In Re: 53 Stanhope LLC

Background

Several debtor companies filed consolidated chapter 11 bankruptcy cases after Brooklyn Lender LLC began foreclosure actions involving 14 loans secured by mortgages on 31 properties. Brooklyn Lender had received the mortgages by assignment from Signature Bank and alleged that the debtors had defaulted on the loan agreements.

The bankruptcy court issued a February 19, 2021 bench ruling and order that granted in part and denied in part the debtors’ objections to Brooklyn Lender’s claims and disallowed several claims for default interest. The bankruptcy court later confirmed three reorganization plans: the D & W Plan on June 10, 2021; the 53 Stanhope Plan on June 11, 2021; and the 55 Stanhope Plan on October 22, 2021. The D & W Plan used refinancing to pay claims, while the 53 Stanhope Plan provided for property sales and payment of creditors from the sale proceeds. The bankruptcy court approved the sales connected to the 53 Stanhope Plan on March 31, 2022.

Brooklyn Lender appealed the February ruling and the confirmations of the D & W Plan and the 53 Stanhope Plan. Its challenges concerned the disallowance of default interest, reductions in claimed legal fees and expenses, alleged fraud by the D & W debtors, and the feasibility of the D & W Plan. Brooklyn Lender sought a stay of the D & W Plan’s confirmation pending appeal, but the bankruptcy court and this court denied stays. Brooklyn Lender did not seek stays of the 53 Stanhope Plan or the 55 Stanhope Plan.

Legal standard

The court applied equitable mootness, a discretionary bankruptcy doctrine that permits dismissal of an appeal when later events make effective relief inequitable, even if some form of relief might technically be possible. When a reorganization plan has been substantially consummated, the court presumes that an appeal is equitably moot.

An appellant may overcome that presumption only by showing five things: effective relief can be ordered; the relief will not harm the debtor’s ability to emerge from bankruptcy; the relief will not unravel complicated transactions; affected third parties were notified and could participate; and the appellant diligently sought a stay of the plan. The court noted that seeking a stay is an especially important factor.

Court’s analysis

For the appeal from the February 19, 2021 ruling, the court found that the plans had been substantially completed. Brooklyn Lender estimated that reversing the ruling would require the D & W debtors alone to pay about $16 million in additional default interest. The court rejected Brooklyn Lender’s proposed alternatives—such as new financing, equity or debt issuance, or a judgment—because the bankruptcy judge had determined that allowing the claims in full could make most or all of the debtors insolvent and prevent them from receiving a fresh start. The court also emphasized that Brooklyn Lender had not sought stays of two of the three plans. It therefore found that Brooklyn Lender had not met the relevant factors and held that this appeal was equitably moot.

For the D & W Plan appeal, the court held that reversing the plan would require unwinding the refinancing arrangement with Maguire Capital Group and other transactions that had already occurred. The court also found that Brooklyn Lender’s stay request was not a diligent request because it sought a stay without a bond and proposed alternative security that would have required the debtors to replace the plan’s exit financing with an obligation to Brooklyn Lender. In any event, the court held that diligence alone could not overcome Brooklyn Lender’s failure to satisfy all five factors.

For the 53 Stanhope Plan appeal, the court found that alternative payment relief could jeopardize the debtors’ emergence from bankruptcy, while reversing the plan could require unwinding sales of 13 properties. Brooklyn Lender also had not shown that the property buyers were notified and able to participate in the appeal. The court therefore concluded that this appeal was equitably moot as well.

Disposition

The court’s discussion states that all three appeals were dismissed as equitably moot, and it directed the Clerk of Court to close the cases. The opinion’s final paragraph instead states that Brooklyn Lender’s appeals were “DENIED as equitably moot.” The opinion does not explain the difference between those two outcome terms.