In Re: Tops Holding II Corporation

Background

Tops Holding II Corporation and affiliated debtors filed for Chapter 11 bankruptcy. A litigation trust was created under the reorganization plan, and Alan D. Halperin was appointed litigation trustee. The trustee brought adversary proceedings challenging four dividends paid to private-equity defendants between 2009 and 2013. The complaint alleged that the dividends were avoidable as constructive and actual fraudulent transfers under federal bankruptcy law and New York law.

The bankruptcy court granted the defendants’ motions to dismiss in part and denied them in part. It dismissed, without prejudice as stated in that order, part of a breach-of-fiduciary-duty claim against Gregory Josefowicz and Stacey Rauch and a claim against Morgan Stanley Investment Management Inc. for aiding and abetting breach of fiduciary duty. The bankruptcy court otherwise denied the motions to dismiss and granted the trustee leave to amend. The amended complaint repleaded the aiding-and-abetting claim against Morgan Stanley Investment Management Inc.

Requests for Interlocutory Appeal

HSBC Equity Partners USA, L.P.; HSBC Private Equity Partners II USA L.P.; Morgan Stanley Investment Management Inc.; Morgan Stanley Capital Partners V U.S. Holdco LLC, also known as North Haven Capital Partners V U.S. Holdco LLC; Turbic Inc.; and Begain Company Limited sought permission to appeal the bankruptcy court’s order before a final judgment. An interlocutory appeal is an appeal during an ongoing case. Under the standard applied by the district court, the movants had to show a controlling legal question, a substantial ground for disagreement about that question, and that an immediate appeal could materially advance the end of the litigation.

The defendants identified three proposed questions:

Word Limit

The court ruled that the bankruptcy appellate rule limiting motions and responses to 5,200 words applied to the trustee’s opposition. Because the defendants had an adequate opportunity to respond and judicial efficiency favored considering the filing, the court considered the opposition for this motion. It warned that future submissions that did not comply with the applicable rules could be struck in their entirety.

Court’s Analysis

The court concluded that the limitations-period issue was a pure legal question, but found no substantial ground for a difference of opinion. It read 11 U.S.C. section 544(b) as containing no state-law limitations-period restriction and noted that bankruptcy courts in the Second Circuit agreed with that interpretation. The court also found that removing the 2009 and 2010 dividend claims would be unlikely to materially speed up the litigation because the four dividend claims were parallel and would likely involve overlapping discovery.

The court declined to certify the question about the fraudulent-intent pleading standard. It reasoned that deciding whether the issue was controlling would require examining whether the trustee had adequately pleaded mutual fraudulent intent. That fact-specific inquiry was outside the scope of deciding whether to permit an interlocutory appeal.

The court also declined to certify the section 546(e) safe-harbor issue. It found that determining whether the dividends were qualifying transactions made by or to a financial institution was fact-intensive rather than a pure question of law. The court further stated that an immediate appeal could produce prolonged and piecemeal litigation instead of materially advancing the case.

Disposition

Judge Nelson S. Roman denied each of the private-equity defendants’ motions for leave to appeal the bankruptcy court’s order. The Clerk of Court was directed to terminate the identified motions and close each of the three related cases.