In Re: Centric Brands Inc.

Background

Alicia Allen appealed from the Bankruptcy Court’s April 15, 2022 Claims Order in Centric Brands Inc.’s Chapter 11 bankruptcy case. The Claims Order denied Allen’s request to reconsider an earlier decision and formally granted Centric Brands’s objections to two proofs of claim.

Allen had separated from employment with Centric Brands on March 1, 2020, after signing a separation agreement. The agreement provided for $25,047 in severance payments and released specified employment-related claims, including claims under Title VII of the Civil Rights Act, the Americans with Disabilities Act, the Rehabilitation Act, and the Family and Medical Leave Act. Allen filed one claim for $11,137.07 for unpaid severance and a second claim for $2.4 million for forgone wages and other costs arising from alleged wrongful termination and injuries.

Centric Brands asked the Bankruptcy Court to reduce the severance claim based on payments already made and to disallow the $2.4 million claim because Allen had released the relevant claims in the separation agreement. After hearings, including an evidentiary hearing on whether the agreement was enforceable, the Bankruptcy Court determined that $5,330.35 in severance remained unpaid and that Allen knowingly and voluntarily released the claims asserted in the $2.4 million claim. It therefore reduced and allowed the first claim at $5,330.35 and disallowed and expunged the second claim.

The Appeal and Reorganization Plan

The district court construed Allen’s appeal, despite technical issues with the notice of appeal, as an appeal from the Claims Order. Allen did not seek a stay—an order pausing enforcement—of the Bankruptcy Court’s decision or any other order while the appeal was pending.

The Chapter 11 plan had been confirmed on September 21, 2020, and became effective on October 9, 2020. Under the plan, Centric Brands was reorganized as a private company. The Bankruptcy Court later entered a final decree closing the bankruptcy case. Centric Brands reported that it had made its only distribution to holders of allowed general unsecured claims from a $5.8 million pool, distributing the funds pro rata to more than 800 general unsecured claimants.

Equitable Mootness

The district court applied equitable mootness, a discretionary doctrine that permits dismissal of a bankruptcy appeal when granting relief might technically be possible but would be unfair because the reorganization has already been carried out. In the Second Circuit, an appeal is presumed equitably moot when a reorganization plan has been substantially consummated.

The court held that the plan here had not merely been substantially consummated; it had been entirely consummated. The plan had taken effect, distributions had been completed, and the Bankruptcy Court had closed the case.

The court also held that Allen did not satisfy the required factors for overcoming the presumption of equitable mootness. The relief she sought would have required allowing an additional $5,806.77 on the severance claim and allowing the $2.4 million claim. According to the court, that relief could require taking back distributions from hundreds of priority unsecured creditors or a substantial portion of the $5.8 million distributed to general unsecured claimants. Centric Brands also contended that undoing the Claims Order would reinstate more than $168 million in general unsecured claims against the reorganized company.

The court rejected Allen’s argument that reinstating her employment could provide effective relief without disturbing the plan because that was not the relief sought through the appeal. The court further found that creditors who could be affected had not received notice of the specific relief Allen sought or an opportunity to participate, and that Allen had not sought a stay of the Bankruptcy Court’s orders. The court stated that quickly filing an appeal did not satisfy the diligence requirement because the relevant question was whether Allen diligently sought a stay.

Disposition

The court granted Centric Brands’s motion to dismiss. It dismissed the appeal as moot, specifically because the completed reorganization made the requested relief inequitable. The court did not decide the underlying merits of Allen’s challenges to the reduced and disallowed claims. It also certified under 28 U.S.C. § 1915(a)(3) that an appeal from this order would not be taken in good faith and denied Allen’s ability to proceed without paying filing fees for purposes of such an appeal. Judge Vincent L. Briccetti directed the Clerk to terminate the motion and close the case.