In Re: RS Old Mill, LLC

Background

RS Old Mill, LLC, the debtor, and Yehuda Salamon, the debtor’s principal and 100% owner, appealed a January 14, 2020, Bankruptcy Court order. The order approved a settlement between Chapter 7 Trustee Marianne O’Toole and Suffern Partners LLC and approved, retroactively to September 5, 2017, the sale of certain real properties by the debtor to RS Old Mills RD LLC.

The properties were originally to be purchased from Novartis Corporation for $18 million. After the debtor could not timely secure financing, it and Suffern arranged a two-step transfer: the debtor would acquire the properties and transfer them to RS Old Mills RD LLC, which would immediately transfer them to Suffern. Suffern financed its purchase with a $33 million loan from CPIF Lending, LLC. The transfers occurred in September 2017, and Suffern then paid carrying costs exceeding $1 million per month.

In March 2019, the debtor began an adversary proceeding seeking to undo the transfers, arguing that the Bankruptcy Court had not approved the two-step transaction. The debtor or Salamon also alleged that they had been promised an equity share in Suffern that they did not receive. After the bankruptcy case was converted from Chapter 11 to Chapter 7, O’Toole became trustee and investigated the debtor’s post-petition activities and creditor claims.

The trustee and Suffern later entered into a settlement. Suffern agreed to pay $2.5 million to the trustee for allowed claims and administrative expenses. The settlement also provided for approval of the property sale and for dismissal of the debtor’s adversary proceeding, while the trustee released and waived claims concerning Suffern’s title to the properties. The Bankruptcy Court approved the settlement and sale after hearings and immediately enforced its order. The appellants did not seek or obtain a stay pending appeal.

Motions to Dismiss

The trustee and Suffern separately moved to dismiss the appeal. They argued that the appeal was equitably moot. Equitable mootness is a bankruptcy doctrine allowing dismissal when later events make it unfair or impractical to undo an unstayed order, even if some relief might technically be possible.

The District Court stated that the appellants had to overcome a strong presumption that an unstayed bankruptcy appeal is moot. Under the factors discussed by the Court of Appeals for the Second Circuit, the appellants had to show, among other things, that effective relief remained available, that reversing the order would not unravel complex transactions, that affected parties had notice and an opportunity to participate, and that the appellants had diligently sought a stay.

Court’s Analysis

The Court found a comprehensive change in circumstances. The property transfers had occurred in 2017; Suffern had taken possession and paid substantial carrying costs; administrative claims totaling approximately $72 million had been resolved; and the Bankruptcy Court had approved the settlement and sale. The appellants had never requested a stay, which alone prevented them from satisfying the required factors.

The Court also concluded that the appellants failed to show that effective relief remained available because the sale had closed. Reversing the Bankruptcy Court’s order could unravel interconnected transactions and create additional claims and litigation. The appellants also had not joined the debtor’s creditors, who could be adversely affected by reversal, and therefore had not shown that all affected parties had notice and an opportunity to participate. The factor concerning the debtor’s reemergence as a revitalized corporate entity did not apply because the dispute concerned property sales rather than such a reorganization.

The Court rejected the appellants’ argument that reversal would require Suffern to return the properties. It explained that reversal could undo only the transfer from the debtor to RS Old Mills RD LLC, not the later transfer from RS Old Mills RD LLC to Suffern.

Ruling

Judge Vincent L. Briccetti held that the appeal was equitably moot and granted the trustee’s and Suffern’s motions to dismiss the appeal. The Court did not reach the appellees’ alternative argument that the appeal should be dismissed because the appellants failed to timely designate the appellate record and statement of issues. The Clerk was directed to terminate the motions and close the case.