In Re: 305 East 61st Street Group LLC

Background

305 East 61st Street Group LLC was in Chapter 11 bankruptcy after filing for protection in 2019. The company owned a ten-story former warehouse building that had been acquired for conversion into a condominium. Its four equity members were 61 Prime LLC, Little Hearts Marks Family II, LLP, Thaddeus Pollock, and Onestone 305 LLC. Little Hearts held a 30% interest and served as the company’s manager.

Because the equity members could not agree on a path forward, the Bankruptcy Court appointed Kenneth P. Silverman as the Chapter 11 trustee. A liquidation plan was later confirmed and became effective. It transferred the company’s remaining assets, including its legal claims, to a creditor trust, with Silverman serving as creditor trustee.

The creditor trustee and creditors of Prime and Jason Carter, referred to as the Carter Parties, negotiated a settlement of the Carter Parties’ claims. The settlement reduced those claims from $60.9 million to $42.5 million and provided for a one-time distribution of $650,000 from funds that otherwise would have been distributed to unsecured creditors and the creditor trustee as compensation for negotiating and administering the settlement. The Bankruptcy Court approved the settlement in November 2022 after considering the seven factors used in the Second Circuit to evaluate bankruptcy settlements.

Little Hearts appealed the approval order. Although the Bankruptcy Court encouraged Little Hearts to seek a stay, or pause, during the appeal, Little Hearts did not request one. After the statutory 14-day stay expired on December 19, 2022, the settlement took effect and the creditor trustee made distributions. Little Hearts filed its appeal on January 5, 2023.

Equitable Mootness

The District Court dismissed the appeal as equitably moot. Equitable mootness is a court-created doctrine that prevents an appellate court from undoing a bankruptcy transaction after it has been implemented when doing so would be unfair or impractical.

The court applied five factors concerning whether an appellate court could still provide effective relief without disrupting the bankruptcy case, undoing complex transactions, harming affected parties, or disregarding the appellant’s efforts to obtain a stay. The court emphasized that Little Hearts never sought a stay, even after the Bankruptcy Court specifically suggested doing so. The District Court called obtaining a stay the chief consideration in deciding whether a bankruptcy appeal is equitably moot.

The court also found that more than $1 million had already been distributed from the creditor trust. Unsecured creditors received more than they otherwise would have received because of the settlement’s treatment of certain claims. Rewriting the settlement could therefore produce an inequitable result for the bankruptcy estate and creditors. In addition, the unsecured creditors who benefited from the distributions did not appear to have actual notice of the appeal or an opportunity to participate. The court concluded that Little Hearts could not overcome the strong presumption that an approved and implemented bankruptcy settlement should not be unwound.

Settlement Approval

The court alternatively held that the Bankruptcy Court did not abuse its discretion in approving the settlement. Under Bankruptcy Rule 9019, the bankruptcy court evaluates whether a settlement falls within the reasonable range, rather than deciding every legal and factual issue that the settlement might avoid. The relevant factors include the settlement’s benefits compared with the chances of success in litigation, the likely cost and delay of continued litigation, the interests of creditors, support from interested parties, the experience of the professionals and court involved, the scope of releases, and whether the agreement resulted from arm’s-length negotiations.

The District Court determined that the Bankruptcy Court reasonably found the settlement beneficial because it provided full payment to unsecured creditors and reduced the Carter Parties’ claims by more than $18 million. The Bankruptcy Court also reasonably found that continued litigation would likely be lengthy and expensive and could deplete the creditor trust’s assets.

The District Court rejected Little Hearts’ contention that the creditor trustee’s success fee undermined the settlement. It explained that the Carter Parties agreed to pay the trustee from their own distributions and that this arrangement did not reduce other creditors’ recoveries under the plan. The District Court also concluded that opposition from three equity members did not make the settlement unreasonable.

Disposition

The court dismissed the appeal of the Bankruptcy Court’s order approving the settlement. It also directed the Clerk to terminate the motion pending at Dkt. 3 and close the action. The opinion did not state that the dismissal was with or without prejudice.