In Re Kainos Partners Holding Company LLC et al

Filing 23

MEMORANDUM ORDER: the Appeal is DISMISSED, ***Civil Case Terminated. Signed by Judge Leonard P. Stark on 11/30/12. (ntl)

IN THE UNITED STATES biSTRICT COURT
FOR THE DISTRICT Of DELAWARE
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INRE:

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KAINOS PARTNERS HOLDING
COMPANY, LLC, et al.,

Chapter 7

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; /Case No. 09-12292 (BLS)

Debtors.
ROBERTA A. DEANGELIS,
UNITED STATES TRUSTEE FOR REGION 3,
Appellant,
Civil Action No. 10-560-LPS

V.

OFFICIAL COMMITTEE OF UNSECURED
CREDITORS 1 AND KAINOS PARTNERS
HOLDING COMPANY, LLC,
Appellees.

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MEMORANDU~ ORDER
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At Wilmington this 30th day ofNovember, 20112, having reviewed the Appeal filed by
Roberta A. DeAngelis, Acting United States Trustee

~r Region 3 (the "UST" or "Appellant"), of

the Bankruptcy Court's order dated and entered Aprill1, 2010 granting the joint motion of the
Committee and the Debtors pursuant to 11 U.S.C. § 1p5(a) and Federal Rule ofBankruptcy

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0n July 6, 2009, appellee Kainos Partners H lding Company LLC and eighty-nine of its
affiliated debtors (collectively, "Kainos" or the "Deb ors") filed with the United States
Bankruptcy Court for the District of Delaware (the " ankruptcy Court") their respective
voluntary petitions for relief under Chapter 11 of Tit e 11 of the United States Code (the
"Bankruptcy Code"). On June 22, 2010, after comm ncement ofthe above-captioned appeal (the
"Appeal") on April15, 2010 (D.I. 1), the Bankruptc Court entered an order converting the
Debtors' Chapter 11 bankruptcy cases to cases under Chapter 7 of Title 11 ofthe Bankruptcy
Code. (See D.I. 10 at 2) Although the Official Com ittee ofUnsecured Creditors (the
"Committee") was named as an appellee in this App al, upon the conversion of these cases the
Committee ceased to exist. (See id at 2-3; D .I. 18

•r)

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Procedure 9019 for an order approving the global setttment (the "Global Settlement") between
and among the Committee, the Debtors, Dunkin'

Br~ds, Inc., Dunkin' Donuts Franchising, Inc.,

DB! Stores LLC, Dunkin' Donuts Franchised Resta+ts, LLC, CIT Group/Equipment
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Financing, Inc., Kainos Investment Partners I, LLC, :Kfinos Investment Partners II, LLC, and
PCEP II KPHC Holdings, Inc. (the "Settlement Order'r) (D.I. 14, App. at 297-99), and the papers
filed in connection therewith;

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IT IS ORDERED that the Appeal (D.I. 1; D.l.

f) is DISMISSED, for the reasons discussed
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below.

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1.

Relevant Background. 2 No plan of reorganization was filed while the Debtors

were in Chapter 11. Instead, the Debtors, their securer lenders, and the Committee ultimately
negotiated and entered into the Global Settlement to erectuate a purchase and sale of substantially
all of the Debtors' assets. The Global Settlement inclfded, inter alia, certain payments and
mutual releases. (See D.l. 14, App. at 89, 103, 160)

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2.

In connection with the Global Settlemert, the parties' final Asset Purchase

Agreement (the "APA") included the following

negot~ated "Carve-Out" provision:
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Section 6.21 Carve-Out. If Bu er is the successful bidder
for one or more stores in the Case and he Official Committee of
Unsecured Creditors (the "Committee" supports the transaction,
Dunkin' Brands, Inc. will at Closing as ign to the Seller's estate for
the benefit of (i) non-lender general un ecured creditors and (ii)
unpaid fees and expenses of Committe professionals in excess of
$125,000, its right to repayment of$25 ,000 of the CML Subsidy
Loans and CML Subsidy Loan Obligat ons (as such terms are
defined in that certain Amended and R~stated DIP Financing,
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The Court presumes the parties' extensive fJniliarity with the background of this case.
A few salient facts, however, have been set forth abofe for ease of reference.
2

Ratification and Intercreditor Agreeme t dated as of July 2009 (the
"DIP Agreement") by and among Sell , the Lenders and the other
parties thereto, as amended and in effe t) (the "Carve-Out"). If
Buyer is the successful bidder for one r more stores, Dunkin
Brands, Inc. will also: (i) waive its rig t to repayment of the
remaining $238,693 of the CML Subsi y Loans and CML Subsidy
Loan Obligations; (ii) waive its right t repayment of obligations
under the DIP Agreement, including b t not limited to, the Dunkin'
Debt (as defined therein); (iii) release t e Seller from any
obligations with respect to the pre-peti ion mortgages granted to
Dunkin' Brands, Inc.; and (iv) waive it right to assert any claim
against the Purchase Price, the Carve- ut and/or the Excluded
Assets.

(D.I. 14, App. at 144-45)
3.

The Debtors submitted the terms of th, AP A to the Bankruptcy Court for approval.

Over the UST's objection, the Bankruptcy Court appived the APA. The Bankruptcy Court
rejected the UST's argument that using the above-reftenced $250,000 payment for the sole
benefit of the Committee professionals and general

u~secured creditors violated the statutory

priority scheme; the UST argued that unpaid adminisiative claimants and priority unsecured
creditors enjoyed a right to those proceeds that was superior to that of the general unsecured
creditors. (See D.I. 14, App. at 192, 297) The B4ptcy Court found that the $250,000 was a
payment by the secured creditors in exchange for resotving potential claims and causes of action
of the estate against the Debtors' secured lender. (Seel id., App. at 282-91, Mar. 31, 2010 Hr'g
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Tr.; id. at 290 ("While there is a distribution that is betng made through the transfer of the secured
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creditors' collateral for the benefit of unsecured credittrs, again, I find that the record does reflect
that there are substantial benefits achieved by adminis rative creditors by virtue of the
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settlement."))

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4.

No stay of the Settlement Order pendi1g appeal was sought or obtained by the
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UST. (See D.l. 18 at 25; see generally D.l. 14; D.l. 2V
5.

Parties' Contentions. The UST

appeal~ the Settlement Order on the ground that
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the Bankruptcy Court erred as a matter of law in appr~ving the Global Settlement, regardless of
any perceived benefit to the estate. (See D. I. 14) The lUST contends that the distribution of the
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sale proceeds approved by the Bankruptcy Court violre the Bankruptcy Code's comprehensive
priority scheme. (See id.) The UST argues that it doe~ not seek to reverse either the sale of estate
assets or the Settlement Agreement but instead only a!ks the Court to vacate the "Carve-Out" or
"Earmark Provision," i.e., that portion of the settleme t agreement directing the estate to use the
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designated funds solely to pay the Committee's lawyets and financial advisors and the general
unsecured creditors. (See D .I. 14 at 9; D .I. 21) The

~ST requests that the $250,000 assigned to

the estate for the benefit of general unsecured creditorf and Committee professionals be returned
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to the bankruptcy estate for distribution by the Chapter 7 Trustee. 3 (See D.l. 14; D.l. 21)
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6.

The appellee is Randy A. Skinner, Esqf, (hereinafter the "Kainos GUC Trustee" or

"Appellee"), the trustee appointed to administer the K~inos General Unsecured Trust (the "Kainos
GUC Trust"). The Kainos GUC Trust was establishet by the Committee and the Debtors in
furtherance of their settlement agreement. Appellee cfntends that, with respect to the $250,000 in
settlement payments directed to general unsecured

cre~itors (and their professionals): (i) the res of

the Kainos GUC Trust is not comprised of estate ass+ but from a carve-out from the secured
creditors' collateral, and (ii) payment of the res to the Kainos GUC Trust in no way violates the
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After the sale of their assets, the Debtors coterted their Chapter 11 cases to liquidation
cases under Chapter 7. Charles M. Forman, the Cha ter 7 trustee (the "Chapter 7 Trustee") for
the Debtors, supports the UST's Appeal. (See D.l. 1 )
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Bankruptcy Code's statutory priority scheme. (See D

18 at 1-3; see also id. Ex. B) Appellee

additionally contends this appeal should be dismissed las equitably moot because Appellant never
sought a stay of the Bankruptcy Court's Settlement O,der and, accordingly, the Kainos GUC
Trustee has been proceeding to carry out his duties to the beneficiaries ofthe Kainos GUC Trust.
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(See id. at 23-26t
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Standard of Review. This Court has j+isdiction to entertain an appeal from the

Bankruptcy Court pursuant to 28 U.S. C. § 15 8(a). 5 In Iundertaking a review of the issues on
appeal, the Court applies a clearly erroneous standardlo the Bankruptcy Court's findings of fact
and a plenary standard to its legal conclusions. See A . Flint Glass Workers Union v. Anchor

Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999); see !also In re Hechinger Inv. Co. of Del., Inc.,
489 F .3d 568, 5 73 (3d Cir. 2007) ("Our review of the pistrict Court's decision effectively
amounts to review of the bankruptcy court's opinion if the first instance, because our standard of
review is the same as that exercised by the District
Court," and, accordingly, "review[ing] the

cfrt

over the decision of the Bankruptcy

Bankruptc~ Court's findings of fact for clear error and

exercis[ing] plenary review over questions of law") (ittemal quotation marks and citations
omitted). The Court must "break down mixed questi1ns of law and fact, applying the appropriate
standard to each component." Meridian Bank v. Alte1, 958 F.2d 1226, 1229 (3d Cir. 1992).
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8.

Discussion. "The doctrine of equitable lmootness provides that an appeal should be
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dismissed as moot when, even though effective relief rould conceivably be fashioned,

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ln particular, as of the filing of his brief in May 2011, Appellee intended to distribute the
$250,000 in or around June 2011. (D.I. 18 at 23)
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'The Court's jurisdiction over this matter is t t in dispute. (See D .I. 14 at I ; D .I. 18 at I)

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implementation of that relief would be inequitable."

emCrude, L.P. v. Manchester Sec. Corp.

("SemCrude "), 456 F. Appx. 167, 169 (3d Cir. Jan. 3 20 12) (internal quotation marks omitted),
aff'g Manchester Sec. Corp. v. Semcrude, L. P. (In re emcrude, L. P.) ("Manchester"), 2011 WL
675033, at *2 (D. Del. Feb. 18, 2011); see also In re

ontinental Airlines ("Continental!!"), 203

F.3d 203, 209 (3d Cir. 2000). The determination of

ether an appeal is equitably moot requires

a "discretionary balancing of equitable and prudential factors." In re Continental Airlines

("Continental!''), 91 F.3d 553, 560 (3d Cir. 1996) (e bane). Specifically, the Court of Appeals
for the Third Circuit has recognized five factors that c urts should consider in evaluating whether
an appeal should be dismissed under the doctrine of e uitable mootness:
(1) whether the reorganized plan has b en substantially
consummated; (2) whether a stay has b en obtained; (3) whether the
relief requested would affect the rights of parties not before the
Court; (4) whether the relief requested ould affect the success of
the plan; and (5) the public policy of a ording finality of
bankruptcy judgments.

!d.
9.

Applying these factors here, the Court oncludes that the UST's appeal is equitably

moot. The Global Settlement was approved by the B

ptcy Court and its implementation was

not stayed. "The existence or absence of a stay is a cr tical factor in determining whether to
dismiss an appeal under the doctrine of equitable moo ness." Kuntz v. Saul, Ewing, Remick &

Saul (In re Grand Union Co.), 200 B.R. 101, 105 (D.

el. 1996); see also, e.g., In re

Northwestern Corp., 2009 WL 2399120, at *2 (D. De. Aug. 4, 2009) (affirming settlement order
and remarking: "Appellant never requested a stay oft e Settlement Order. The settlement was a
complex and integrated resolution of the many claims involving the parties, and the Court is not

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persuaded that relief can be granted to Appellant withtut causing adverse consequences to
numerous parties, including general unsecured credito s not before the Court who are still
awaiting distributions under the Plan, and whose distr butions would be further delayed if the
settlement were unwound. Accordingly, in these eire mstances, the Court concludes that the
Appellant's appeal is equitably moot."). In the absen e of a stay, it appears that the terms ofthe
settlement have been substantially consummated. 6 (S e D.I. 18) The UST's requested relief
would impact numerous third parties not before the C urt, namely Kainos' unsecured creditors,
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and would affect the success of the Global Settlement The public policy of affording finality to
bankruptcy judgments also weighs in favor of dismiss 1. Here, given the "complexity of the
litigation" (D.I. 14, App. at 289); the number of partie involved in the negotiation, approval, and
implementation of the Global Settlement; and the B

ptcy Court's not-clearly-erroneous

finding that "in the absence of the settlement that trig ers the sale process, that triggered the
support of a [$]500,000 DIP to keep the process goin ... all parties would have suffered a
catastrophic loss" (id. at 269), public policy favors lea ing the Settlement Order undisturbed.
Here, "even though effective relief could conceivably e fashioned, implementation of that relief
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would be inequitable." Continental I, 91 F.3d at 558-t9 (internal quotation marks omitted).
Accordingly, the Court finds this appeal to be equitabt moot and will dismiss it. 7

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See 11 U.S.C. § 1101(2) (defining "substanti
substantially all of the property proposed by the plan
debtor or by the successor to the debtor under the pl
all or substantially all of the property dealt with by th
distribution under the plan").
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1 consummation" as "(A) transfer of all or
o be transferred; (B) assumption by the
of the business or of the management of
plan; and (C) commencement of

Given the overall equities and other factors c ted here, the Court reaches its conclusion
ofmootness even assuming the UST is correct that t e $250,000 is protected by a bond or is
otherwise retrievable by the estate even after distribu ion. (See D.I. 21 at 9-10)
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10.

In the alternative, even ifthe Court

we~e to reach the merits ofthis Appeal, the

Court would agree with the Bankruptcy Court that the Global Settlement does not violate the
Bankruptcy Code's statutory priority scheme but, inst ad, satisfies the criteria for approval under
Bankruptcy Rule 9019 and the standards set forth undtr In re Martin, 91 F.3d 389, 393 (3d
Cir.1996). As the Bankruptcy Court observed, the set lement payments slated for distribution to
general unsecured creditors and their professionals ari e from a carve-out from the secured
creditors' collateral. (See D.I. 14, App. at 282-91, M . 31,2010 Hr'g Tr.)
Accordingly, this Appeal is DISMISSED.

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