Summary
In DJK, whose analysis of this area is the most recent, and in my view the most comprehensive, Judge Lynch focused on the principal claim of irreparable injury here — that by application of the equitable mootness doctrine, the appellants may lose their rights.
Summary of this case from In re General Motors Corp.Opinion
Case No. 08-10375 (JMP), M-47 (GEL).
March 7, 2008
Robert E. Nies, Wolff Samson PC, West Orange, NJ, for appellant.
Marc Kieselstein, P.C., Adam C. Paul, Kirkland Ellis LLP, Chicago, IL, for appellee.
OPINION AND ORDER
Triple Net Investments IX, LP ("Triple Net"), a landlord and creditor of North American Van Lines ("North American"), a debtor in this multi-debtor bankruptcy case filed on February 5, 2008, moves pursuant to Rule 8005, Fed.R.Bankr.P., for an entry of a stay pending appeal from two orders of the Bankruptcy Court. After filing bankruptcy, North American rejected its lease with Triple Net, and under the proposed bankruptcy plan of reorganization of the Debtors, Triple Net, along with a subset of general unsecured creditors, is to receive no distribution. Triple Net objected to the entry of certain orders by the Bankruptcy Court, and after these objections were denied, sought a stay before the Bankruptcy Judge, which, on March 5, 2008, also was denied. That afternoon, Triple Net brought its dispute before this Court.
BACKGROUND
The first order that Triple Net seeks to stay is a Final Order Authorizing Debtors to Obtain Post-Petition Financing, Authorizing Debtors to Use Cash Collateral, and Granting Adequate Protection to Prepetition Secured Parties, referred to by the parties as the Final Debtor in Possession ("DIP") Order. The Bankruptcy Court entered an Interim DIP Order on February 5, 2008. The DIP orders are intended to ensure that the Debtors — a congeries of affiliated companies in the moving and storage industry — have adequate funds to continue their operations, thereby preserving the going value of the Debtors while in bankruptcy, by authorizing Debtors to obtain initially $100 million and up to $150 million in postpetition financing, secured, in part, by certain assets of the Debtors. Triple Net objects to the structure of the DIP financing because the financing is secured, or cross-collateralized, by assets of the various Debtors, including previously unencumbered assets of North American that might otherwise be available to satisfy North American's obligations to Triple Net, and because the orders permitted $65 million of the initial $100 million DIP financing to be immediately repaid to various prepetition creditors. Triple Net argues that these payments to prepetition creditors using postpetition financing were preferential payments that subverted the bankruptcy process, thereby leaving Triple Net holding an empty bag. On February 21, 2008, Triple Net objected to the Interim DIP Order. On February 29, 2008, the Bankruptcy Court overruled Triple Net's objections and entered the Final DIP Order.The second order that Triple Net seeks to stay is a Stipulation and Agreed Order Between the Debtors, the Official Committee of Unsecured Creditors, and the Official Committee of Unsecured Creditors of 360 networks (USA), Inc., in connection with the Order Authorizing Payments of Unimpaired Claims in the Ordinary Course of Business, referred to as the Ordinary Course Order. On February 5, 2008, the Bankruptcy Court, on the Debtors' motion, entered an order authorizing the payment of prepetition claims in the ordinary course of business. The order gave Debtors the authority to make certain payments to creditors for certain accounts due. Triple Net objects to the Ordinary Course Order because it believes the order gives the Debtors too much discretion to pay prepetition debt using the postpetition financing, without any requirement that the postpetition financing be used to pay only critical vendors necessary to preserve the ongoing value of the company. Triple Net further objects to that order because, even to the extent that the order is successful in preserving any going concern value of the Debtors, under the proposed plan of reorganization none of that value will be shared with Triple Net. Triple Net and other unsecured creditors moved the Bankruptcy Court to reconsider the Ordinary Course Order. The Debtors resolved the objections of all of the objecting parties except Triple Net through a stipulation that was subsequently endorsed by the Bankruptcy Court on February 28, 2008. Triple Net's objection to the order thus still remains unresolved, and the Bankruptcy Court denied Triple Net's application for a stay of this order pending appeal on March 5, 2008.
DISCUSSION
Rule 8005, Fed.R.Bankr.P., provides, that:
A motion for a stay of the judgment, order, or decree of a bankruptcy judge, for . . . relief pending appeal must ordinarily be presented to the bankruptcy judge in the first instance. . . . A motion for such relief, or for modification or termination of relief granted by a bankruptcy judge, may be made to the district court . . . but the motion shall show why the relief, modification, or termination was not obtained from the bankruptcy judge. The district court . . . may condition the relief it grants under this rule on the filing of a bond or other appropriate security with the bankruptcy court.
A movant seeking a stay pending appeal pursuant to Rule 8005 must demonstrate (1) that it would suffer irreparable injury if a stay were denied; (2) that other parties would suffer no substantial injury if the stay were granted; (3) that the public interest favors a stay; and (4) that there is a substantial possibility of success on the merits of movant's appeal. See Hirschfeld v. Bd. of Elections, 984 F.2d 35, 39 (2d Cir. 1992);In re WestPoint Stevens, Inc., No. 06 Civ. 4128, 2007 WL 1346616, at *4 (S.D.N.Y. May 9, 2007); In re Adelphia Cmmc'ns Corp., 333 B.R. 649, 659 (S.D.N.Y. 2005).
The burden on the movant is a "heavy" one. Adelphia, 333 B.R. at 659; see also United States v. Private Sanitation Indus. Ass'n of Nassau/Suffolk, Inc., 44 F.3d 1082, 1084 (2d Cir. 1995). To be successful, the party must "show satisfactory evidence on all four criteria." In re Turner, 207 B.R. 373, 375 (2d Cir. B.A.P. 1997) (citations and internal quotation marks omitted); see also Adelphia, 333 B.R. at 659. "Failure to satisfy one prong of this standard for granting a stay will doom the motion." Turner, 207 B.R. at 375; In re Metiom, Inc., 318 B.R. 263, 271 (S.D.N.Y. 2004); cf. In re Adelphia Cmmc'ns Corp. ("Adelphia II"), 361 B.R. 337, 347 (S.D.N.Y. 2007) (balancing the four factors as opposed to adopting a "rigid rule"). Moreover, if the movant "seeks the imposition of a stay without a bond, the applicant has the burden of demonstrating why the court should deviate from the ordinary full security requirement." WestPoint, 2007 WL 1346616, at *4.
On March 5, 2005, the Bankruptcy Court denied Triple Net's motion for a stay of these two orders. The Bankruptcy Court found that Triple Net made no showing of irreparable harm, and failed to demonstrate a likelihood of success on the merits as the record "provides ample support for the orders that were entered." (3/5/08 Bankr. Tr. 42.) Furthermore, the Bankruptcy Court noted that "the injury to the debtors and the creditors of this estate would be substantial if a stay . . . were to be issued" and found "no public interest reason for a stay to be issued." (Id.) Moreover, the Bankruptcy Court noted the "general rule that a party seeking a stay would need to post a bond associated with the potential harm arising out of the grant of the stay" and concluded that, although the issue was not directly raised, the potential amount of the bond "would, in all likelihood, be prohibitive from the perspective of Triple Net." (Id. at 43.)
I. Irreparable Harm to Movant
Triple Net argues that it has been irreparably harmed because the DIP financing has been secured by previously unencumbered assets of North American, and because $65 million of that financing was immediately used to repay pre-petition creditors, thereby "cleans[ing]" a "sixty-five million dollar preference payment." (3/5/08 Bankr. Tr. 27.) However, as the Bankruptcy Court noted, if the debtors succeed in confirming their proposed plan, then Triple Net is not entitled to anything, and there cannot be any irreparable harm to Triple Net. (Id. at 29-30.) In order to prove that it was irreparably harmed, therefore, Triple Net first must demonstrate that the plan cannot be confirmed as proposed, inasmuch as Triple Net receives no distribution under the plan. Moreover, even if Triple Net could prove that it would be entitled to a distribution under any potentially confirmable plan, it still must prove that, absent the entrance of the stay, at some later point Debtors would not be able to compensate Triple Net under a future plan for any alleged damages that it suffered as a result of how Debtors structured their DIP financing or how Debtors used the bankruptcy process.
Triple Net does not come close to demonstrating that Debtors will be unable to make distributions to Triple Net in the future. The entire purpose of the DIP financing is to preserve the going concern value of the Debtors, such that there will be money in the future available to the Debtors. Although Triple Net may prefer to have had the Debtors liquidate, leaving North American with certain unencumbered assets that might be sufficient to pay its obligations to Triple Net, it has not proven that it would be irreparably harmed by the Debtors' attempt to navigate themselves through bankruptcy and emerge as ongoing businesses, capable of paying creditors in the future. The magnitude of the Debtors' operation militates against any such finding. The Bankruptcy Court found at the outset of the case that, given the volume of Debtors' cash flow, the leases in question "while potentially significant in a small case . . . are relatively minor amounts" in the context of the present proceedings (2/5/08 Bankr. Tr. 49), and Triple Net has not significantly disputed that finding. Indeed, it was represented without dispute in argument before this Court that the Debtors' business generates billions of dollars per year in cash flow (3/5/08 Tr. 39), while Triple Net's claim at most amounts to $13 million (id. at 7). If the Bankruptcy Court's orders succeed in enabling Debtors to continue to operate their business, as they are intended to do and as the experienced bankruptcy judge determined that they would, there is no reason to believe that Debtors would be unable to provide whatever distribution (if any) is ultimately found to be due to Triple Net.
Triple Net further argues that their appeal may become equitably moot absent a stay. Although "several courts including ones within this Circuit, have held to the contrary," a "majority of courts have held that a risk of mootness, standing alone, does not constitute irreparable harm." Adelphia II, 361 B.R. at 347 (footnotes omitted). In Adelphia II, a court in this district recently held that "where the denial of a stay pending appeal risks mooting any appeal of significant claims of error, the irreparable harm requirement is satisfied." Id. at 348 (emphasis omitted). Triple Net has failed to demonstrate a similarly significant claim of error such as the one that concerned the court in Adelphia II. There, the claims of error related to the "troubling" failure by the proponents of the confirmation plan to comply with the a central order of the Bankruptcy Court and the Bankruptcy Court's failure to enforce that order. Id. at 356. Here, there is no such "troubling" claim of error, but merely an argument that the Bankruptcy Court was wrong on the merits of two decisions. In this situation, there is no reason why the majority view that the risk of mootness does not constitute irreparable harm should not apply to Triple Net's situation.
In any event, Triple Net will have an opportunity to raise objections to the confirmation of the plan, and surely, many of these current concerns and objections will be raised again in that context. Triple Net's claim that the "entry of the Orders essentially enacts . . . the principal components of the [Debtors' proposed] Plan before the Court has even had an opportunity to consider confirmation issues and objections" (Stay Motion ¶ 14) is unpersuasive. The Bankruptcy Court has not yet approved the Plan, and will not do so until after a hearing at which all objections will be heard and considered.
II. Irreparable Harm to Non-Movants
The Debtors, in contrast, have demonstrated that they would be irreparably harmed by a stay, which would jeopardize their ability to keep their business afloat. Debtors also argue that a stay of the orders would jeopardize their exit financing, which may require renegotiation of their credit agreements. Furthermore, Debtors argue that a stay would substantially limit their liquidity and could cause substantial harm to the business. At oral argument before this Court, Debtors' counsel even stated that the Debtors may have to liquidate if a stay were entered. (3/5/08 Tr. 32.) Triple Net does not even attempt to refute these assertions, presumably because it believes that such liquidation could be in its interest.
Such an outcome would be disastrous for the Debtors, as well as for their employees and for most of their creditors, customers, and suppliers. It is in the interest of virtually all parties — including the unsecured creditors, who comprise a majority of the creditors' committee that has conspicuously failed to support Triple Net's objections or its application for a stay — for the plan adopted by the Bankruptcy Court to succeed, and for Debtors to continue in operation. Triple Net's proposed stay would undermine that prospect.
III. The Public Interest
Debtors argue that the public interest favors the efficient resolution of bankruptcy proceedings. Moreover, given the nature of Debtors' business, which includes moving businesses and households across the country, continued smooth operation of that business is beneficial not only to the parties to the bankruptcy proceedings, but also to the broad consuming public. In their papers, Triple Net provides no explanation why entering a stay, and potentially jeopardizing Debtors' continued operations and hoped-for eventual emergence from bankruptcy, would be in the public interest.
IV. Likelihood of Success on the Merits
Triple Net has had the opportunity to bring these objections to the Bankruptcy Court, which, after a hearing that included "live testimony and cross examination" (3/5/08 Bankr. Tr. 21), concluded that Triple Net's arguments were without merit. At oral argument before the Bankruptcy Judge and before this Court, as well as in its papers, Triple Net has focused its argument almost entirely on its contention that the Bankruptcy Court was wrong. Of course, the Bankruptcy Judge may have been wrong, and he advised Triple Net that it has an "absolute right to appeal any order . . . entered to any Court that's willing to hear you." (Id. at 31.) However, the Bankruptcy Court has broad equitable discretion to manage the affairs of the Debtor in the interests of all parties. The record before this Court shows that the Bankruptcy Court gave careful consideration to the matters at issue, and its finding that the provisions of the DIP Order and the Ordinary Course Order are necessary and proper measures to facilitate the operation of the business and secure the maximum benefit for all parties. Thus, Triple Net has not demonstrated a substantial possibility of success on appeal.
In any event, in the absence of any showing of irreparable injury on their part, and in the face of irreparable injury on the part of the Debtors, the possibility that the Bankruptcy Court may have gotten it wrong is simply not enough to merit the extraordinary relief of a stay pending appeal.
V. Bond
In any event, Triple Net expressly stated at oral argument before this Court that it would be unable to post a bond commensurate with the threatened loss to the non-moving parties, and it has not demonstrated why this Court "should deviate from the ordinary full security requirement." WestPoint, 2007 WL 1346616, at *4; see Adelphia 361 B.R. at 368 (requiring movants to post cash or a bond in the amount of $1.3 billion). Triple Net argues, with some force, that it cannot be expected to post a bond, because the cost of a bond would be prohibitive in light of the magnitude of the potential loss to Debtors. (3/5/08 Tr. 39-40.) But this argument only serves to highlight the substantial risk of dramatic injury to Debtors and other creditors if the Bankruptcy Court's orders were erroneously stayed. Absent a bond, such injuries would be substantial and irreparable.
CONCLUSION
As Triple Net has failed to demonstrate that a stay is warranted, it is hereby ORDERED that Triple Net's motion for a stay pending appeal be denied.
SO ORDERED.