In Re: Extended Stay Inc.

Filing 20

MEMORANDUM OPINION AND ORDER: For the foregoing reasons, the Trustee's appeal is dismissed for lack of jurisdiction. The Clerk of the Court is directed to close this appeal. (Signed by Judge Shira A. Scheindlin on 2/14/2012) (mro)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

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MEMORANDUM
OPINION AND ORDER
Chapter 11 Case No.
09-13764 (JMP)

In re EXTENDED STAY, INC., et at,
Debtors.

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WALKER, TRUESDELL, ROTH &
ASSOCIATES, as Trustee for and on behalf of
the Extended Stay Litigation Trust, HOBART
TRUESDELL, as Trustee for and on behalf of
the Extended Stay Litigation Trust, and THE
EXTENDED STAY LITIGATION TRUST,
Plaintiffs,

11 Civ. 7782 (SAS)
Adv. Pro. No. 11-2398

- againstTHE BLACKSTONE GROUP, L.P.,
BLACKSTONE HOLDINGS I L.P.,
BLACKSTONE HOLDINGS II L.P.,
BLACKSTONE HOLDINGS III L.P.,
BLACKSTONE HOLDINGS IV L.P.,
BLACKSTONE HOLDINGS V L.P.,
BLACKSTONE HOLDINGS 1111 GP, INC.,
BLACKSTONE HOLDINGS III GP L.L.C.,
BLACKSTONE HOLDINGS IV GP L.P.,
BLACKSTONE HOLDINGS V GP L.P.,

BLACKSTONE REAL ESTATE PARTNERS

IV L.P., BLACKSTONE CAPITAL

PARTNERS IV L.P., BHAC IV, LLC, BRE/HV :

HOLDINGS LLC, BLACKSTONE

HOSPITALITY ACQUISITIONS, LLC,

PRIME HOSPITALITY, LLC, DL-DW

HOLDINGS, LLC, LIGHTSTONE HOLDINGS:

LLC, THE LIGHTSTONE GROUP, LLC,

PGRT ESH INC., LIGHTSTONE

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COMMERCIAL MANAGEMENT, ARBOR
ESH II, LLC, ARBOR COMMERCIAL
MORTGAGE, LLC, PRINCETON ESH LLC,
ATMAR ASSOCIATES, LLC, GLIDA ONE
LLC, RON INVEST LLC, POLAR EXTENDED:
STAY (USA) L.P., BHAC CAPITAL IV, LLC, :
BRE/ESH HOLDINGS, LLC, ABT-ESI LLC,
MERICASH FUNDING LLC, PARK AVENUE :
FUNDING LLC, BANK OF AMERICA, N.A.,
CITIGROUP GLOBAL MARKETS INC.,
EBURY FINANCE LIMITED, BANC OF
AMERICA SECURITIES LLC, DAVID
LICHTENSTEIN, BRUNO DE VINCK,
PEYTON "CHIP" OWEN, JR., GUY R.
MILONE, JR., JOSEPH CHETRIT, JOSESPH
TEICHMAN, JOSEPH MARTELLO, F.
JOSEPH ROGERS, DAVID KIM, GARY
DELAPP, JONATHAN D. GRAY, WILLIAM
STEIN, MICHAEL CHAE, ROBERT L.
FRIEDMAN, THOMAS BURDI, GARY
SUMERS, DENNIS J. MCDONAUGH, ALAN
MIYASAKI, and JOHN DOES 1 through 100,
inclusive,
Defendants.

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SHIRA A. SCHEINDLIN, U.S.D.J.:

I.

INTRODUCTION
Plaintiffs, Walker, Truesdell, Roth & Associates and Hobart

Truesdell, as Trustees for and on behalf of the Extended Stay Litigation Trust (the
"Trust"), and the Trust bring this appeal of the September 19, 2011 Order (the
"Order") issued by Judge James M. Peck of the United States Bankruptcy Court for

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the Southern District of New York (the "Bankruptcy Court") denying plaintiffs'
motion for abstention and remand of this adversary proceeding, which was
originally commenced in New York state court. For the reasons set forth below,
this appeal is dismissed for lack ofjurisdiction.
II.

BACKGROUND
Extended Stay, Inc. and affiliated entities (the "Debtors" or
"Extended Stay") owned the leading mid-priced extended-stay
hotel business in the U.S., with 684 hotels located in 44 states. On
April 12,2007, Lightstone Holdings LLC and affiliated entities
offered to purchase the Debtors in a leveraged buyout ("LBO") for
eight billion dollars, comprised of $7.4 billion of debt, four­
hundred million dollars of cash, and two-hundred million dollars
of rollover equity. Before the LBO, the Debtors' business was
encumbered by secured debt totaling approximately $3.3 billion
and mezzanine debt totaling approximately $1.9 billion. The LBO
closed on June 11,2007.
A little over two years later, on June 15,2009, the Debtors filed
for chapter 11 bankruptcy protection. In July 2010, the
bankruptcy court confirmed the Extended Stay Plan of
Reorganization (the "Plan"), The Confirmation Order created the
Trust to bring claims on behalf of the Debtors. The bankruptcy
court retained jurisdiction over any matters . . . arising in or
related to the Chapter 11 Cases of the Plan, including any claims
by the Trustee to recover assets for the benefit of the Debtors'
estates. l
On June 14,2011, plaintiffs filed a Complaint in the Supreme Court

In re Extended Stay, Inc., No. 11 Civ. 5394, 2011 WL 5532258, at *1
(S.D.N.Y. Nov. 10,2011) (quotations and citations omitted).
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of the State of New York, County of New York (the "State Court Complaint"),2
which the Blackstone Defendants3 removed to federal court based on sections 1334
and 1452 of Title 28 of the United States Code4 on July 1,2011. This action was
referred to the bankruptcy court on July 12,2011. 5 The State Court Complaint
asserts state law causes of action for breaches of fiduciary duty, corporate waste,
aiding and abetting breaches of fiduciary duty, unjust enrichment, and illegal
dividends and other distributions. The defendants are (1) former directors, officers
or other persons controlling the Debtors immediately prior to the LBO; (2) former
directors, officers or other persons controlling the Debtors after the LBO closed;

See Walker, Truesdell, Roth & Assoc. v. Blackstone Group, L.P.,
Index No. 651667/2011 (Sup. Ct. N.Y. Co.).
2

The Blackstone Defendants consist of the Blackstone Group, L.P.,
Blackstone Holding I L.P., Blackstone Holding II L.P., Blackstone Holding III
L.P., Blackstone Holding IV L.P., Blackstone Holding V L.P., Blackstone
Holdings III GP L.L.c., Blackstone Holdings IV GP L.P., Blackstone Capital
Partners IV L.P., Blackstone Hospitality Acquisitions, LLC, and Blackstone
Holdings V GP L.P.
3

See 28 U.S.C. § 1334(b) ("[T]he district courts shall have original but
not exclusive jurisdiction of all civil proceedings arising under title 11, or arising
in or related to cases under title 11."); id. § 1452 ("A party may remove any claim
or cause of action in a civil action ... to the district court for the district where
such civil action is pending, if such district court has jurisdiction of such claim or
cause of action under section 1334 of this title. ").
4

See Walker, Truesdell, Roth & Assoc. v. Blackstone Group, L.P. (In re
Extended Stay, Inc.), Adv. Pro. No. 11-2398 (Bankr. S.D.N.Y.).
5

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and (3) certain advisors involved in consummating the LBO.
On July 29,2011, plaintiffs moved to remand this action to the
Supreme Court of the State of New York on three distinct bases - mandatory
abstention,6 permissive abstention/ and equitable remand. 8 The Bankruptcy Court
orally denied the motion at a September 8, 2011 hearing and issued a written order
denying the motion on September 19, 2011. Plaintiffs now appeal that ruling.

III.

LEGAL STANDARD
A district court functions as an appellate court in reviewing judgments

rendered by bankruptcy courts. 9 Findings of fact are reviewed for clear error 10
whereas findings that involve questions of law, or mixed questions of fact and law,
are reviewed de novo. I I

6

See 28 U.S.C. § 1334(c)(2).

7

See id. § 1334(c)(I).

8

See id. § 1452(b).

9

See In re Sanshoe Worldwide Corp., 993 F.2d 300, 305 (2d Cir.

1993).
See Fed. R. Bankr. P. 8013 ("Findings of fact ... shall not be set aside
unless clearly erroneous, and due regard shall be given to the opportunity of the
bankruptcy court to judge the credibility of the witnesses."). Accord In re Cody,
Inc., 338 F.3d 89, 94 (2d Cif. 2003).
10

See In re Adelphia Commc 'ns Corp., 298 B.R. 49, 52 (S.D.N.Y. 2003)
(citing In re United States Lines, Inc., 197 F.3d 631,640-41 (2d Cir. 1999».
II

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IV.

APPLICABLE LAW

A district court has appellate jurisdiction over "final judgments,

orders, and decrees" of bankruptcy courtS.12 Under the collateral order doctrine, an
order is treated as "final" if it '"conclusively detennine[ s] a disputed question that
is completely separate from the merits of the action, effectively unreviewable on
appeal from a final judgment, and too important to be denied review.,,'13

A district court may also grant discretionary leave to appeal an
interlocutory order. 14 Leave to appeal an interlocutory order is granted only "in
exceptional circumstances."15 Leave is appropriate where the interlocutory order
"1) involves a controlling question of law 2) as to which there is substantial ground
for difference of opinion, and 3) that an immediate appeal from the order may
materially advance the ultimate termination of the litigation.,,16

V.

DISCUSSION
A.

Final Order

12

28 U.S.C. § 158(a)(1); see also Fed. R. Bank. P. 8001(a).

13
Mt. McKinley Ins. Co. v. Corning Inc., 399 F.3d 436,442 (2d Cir.
2005) (quoting Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 712 (1996».

14

See 28 U.S.c. § 158(a)(3).

15
Securities Investor Prot. Corp. v. Bernard L MadoffInv. Sec. LLC,
No. M 47, 2010 WL 185102, at *1 (S.D.N.Y. Jan. 11,2010).

16

Id. (citing 28 U.S.c. § 1292(b».

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The Order is not a final order under section 158(a)(I). A bankruptcy
court order must "dispose of discrete disputes within the larger case" to be final. 1
?
In other words, the order must resolve "at least an entire claim for which relief may
be granted" and "the determination of a seperable issue" is insufficient. 18 Although
the Trustee cites one unpublished district court decision holding that an abstention
order is a final order,19 the rule promulgated by the Second Circuit three years later
frames the inquiry as to whether "an entire claim for ... relief' has been resolved.
Because the abstention order does not resolve an entire claim, it is not final under
section 158(a).20

B.

Collateral Order Doctrine
The Order is also unreviewable under the collateral order doctrine.

The Second Circuit has noted that, in contrast to a decision granting abstention,
"under ordinary circumstances, a refusal to abstain would be reviewable on appeal
from a final judgment, making the collateral order exception inapplicable.,,21 This
17

In re Flor, 79 F.3d 281,283 (2d Cir. 1996).

18

Id.

See Fischer v. 47th St. Photo, Inc., No. 92 Civ. 5695, 1993 WL
126518, at *2 (S.D.N.Y. Apr. 22, 1993).
19

See Beightol v. UBS Painewebber, Inc., 354 F.3d 187, 189 (2d Cir.
2004) (holding that an "order declining to abstain [i]s not a final decision").
20

21

Mt. McKinley, 399 F.3d at 443.
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case does not depart from "ordinary circumstances." The complex and unusual
procedural posture in Mt. McKinley illustrates the circumstances under which a
refusal to abstain is unreviewable on appeal from a final judgment - circumstances
not present here. The holding in Mt. McKinley, in short, was based on a finding
that the district court's abstention decision would not be reviewable after a final
judgement was entered because "on appeal, we would review only whether the
Southern District ultimately made the correct judgment on claim preclusion and
not whether it correctly abstained as an initial matter.'m
The Trustee here has made no showing that this case is any different
from the "ordinary circumstances" under which a refusal to abstain is not
immediately reviewable. Contrary to the Trustee's claim that the Order
"conclusively determine [s] which forum will decide the merits of [the] dispute,,,23
this determination could be reviewed upon an appeal of the final judgment, unlike
in Mt. McKinley. Although it might be inefficient to proceed in Bankruptcy Court
if it is ultimately determined that the action belonged in state court, the Second
Circuit has recognized that "refusal to accelerate review may force a would-be
appellant to litigate in an improper forum and later render an entire proceeding

22

23

Id. at 444.
Id.
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nugatory" and that such "dangers ... are not of the sort upon which [the collateral
order rule] is founded. ,,24

C.

Leave to Appeal Interlocutory Order
Finally, I consider whether to grant leave to file an interlocutory

appeal under section 158(a)(3). Although there may be controlling questions of
law here as to which there are substantial grounds for disagreement, I find that an
immediate appeal would not advance the termination of this litigation to the degree
that it presents an "exceptional circumstance[]"25 justifying leave to appeal an
interlocutory order. The Trustee claims that an appeal of the Order would "put[] to
rest substantial constitutional and statutory issues that no doubt will be raised by
the defendants once they receive an adverse judgment."26 However, as I have
previously noted, resolution of any issues raised by Stern v. Marshal will merely
affect the standard of review given to the Bankruptcy Court's determination. 27 At
most, the resolution of this appeal would finally determine whether this action
proceeds in the Bankruptcy Court or New York state court. If that were a

24
RRI Realty Corp. v. Incorporated Vill. OfSouthhampton, 766 F.2d 63,
65 (2d Cir. 1985).
25

Securities Investor Prot. Corp., 2010 WL 185102, at *1.

26

Appellants' Reply Brief at 6.

27

See In re Extended Stay, 2011 WL 5532258, at *9.
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sufficient concern to grant leave to appeal an interlocutory order, then every
decision not to abstain and remand would be immediately appealable. The Second
Circuit has stated otherwise?8 Accordingly, I decline to grant leave to the Trustee
to appeal an interlocutory order.

VI.

CONCLUSION
For the foregoing reasons, the Trustee's appeal is dismissed for lack

ofjurisdiction. The Clerk of the Court is directed to close this appeal.

SO ORDERED:
/"-.
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'i~~'~ 't ',&­
l,

('shira j(S'cheindlin '. - ­
, V.S.DJ. '
Dated:

28

New York, New York
February 14,2012

See RRlRealty Corp., 766 F.2d at 65.
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- Appearances ­

For Plaintiffs:
Marc Dennis Powers, Esq.

Matthew R. Goldman, Esq.

Benjamin David Pergament, Esq.

Baker & Hostetler LLP

45 Rockefeller Plaza

New York City, New York 10111

[phone]/4622
Michael A. VanNiel, Esq.
Alexis C. Osburn, Esq.
Baker & Hostetler LLP
1900 East 9th Street, Suite 3200
Cleveland, Ohio 44114
[phone]
For Defendants Blackstone Group, L.P., Blackstone Holding I L.P.,
Blackstone Holding II L.P., Blackstone Holding III L.P., Blackstone Holding
IV L.P., Blackstone Holding V L.P., Blackstone Holdings III GP L.L.C.,
Blackstone Holdings IV GP L.P., Blackstone Capital Partners IV L.P.,
Blackstone Hospitality Acquisitions, LLC, and Blackstone Holdings V GP
L.P.:
Paul Basta, Esq.

Kirkland & Ellis LLP (NYC)

601 Lexington Avenue

New York, New York 10022

[phone]
Daniel T. Donovan, Esq.
Kirkland & Ellis LLP
655 15th Street NW, Suite 1200
Washington, DC 20005
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[phone]
For Defendants Lightstone Holdings, LLC, The Lightstone Group, LLC,
Lightstone Commercial Management, DL-DW Holdings, LLC, BHAC Capital
IV, LLC, Park Avenue Funding LLC, David Lichtenstein, Bruno De Vinck,
Peyton Chip Owen, Jr., and Joseph Teichman:
Adina Giselle Storch, Esq.

Christopher Paul Johnson, Esq.

Howard W. Schub, Esq.

Robert M. Novick, Esq.

Kasowitz, Benson, Torres & Friedman, LLP (NYC)

1501 Broadway 12th, Floor

New York, New York 10036

(212) 506-1954117001172911758

For Defendant PGRT ESH, Inc.:
Edward Kevin Lenci, Esq.
Hinshaw & Culbertson LLP
780 Third Avenue
New York, New York 10017
[phone]

For Defendants Bank of America, N.A., Banc of America Securities LLC, and
JPMorgan Chase Bank, N.A., individually and in its capacity as
administrator:
Benjamin S. Kaminetzky, Esq.
Jonathan D. Martin, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
[phone]

For Defendant Citigroup Global Markets, Inc.:
Thomas Joseph Hall, Esq.
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Chadbourne & Parke LLP (NY)

30 Rockefeller Plaza

New York, New York 10112

[phone]

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