Continental Securities v. Shenandoah Nursing Home

188 B.R. 205 (1995)

CONTINENTAL SECURITIES CORP., Appellant, v. SHENANDOAH NURSING HOME PARTNERSHIP, Appellee.

Misc. A. No. 95-M-4(H).

United States District Court, W.D. Virginia, Harrisonburg Division.

September 11, 1995.

COPYRIGHT MATERIAL OMITTED

Augustus Charles Epps, Jr., Christian, Barton, Epps, Brent & Chappell, Richmond, VA, Michael F. Wurst, Joseph J. Wielebinski, Raymond J. Urbanik, Munsch, Hardt, Kopf, Harr & Dinan, P.C., Dallas, TX, for appellant.

William E. Shmidheiser, III, Wharton, Aldhizer & Weaver, Harrisonburg, VA, for appellee.

MEMORANDUM OPINION

MICHAEL, District Judge.

This matter is before the court on the motion of Continental Securities Corp. (Continental) for a stay pending appeal of an order of the bankruptcy court confirming Shenandoah Nursing Home Partnership's (Shenandoah) Second Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code. For the reasons stated herein, the motion is denied.

I.

On December 12, 1990, Shenandoah, the debtor in this case, and Continental, the creditor, executed a Deed of Trust Note (Note) in the amount of $2,339,900. The Note bears interest at 11.125% per annum through the date of Final Endorsement and thereafter at the rate of 11% per annum on the unpaid balance until paid. The indebtedness is secured by a Deed of Trust lien on the actual property comprising the nursing home. Shenandoah's obligations under the Note are insured by the Department of Housing and Urban Development. The Note contains a so-called "lockout" provision that prohibits prepayment of the Note prior to December 1, 2001. However, unlike many similar instruments containing lockout provisions, the Note does not contain a penalty provision enforcing the lockout provision. The bankruptcy court's treatment of this provision forms the crucible of this dispute.

On July 1, 1994, Shenandoah filed a voluntary petition in Bankruptcy Court under Chapter 11 of the Bankruptcy Code. The Second Amended Plan of Reorganization (Plan), confirmed by the Bankruptcy Judge on July 31, 1995, provides that "the allowed secured claim of Continental shall be accelerated and all principal and interest accrued as of the Confirmation Date shall be paid in full ten (10) days after the Confirmation Date." Second Amended Plan of Reorganization ¶ 4.2.¹ Thus, the Plan allows Shenandoah to prepay the Note in violation of the terms of the lockout provision. Moreover, the Plan does not provide Continental with damages for Shenandoah's prepayment. Continental moved the bankruptcy court to reconsider the Plan, or alternatively, for a stay pending appeal of the Confirmation Order, arguing that the Plan could not be confirmed as a matter of law. In a written order entered on August 3, 1995, the bankruptcy court denied Continental's motions.

Continental now moves this court for a stay pending appeal of the bankruptcy court's order confirming the Plan. On August 7, 1995, this court issued a temporary stay pending completion of the record below. As that record is now complete, the issue of whether to continue or dissolve the stay is ripe for consideration.²

II.

Rule 8005 of the Federal Rules of Bankruptcy Procedure governs the issuance of a stay pending an appeal of a bankruptcy court order. Although the issuance of a stay is left to the court's discretion, the Fourth Circuit requires a party seeking a stay to meet the same criteria movants for a preliminary injunction must meet in seeking their relief. Long v. Robinson, 432 F.2d 977 (4th Cir.1970); City of Alexandria v. Helms, 719 F.2d 699 (4th Cir.1983); In re Tolco Properties, Inc., 6 B.R. 490 (Bankr.E.D.Va.1980).

In the Fourth Circuit, district courts must consider, in "flexible interplay," four factors in determining whether to issue a preliminary injunction: 1) the likelihood of irreparable harm to the plaintiff without the injunction; 2) the likelihood of harm to the defendant with an injunction; 3) the plaintiff's likelihood of success on the merits; and 4) the public interest. Blackwelder Furniture Co. v. Seilig Mfg. Co., 550 F.2d 189, 193-96 (4th Cir.1977). The Fourth Circuit recently reiterated the proper framework within which to analyze these four factors:

First, the party requesting preliminary relief must make a "clear showing" that he will suffer irreparable harm if the court denies his request. Second, if the party establishes that he will suffer irreparable harm, "the next step then for the court to take is to balance the likelihood of irreparable harm to the plaintiff from the failure to grant interim relief against the likelihood of harm to the defendant from the grant of such relief." Third, if the balance tips decidedly in favor of the party requesting preliminary relief, "a preliminary injunction will be granted if the plaintiff has raised questions going to the merits so serious, substantial, difficult, and doubtful, as to make them fair ground for litigation and thus more deliberate investigation." However, "if the balance does not tip decidedly there must be a strong probability of success on the merits." Fourth, the court must evaluate whether the public interest favors granting preliminary relief.

Multi-Channel TV Cable Co. v. Charlottesville Quality Cable Operating Co, 22 F.3d 546, 551 (4th Cir.1994) (quoting Direx Israel, Ltd. v. Breakthrough Medical Corp., 952 F.2d 802, 812-813 (4th Cir.1991)).

This framework is followed below.

A. Irreparable Injury

The Fourth Circuit has established the following principles to guide courts in determining whether prospective harm is irreparable. "Where the harm suffered by the moving party may be compensated by an award of money damages at judgment, courts generally have refused to find that harm irreparable." Hughes Network Systems, Inc. v. Interdigital Communications Corp., 17 F.3d 691 (4th Cir.1994). In other words, "Mere injuries, however substantial, in terms of money, time and energy necessarily expended in the absence of a stay, are not enough. The possibility that adequate compensatory or other corrective relief will be available at a later date, in the ordinary course of litigation, weighs heavily against a claim of irreparable harm." Id. at 694 (quoting Sampson v. Murray, 415 U.S. 61, 90, 94 S.Ct. 937, 952-53, 39 L.Ed.2d 166 (1974)). "Thus, when `the record indicates that plaintiff's loss is a matter of simple mathematical calculation,' a plaintiff fails to establish irreparable injury for preliminary injunction purposes." Multi-Channel, 22 F.3d at 551-552 (quoting Graham v. Triangle Pub., 344 F.2d 775, 776 (3d Cir.1965)).

There are, however, two caveats to the general rule that money damages are not irreparable. "Even where a harm could be remedied by money damages at judgment, irreparable harm may still exist where the moving party's business cannot survive absent a preliminary injunction³ or `where damages may be unobtainable from the defendant because he may become insolvent before a final judgment can be entered and collected.'" Hughes Systems, 17 F.3d at 694 (quoting Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380, 386 (7th Cir.1984)).

Finally, "when the failure to grant preliminary relief creates the possibility of permanent loss of customers to a competitor or the loss of goodwill, the irreparable injury prong is satisfied." Multi-Channel, 22 F.3d at 552.

Continental argues that in the absence of a stay, Shenandoah will prepay the Note,⁴ and that the consequences of that action will be "irreversible and devastating." Appellant's Support Memorandum at 9. Specifically, Continental contends the damage caused by Shenandoah's prepayment of the Note is "at the very least, the difference between the guaranteed income stream provided for under the Note through the year 2001 and the amount the owners of the Note will be able to receive if the proceeds are reinvested." Id.

Thus, a significant component of Continental's alleged injury is monetary loss. As stated above, money damages are generally considered non-irreparable. Moreover, the first of the caveats to this general rule is not at issue — Continental does not argue that it will go out of business absent a stay. However, Continental does raise the second caveat — it expresses a concern that Shenandoah may become unable, or unwilling, to pay its obligations under the Note. Continental argues that the first lien it holds on the nursing home property will become inoperable once Shenandoah prepays the Note, thereby effectively releasing Shenandoah from any further obligations under the Note.

Thus, Continental asserts that the money damages it seeks is "irreparable" because there is a possibility that it may never take possession of the money. Stated differently, Continental argues that if the court denies its motion, it will become impossible to return all the parties to the status quo should Continental prevail on appeal.

In response, Shenandoah cites the general rule that money damages are by definition non-irreparable. It believes the court can make Continental whole in the absence of a stay — the status quo can be re-born.

The court agrees. There is simply no evidence that Shenandoah will "become insolvent before a final judgment can be entered and collected" as required under Hughes' second caveat. Hughes, 17 F.3d 691 at 694. Nor is there any evidence to support Continental's assertion that Shenandoah may become unwilling to pay whatever obligation this court places upon Shenandoah. The record compiled thus far indicates the opposite. Shenandoah moved immediately to pay its obligation under the Plan to Continental. It has stipulated that the issue of damages is preserved on appeal despite consummation of the Plan. In short, this is not one of those "extraordinary circumstances that may give rise to the irreparable harm required for . . . preliminary relief." Id.⁵

In addition to arguing that the status quo is imperiled by the denial of its motion for a stay, Continental also argues that it will...