Opinion
00 CIV. 6624 (DLC), 00 CIV. 6625 (DLC).
March 7, 2001.
For BNP Paribas, P. Bradley O'Neill, Saul E. Burian, Robert T. Schmidt, KRAMER LEVIN NAFTALIS FRANKEL LLP, New York, New York.
For Debtors, Joshua J. Angel, Leonard H. Gerson, ANGEL FRANKEL, P.C., New York, New York.
For ALGM I LLC, Douglas Mayer, WACHTELL, LIPTON, ROSEN KATZ, New York, New York.
OPINION AND ORDER
BNP Paribas ("BNP"), a general unsecured creditor with an outstanding judgment in excess of $5 million against the debtors in this bankruptcy proceeding, appeals from two Orders of the Honorable Cornelius Blackshear, United States Bankruptcy Judge.
BNP appeals from (i) the July 26, 2000 Order ("Confirmation Order") confirming the Debtors' Second Amended Joint Chapter 11 Plan of Reorganization ("Plan"), and (ii) the July 20, 2000 Order ("July 20 Order") denying BNP's motion to disqualify ALGM I LLC, ("ALGM") from voting on the Plan as an unsecured creditor. In summary form, BNP contends that the Bankruptcy Court erred by releasing claims of creditors without their consent, by classifying certain ALGM claims with claims of other unsecured creditors, and by failing to maximize distributions to creditors.
BNP seeks to unravel so much of the proceedings below as will allow it to increase its recovery on its claims against the bankrupt estate. Appellees National Restaurants Management, Inc., NRM Disbursements, Inc., 1286 RR Operating, Inc., National Franchises, Inc., No. 604 Fifth Avenue Restaurant, Inc., and No. 26 Court Street Restaurant, Inc. (collectively, the "Debtors") move to dismiss the appeal as moot. Appellee ALGM joins the Debtors' motion. For the reasons discussed below, the appeal is dismissed as moot.
BACKGROUND
The Debtors are part of a family-owned restaurant business (the "NRM Companies"), which began with a midtown luncheonette in 1940. The NRM Companies became the largest family-owned business in New York City, and now operate approximately one hundred fast food and table service restaurants and employ almost 3,000 people. National Restaurants Management, Inc. ("NRM") is the parent company and the remaining Debtors are five of NRM's wholly-owned subsidiaries. Two brothers, Irving and Murray Riese, founded and subsequently managed the NRM Companies.
Murray Riese's son, Dennis Riese ("Riese"), succeeded the brothers in managing the NRM Companies. Riese is the president, chief executive, and substantial majority shareholder of the Debtors. BNP is one of the Debtors' largest creditors, holding a judgment against the Debtors in the amount of $5,225,000.
In 1988, the NRM Companies borrowed approximately $120 million (the "BOT Loan") from The Bank of Tokyo Trust Company, now known as The Bank of Tokyo-Mitsubishi Trust Company. The BOT Loan was secured essentially by all of the assets of the NRM Companies. In 1990, The Bank of Tokyo loaned the NRM Companies an additional $22 million. The NRM Companies were subsequently unable to service the BOT Loan, and in 1993, the loan was restructured. After the restructuring, the NRM Companies were still unable to generate enough revenue to repay the BOT Loan.
The BOT Loan, however, was not in default for non-payment during its remaining five-year term, because a portion of the restructured debt consisted of an accrual note which required no current payments. The restructured BOT Loan matured in May 1998.
The Debtors were unable to refinance the BOT Loan, and it went into default.
In June 1998, ALGM purchased The Bank of Tokyo's interest in the BOT Loan, which totaled approximately $180 million. The Debtors and ALGM negotiated for approximately eight months, and, on February 8, 1999, signed a settlement agreement ("ALGM Settlement Agreement"). The ALGM Settlement Agreement was in part structured as a pre-packaged bankruptcy with respect to the interests of the Debtors and ALGM. It provided for the transfer of two fee properties, eight leaseholds, and $925,000 (in lieu of another leasehold) by the Debtors to entities designated by ALGM.
The ALGM Settlement Agreement also provided for another three leaseholds to be transferred to ALGM under a Chapter 11 plan in satisfaction of ALGM's secured claims of approximately $15 million, and a payment of one million dollars to be made in satisfaction of ALGM's general unsecured claim of approximately $105 million. Before the commencement of the Chapter 11 cases, the three leaseholds were transferred to ALGM designated entities. The Debtors, however, remained obligated to pay ALGM one million dollars and to confirm a Chapter 11 plan which provided injunctive relief and other protections to ALGM. The ALGM Settlement Agreement also provided that if a plan were not consummated by June 1, 2001, or the Debtors were otherwise in default of the agreement, ALGM would no longer be bound to accept the one million dollar distribution under the plan. Instead, ALGM would be entitled to a distribution equal to the full amount of its $120 million claim and the full value of its liens on essentially all of the Debtors' assets.
While the ALGM Settlement Agreement provided for a closing mechanism outside of a probable bankruptcy filing, the agreement was structured to accommodate the fact that the Debtors' other, non-BOT Loan financial and operational problems would require a Chapter 11 filing.
On July 7, 1999, the Debtors filed voluntary petitions for relief pursuant to Chapter 11 of the Bankruptcy Code. On the same date, the Debtors filed the Plan, incorporating the terms of the ALGM Settlement Agreement. One month prior to the hearing on the confirmation of the Plan, BNP filed a motion to disqualify ALGM from voting on the Plan pursuant to Section 1126(e) of the Bankruptcy Code. On July 20, 2000, the Bankruptcy Court denied BNP's motion to disqualify the ALGM vote. BNP opposed the Plan, but the Debtors and the Official Committee of Unsecured Creditors reached an agreement on the Plan. The Plan was accepted by a majority of the Debtors' creditors, both in number (95%) and dollar amount (93%). The Plan was confirmed by the Bankruptcy Court at a hearing on July 26, 2000, over the objection of BNP.
After the Plan was confirmed, BNP made an oral application to the Bankruptcy Court for a stay of the Confirmation Order pending appeal. The Bankruptcy Court conditionally granted the application, requiring BNP to post a $4.5 supersedeas bond to stay the Confirmation Order. BNP did not post the required bond.
The Bankruptcy Court instructed: "If you put up a supersedes [sic] bond of $4.5 million, then the stay pending appeal is granted. If you don't wish to do that, you need to give me an Order denying your stay pending appeal, so when you go to the District Court, there will be no question that you went to the Bankruptcy Court first."
On August 3, 2000, BNP appealed both the Confirmation Order and the July 20 Order. On or about August 16, 2000, the Plan was substantially consummated upon the payment of $1,000,001 to ALGM, and ALGM's corresponding release of its liens on all of the Debtors' property. Additional payments of more than one million dollars have been made to the Debtors' creditors upon the consummation of the Plan. Further, after confirmation of the Plan, the separate centralized cash management system of the Debtors in preparation for the Chapter 11 cases was disbanded and the financial management system of the Debtors was reintegrated with the centralized system servicing all of the NRM Companies.
Trade creditors have extended new credit to the NRM Companies in light of the consummation of the Plan. Also, as part of the consummation of the Plan, the NRM Companies have vacated their offices and moved to new locations in spaces provided by Riese.
Riese contributed $1.024 million cash to the Debtors, and provided the Debtors with $3.3 million of free and below market rental use of office space to replace the 20,000 square feet of space lost in a settlement with their major landlord.
DISCUSSION
If an event occurs while a case is pending on appeal that makes it impossible for the court to grant "`any effectual relief whatever'" to a prevailing party, the appeal must be dismissed because of Article III's "case or controversy" requirement. Church of Scientology v. United States, 506 U.S. 9, 12 (1992) (citations omitted). In the bankruptcy context, where mootness involves equitable considerations as well as the Article III requirement that there be a live case or controversy, "`[a]n appeal is also moot when even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable.'" In re Best Products, Inc., 68 F.3d 26, 30 (2d Cir. 1995) (citation omitted). This prudential concern is "especially pertinent in bankruptcy proceedings, where the ability to achieve finality is essential to the fashioning of effective remedies." In re Chateaugay Corp., 988 F.2d 322, 325 (2d Cir. 1993) ("Chateaugay I"). Under the doctrine of equitable mootness,
[r]eviewing courts presume that it will be inequitable or impractical to grant relief after substantial consummation of a plan of reorganization. But . . . this presumption will give way if 1) the court can still provide effective relief; 2) granting relief will not affect the `re-emergence of the debtor as a revitalized corporate entity'; 3) granting relief will not unravel the transactions that formed the basis of the plan of reorganization; 4) the parties that might be adversely affected by a grant of relief have received notice and an opportunity to be heard; and 5) the entity seeking relief has diligently pursued a stay of execution of the plan throughout the proceedings.
In re Chateaugay Corp., 94 F.3d 772, 776 (2d Cir. 1996) ("Chateaugay III") (citation omitted).
Citing the steps taken since the July 26, 2000 Confirmation Order, the Debtors argue that this appeal should be dismissed as moot since the Plan has been "substantially consummated." BNP does not contest the claim that the Plan has been substantially consummated. Accordingly, the Chateaugay presumption applies, and this case must be dismissed as moot unless BNP can rebut it.
In order to do so, BNP must show that each of the five Chateaugay factors supports maintaining its appeal. In re Chateaugay Corp., 10 F.3d 944, 952 (2d Cir. 1993) ("Chateaugay II") (describing five factors and noting that "substantial consummation will not moot an appeal if all of the [five] circumstances exist") (emphasis supplied); see also In re Kenwin Shops, Inc., 99 Civ. 10485 (MBM), 2000 WL 351404, at *2 (S.D.N.Y. Apr. 5, 2000) (to defeat argument of mootness, appellant "must show that each of the five Chateaugay factors supports maintaining its appeal").
Because BNP has failed to prevail on at least three of the Chateaugay factors, the appeal is moot.
Re-emergence of Debtors The second Chateaugay factor asks whether the relief requested would adversely affect the re-emergence of the Debtors as revitalized corporate entities. BNP principally seeks reversal of the Confirmation Order, an order vacating the third party releases, or an order modifying the Confirmation Order to increase distributions to creditors.
Since the confirmation of the Plan, trade creditors have extended new credit to the NRM companies in reliance on the Debtors' successful exit from Chapter 11 bankruptcy. Before the confirmation of the Plan, some of these same creditors required payment in advance for their services. If the Confirmation Order were reversed, the Debtors' creditworthiness would almost certainly be damaged. Reversing the Confirmation Order would also enable ALGM to walk away from the ALGM Settlement Agreement.
Under the ALGM Settlement Agreement, if the Confirmation Order is reversed, the Debtors will have until June 1, 2001 to confirm an alternative plan of reorganization. Considering that it took over a year to confirm the original Plan, it is unrealistic to expect the Debtors to confirm an alternative plan within the space of a few months. Recognizing this hurdle, BNP points out that ALGM granted Riese an option to purchase ALGM's entire $120 million claim for one million dollars. This option expires on June 1, 2001. While BNP argues that it would still be in Riese's interest to exercise the option even without the Plan, that prediction assumes that there will be no material change in Riese's circumstances. Without the protection offered by the Plan, however, such a prediction is too speculative to be reliable.
BNP posits that the Debtors could re-emerge as revitalized corporate entities if the Court simply modified the Plan to require the Debtors to pay a percentage of their post-confirmation profits to increase the recovery to unsecured creditors. BNP bases this proposal on the Debtors' projected after tax profits over the next several years without any acknowledgment of the limitations in that same forecast. Given the current limited cash available to the Debtors, BNP has not shown that increased distributions to creditors will not weaken the Debtors and endanger their re-emergence as revitalized corporate entities.
BNP also proposes modifying the Plan by eliminating the third party releases that accompanied the Plan. It contends that Riese will continue to support the Plan, even if the third party releases are eliminated. BNP offers no factual support for this contention. Considering that the elimination of the third party releases would leave Riese and the Debtors' management and directors open to attack, there is little reason to assume that a Plan without the third party releases would continue to receive Riese's support.
The Plan provided a compulsory release of all claims of creditors and interest holders against the "Debtor Release Entities." The "Debtor Release Entities" include the Debtors, NRM Subsidiaries, and the officers, directors, attorneys, accountants, and agents of the Debtors or the NRM Subsidiaries; Riese is part of this group.
If the Debtors lose Riese's support for the Plan, they will also lose Riese's $6 million in contributions, consisting of cash contributions and free or below-market rent contributions.
In sum, to the extent that BNP seeks to overturn the entire Plan, the Debtors' re-emergence will be adversely affected. See In re Fours on Seventh, LLC, 251 B.R. 784, 793 (S.D.N.Y. 2000) ("Where appellant seeks relief that would reverse a substantially consummated plan and thereby impact debtor's reemergence, courts hold that the appeal is moot."). To the extent BNP seeks only modification of the Plan, it has not shown that either of the proposed modifications will not also undermine the Debtors' re-emergence. The failure to satisfy the second Chateaugay factor alone mandates a dismissal of this appeal as moot.
Unravel Intricate Transactions The third Chateaugay factor asks whether the requested relief will unravel intricate transactions. The answer is clearly yes.
To grant BNP's request to reverse the Confirmation Order would require the reversal of several complex transactions. First, ALGM released its long-standing liens on the Debtors' property. Second, distributions were made to more than 150 creditors. Third, Riese made monetary and in-kind contributions. Fourth, the NRM Companies moved their offices and opened two restaurants as a part of the Plan's consummation. Finally, once June 1, 2001 passes, the concessions granted to Debtors will be lost.
To the extent BNP asks the Court to modify the Confirmation Order by ordering the Debtors to pay a portion of their post-confirmation profits to their creditors, or to reallocate the Debtors' equity from Riese to creditors, BNP has not made a sufficient showing that either of these tasks could be accomplished simply. Further, as discussed above, BNP's request to eliminate the third party releases would threaten the Debtors' management by leaving their officers and directors open to attack. BNP itself plans to pursue its claims against Riese.
Thus, there is no reason to assume that a Chapter 11 plan without the third party releases would enjoy Riese's continued support.
Again, if the Debtors lose Riese's support, they would also lose his $6 million in contributions to the Debtors and the myriad components of the Plan may unravel. In sum, BNP's requests threaten to unravel intricate transactions underlying the Plan and its success.
Diligent Pursuit of a Stay The fifth and final Chateaugay factor requires that the appellant diligently pursue a stay. BNP failed to do this.
While BNP made an oral motion for a stay of the Confirmation Order pending appeal, it did not post the $4.5 million supersedeas bond required by the Bankruptcy Court to impose a stay or seek a stay from this Court. BNP's failure to seek a stay diligently is fatal to its appeal. That failure cannot be excused by the size of the bond imposed by the Bankruptcy Court, particularly where there was no effort in this Court to obtain a stay. See, e.g., In re Rickel Home Ctrs., Inc., 209 F.3d 291, 304-05 (3d Cir. 2000) (high amount of bond does not excuse appellant's failure to seek lower bond amount required for a stay of the order); Bartel v. Bar Harbor Airways, Inc., 196 B.R. 268, 272-73 (S.D.N.Y. 1996) ("Although Bartel made an oral motion for a stay of the Confirmation Order pending appeal, Bartel would not agree at the time to post the necessary substantial bond, and the stay was denied on the merits. There is no indication of any further effort to obtain a stay. This failure to obtain a stay is an equitable factor that weighs strongly in favor of a finding of mootness."); In re Best Prods. Co., Inc., 177 B.R. 791, 803 (S.D.N.Y. 1995) ("Where a plan has been substantially consummated, `there fairly exists a strong presumption that appellants' challenges have been rendered moot due to their inability or unwillingness to seek a stay.'") (citations omitted).
Given BNP's clear failure to prevail on three of the Chateaugay factors, it is unnecessary to address the two remaining factors. In this case, it would be inequitable to grant relief to BNP at this juncture because of both the Debtors' and their creditors' reliance upon the substantial consummation of the Plan.
Because consideration of this appeal is precluded on the ground of mootness, the Court expresses no opinion on appellant's argument that the Bankruptcy Court should not have confirmed the Plan or that it erred by not disqualifying ALGM from voting on the Plan. Cf. Chateaugay I, 988 F.2d at 327 (vacating district court's ruling that creditors' committee lacked standing to appeal bankruptcy court order where appeal itself is moot).
CONCLUSION
The appeal is dismissed as moot.SO ORDERED: