IN RE BED BATH & BEYOND INC. SECTION 16 LITIGATION

Background

Todd Augenbaum and Judith Cohen sued Ryan Cohen and RC Ventures LLC under Section 16(b) of the Securities Exchange Act. That provision requires certain corporate insiders, including owners of more than 10% of a company’s stock and directors, to give up profits from buying and selling, or selling and buying, the company’s securities within a six-month period. The plaintiffs alleged that the defendants earned such short-swing profits involving Bed Bath & Beyond Inc. stock.

The plaintiffs demanded that Bed Bath & Beyond’s board bring the lawsuit. The board declined, and the plaintiffs filed separate actions that were later consolidated. Bed Bath & Beyond was named as a nominal defendant. The company and its affiliates later filed for Chapter 11 bankruptcy in the District of New Jersey.

Bed Bath & Beyond’s confirmed bankruptcy plan became effective on September 29, 2023. The plan canceled and extinguished all Bed Bath & Beyond shares, stated that shareholders would receive no recovery or distribution on account of those shares, transferred the company’s causes of action to the wind-down debtors, and gave the plan administrator authority over those causes of action. The plan also released and permanently barred certain claims and proceedings against the debtors and their property.

Defendants’ Motion to Dismiss

The defendants moved to dismiss under Rules 12(b)(1) and 12(b)(6). Rule 12(b)(1) concerns the court’s subject-matter jurisdiction, while Rule 12(b)(6) concerns whether a complaint adequately states a legal claim. The court addressed mootness first. A case is moot when the parties no longer have a legally meaningful stake in its outcome.

The court held that the plaintiffs’ Section 16(b) claims became moot after the bankruptcy plan canceled their Bed Bath & Beyond shares. Because they no longer held those shares and could not receive a distribution under the plan, they lacked the continuing financial interest required to pursue the action.

The court rejected four theories offered by the plaintiffs. First, it ruled that their later purchases of equity in Sixth Street Specialty Lending, Inc., a creditor that acquired Bed Bath & Beyond debt, did not create a continuing financial interest in this case. The court found no evidence that those purchases flowed from the plaintiffs’ former ownership of Bed Bath & Beyond.

Second, the court rejected the argument that a possible incentive award for serving as class representatives preserved a financial interest. Third, it rejected Judith Cohen’s argument that a statutory right to attorney’s fees did so. The court treated potential fees, expenses, and incentive awards as contingent claims against Bed Bath & Beyond’s bankruptcy estate that the plan had extinguished. Finally, the court rejected Todd Augenbaum’s argument that the lost value of his canceled shares could be reimbursed from a judgment or settlement.

The court concluded that intervening events had deprived the plaintiffs of a personal stake in the litigation and that their claims were moot. It therefore granted the defendants’ motion to dismiss. Because dismissal on mootness grounds resolved the case, the court declined to address the defendants’ Rule 12(b)(6) arguments.

Bed Bath & Beyond’s Substitution Motion

Bed Bath & Beyond moved under Rule 17(a)(3) to substitute itself as the plaintiff and asked the court to stay consideration of the defendants’ dismissal motion. Rule 17(a)(3) can allow substitution of the real party in interest—the person or entity legally entitled to pursue the claim—when substitution would not change the substance of the case, would not reflect bad faith or unfairness, and is necessary to avoid injustice.

The court denied the motion. Bed Bath & Beyond did not submit a proposed amended complaint, so the court could not determine whether substitution would change the substance of the action. Although the company described the substitution as merely formal, it also said it would seek permission to amend the pleadings without explaining how the proposed pleading would differ.

The court also concluded that it could not find good faith on the record before it because Bed Bath & Beyond had not provided the proposed amended pleading. Finally, the court found that substitution was not necessary to avoid injustice because nothing prevented Bed Bath & Beyond from filing its own Section 16(b) action. The court stated that the alleged profits occurred around August 16, 2022, and that the two-year limitations period therefore still permitted a timely action at the time of the opinion.

Disposition

Judge Dale E. Ho granted Defendants RC Ventures LLC and Ryan Cohen’s motion to dismiss. He denied Bed Bath & Beyond’s motion for substitution as the real party in interest and to stay consideration of the dismissal motion. The Clerk was directed to terminate the two motions and close the case.