504 B.R. 754

In re BGI, INC., f/k/a Borders Group, Inc., Debtor. Eric Beeman, Jane Freij, and Robert Traktman, Appellants, v. BGI Creditors’ Liquidating Trust and Curtis R. Smith, in his capacity as the Liquidating Trustee, Appellees.

Bankruptcy No. 11-10614.

No. 13 Civ. 5754(SAS).

United States District Court, S.D. New York.

Jan. 28, 2014.

*756Clinton A. Krislov, Esq., Kenneth T. Goldstein, Esq., Krislov & Associates, Ltd., Chicago, IL, Jay Teitelbaum, Esq., Teitelbaum & Baskin, LLP, White Plains, NY, for Appellants.

Bruce Buechler, Esq., Brace S. Nathan, Esq., Andrew Behlmann, Esq., Lowenstein Sandler LLP, New York, NY, for Appel-lees.

OPINION AND ORDER

SHIRA A. SCHEINDLIN, District Judge.

I. INTRODUCTION

This dispute arises from the chapter 11 bankruptcy cases of Borders Group, Inc. *757and certain of its affiliates (“Borders”).1 Eric Beeman, Jane Freij, and Robert Traktman (“Appellants”), holders of unused Borders gift cards, appeal from an order of bankruptcy judge Martin Glenn permitting a second interim distribution under the Plan (the “Second Distribution Order”).2 Appellants ask this Court to (1) certify a direct appeal to the Court of Appeals pursuant to section 158(d)(2) of title 28 of the United States Code (“section 158(d)(2)”) and (2) stay interim distributions pending disposition of their appeals.3 For the reasons set forth below, their motion is denied.

II. BACKGROUND

When Borders and its affiliates filed their chapter 11 bankruptcy petitions on February 16, 2011, they intended to reorganize through a sale of their business as a going concern to a third party.4 To that end, they sought and received authorization from Judge Glenn to continue customer programs, such as gift cards.5 As of June 2011, Borders’ “books and records indicated the existence of approximately 17.7 million outstanding gift cards with unredeemed balances aggregating approximately $210.5 million.”6

On April 8, 2011, Judge Glenn entered an order establishing June 1, 2011 as the last date for prepetition creditors to file proofs of claim (the “Bar Date Order”).7 The Bar Date Order required notice by mail to all known creditors and notice by publication to all unknown creditors.8 No appeal was taken from the Bar Date Order. Neither Appellants, nor any other holder of a gift card, filed a timely proof of claim.9

The proposed sale of Borders’ business as a going concern was unsuccessful.10 Borders then sought and received approval *758to sell its stores and intellectual property assets.11 “As of September 27, 2011, all e-commerce transactions on the Debtors’ website ceased, including the processing and honoring of gift-cards.” 12

On November 10, 2011, Borders filed a disclosure statement pursuant to section 1125 of the Bankruptcy Code.13 Judge Glenn approved the disclosure statement, the means of soliciting votes on the Plan, and the form of notice of the hearing on confirmation.14 The Plan was confirmed on December 21, 2011, and became effective on January 12, 2012.15 Appellants did not object to the Plan before it was confirmed. Following confirmation, they neither sought reconsideration, pursued stay relief, nor appealed from the confirmation order.

Just prior to the effective date, Beeman and Freij sought leave to file untimely proofs of claim based on the amounts remaining on their gift cards.16 Appellants also moved to certify a class of gift card holders.17 In February 2012, Traktman filed an untimely proof of claim relating to his gift card.18 Judge Glenn denied both motions,19 and later sustained the Trust’s objection to Traktman’s untimely claim and disallowed it.20 Appeals from these orders were assigned to Judge Carter.

In September 2012, the Trust sought authorization to make interim distributions pursuant to the Plan of up to $75 million to holders of allowed general unsecured claims (the “First Distribution Motion”).21 Appellants filed an objection and separately moved to stay all interim distributions pending resolution of their then-pending appeals.22 On November 5, 2012, Judge Glenn entered orders granting the Trustee’s motion (the “First Distribution Order”) and denying stay relief.23

*759Judge Glenn held that Appellants’ request for a stay was more akin to a collateral attack on a confirmed, substantially consummated plan, which is prohibited by sections 1127(b) and 1144 of title 11 of the United States Code.24 He reasoned that:

Granting the requested relief would necessarily interfere with the Liquidating Trustee’s ability to carry out the provisions of the Plan requiring it to make scheduled interim distributions, and the Claimants’ ultimate goal — allowing a class of gift-card holders to file untimely proofs of claims — would result in a.substantial redistribution of estate assets long after confirmation of the Plan. The Court therefore considers the Gift-Card Claimants’ Motion to be an action to revoke the confirmed chapter 11 Plan.25

In addition, Judge Glenn found that Appellants did not meet the standard for a stay pending appeal pursuant to Rule 8005 of the Federal Rules of Bankruptcy Procedure (“Rule 8005”).26 Although Appellants did not appeal from the First Distribution Order, they filed a motion asking Judge Carter to stay further distributions.27

While the appeals were still pending, the Trust sought authorization for a second interim distribution of an additional $25 million (the “Second Distribution Motion”).28 Appellants filed an objection, arguing that Judge Glenn should delay ruling on the motion to ensure that sufficient funds remained in the Trust to satisfy gift card claims in the event that Judge Carter reversed the prior orders.29 Appellants did not separately move for a stay.

Judge Glenn held a hearing on May 22, 2013, and deferred ruling on the motion based on the parties’ assertions that Judge Carter was likely to decide the appeals in a matter of weeks.30 That same day, Judge Carter issued his decision dismissing the appeals as equitably moot.31

On May 23, 2013, Judge Glenn entered the Second Distribution Order. Appellants filed a timely appeal, which was assigned to this Court on August 16, 2013. On August 19, 2013, Appellees filed a letter indicating that they intended to make a motion seeking to have this appeal assigned to Judge Carter. On August 28, 2013, Appellants responded that transferring the case to Judge Carter was not warranted because the appeals were no longer before him.32 They argued that instead of assigning the appeal to Judge Carter, I should either certify a direct *760appeal pursuant to section 158(d)(2) or,' over their objection, dismiss the appeal as equitably moot.33

Following a hearing, Appellants filed their motion for direct certification. In addition, Appellants, request a stay of “further distributions until the matter can be ruled on by the Court of Appeals.”34 They characterize this appeal as presenting a single issue, “[wjhether the second and subsequent interim Liquidation distributions to [ ] general [unsecured] creditors should be approved or stayed during the pendency of the” appeals before the Second Circuit.35

By September 30, 2013, the Trust had distributed $91 million out of the $100 million authorized under the two interim distribution orders, including roughly $86 million to 1,700 holders of unsecured claims.36 As of the same date, the Trust held an aggregate cash balance of approximately $22.9 million.37

III. LEGAL STANDARD

A. Section 158(d)(2)

Under section 158(d)(2), the court of appeals has jurisdiction over appeals from final and interlocutory bankruptcy court orders38 in certain circumstances. First, there must be a certification that:

(i) the judgment, order, or decree involves a question of law as to which there is no controlling decision ... or involves a matter of public importance;
(ii) the judgment, order, or decree involves a question of law requiring resolution of conflicting decisions; or (iii) an immediate appeal from the judgment, order, or decree may materially advance the progress of the case.39

Second, the court of appeals must authorize the direct appeal.40

Certification may be made by the bankruptcy court or the district court41 on its own motion or at the request of a party.42 The court “shall” issue a certification if it determines that one of the three conditions in section 158(d)(2)(A) exists.43 However, *761any “request” for certification must “be made not later than 60 days after the entry of the judgment, order, or decree.”44

After a certification is made, the court of appeals may “in its discretion exercise, or decline to exercise, [ ] jurisdiction.”45 As explained by the Second Circuit, “[t]he focus of the statute is explicit: on appeals that raise controlling questions of law, concern matters of public importance, and arise under circumstances where a prompt, determinative ruling might avoid needless litigation.”46

B. Stay Pending Appeal

Rule 8005 governs the procedure for seeking a stay pending an appeal to the district court of a bankruptcy judge’s order. The rule states that a motion for a stay “must ordinarily be presented to the bankruptcy judge in the first instance.”47 When a request for a stay is not made to the bankruptcy judge, the moving party’s “motion shall show why the relief, modification, or termination was not obtained' from the bankruptcy judge.”48

As explained in a leading treatise: One of two reasons might explain why the relief was not obtained in the first instance from the bankruptcy judge. The first is that the motion for a stay was denied. In that case, it is the burden of the appellant to convince the district court or appellate panel that the bankruptcy judge was incorrect....
The second reason ... would be that it was not practicable to seek relief from the bankruptcy court-It would seem that a showing of impracticability would normally require a showing that the bankruptcy judge is unavailable, or that, to be effective, relief must be immediate, and that based upon what occurred in the bankruptcy court, relief from it is improbable.49

“If the party improperly bypasses the bankruptcy court and seeks a stay first from the district court, the district court lacks the jurisdiction to hear the matter.” 50 Thus, district courts routinely dismiss motions for a stay pending appeal when stay relief is not first sought from the bankruptcy judge and the failure to do so is not adequately explained.51

*762Rule 8005 does not articulate the standard for granting a stay pending an appeal. Courts within the Second Circuit have followed the same standard used for stays of district court orders pending appeals to the circuit court under Federal Rule of Appellate Procedure 8(a)(1)(A), in large part because Rule 8005 is directly adapted from Rule 8A.52

The decision as to whether to issue a stay of an order pending appeal lies within the sound discretion of the district court.53 “[F]our factors are considered” in exercising that discretion: “(1) whether the movant will suffer irreparable injury absent a stay, (2) whether a party will suffer substantial injury if a stay is issued, (3) whether the movant has demonstrated a substantial possibility, although less than a likelihood, of success on appeal, and (4) the public interests that may be affected.” 54

“[T]he Second Circuit has consistently treated the inquiry of whether to grant a stay pending appeal as a balancing of factors that must be weighed.”55 Thus, “[t]he lack of any one factor is not disposi-tive to the success of the motion, rather the inquiry represents a balancing of the four factors.”56

1. Irreparable Harm

“A showing of probable irreparable harm is the principal prerequisite for the issuance of a [Rule 8005] stay.”57 Irreparable harm must be “neither remote nor speculative, but actual and imminent.” 58 “[I]njuries fully remedied by monetary damages do not constitute irreparable harm.”59

“There is a division of authority as to whether the risk that an appeal may become moot in the absence of a stay pending appeal constitutes threatened ir*763reparable injury.”60 “A majority of courts have held that a risk of mootness, standing alone, does not constitute irreparable harm.”61 “However, several courts, including ones within this Circuit, have held to the contrary.”62 In my view, “where the denial of a stay pending appeal risks mooting any appeal of significant claims of error, the irreparable harm requirement is satisfied.”63 But “the seriousness of that threat is inextricably related to the appellants’ likelihood of success on the merits.”64

Thus, the irreparable harm factor requires consideration of the doctrine of equitable mootness. The Second Circuit has held that “when, during the pendency of an appeal, events occur that would prevent the appellate court from fashioning effective relief, the appeal should be dismissed as moot.”65 Equitable mootness “has been applied in two situations” in this Circuit: “ ‘when an unstayed order has resulted in a comprehensive change in circumstances, and when a [chapter 11 plan has been] substantially consummated.’ ”66

The Second Circuit has identified five factors (the “Chateaugay factors”) to be applied when determining whether to dismiss an appeal of a bankruptcy court order as equitably moot:

(a) the court can still order some effective relief; (b) such relief will not affect the re-emergence of the debtor as a revitalized corporate entity; (c) such relief will not unravel intricate transactions so as to knock the props out from under the authorization for every transaction that has taken place and create an unmanageable, uncontrollable situation for the Bankruptcy Court; (d) the parties who would be adversely affected by the modification have notice of the appeal and an opportunity to participate in the proceedings; and (e) the appellant pursue[d] with diligence all available remedies to obtain a stay of execution of the objectionable order ... if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from.67

Courts in this Circuit have emphasized the importance of obtaining a stay from an order confirming a plan. As explained by the Second Circuit, “[i]n the absence of any request for a stay, the question is not *764solely whether we can provide relief without unraveling the Plan, but also whether we should provide such relief in light of fairness concerns.”68

2.Harm to Non-Moving Party

In addition to showing irreparable harm, the party seeking a stay must establish that the non-moving party or other parties will not suffer substantial harm if the stay is granted.69 In other words, the moving party must show that the balance of harms tips in favor of granting the stay.70

3.Degree of Showing on the Merit s

“ ‘The necessary “level” or “degree” of possibility of success will vary according to the court’s assessment of the other [stay] factors.’ ”71 The requisite showing of “substantial possibility” of success is “ ‘inversely proportional to the amount of irreparable injury plaintiff! ] will suffer absent the stay.’ ”72 “[T]he mov-ant need not always show a ‘probability of success’ on the merits; instead, the mov-ant need only present a substantial case on the merits when a serious legal question is involved and show that the balance of the equities weighs heavily in favor of granting the stay.”73

4.Public Interest

The “public interest favors the expedient administration of the bankruptcy proceedings.”74 Indeed, compromises are favored in bankruptcy precisely for the reason that they “minimize litigation and expedite the administration of a bankruptcy estate.”75

Y. DISCUSSION

A. Direct Appeal Under Section 158(d)(2)

A party’s request for certification must “be made not later than 60 days after the entry of the judgment, order, or decree” appealed from.76 Judge Glenn entered the Second Distribution Order on May 23, 2013, and thus the last date to request certification was July 22, 2013. Because the appeal was not docketed in this Court until August 16, 2013, any timely request must have been presented to Judge Glenn.77 However, Appellants first raised certification on August 29, 2013. Accordingly, Appellants’ request for certification is time-barred.

There are also no grounds to issue a certification. Appellants argue that the most likely basis for certification is section 158(d) (2) (A)(iii), which provides for certification when immediate appeal to the cir*765cuit would “materially advance the progress of the case or proceeding [before the bankruptcy judge.]”78 In essence, Appellants contend that consolidation of then-pending appeals would be more efficient than proceeding on separate -tracks, particularly when the outcome of the appeals before the Second Circuit will impact resolution of this appeal.79

But efficiency alone is not a proper reason for certification. Borders’ assets have been sold, the Plan has been confirmed and substantially consummated, and the Trustee is not stayed from continuing his efforts to pursue claims and make distributions under the Plan. Thus, certification of this appeal in no way advances the progress of the bankruptcy case.

B. Stay Pending Appeal

Appellants argue that their objection to the Second Distribution Motion satisfies Rule 8005’s requirement that a request for a stay must ordinarily be made to the bankruptcy judge in the first instance.80 According to Appellants, then-objection was a request for a stay of “further distributions until the merits are resolved” which is “precisely what [is] at issue” here.81

Contrary to Appellants’ assertions, the relief sought here was not sought in their objection to the Second Distribution Motion. Appellants asked Judge Glenn to “delay” his decision on the Second Distribution Motion pending the outcome of the appeals before Judge Carter.82 This request was based on (1) the procedural posture óf the appeals before Judge Carter and (2) the timing of the Second Distribution Motion.83 Thus, they argued that “[a]ny further Interim Distribution at this time is unnecessary ..., and would serve only to further deplete Trust assets on the eve of a decision on the merits in the Gift Card Holders’ appeal now pending” before Judge Carter.84 In response, Judge Glenn indicated he would delay ruling on the Second Distribution Motion for a limited time in deference to Judge Carter.

To the extent that the Second Distribution Objection was a request for a stay at all, it was a request for a stay in connection with the Second Distribution Motion— not all future distributions. This factor alone makes the requests different and therefore Appellants were required to first seek the relief from Judge Glenn or explain their reason for not doing so.85 In addition, their request to Judge Glenn related to an appeal before Judge Carter, not to appeals before the Second Circuit following the dismissal of Appellants’ appeals as equitably moot. It was made at a *766time when distributions were apparently not required under the Plan, and, notably, before the bulk of such distributions had been made.

“When considering motions to stay pending appeal under Rule 8005, [a district’s court’s] role is comparable to that of the court of appeals under Rule 8 of the Federal Rules of Appellate Procedure.”86 The Appellants, “[h]aving elected not to present” their request for a blanket stay of distributions to Judge Glenn, “have denied this [Court] the benefit of the views of the Judge who is familiar with the issues pertaining to any purported emergency.”87

To be sure, Judge Glenn’s November 2012 decision denying Appellants’ motion for a stay strongly suggests how he would rule in response to a second motion.88 But this Court should not be denied the benefit of Judge Glenn’s analysis relating to such changed circumstances as the timing of the request, the amount of funds distributed, and the extent to which the claims of unsecured creditors have been satisfied.89

Accordingly, Appellants’ request for a stay of all future distributions does not comply with Rule 8005 and must be denied on that basis alone. Furthermore, Appellants have failed to show they are entitled to a stay on the merits. In particular, Appellants have not established irreparable harm or a substantial possibility of success on the merits.90

1. Lack of Irreparable Harm to Appellants

Appellants argue that the potential class of gift card holders will be irreparably harmed if a stay is not issued because the estate may no longer have sufficient funds to pay their claims, which would render their appeals equitably moot.91 Appellees argue that because Appellants do not represent a class of gift card holders there is no risk of irreparable harm because the Trust will have sufficient funds available to satisfy Appellants’ individual claims.92 I find that even if viewed as a class, Appellants have not made a showing that they will be irreparably harmed in the absence of a stay.

Appellants did not object to the Plan or challenge it after confirmation. As noted by Judge Carter, Appellants’ counsel indicated that he was retained on December *76729, 2011.93 “[Counsel] was apparently first contacted by Appellants on or around December 5, 2011.”94 “After he initially spoke to Appellants, Counsel [] immediately began analyzing the bankruptcy docket ..., and ... learned that the Plan had been submitted for vote.”95

The Plan was substantially consummated before Appellants first sought a stay of distributions.96 After Judge Glenn denied the motions to file untimely proofs of claim and for class certification on August 14, 2012, Appellants appealed from those orders but did not seek a stay. Their first request for a stay was on October 11, 2012, in response to the First Distribution Motion.

Judge Glenn denied stay relief on November 2, 2012. On November 13, 2012, Appellants requested a stay in the District Court. But they did not request consideration of their motion on an expedited basis, and waited until January 7, 2013 to make a motion for expedited oral argument.97 Appellants then waited over four months after entry of the Second Distribution Order to seek a stay in this Court, and even then did not seek an expedited ruling.

Appellants have failed to act with appropriate diligence throughout these proceedings. The four-month delay in seeking a stay of the Second Distribution Order alone undercuts any argument that they would suffer harm that was “actual and imminent.”98 Moreover, “[a]ny harm the[y][ ] may now face is a result of their own dilatory conduct.”99

Indeed, regardless of whether the court grants a stay to preserve available funds, the relief sought by Appellants before the Second Circuit is almost certainly foreclosed under the equitable mootness doctrine.100 As explained by the *768Second Circuit, “courts presume that it will be inequitable or impractical to grant relief after substantial consummation of a plan” unless, among other things, “the entity seeking relief has diligently pursued a stay of execution of the plan throughout the proceedings. 101

Finally, Appellants appear to concede that there is no imminent or actual threat of mootness based on available funds. In a supplemental brief on the issue of equitable mootness submitted to this Court, Appellants argue that in addition to the millions of dollars held by the Trust, “[t]here are also hundreds of pending avoidance actions and potential actions against Committee members which are likely to generate millions more for creditors.”102 Appellants conclude that “[t]he fair treatment of [a class of] Gift Card Holders as Unsecured Creditors is feasible, poses no threat to any reorganization, and does not impair any innocent party.”103

Thus, Appellants have not demonstrated that even a class of gift card holders would suffer irreparable harm if a stay of all future distribution is not issued while this appeal or the appeals before the Second Circuit are pending.

2. Harm to Non-Moving Parties

The Second Distribution Order permitted a distribution that was authorized pursuant to the Plan.104 In his decision denying Appellants’ October 2012 stay motion, Judge Glenn determined that a stay of interim distributions would cause “significant harm” to the holders of general unsecured claims “including the loss of valuable working capital for an indefinite period of time, lost opportunities to invest funds, and the risk of losing principal based on the FDIC’s insurance coverage.”105 The parties’ arguments do not definitively demonstrate whether or not these considerations remain relevant or if they were factually correct in the first instance. Accordingly, this factor neither weighs in favor of nor against granting a stay.

3. Appellants Have Not Demonstrated a Substantial Possibility of Success on the Merits

Appellants argue that they have a substantial possibility of success on the merits of the appeals before the Second Circuit because the denial of their late claims motion is an issue of law that is subject to de novo review.106 According to Appellants, they “present a legal argument based on a reasonable interpretation of Constitutional Due Process jurisprudence, and thus demonstrate a sufficient likelihood of success.” 107 Appellants also argue that the doctrine of equitable mootness does not apply to chapter 11 plans of liquidation, and note that the Second Circuit has not yet ruled on this issue.108

I find that there is not a substantial possibility that Appellants will succeed in their ultimate objective of certifying a class of gift card holders that will receive a payout under a chapter 11 plan. Among other things, the Second Circuit would have to reverse Judge Carter’s orders dismissing all three of Appellants’ prior ap*769peals as equitably moot, and then it, or the district court on remand, would have to find for Appellants on the merits.

However, a district court’s dismissal of a bankruptcy appeal as equitably moot is reviewed for abuse of discretion.109 Judge Carter’s decision was based in part on Judge Glenn’s unchallenged finding that the Plan had been substantially consummated.110 Accordingly, Judge Carter found that Appellants had the burden of establishing each of the Chateaugay factors. He then determined that Appellants failed to meet their burden with respect to two factors, including the crucial consideration of whether an appellant has diligently pursued stay relief.111

As discussed above, Appellants’ failure to act with diligence and the resulting substantial consummation of the Plan strongly support a finding of equitable mootness. Furthermore, Appellants’ dubious contention that the equitable mootness doctrine never applies to a chapter 7 liquidation has been rejected by numerous courts.112

In addition, as a general matter, the abuse of discretion standard also applies to decisions denying requests to file late claims.113 After briefing, discovery, and a hearing, Judge Glenn found that Appellants were not “known” creditors.114 He then determined that the notice provided to Appellants as unknown creditors was sufficient as a matter of law.115 Appellants have not shown a substantial possibility that the Second Circuit will find that Judge Glenn abused his discretion in making these findings or in applying the law.

4. Public Interest

Appellants argue that the public interest supports granting a stay because: (1) there are millions of gift card holders with claims exceeding $200 million and (2) the “issue of due process for such customers in large retail bankruptcies is great and has not been addressed by any court of appeals to date.”116 They contend that “[fundamentally, the issue is what notice is required to satisfy due process notice to absent class members in the current digital age.”117

Appellees argue that “[n]o public interest is implicated” as “the Trust has adequate reserves for Appellants’ claims and Appellants do not represent anyone else.”118 Appellees also state that a stay would interfere with the expedient administration of the estate under the Plan.119

Appellants have made a plausible showing with respect to this factor. However, the overall balance of harms does not support stay relief. In particular, Appellants’ failure to demonstrate either irreparable harm or substantial possibility of success on the merits forecloses stay relief.

*770VI. CONCLUSION

For the foregoing reasons, Appellants’ motion for certification of a direct appeal to the Second Circuit and for stay relief is denied. The Clerk of the Court is directed to close this motion (Docket # 9).

Pursuant to Bankruptcy Rule of Procedure 8009(a)(1) (“Rule 8009(a)(1)”), Appellants’ opening brief was due on August 30, 2013. Appellants have not yet filed an appellate brief. If Appellants wish to pursue this appeal, they must file their opening appeal brief by February 4, 2014. Failure to submit a brief by that date will result in dismissal of this appeal pursuant to Rule 8009(a)(1). Appellees’ response is due fourteen days from the filing of Appellants’ brief, and Appellants’ reply is due seven days from the filing of Appellees’ response. No extensions will be permitted.

SO ORDERED.

Beeman v. BGI Creditors' Liquidating Trust (In re BGI, Inc.)
504 B.R. 754

Case Details

Name
Beeman v. BGI Creditors' Liquidating Trust (In re BGI, Inc.)
Decision Date
Jan 28, 2014
Citations

504 B.R. 754

Jurisdiction
United States

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