In re Revel AC, Inc., et al.

In re Revel AC, Inc., et al. (3d Cir. 15-1253, Sept. 30, 2015)
Third Circuit reversed the District Court's denial of IDEA Boardwalk, LLC's ("IDEA") motion for stay pending appeal with respect to the portion of the Bankruptcy Court's sale order that allowed the debtor, Revel AC, Inc. ("Debtor") to sell its casino free and clear of IDEA's lease.
Procedural context:
Bankruptcy Court for District of New Jersey denied IDEA's motion for stay pending appeal of the Bankruptcy Court's order approving the sale of the Debtor's casino. IDEA filed an emergency motion with the United States District Court for the District of New Jersey for a stay pending appeal which was denied. IDEA appealed to the United States Court of Appeals for the Third Circuit.
The Debtor owned a resort-casino in Atlantic City, New Jersey. The Debtor filed for relief under chapter 11 of the Bankruptcy Code and sought approval of bid procedures for the sale of its assets on the first day. The Bankruptcy Court approved the bid procedures an set an auction date. However, the marketing process yielded no interested parties an the auction was postponed. As a result, the Debtor closed its doors and barred its tenants from entering the casino. At the continued auction, Brookfield U.S. Holdings LLC was the successful bidder and the Bankruptcy Court approved the sale to Brookfield at a subsequent sale approval hearing. IDEA, a tenant of the Debtor that operated two nightclubs and a beach club at the resort-casino, objected to the sale based upon section 365(h) of the Bankruptcy Code. The issue raised by IDEA was whether a sale of property under 363(f) can wipe out a lessee's possessory interest in property under Bankruptcy Code section 365(h) and whether IDEA's leasehold interest was subject to a bona fide dispute under 363(f). The Bankruptcy Court ruled in favor of Revel, approved the sale over IDEA's objection, and denied IDEA's request for a stay pending appeal. IDEA filed an emergency motion for stay pending appeal with the United States District Court for the District of New Jersey. The District Court also denied IDEA's request for a stay pending appeal. On appeal to the United States Court of Appeals for the Third Circuit, the appellate court analyzed the stay request under the four factors traditionally used to determine whether a stay is warranted: (i) whether the stay applicant has made a strong showing that it is likely to succeed on the merits; (ii) whether the stay applicant will be irreparably injured absent a stay pending appeal; (iii) whether issuance of a stay will substantially injure other parties interested in the proceeding; and (iv) where the public interest lies. The Third Circuit held that all four factors are interconnected. The Third Circuit held that the appropriate analysis was whether the stay applicant made a sufficient showing that (i) it can win on the merits (which the Third Circuit stated was a standard that is significantly better than negligible but not greater than 50%) and (ii) will it suffer irreparable harm without the stay. The Third Circuit then reasoned that if the stay applicant makes such a showing, then the court will balance the harms considering all four factors using a sliding scale approach. Applying this analytical framework, the Third Circuit found irreparable harm to IDEA due to economic loss so great as to threaten IDEA's business. On the other hand, the Third Circuit found the alleged harm to the Debtor (i.e that the buyer would walk from the transaction, the Debtor would have to liquidate under chapter 7, thousands of jobs would be lost, and the Atlantic City area and other casinos would be harmed) to be speculative. Further, the Third Circuit found that the public interest consideration did not "move the needle" much. The Court did find that the public had an interest in protecting the rights of commercial tenants. However, the Third Circuit found that public interest weighed slightly in the Debtor's favor due to jobs that would be saved. With respect to the success on the merits prong of the analysis, the Third Circuit found that IDEA demonstrated a probability of success on the merits under Bankruptcy Code section 363(f) in that the Debtor did not demonstrate that a bona fide dispute existed under Bankruptcy Code section 365(f)(4). Rather, the Court held that the Debtor needed to establish that there was some factual or legal basis to establish that IDEA did not hold a true lease and that the Debtor failed to do so. As a result, the Third Circuit held that the factors favoring a stay pending appeal weighed "solidly" in favor of IDEA notwithstanding the public interest in a stay denial in light of the likelihood of IDEA's success on the merits, irreparable harm to IDEA and lack of any evidentiary showing of harm to the Debtor.
Ambro, Schwartz and Krause

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