The Third Circuit belatedly wrote an opinion in the Revel casino reorganization to clarify the standards for issuing a stay pending appeal. The decision also makes law on the definition of “bona fide dispute,” the showing that is required before property can be sold free of an interest under Section 363(f).
In addition, the Sept. 30 opinion by Circuit Judge Thomas Ambro expanded the notion of a final order giving a right of appeal. Judge Ambro was a bankruptcy lawyer before taking the circuit bench in 2000.
In chapter 11 a second time, the Revel casino cost $2.4 billion to build and was sold this year for a disappointing $82 million. The sale motion sought authority to sell the facility free and clear of the lease of a tenant that operated two nightclubs.
The lease was unusual because the tenant contributed $16 million toward $80 million in construction costs. There was no fixed rent; instead, the tenant paid a percentage of its revenue.
Revel convinced the bankruptcy judge that the power to sell free and clear trumped a tenant’s rights under Section 365(h)(1)(A)(ii) to remain in possession after rejection of the lease.
Rejecting another tenant argument, the bankruptcy judge decided that there was a bona fide dispute over the validity of the lease, allowing sale of the property free of the lease under Section 363(f).
The bankruptcy judge and a district judge both denied the tenant’s application for a stay pending appeal. In a terse order on Feb. 6, the Third Circuit granted a stay, but only to the extent that Revel could not evict the tenant. Otherwise, the appeals court allowed the sale to proceed in a 2/1 order. Despite Revel’s argument that any stay would crater the sale, the purchaser later decided to close the deal despite the stay.
Again for a 2/1 majority, Judge Ambro wrote a 41-page opinion on Sept. 30 to explain why the circuit granted the stay in February and to clarify how courts should balance the four factors to determine whether an appellant is entitled to a stay pending appeal. The four issues are: (1) the appellant’s likelihood of success on appeal; (2) whether the appellant will suffer irreparable harm without a stay; (3) the harm to other parties from a stay; and (4) whether a stay is in the public interest.
Judge Ambro said that factors 1 and 2 are the most important. On likelihood of success, he said the appellant must show “a reasonable chance, or probability, of winning.” However, the appellant is not required to establish that winning is “more likely than not.”
On irreparable harm, Judge Ambro said that the appellant must show “more than a mere possibility.” He said the court must evaluate the first two factors on a sliding scale. The more likely the appellant is to win, the less heavily the balance of harms must weigh in its favor, he held.
If the appellant does not prevail on the first two factors, Judge Ambro ruled that the last two factors do not matter “and the stay should be denied without further analysis.”
Applying the first two factors to the Revel case, Judge Ambro made law on Section 363(f)(4), which allows selling free and clear if there is a bona fide dispute over the validity of an interest in property.
Revel claimed there was a bona fide dispute regarding its contention that the lease was not a “true lease,” but rather some sort of a joint venture or profit sharing arrangement. To buttress the argument, Revel pointed to the adversary proceeding that the tenant filed for a judgment declaring that the lease was a true lease. The initiation of the suit by itself demonstrated the existence of a bona fide dispute, according to Revel’s argument.
Although the two lower courts bought Revel’s theory, Judge Ambro did not. He said that “Revel failed to cite a single authority suggesting that a percentage-lease clause disqualifies a purported lease from being one.” He also quoted the lease itself, which said it could not be construed to create a partnership or joint venture. He characterized Revel’s argument as “fanciful if not disingenuous.”
Circuit Judge Patty Shwartz dissented. To win a stay, she interpreted Third Circuit law as requiring the appellant to prevail on all four elements. She also argued that the “sliding scale approach” is contrary to Third Circuit law.
In his prevailing opinion, Judge Ambro said his court had “explicitly disavowed” the notion that an appellant must prevail on all four factors. To require winning across the board would be “deeply unfair,” he said.
Judge Ambro faulted Judge Shwartz for relying on later Third Circuit opinions that differed from authorities he cited. If there is a conflict, Judge Ambro said, “the earlier is controlling authority and the latter is ineffective as precedent.”
Of perhaps equal importance, Judge Ambro held there was appellate jurisdiction despite Revel’s argument that denial of a stay pending appeal was not a final order.
Judge Ambro conceded that denial of a stay pending appeal “is not technically a final judgment.” In a “practical sense,” he said, it was final because Section 363(m) would have prevented the court from later reaching the merits if there were no stay.
The ruling on finality is arguably at odds with the Supreme Court’s decision this year in Bullard, which limits the definition of “finality” in the context of an order denying confirmation of a chapter 13 plan.
The Revel opinion is also arguably in conflict with the Second Circuit’s terse ruling last year following confirmation of a chapter 11 plan by MPM Silicones LLC. Creditors went to the circuit court after they were denied stays pending appeal in both the bankruptcy court and the district court. In a terse, unreported opinion on Oct. 31, 2014, the New York circuit court dismissed the application for a stay pending appeal, saying the creditors “have not shown that the district court's order denying a stay should be treated as a denial of injunctive relief.”