Donoghue v. BurgerFi International, Inc.

Background

Dennis J. Donoghue and Mark Rubenstein brought an action under Section 16(b) of the Securities Exchange Act of 1934. That provision allows certain shareholders to seek recovery of profits from short-swing trades—purchases and sales of a company’s stock within a six-month period. The plaintiffs sought profits allegedly realized by John Rosatti and the John Rosatti Family Trust from trading BurgerFi International, Inc. stock. BurgerFi was named as the nominal defendant.

BurgerFi later filed a suggestion of bankruptcy, stating that it had filed for Chapter 11 bankruptcy in the Bankruptcy Court for the District of Delaware. Under the federal bankruptcy statute, filing a bankruptcy petition generally automatically pauses certain lawsuits against the debtor and actions involving property of the bankruptcy estate. The plaintiffs argued that the pause did not apply because their Section 16(b) claim was their statutory right and was brought for BurgerFi’s benefit, rather than being a claim against BurgerFi.

Court’s Analysis

The court noted that courts in the Southern District of New York disagree about whether the bankruptcy stay applies to a pending Section 16(b) lawsuit. One line of authority treats the claim as primarily belonging to the shareholder; another recognizes that the debtor’s status as a nominal defendant and its potential interest in the proceeds may support a stay.

The court concluded that the automatic stay applies. It relied on the statute’s language covering a proceeding brought “against” the debtor, even when the debtor is only a nominal defendant. The court also relied on a nonprecedential Second Circuit opinion stating that the right to recover short-swing profits becomes the exclusive property of the debtor-in-possession when the debtor files for bankruptcy protection.

Ruling

Judge Analisa Torres ordered that the case is stayed pending BurgerFi’s Chapter 11 proceeding. The court stated that the plaintiffs must first obtain permission from the bankruptcy court if they wish to pursue the action. The Clerk of Court was directed to terminate the motions at ECF Nos. 71 and 79. The order did not decide whether the plaintiffs are entitled to recover the trading profits.

Note on the Opinion’s Dates

The opinion states that BurgerFi filed its suggestion of bankruptcy on September 11, 2025, but the order is dated November 18, 2024. The text therefore contains an apparent date inconsistency.