation and Appellants' failure to demonstrate diligence in pursuing stay relief, supporting the equitable mootness finding. Courts have also rejected Appellants' assertion that equitable mootness is inapplicable to chapter 7 liquidations. Additionally, Judge Glenn deemed Appellants as "unknown" creditors and determined that the notice provided met legal standards, which Appellants have not convincingly challenged.
Regarding public interest, Appellants argue that a stay is warranted due to the significant number of gift card holders and unresolved due process issues related to notice for absent class members. In contrast, Appellees argue that no public interest is at stake since the Trust can cover Appellants’ claims and that a stay would hinder efficient estate administration under the Plan. Appellants have presented a plausible case for this factor.
The Appellants' motion for certification of a direct appeal to the Second Circuit and for stay relief is denied due to their inability to demonstrate irreparable harm or a substantial possibility of success on the merits. The Clerk of the Court is instructed to close the motion (Docket 9). Appellants were required to file their opening brief by August 30, 2013, but have not done so. They must submit their brief by February 4, 2014, or risk dismissal of the appeal under Bankruptcy Rule 8009(a)(1). Appellees have 14 days to respond after the Appellants' brief is filed, with Appellants' reply due 7 days thereafter, and no extensions will be granted.
The debtors’ cases have been substantively consolidated, with the BGI Creditors' Liquidating Trust, represented by trustee Curtis R. Smith, as the successor to Borders under the confirmed chapter 11 plan. The Appellants, who are seeking to represent a class of gift card holders, claim there are millions of outstanding gift cards worth over $150 million, despite the aggregate unused balance on their gift cards being only $225. The Appellants also have three pending appeals in the Second Circuit related to prior dismissals by District Court Judge Andrew L. Carter, Jr. on May 22, 2013, as equitably moot. The excerpt emphasizes the necessity of meeting the four criteria for stay relief, citing various precedents to support the conclusion that the Appellants failed to meet the required standards.
The Gift Card Claimants object to the court's pending motion, asserting that their appeals from previous rulings are still active in the district court. They argue for a delay in decision-making to ensure adequate funds remain in the Liquidating Trust to cover their claims if the district court overturns the earlier decisions. Appellants contend that distributions under the plan should occur annually, making the May 2013 distributions unnecessary. They assert compliance with Rule 8005 by referencing a prior request for a stay; however, the court finds their arguments insufficient because they do not address an earlier ruling that deemed their stay request an impermissible challenge to a confirmed plan. The court emphasizes that it should have the opportunity to assess stay requests based on presented evidence. The request for a stay on distributions pending appeal is viewed as unsupported by the record, particularly as the Appellants have not shown irreparable harm due to their inaction, which has allowed for most funds to be distributed. Furthermore, the explanation provided by Appellants' counsel regarding the lack of objection to the Distribution Plan prior to confirmation is deemed unconvincing.
A motion for leave to file late proofs of claim was submitted before the effective date of the Distribution Plan, ensuring that Mr. Buechler’s clients and the Court were aware of the situation. The motion to enjoin the Appellees was not made at that time. In August 2012, Judge Glenn denied the Appellants’ motions for late proofs of claim and class certification, after the Trust had already distributed approximately $17 million. The delay in filing motions by the Board of Elections weakened their argument for irreparable harm due to the absence of urgency typically associated with such motions. Previous case law supports this view, indicating that claims of irreparable harm stemming from a party's procrastination or neglect are generally rejected. Furthermore, it is emphasized that a party should seek a stay of confirmation even if it appears unlikely that the bankruptcy court would grant one. As of September 30, 2013, the Trust had an aggregate cash balance of around $22.9 million. The concept of equitable mootness may apply in this context, particularly in liquidation cases, as supported by various legal precedents.
