In re Wellington

631 B.R. 833

IN RE: Donald F. WELLINGTON, Debtor.

Case No. 20-10080

United States Bankruptcy Court, M.D. North Carolina, Greensboro Division.

Signed May 20, 2021

Charles M. Ivey, III, Charles (Chuck) M. Ivey, IV, Dirk W. Siegmund, Ivey, McClellan, Gatton, & Siegmund, LLP, Greensboro, NC, for Debtor.

ORDER AND OPINION

LENA MANSORI JAMES, UNITED STATES BANKRUPTCY JUDGE

DENYING CREDITORS' MOTION FOR STAY PENDING APPEAL

THIS CASE came before the Court on the Motion for Stay Pending Appeal (Docket No. 386, the "Motion") filed by creditors AAEB5 Fund 17 LLC and ZSC Nyack Hotel Fund LLC (the "Creditors"). The Creditors request that the Court, pursuant to Federal Bankruptcy Rule of Procedure 8007 and its inherent powers, stay further proceedings regarding distributions to unsecured creditors until a determination is made on its appeal of this Court's Order Sustaining Debtor's Objection to Claim Number 14 and 15 and Denying Creditors' Motion to Allow Late Filed Claims (Docket No. 327, the "Bench Ruling"). In the Bench Ruling, the Court found the Creditors did not meet their burden of demonstrating their failure to timely file the proofs of claim, which were filed five days after the claims bar date, was due to excusable neglect within the meaning of Federal Bankruptcy Rule 9006(b)(1).

The Debtor filed a response opposing the requested relief from stay (Docket No. 397). Creditor Juniper Time Investor, LLC ("Juniper") also filed an objection to the Motion, which was joined by creditor Wells Fargo Bank, N.A. ("Wells Fargo") (Docket No. 394, 395).

The Court held a hearing on May 13, 2021, at which Charles Ivey III appeared on behalf of the Debtor, William Miller appeared as United States Bankruptcy Administrator, James Lanik appeared on behalf of the Creditors, Ashley Edwards appeared on behalf of Wells Fargo, Bruce Goodman appeared for Popular Bank, and Brian Anderson, Chris Bayley, and James Florentine appeared on behalf of Juniper.

For the reasons discussed herein, the Court finds the Creditors fail to satisfy the burden required to issue a stay pending appeal and will therefore deny the Motion.

DISCUSSION

Procedural History

The Court assumes familiarity with the circumstances that prompted the Debtor's bankruptcy filing as well as the complex procedural history of this case but will briefly summarize the pertinent facts and filings that are essential to determining the Motion.¹

On January 24, 2020, the same day he initiated this chapter 11 case, the Debtor provided notice of the filing by email to the Creditors' state-court attorney, Kirk Brett. A managing member of both Creditors stated in a deposition that she too learned of the Debtor's bankruptcy filing on that same day. In both the schedules and the Notice of Disputed, Contingent, or Unliquidated Claims (Docket No. 53, the "Notice"), the Debtor designated the claims of the Creditors as unliquidated, thereby requiring the Creditors to file proofs of claim by the May 20, 2020 claims bar deadline. Despite receiving the Notice at the same addresses the Creditors later provided in their claims, the Creditors did not file proofs of claim until May 25, 2020 (Claim Nos. 14-1 and 15-1), five days after the deadline. The Debtor soon objected to both claims as untimely, and the Creditors responded by filing a motion to allow the late-filed claims (Docket Nos. 146, 206). In September of 2020, while those matters were still pending, the Court entered an Order Confirming the Debtor's Second Modified Plan, which, among other provisions, required the Debtor to liquidate certain of his LLC interests in order to provide a fund of $6,100,000 to holders of allowed general unsecured claims (Docket No. 190, 275). The unsecured claim fund was the byproduct of extensive negotiations and court-approved mediation between the Debtor and certain of his largest creditors, including Wells Fargo, Juniper, and Popular Bank. The Creditors did not participate in that mediation.

The Court issued a bench ruling on December 15, 2020, sustaining the Debtor's objection and denying the Creditors' motion to allow late-filed claims. The Court determined that the factors necessary to a finding of excusable neglect, see Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P'ship , 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993), did not weigh in favor of the Creditors. The Court questioned the Creditors' contention that three of the four Pioneer factors weighed in their favor, but even assuming that to be true, found that the Creditors failed to provide explanation for why the claims were filed late and why the delay was not entirely within the Creditors' control, which numerous courts, including the Fourth Circuit Court of Appeals, have found to be the most critical factor in determining excusable neglect. See Thompson v. E.I. DuPont de Nemours & Co., Inc. , 76 F.3d 530 (4th Cir. 1996) ; see also Symbionics Inc. v. Ortlieb , 432 F. App'x 216, 219 (4th Cir. 2011) ; Tubens v. Doe , 976 F.3d 101, 105 (1st Cir. 2020) ; In re Scorpion Fitness Inc. , No. 19-11231, 2020 WL 1670752, at *7 (Bankr. S.D.N.Y. Apr. 3, 2020) ; In re Benefit Corner, LLC , No. 16-11027, 2019 WL 7498664, at *6 (Bankr. M.D.N.C. Dec. 31, 2019).

While the Creditors timely appealed the Bench Ruling on January 14, 2021 (Docket No. 352), "[a]n appeal ... does not stay any proceeding of the bankruptcy court ... from which the appeal is taken, unless the respective bankruptcy court ... in which the appeal is pending, issues a stay of such proceeding pending the appeal." 28 U.S.C. § 158(d)(2)(D). The Creditors filed the instant Motion seeking a stay to proceedings in the Debtor's bankruptcy case regarding distributions to unsecured creditors, specifically the Joint Motion to Authorize and Direct Second Interim Distributions to Unsecured Creditors (Docket No. 379, the "Second Interim Distribution Motion"). In the Second Interim Distribution Motion, the Debtor requests authority to disburse nearly $2.3 million to unsecured creditors holding allowed claims, which will be taken from the $6.1 million unsecured claim fund (Docket No. 275). In the instant Motion, the Creditors seek a stay pending appeal, under either Federal Rule of Bankruptcy Procedure 8007 or, alternatively, the Court's inherent powers, that would stay any decision on the Second Interim Distribution Motion, and defer any other proposed distributions, pending a determination on the appeal of the Bench Ruling.

Request for Stay Pending Appeal under Fed. R. Bankr. P. 8007

Federal Rule of Bankruptcy Procedure 8007, which governs stays pending appeal in bankruptcy proceedings, requires a party requesting a stay to first seek relief in the bankruptcy court.²

"A stay is not a matter of right, even if irreparable injury might otherwise result. It is instead an exercise of judicial discretion, and the propriety of its issue is dependent upon the circumstances of the particular case." Nken v. Holder , 556 U.S. 418, 433, 129 S.Ct. 1749, 173 L.Ed.2d 550 (2009) (cleaned up). A stay pending appeal is considered "extraordinary relief" for which the moving party bears a "heavy burden." Covington v. North Carolina , No. 1:15CV399, 2018 WL 604732, at *3 (M.D.N.C. Jan. 26, 2018) ; see also Nken , 556 U.S. at 433–34, 129 S.Ct. 1749 (noting "[t]he party requesting a stay bears the burden of showing that the circumstances justify an exercise of that discretion.").

The standard for determining stays pending appeal remains the traditional four-factor test,³ requiring consideration of: "(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies." Nken , 556 U.S. at 434, 129 S.Ct. 1749 (quoting Hilton v. Braunskill , 481 U.S. 770, 776, 107 S.Ct. 2113, 95 L.Ed.2d 724 (1987) ). The test described by the Supreme Court in Hilton , and reaffirmed in Nken, is the same test that has traditionally been employed by the Fourth Circuit and the District Court for the Middle District of North Carolina. See Long v. Robinson , 432 F.2d 977, 979 (4th Cir. 1970) ; Krakauer v. Dish Network, LLC , 1:14-CV-333, 2021 WL 631906, at *1 (M.D.N.C. Feb. 10, 2021) ; Palomo v. Howard , No. 1:19CV884, 2019 WL 9633647, at *1 (M.D.N.C. Dec. 17, 2019). Pursuant to Long and Hilton , a court determines a stay pending appeal through "a balancing of the factors," Long , 432 F.2d at 981, "such that a stronger showing on some of these prongs can make up for a weaker showing on others." Ohio Valley Envtl. Coalition, Inc. v. U.S. Army Corps of Eng'rs , 890 F. Supp. 2d 688, 692 (S.D. W. Va. 2012) ; United States v. Springer , No. 5:12-HC-2009, 2012 WL 4321393, at *1 (E.D.N.C. Sept. 20, 2012) ; see also Hilton , 481 U.S. at 777–78, 107 S.Ct. 2113 (describing balancing of factors and noting that a strong showing of likelihood of success on appeal can make up for shortcomings on the other factors). While the factors may be balanced, the Supreme Court has reiterated that the first two factors — likelihood of success and irreparable injury absent a stay — "are the most critical." Nken , 556 U.S. at 434, 129 S.Ct. 1749. The Court, therefore, will consider the Creditors' arguments through the prism of the four-factor test to determine whether the Creditors meet the necessary burden to issue a stay pending appeal.

1. Likelihood of Prevailing on the Merits of the Appeal

Of the two "most critical" factors cited by Nken , 556 U.S. at 434, 129 S.Ct. 1749, the success or failure of a motion for stay pending appeal most often hinges on the likelihood of success on appeal. See Hilton , 481 U.S. at 778, 107 S.Ct. 2113 ("The balance may depend to a large extent upon a determination of the State's prospects of success on its appeal."); see also Brady v. Nat'l Football League , 640 F.3d 785, 789 (8th Cir. 2011) ; In re...