In re: Arcapita Bank B.S.C.(C)
Filing
22
OPINION AND ORDER: For the reasons discussed above, these appeals are dismissed as equitably moot. The Clerk of the Court is directed to close these appeals. (Signed by Judge Shira A. Scheindlin on 1/6/2014) (cd)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------------------)(
In re
OPINION AND ORDER
ARCAPITA BANK B.S.C.(c), et aI.,
Chapter 11
Bankruptcy Case No. 12
11076
Jointly Administered
Debtors,
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CAPTAIN HANI ALSOHAIBI,
13 Civ. 5755 (SAS)
13 Civ. 5756 (SAS)
Appellant,
- against
ARCAPITA BANK B.S.C.(c), et aI.,
Appellees.
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SHIRA A. SCHEINDLIN, U.S.D.J.:
These appeals arise out of the jointly administered chapter 11 cases of
Arcapita Bank B.S.C.(c) ("Arcapita") and several of its direct or indirect wholly
owned subsidiaries ("Debtors").l Captain Hani Alsohaibi ("Appellant") appeals
The affiliated debtors include Arcapita Investment Holdings Limited
("AIHL"), Arcapita LT Holdings Limited ("LT Holdings"), WindTurbine Holdings
Limited, AEID II Holdings, and Railinvest Holdings Limited. The Debtors' cases
were administratively, but not substantively, consolidated. Under the Debtors'
joint chapter 11 plan (the "Plan"), the Debtors were replaced by reorganized
debtors and new holding companies; for convenience, I will use the terms
"Debtors" or "Appellees" and not "Reorganized Debtors."
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from two orders of the Bankruptcy Court: (1) the final order approving
replacement debtor-in-possession (“DIP”) financing (the “Replacement DIP
Order”) and (2) the order confirming the Plan (the “Confirmation Order”).2
Following initial briefing in which Appellees addressed the merits of the appeals,3
Appellees moved to dismiss each appeal on grounds of equitable mootness.4
Because the Plan has become effective, and there has been a comprehensive
change in circumstances, I conclude that both appeals must be dismissed on
equitable mootness grounds. Accordingly, I will not address the merits of these
appeals.
I.
BACKGROUND
A.
The Debtors’ Business
Arcapita was incorporated in 1996 as a Bahrain Joint Stock Company,
operating under an “Islamic wholesale banking license” issued by the Central Bank
2
The Bankruptcy Court recently sustained the Debtors’ objection to
Appellant’s claim of some $1.5 million, reducing it to $148.91 after finding the
remainder was based on equity investments in non-debtor entities. See In re
Arcapita Bank B.S.C. (c), No. 12-11076, 2013 WL 6141616, at *3-6 (Bankr.
S.D.N.Y. Nov. 21, 2013). The appeal from this order is not before me.
3
See Appellees’ Consolidated Opening Brief (“Appellees’ Opening
Brief”).
4
See Memorandum of Law in Support of Reorganized Debtors’ Motion
to Dismiss Appeals as Moot (“Debtors’ Mem.”).
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of Bahrain (“CBB”), the regulatory agency charged with maintaining financial
stability in Bahrain.5 It was privately held by some 360 shareholders.6 Arcapita,
through its debtor and non-debtor subsidiaries (“Arcapita Group”), provided
Shari’ah compliant alternative investments and operated as an investment bank.7
The Arcapita Group structured a typical third-party investment by first
creating a Cayman Island “Transaction Holdco,” owned by AIHL or LT Holdings,
which acquired one hundred percent of the equity in a target company.8 The
Arcapita Group retained between twenty and thirty percent of the equity in the
Transaction Holdco, and created Cayman Island “Syndication Companies,” “to
which the Arcapita Group, in exchange for the equity in the Syndication
Companies, transferred that portion of the equity of the Transaction Holdco that it
intended to offer for sale to” third-party investors.9 Equity in the Syndication
5
Second Amended Disclosure Statement in Support of the Second
Amended Joint Plan of Reorganization of Arcapita Bank B.S.C.(c) and Related
Debtors Under Chapter 11 of the Bankruptcy Code (“Disclosure Statement”)
(Bankr. Dkt. No. 1038), at 42.
6
See id.
7
See id.
8
See id. at 43.
9
Id.
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Companies was then sold to third-party investors.10
B.
The Debtors’ Bankruptcy Filing
The principal driver of the Debtors’ filing was their inability to
refinance, due to the Eurozone crisis and weak markets, a $1.1 billion syndicated
loan which was set to mature on March 28, 2012 (the “Syndicated Facility”).11
After failed negotiations with the lenders, the Debtors filed voluntary petitions for
relief under chapter 11 of the Bankruptcy Code on March 19, 2012.12 The United
States Trustee appointed a committee of unsecured creditors (the “Committee”),
which includes CBB and the National Bank of Bahrain.13 Following the petition
date, AIHL sought ancillary relief from the Grand Court of the Cayman Islands,
which led to the appointment of joint provisional liquidators (the “JPLs”).14 In
addition, holders of debt related to the Syndicated Facility formed an ad hoc group
10
See id.
11
See id. at 53.
12
See id. at 53-54.
13
See id. at 54.
14
See Debtors’ Memorandum of Law in Support of Confirmation of
Second Amended Joint Plan of Reorganization of Arcapita Bank B.S.C.(c) and
Related Debtors Under Chapter 11 of the Bankruptcy Code (Bankr. Dkt. No. 1218)
¶ 12.
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to represent the interests of the Syndicated Facility (the “Ad Hoc Group”).15
The Debtors projected aggregate allowed claims of $2.757 billion in
the Disclosure Statement.16 This included (1) Standard Chartered Bank’s (“SCB”)
secured claim of some $96.6 million; (2) unsecured claims arising under various
Murabaha agreements, such as the $1.1 billion owed under the Syndicated Facility,
in addition to approximately $100 million owed pursuant to the “Arcsukuk
Facility,” and $255 million owed to CBB; and (3) Arcapita’s unsecured debt of
over $675 million from cash balances held on behalf of Transaction Holdcos,
Syndication Companies, and third-party investors.17
C.
Post-petition Financing
In December 2012, the Bankruptcy Court approved, without objection
from Appellant, post-petition financing of $150 million (the “Fortress Facility”).18
15
See generally Declaration of Matthew Bonanno, vice president of
York Capital Management, a member of the Ad Hoc Group, in Support of the
Second Amended Joint Plan of Reorganization of Arcapita Bank B.S.C.(c) and
Related Debtors Under Chapter 11 of the Bankruptcy Code (Bankr. Dkt. No.
1222).
16
See Disclosure Statement at 69.
17
See id. at 48-51.
18
See id. at 68. In January 2013, the Debtors prepaid approximately $35
million under the Fortress Facility. See id.
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The Fortress Facility matured by its terms on June 14, 2013.19 Prior to the maturity
date, the Debtors obtained a commitment from Goldman Sachs International
(“Goldman”) to provide $350 million in replacement DIP financing.20 $175
million was earmarked to repay the Fortress Facility and to fund the Debtors’
operations until the effective date of the Plan.21 The remainder was directed to
funding the Plan, including payment of SCB’s $96.6 million secured claim.22 In
March 2013, without objection from Appellant, the Bankruptcy Court approved the
Debtors’ entry into commitment documentation with Goldman.23
The Debtors subsequently filed a motion seeking approval of the
replacement DIP financing; thereafter, Appellant filed an objection to the motion,
citing procedural grounds.24 At a hearing on June 10, 2013,25 the Bankruptcy Court
overruled Appellant’s objection, granted the Debtors’ motion on an interim basis,
19
See Appellees’ Opening Brief at 5.
20
See id. at 6.
21
See id.
22
See id.
23
See id.
24
See id. at 6-7.
25
The confirmation hearing was scheduled for the next day.
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and scheduled a final hearing for June 24, 2013.26 Appellant neither sought a stay
of the interim order nor appealed it.27 The Debtors closed the $175 million
replacement DIP financing on June 13, 2013, and used $105 million to repay the
Fortress Facility.28
On June 17, 2013, Appellant filed a second objection. On June 24,
2013, the Bankruptcy Court conducted a final hearing and overruled Appellant’s
objections, including objections based on Shari’ah concerns.29 On June 26, 2013,
the Bankruptcy Court entered the Replacement DIP Order, expressly finding that
the financing was obtained in “good faith” pursuant to sections 363(m) and 364(e)
of the Code.30 Appellant did not seek a stay of the Replacement DIP Order.31
D.
The Plan and Confirmation
The Plan consists of subplans for each of the Debtors and provides a
highly complex framework for the orderly wind-down of their business operations.
Among scores of other transactions, the Plan contemplated (1) the transfer of the
26
See id. at 8.
27
See id.
28
See id. at 10.
29
See id.
30
See id.
31
See id.
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Debtors’ property to reorganized debtors and nineteen new holding companies; (2)
numerous settlements, including with SCB, which had threatened to block
confirmation; (3) entry into the exit financing; and (4) the issuance of $550 million
in “sukuk” certificates by one of the new holding companies.32 This framework
was the product of extensive negotiations among the Debtors, the Committee, the
JPLs, the Ad Hoc Group, and other stakeholders, “regarding the myriad claims and
issues affecting the estates.”33
The Debtors’ liquidation analysis highlights the benefits of the Plan
over a hypothetical chapter 7 liquidation. Holders of Syndicated Facility and
Arcsukuk Facility claims were projected to recover 65.5 percent of their claims
under the Plan versus a recovery of between 18.7 to 22.8 percent in a chapter 7
liquidation.34 Holders of general unsecured claims against Arcapita were projected
32
See, e.g., 10/11/13 Declaration of Bradley Jordan, a managing director
of Houlihan Lokey Capital, Inc., an advisor to the Committee, in Support of
Reorganized Debtors’ Motion to Dismiss Appeals as Moot (“Jordan Decl.”) ¶¶ 10,
12-13, 18-19. Sukuk certificates are structured to comply with Shari’ah principles.
33
Statement of Official Committee of Unsecured Creditors in Support of
Confirmation of the Second Amended Joint Plan of Reorganization of Arcapita
Bank B.S.C.(c) and Related Debtors Under Chapter 11 of the Bankruptcy Code
(“Committee Statement”) (Bankr. Dkt. No. 1253) ¶ 1.
34
See 6/6/13 Declaration of Matthew Kvarda, a managing director of
Alvarez & Marsal North America, LLC, an advisor to the Debtors, in Support of
Confirmation of Second Amended Joint Plan of Reorganization of Arcapita Bank
B.S.C.(c) and Related Debtors Under Chapter 11 of the Bankruptcy Code (“Kvarda
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to receive 7.6 percent of their claims under the Plan, compared with between 3.3 to
4.1 percent in a chapter 7 liquidation.35 General unsecured creditors of AIHL were
projected to recover 58.9 percent under the Plan, compared with between 15.4 to
18.7 percent in a chapter 7 liquidation.36
Nearly every impaired class voted to the accept the Plan.37 During the
confirmation hearing, the Bankruptcy Court addressed Appellant’s argument, made
at the financing hearing the previous day, that the Debtors should be liquidated
immediately. The Bankruptcy Court stated:
I do not see counsel for [Alsohaibi] here today, but [the objection]
had to do with the fact that liquidation was a better option than a
chapter 11 reorganization, and it overlooks several things,
including the liquidation analysis, and the fact that this is really a
managed liquidation in any event, but just a very well managed
one. So that is explicitly overruled. And I actually did not see an
objection to confirmation by [Alsohaibi], but it certainly was
mentioned yesterday, so I want to make sure that’s addressed.38
The Bankruptcy Court entered the Confirmation Order on June 17, 2013.39
Decl.”) (Bankr. Dkt. No. 1220) ¶ 13.
35
See id.
36
See id.
37
See Committee Statement ¶ 3.
38
Appellees’ Opening Brief at 9 (citation omitted) (alterations in
original).
39
See id.
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Appellant did not seek a stay of the Confirmation Order.
E.
Plan Implementation and Consummation
Due to the complexity of implementing the Plan, the Debtors delayed
the effective date several times. At a hearing on August 27, 2013, the Bankruptcy
Court noted the parties’ “frustration” in getting to an effective date.40 The
Bankruptcy Court explained that it is “a very complicated plan and series of
transactions contemplated under the plan. But, nonetheless, finality, and the need
to go effective, I think everyone recognizes important end deadlines are crucial to
that.”41 Thereafter, the Bankruptcy Court entered an order approving an
implementation timeline for the Plan, setting September 17, 2013 as the effective
date.42 The required action under the timeline included:
(i) conducting board meetings or similar authorizing actions
necessary to approve consummation of the Plan transactions,
(ii) providing notice to the Exit Financing arrangers of the closing
of the Exit Financing on the Effective Date,
(iii) advising the share registrar of Arcapita Bank to take all
actions necessary to effect transfers of Arcapita Bank shares to
one or more subsidiaries of RA Holding Corp.,
(vi) initiating all actions necessary to implement the Plan in the
Cayman Islands, including the merger of certain subsidiaries of
Arcapita Bank, and
40
8/17/13 Hearing Transcript, Ex. B to Debtors’ Mem., at 5:19.
41
Id. at 5:20-24.
42
See Debtors’ Mem. at 4.
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(v) executing substantially all Plan implementation documents.43
The Debtors completed these steps and the Plan became effective as scheduled.44
Following the effective date, the Debtors’ assets were transferred to
the reorganized debtors and the new holding companies.45 Participating
shareholders of Arcapita transferred all of their interests in Arcapita to the new
holding companies in exchange for the issuance of seventy-eight million
shareholder warrants.46 The reorganized debtors consummated certain settlements
that were integral to the Plan, including: (i) a settlement of claims of senior
management; (ii) a settlement with the Syndication Companies and their investors,
which established a framework for the coordinated disposition of jointly-owned
investment assets; (iii) the settlement with SCB; and (iv) a settlement resolving the
characterization and treatment of the Debtors’ headquarters lease and related
claims.47 The exit financing was funded, and the proceeds were used to make
distributions of $95 million to SCB under the settlement; $29.1 million on account
of administrative claims; and $40.3 million to fund an escrow account to pay
43
Jordan Decl. ¶¶ 8-9.
44
See id. ¶ 9.
45
See id. ¶ 12.
46
See id. ¶ 13.
47
See id. ¶ 21.
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professional fee claims.48 RA Invest Limited, a Cayman company and one of the
new holding companies, issued $550 million in sukuk certificates in the form of a
definitive registered certificate to creditors of Arcapita and AIHL in accordance
with a Mudaraba agreement.49 RA Holding Corp. issued 29.5 million new equity
securities to be distributed to holders of allowed claims to discharge the claims
held by creditors of Arcapita and AIHL.50
New boards of directors were appointed for each of the reorganized
debtors and the new holding companies, which adopted new governing
documents.51 These boards have held meetings and have begun to make decisions
with respect to the assets under their control relating to the sale of, and additional
investments in, these assets.52 The reorganized debtors entered additional business
transactions and activities in the ordinary course, including the retention of various
48
See id. ¶¶ 18, 20. As of the day following the Effective Date,
approximately $10.7 million of the exit financing proceeds remained in the
Debtors’ bank accounts, in addition to cash held in such accounts prior to the
Effective Date. See id. ¶ 18.
49
See id. ¶ 19.
50
See id. ¶ 20.
51
See id. ¶ 17.
52
See id.
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professionals, such as auditors and service providers.53 All of the employees of the
Debtors and their subsidiaries have been terminated and the reorganized debtors
and the new holding companies have no employees or management other than their
directors.54 The Debtors contend that by virtue of these transactions, the Plan has
been substantially consummated.55
II.
LEGAL STANDARD
A.
Appeals of Bankruptcy Court Orders
Bankruptcy appeals are governed by the procedural rules set forth in
Section VIII of the Federal Rules of Bankruptcy Procedure. Rules 8009 and 8010
relate to the filing of appellate briefs, whereas Rule 8011 concerns motion practice
before the district court. Under Rule 8011, “[a] request for an order or other relief
shall made by filing with . . . the district court . . . a motion for such order or relief”
and may be supported by briefs and affidavits.56 A motion under Rule 8011 can be
53
See id. ¶ 22.
54
See id.
55
See id. ¶ 10.
56
Fed. R. Bankr. P. 8011(a).
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made at any time,57 and may be acted on by the court without a hearing.58
B.
Equitable Mootness
“‘[E]quitable mootness is a pragmatic principle, grounded in the
notion that, with the passage of time after a judgment in equity and implementation
of that judgment, effective relief on appeal becomes impractical, imprudent, and
therefore inequitable.’”59 An appeal from an order of a bankruptcy court should be
dismissed when, “even though effective relief could conceivably be fashioned,
implementation of that relief would be inequitable.”60 The doctrine “requires the
district court to carefully balance the importance of finality in bankruptcy
57
See, e.g., Leighton v. E-II Holdings Inc. (In re E-II Holdings Inc.), No.
94 Civ. 2246, 1995 WL 387650, at *6 n.2 (S.D.N.Y. June 30, 1995) (stating
“[t]here is no timing requirement for motions under Fed. R. Bankr. P. 8011”).
58
See Fed. R. Bankr. P. 8011(b).
59
Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re
Metromedia Fiber Network, Inc.), 416 F.3d 136, 144 (2d Cir. 2005) (quoting MAC
Panel Co. v. Virginia Panel Corp., 283 F.3d 622, 625 (4th Cir. 2002)).
60
Official Comm. of Unsecured Creditors of LTV Aerospace & Def. Co.
v. Official Comm. of Unsecured Creditors of LTV Steel Co. (In re Chateaugay
Corp.) (“Chateaugay I”), 988 F.2d 322, 325 (2d Cir. 1993) (stating that principles
of mootness are “especially pertinent in bankruptcy proceedings, where the ability
to achieve finality is essential to the fashioning of effective remedies”). Accord R 2
Invs., LDC v. Charter Commc’ns (In re Charter Commc’ns, Inc.), 691 F.3d 476,
481 (2d Cir. 2012) (“Unlike constitutional mootness, which turns on the threshold
question of whether a justiciable case or controversy exists, equitable mootness in
the context presented here is concerned with whether a particular remedy can be
granted without unjustly upsetting a debtor’s plan of reorganization.”).
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proceedings against the appellant’s right to review and relief.”61
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 reorganization is substantially consummated.’”62
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.63
61
Charter Commc’ns, 691 F.3d at 481.
62
Parker v. Motors Liquidation Co. (In re Motors Liquidation Co.), 430
B.R. 65, 80 (S.D.N.Y. 2010) (quoting Kenton County Bondholders Committee v.
Delta Air Lines, Inc. (In re Delta Air Lines, Inc.), 374 B.R. 516, 522 (S.D.N.Y.
2007)) (quotations omitted). Accord Allstate Ins. Co. v. Hughes, 174 B.R. 884,
888 (S.D.N.Y. 1994).
63
Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay Corp.)
(“Chateaugay II”), 10 F.3d 944, 952-53 (2d Cir. 1993) (citations and quotations
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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 solely whether we can provide relief
without unraveling the Plan, but also whether we should provide such relief in light
of fairness concerns.”64
Equitable mootness of an appeal of a bankruptcy court order
confirming a chapter 11 is presumed when the plan has been substantially
consummated during the pendency of the appeal.65 The Code defines substantial
consummation as “(A) transfer of all or substantially all of the property proposed
by the plan to be transferred; (B) assumption by the debtor or by the successor to
the debtor under the plan of the business or of the management of all or
substantially all of the property dealt with by the plan; and (C) commencement of
distribution under the plan.”66 Courts have also applied this presumption when an
omitted).
64
Metromedia, 416 F.3d at 145 (emphasis in original).
65
See Aetna Cas. & Sur. Co. v. LTV Steel Co. (In re Chateaugay Corp.)
(“Chateaugay III”), 94 F.3d 772, 776 (2d Cir. 1996) (“Reviewing courts presume
that it will be inequitable or impractical to grant relief after substantial
consummation of a plan of reorganization.”).
66
11 U.S.C. § 1101(2). Substantial consummation precludes
modification of a plan. See id. § 1127.
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unstayed order has resulted in a comprehensive change in circumstances.67
The doctrine of equitable mootness is perhaps most often associated
with orders confirming reorganization plans, but it is also applies to orders
confirming chapter 11 liquidation plans.68 Indeed, the doctrine is not limited to
appeals from confirmation orders, and has been applied in a variety of contexts,
including to appeals from orders addressing settlements,69 injunctive relief,70 leave
67
See Motors Liquidation Co., 430 B.R. at 80; Kassover v. Gibson, No.
02 Civ. 7978, 2003 WL 21222341, at *2 (S.D.N.Y. May 27, 2003), aff’d, In re
Kassover, 98 Fed. App’x 30 (2d Cir. 2004). See also In re Leatherstocking
Antiques, Inc., No. 12 Civ. 7758, 2013 WL 5423995, at *4 (S.D.N.Y. Sept. 27,
2013); Allstate Ins., 174 B.R. at 889.
68
See Schaefer v. Superior Offshore Int’l, Inc. (In re Superior Offshore
Int’l, Inc.), 591 F.3d 350, 353-54 (5th Cir. 2009) (applying equitable mootness
analysis to liquidation plan); In re BGI, Inc., Nos. 12 Civ. 7714, 12 Civ. 7715, 13
Civ. 0080, 2013 U.S. Dist. LEXIS 77740, at *35-37 (S.D.N.Y. May 22, 2013);
Cadle Co. II, Inc. v. PC Liquidation Corp. (In re PC Liquidation Corp.), No. 06
Cv. 1935, 2008 WL 199457, at *5 (E.D.N.Y. Jan. 17, 2008) (finding “the doctrine
of equitable mootness is not limited to appeals of orders confirming reorganization
plans”); ACC Bondholder Group v. Adelphia Commc’ns Corp. (In re Adelphia
Commc’ns Corp.), 367 B.R. 84, 96 (S.D.N.Y. 2007) (applying equitable mootness
in case where the “Debtors have been liquidated and effectively cease to exist”).
69
See In re Adelphia Commc’ns Corp., 222 Fed. App’x 7 (2d Cir. 2006);
PC Liquidation Corp., 2008 WL 199457, at *5; Delta Air Lines, 374 B.R. at 52225; D’urso v. Durso Supermarkets, Inc. (In re Durso Supermarkets, Inc.), No. 93
Civ. 5697, 1994 WL 17913 (S.D.N.Y. Jan. 20, 1994).
70
See Allstate Ins., 174 B.R. at 890-91.
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to file untimely proofs of claim,71 class certification,72 property rights,73 asset
sales,74 and payment of prepetition wages.75 The doctrine has also been applied to
financing orders.76
III.
DISCUSSION
A.
The Parties’ Arguments
Appellees argue that the Plan has been substantially consummated and
that a comprehensive change of circumstances has resulted from implementation of
the Confirmation Order and Replacement DIP Order. Appellant does not dispute
either contention. Nor does Appellant address the Chateaugay factors, except to
claim that Appellees “exaggerate the importance of a stay, which may be important
71
See BGI, Inc., 2013 U.S. Dist. LEXIS 77740, at *35-37.
72
See id.
73
See Samson Energy Resources Co. v. Semcrude, L.P. (In re Semcrude,
L.P.), 728 F.3d 314 (3d Cir. 2013).
74
See Motors Liquidation Co., 430 B.R. at 80-83; Kassover, 2003 WL
21222341, at *2 (appeal from order in chapter 7 case approving settlement and
stock purchase agreement creating new entity was equitably moot where appellant
had opportunity to, but did not, apply for stay prior to consummation of merger,
resulting in a comprehensive change of circumstances).
75
See Drawbridge Special Opportunities Fund v. Shawnee Hills, Inc. (In
re Shawnee Hills, Inc.), 125 Fed. App’x 466 (4th Cir. 2005).
76
See Desert Fire Protection v. Fontainebleau Las Vegas Holdings,
LLC (In re Fontainebleau Las Vegas Holdings, LLC), 434 B.R. 716
(S.D. Fla. 2010).
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in reorganization but is not in liquidations.”77
Appellant argues that the Debtors’ motion to dismiss is an improper
sur reply because they had already filed a brief in response to his opening appellate
brief.78 In making this argument, Appellant relies on Federal Rule of Civil
Procedure 12(b).79 However, Federal Rule of Civil Procedure 12(b) is not
applicable to these appeals, and Appellant has confused appellate briefing under
Rules 8009 and 8010 with motion practice under Rule 8011. Accordingly,
Appellant’s procedural arguments are rejected.80 Similarly, Appellant’s request for
discovery and an evidentiary hearing is not supported by the Bankruptcy Rules or
the facts of this case and is denied.81
77
Appellant’s Mem. at 5. Appellant also contends, “Appellees do not
address the Appellant’s point below, which is that had he sought a stay, Goldman
Sachs would have likely taken the opportunity to foreclose on Arcapita’s assets.”
Id.
78
See id. at 3-5.
79
See id. at 4 (“A motion asserting any of these defenses must be made
before pleading if a responsive pleading is allowed”) (quoting Fed. R. Civ. P.
12(b)). Appellant also cites to this Court’s individual rules. See id.
80
Appellant is correct that Debtors’ initial memorandum of law violated
my individual rule regarding the font size to be used in footnotes. See Individual
Rules and Procedures of Judge Shira A. Scheindlin, Rule IV.G. Even were I to
reject Debtors’ memorandum on this basis, the Jordan Declaration, the record
below, and Debtors’ reply brief provide ample grounds to dismiss these appeals as
equitably moot.
81
See Appellant’s Mem. at 6 (citing Fed. R. Civ. P. 12(d)).
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Appellant also contends that the doctrine of equitable mootness does
not apply “in the context of a liquidation.”82 Although the Second Circuit has not
expressly ruled on this issue, based on the authority already cited in this Opinion
and Order, Appellant’s argument is meritless. In addition, as explained by the
Supreme Court, “the two recognized policies underlying Chapter 11 [are]
preserving going concerns and maximizing property available to satisfy
creditors.”83 In fact, the Code expressly authorizes chapter 11 plans to liquidate all
or some of a debtor’s assets.84 It is uncontested that the Debtors’ carefully
negotiated Plan – while ultimately effecting a liquidation of the Debtors and the
82
Id. at 5.
83
Bank of America Nat’l Trust and Sav. Ass’n v. 203 North LaSalle
Street P’ship, 526 U.S. 434, 453 (1999) (citing Toibb v. Radloff, 501 U.S. 157, 163
(1991)). Accord Toibb, 501 U.S. at 163 (recognizing that chapter 11 embodies the
Bankruptcy Code’s general policy of “maximizing the value of the bankruptcy
estate”). See also Cadle Co. II, Inc. v. PC Liquidation Corp. (In re PC Liquidation
Corp.), 383 B.R. 856, 866 (E.D.N.Y. 2008) (stating that “while the primary
purpose of Chapter 11 is reorganization, liquidation is not prohibited.
Reorganization encompasses rehabilitation and may include liquidation”)
(quotations omitted) (citing cases).
84
See 11 U.S.C. §§ 1129(a)(11) (stating that a plan must satisfy the
condition that “[c]onfirmation of the plan is not likely to be followed by the
liquidation, or the need for further financial reorganization, of the debtor or any
successor to the debtor under the plan, unless such liquidation or reorganization is
proposed in the plan”) (emphasis added); 1123(a)(5)(D) (stating that a plan shall
provide adequate means for implementation including “sale of all or any part of the
property of the estate”); 1123(b)(4) (stating that a plan may “provide for the sale of
all or substantially all of the property of the estate”).
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creation of indefinitely operating reorganized debtors – yielded greater benefits
than a hypothetical chapter 7 liquidation.85 There is no reason to give less weight
to the final orders entered by the Bankruptcy Court just because the Plan did not
contemplate the continuing operation of the Debtors.
Appellant also argues that equitable mootness is an exception to a
district court’s “‘virtually unflagging obligation to exercise jurisdiction’” that must
be used sparingly and “applied ‘with a scalpel rather than an axe.’”86 While
Appellant is correct about these principles, he has neither demonstrated why use of
the doctrine is inappropriate in this case, nor indicated how this Court could
possibly afford him relief without completely undermining the Confirmation Order
and the Replacement DIP Order.
B.
Equitable Mootness
I find that these appeals are equitably moot. Appellant does not
dispute that the Plan has been substantially consummated or that the exit financing
was integral to that Plan. Based on the transfer of the Debtors’ assets to the
reorganized debtors and the new holding companies, the payment of the exit
85
See, e.g., Kvarda Decl. ¶ 13. Furthermore, after considered analysis,
the Debtors concluded that the structure under the Plan was more feasible than
reorganization. See, e.g., Disclosure Statement at 78.
86
Appellant’s Mem. at 5 (quoting Charter Commc’ns, 691 F.3d at 481-
82).
-21-
financing, and the distributions made to settle and satisfy various claims, among
other transactions outlined in the Jordan Declaration, the Plan has been
substantially consummated. In addition, there has been a comprehensive change of
circumstances as a result of Appellant’s failure to seek a stay of either the
Confirmation Order or the Replacement DIP Order. Accordingly, these appeals
must be dismissed unless Appellant can demonstrate that the Chateaugay factors
support permitting these appeals to be heard on the merits.87
1.
Whether Effective Relief Can Be Granted
Appellees argue that effective relief cannot be granted because
“[n]umerous parties have relied on the Replacement DIP Order and Confirmation
Order in taking actions that cannot be unwound.”88 Appellees also note that “[t]he
syndicate of lenders who provided the Replacement DIP Financing and the Exit
Financing to the Debtors provided such financing to fund the Plan as it was written
. . . not to fund some other hypothetical plan that Appellant would like.” 89
Appellant provides no guidance on what relief the Court could order
that would satisfy this factor. Based on all the transactions that have occurred, it
87
See Chateaugay II, 10 F.3d at 952.
88
Appellees’ Mem. at 12.
89
Id.
-22-
seems unlikely that an effective remedy can still be granted in this case.90
Unwinding the transactions would not constitute “effective relief” because under
the unchallenged liquidation analysis, the Plan provides a greater recovery to
unsecured creditors than the alternative suggested by the Appellant, the liquidation
of the Debtors.91 Accordingly, Appellant fails to satisfy the first Chateaugay
factor.
2.
Whether Such Relief Will Negatively Affect Re-emergence
of the Debtor
The Debtors have been liquidated and effectively cease to exist. As a
result, the second Chateaugay factor is inapposite.
3.
Whether Such Relief Will Unravel Intricate Transactions
Relief on these appeals would be inequitable because it would
“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.”92 Numerous
90
Apart from whether the Debtors could repay the $350 million in DIP
financing or complete the steps necessary to unwind the financing transaction
itself, statutory mootness raises an additional problem with respect to the
Replacement DIP Order. See, e.g., In re General Growth Props., Inc., 423 B.R.
716, 721-22 (S.D.N.Y. 2010) (discussing statutory mootness under section 364(e)).
91
See Motors Liquidation Co., 430 B.R. at 82.
92
Chateaugay II, 10 F.3d at 953.
-23-
settlements were reached and implemented, including the payment of millions of
dollars in severance payments made to former employees. The new holding
companies were created, and a complex series of mergers and dissolutions have
been consummated. Hundreds of millions of dollars have been distributed in cash
or equity interests. These transactions cannot be unraveled, nor would it be
equitable to do so for the sole purpose of providing Appellant relief on this appeal.
In addition, canceling the exit financing would “knock the props out from under
the authorization for every transaction that has taken place” under the Plan.93
Thus, Appellant fails to satisfy the third Chateaugay factor.
4.
Whether Parties Adversely Affected Have Had Notice and
Opportunity to Participate in the Appeal
Appellant does not contend that the numerous third parties who have
participated in and relied on the transactions completed pursuant to the Plan have
been notified. Accordingly, Appellant fails to satisfy the fourth Chateaugay factor.
5.
Whether Appellant Pursued a Stay with Diligence
Appellant did not seek a stay of either order. There is no support for
Appellant’s contention that seeking a stay of the orders was not important because
the Plan resulted in the liquidation of the Debtors. It should have been obvious to
Appellant – given the complexity of the Plan – that the Debtors and third parties
93
Id.
-24-
would have to perform hundreds of transactions to implement and carry out its
terms.
In sum, Appellant failed to establish the four Chateaugay factors that
are relevant to these appeals. As I have previously explained,
Even apart from the precise application of each of the Chateaugay
factors in this case, the essence of the equitable mootness doctrine
is to prevent appeals from going forward in cases where granting
relief, even where hypothetically possible, would be inequitable. 94
This is one of those cases.
IV.
CONCLUSION
F or the reasons discussed above, these appeals are dismissed as
equitably moot. The Clerk of the Court is directed to close these appeals.
Dated:
94
f'
New York, New York
January
2014
Adelphia Commc 'ns Corp., 367 B.R. at 99.
-25
- Appearances For Appellant:
Tally M. Wiener, Esq.
Law Office of Tally M. Wiener, Esq.
119 West 72nd Street, PMB 350
New York, NY 10023
(212) 574-7975
For Appellees:
Andrew M. Leblanc, Esq.
Milbank, Tweed, Hadley & McCloy LLP
1850 K Street, NW, Suite 1100
Washington, DC 20006
(202) 835-7574
Dennis F. Dunne, Esq.
Evan R. Fleck, Esq.
Anne Knight, Esq.
Milbank, Tweed, Hadley & McCloy LLP
1 Chase Manhattan Plaza
New York, NY 10005
(212) 530-5000
-26-
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