<b><i>In Re Revel AC, Inc.:</i></b> The Third Circuit's Roadmap Around Equitable Mootness

Three days before the sale hearing, Revel filed a response to IDEA's objection to the sale, arguing that ' 365(h) does not disable Revel's authority under ' 363(f) to sell property free of an existing leasehold interest, and that Revel could satisfy one of ' 363(f)'s five conditions to allow such lease stripping to take place. Id. at 563. Mainly, Revel argued that a bona-fide dispute existed with respect to the validity of IDEA's lease, and that Revel could thus satisfy ' 363(f)(4). Id. Ultimately, the bankruptcy court entered an order approving the sale of the casino free and clear of all existing tenancies and/or possessory rights, including IDEA's lease (the “Sale Order”). Id. at 564. IDEA appealed the order and moved to stay the effect of the bankruptcy court's order. Id. In its stay motion, IDEA noted that if the bankruptcy court's order were not stayed, IDEA's appeal would risk becoming moot by operation of 11 U.S.C. ' 363(m). Id. at 564-65. The bankruptcy court denied IDEA's request for a stay, as did the District Court. Id.

The Third Circuit

On appeal, the Third Circuit first recognized that it had previously provided “little direction on how to balance the four stay factors” when determining the appropriateness of a stay pending appeal. Id. at 567. The majority (as noted below, this was a split decision with a dissenting opinion) then began its analysis by summarizing the process undertaken by courts in weighing the four factors, and noted that the most “critical” of the four factors, according to the United States Supreme Court, are the first two ' whether the stay movant has demonstrated: 1) a strong showing of the likelihood of success; and 2) whether it will suffer irreparable harm, i.e., harm that cannot be prevented by a successful appeal. Id. at 568 (citing Nken v. Holder, 556 U.S. 418, 434 (2009)).

With respect to the first factor, the Third Circuit reasoned that a movant may demonstrate that a strong showing exists if “there is a reasonable chance, or probability, of winning.” Id. at 568-69. With respect to the second factor, the court reasoned that an applicant must demonstrate that irreparable injury is “likely,” and not just a mere possibility. Id. at 569. Last, the Third Circuit summarized that once an applicant satisfies the first two factors, then courts will weigh the likely harm to the movant against the irreparable harm to stay opponents (i.e., the “balancing of harms”) and take into account where the public interest lies. Id.

Sliding-Scale Approach

Critically, in considering the weight to be applied to the four stay factors, the Third Circuit discussed what is often referred to as the “sliding-scale” approach. Id. Under this approach, if a stay movant can demonstrate that it has a strong likelihood of success on the merits, the court will place less weight on whether the balance of harms is in the stay movant's favor. Id. at 569-70. Thus, according to the majority, if a stay movant has a particularly strong case on the merits, a stay is permissible even if the balance of harms and the public interest weigh against the stay movant.

It was the propriety of using this “sliding-scale” analysis that divided the Third Circuit. In the minority opinion, the dissent argued that that the approach failed to honor the court's precedent of a conjunctive four-part test to obtain a stay. Id. at 575-76. According to the dissent, a stay movant must demonstrate all four of the stay factors. Id. at 576. The dissent disagreed with the notion that a stay movant could be granted a stay upon a “particularly strong showing on just a single factor,” even if other stay factors would weigh against the movant. Id. While the majority noted that requiring a stay movant to satisfy all four factors has the potential to be unfair to stay movants, the dissent disagreed. The dissent argued that a four-part conjunctive test was not unfair because stay relief was an extraordinary remedy and should require a high bar to obtain it. Id.

Ultimately, in weighing the four stay factors, the majority ruled that the analysis should proceed as follows: “Did the stay movant make a sufficient showing that (a) it can win on the merits … and (b) will it suffer irreparable harm absent a stay? If it has, we balance the relative harms considering all four factors using a sliding scale approach. However, if the movant does not make the requisite showings on either of these first two factors, the inquiry into the balance of harms and the public interest is unnecessary and the stay should be denied.” Id. at 571. The majority then applied the foregoing analysis to IDEA's stay request and found that the factors weighed in its favor.

Principally, the Third Circuit reasoned that IDEA success on the merits of its appeal “was all but assured,” and that IDEA had demonstrated that it would suffer irreparable harm should the stay not be granted. The Third Circuit found that Revel's own showing of irreparable harm was insufficient to tip the balance in its favor, and that while public interest would favor denying the stay request, that alone could not prevent granting IDEA's stay request. The Third Circuit accordingly reversed the district court, and stayed the portion of the Sale Order allowing Revel to sell the casino free and clear of IDEA's lease. Id. at 575.

Implications

Revel provides an important analysis for any party seeking to avoid losing its appeal rights due to the doctrine of equitable mootness. The doctrine is not a perfect science, and its application can be hard to predict. Yet, if applied, it results in draconian harm to an appellant by precluding appellate review of, and relief from, a lower court order. The basic theory behind the doctrine is that if the acts authorized by the entry of the appealed take place and the unwinding of these acts is impractical to impossible and/or would harm unsuspecting third parties that acted on reliance of the lower court order, then equity should require the appeal to be dismissed. Obviously, a stay that precludes the acts from taking place would preclude the application of equitable mootness as well. Moreover, as noted below, the act of seeking a stay from lower courts, in and of itself, may help ward off application of equitable mootness, even if the lower courts deny the request for a stay.

This was the case in two recent opinions handed down by the Third Circuit and the U.S. Court of Appeals for the Ninth Circuit. In In re Transwest Resort Properties, Inc., 801 F.3d 1161 (9th Cir. 2015), the Ninth Circuit held that a lender's appeal from an order confirming a Chapter 11 debtor's cramdown was not equitably moot when the lender diligently sought a stay and the court could grant effective relief. Similarly, in In re One2One Communications, LLC , 2015 WL 4430302 (3d Cir. July 21, 2015), the Third Circuit reversed the district court's dismissal of an appeal after finding that the circumstances would not make it difficult to retract the confirmed plan, and that there was little “limited evidence of potential third-party injury.”

In both instances, the appellants unsuccessfully sought to obtain a stay from the lower courts, yet their attempts to do so resonated with the circuit courts and weighed in their favor when the circuit courts decided that the doctrine of equitable mootness would not be applied. It is in this context that Revel is also relevant. Not only is a stay pending appeal the surest way to avoid the quagmire that is equitable mootness, but courts assessing whether a party's appeal is equitably moot (presumably when a stay pending appeal has not been granted) will take into account whether the appellant sought to protect its rights to the fullest extent possible by seeking a stay pending appeal. For both these reasons, the Third Circuit's guidance in Revel is significant.

Notably, the Third Circuit is not the only circuit to endorse a “sliding-scale” analysis to a stay pending appeal. As cited by the court in Revel, the U.S. Courts of Appeal for the Second, Sixth and Seventh Circuits have all discussed the notion that the probability of the stay movant's success on the merits is inversely proportional to the balance of harms when considering whether to grant a stay pending appeal. See Mohammed v. Reno, 309 F.3d 95 (2d Cir. 2002); Mich. Coal. of Radioactive Material Users, Inc. v. Griepentrog, 945 F.2d 150 (6th Cir. 1991); In re A & F Eners., Inc. II, 742 F.3d 763 (7th Cir. 2014). Some lower courts, however, have taken a stricter approach in line with the Revel dissent's analysis. See In re Metiom, Inc., 318 B.R. 263 (S.D.N.Y. 2004) (“[M]ovant's failure to satisfy one prong of the standard for granting a stay pending appeal of a bankruptcy court order dooms the motion.”) (internal quotations omitted); In re McIntyre Building Co., Inc., 2011 WL 1434691, at * 6 (Bankr. M.D. Ala. Apr. 14, 2011) (“The failure to establish any one prong necessary [sic] results in denial of the motion.”); Jet Networks FC Holding Corp. v. Goldberg , 2009 WL 1616375, at * 2 (S.D. Fla. June 9, 2009) (“The movant must show satisfactory evidence on all four criteria, and the failure to satisfy one prong is fatal to the motion.”). Accordingly, it is important for an appellant to fully understand its court's position on this subject before it determines how to present its arguments for a stay pending appeal.

Conclusion

Regardless of the standard applicable to a request for a stay pending appeal in your jurisdiction, seeking relief is almost a necessity if there is any chance that the implementation of the order from which you are appealing would give rise to an equitable mootness argument. This is not only because appellate courts will look at how vigorously an appellant sought to protect its rights when balancing the equities of equitable mootness, but because if you succeed in obtaining a stay, your client will not be subjected to the less than clear doctrine of equitable mootness and the problems it raises. And with the Third Circuit's recently published guidance in Revel, at least appellants have an effective and up-to-date roadmap on how to avoid equitable mootness altogether.

Brian L. Shaw is a member and Allison B. Hudson is an associate of Shaw Fishman Glantz & Towbin LLC, a boutique law firm in Chicago focusing on business bankruptcy and insolvency, litigation and commercial real estate. The authors can be reached at [email protected] and [email protected], respectively.

It is well established that courts consider the following four factors in determining whether to stay the effect of an order pending appeal: 1) whether the movant has made a strong showing of the likelihood of success on the merits; 2) whether the movant will suffer irreparable injury absent a stay; 3) whether a stay would substantially harm other parties with an interest in the litigation; and 4) whether a stay is in the public interest. Recently, in In re Revel AC, Inc., 802 F.3d 558 (3d Cir. 2015), the U.S. Court of Appeals for the Third Circuit revisited these considerations and provided guidance on “how to conduct a balancing of the stay factors.” While the court's analysis in Revel was not a shocking revelation, it provides significant guidance on the most effective way to avoid losing appeal rights to the hard-to-pin-down doctrine of equitable mootness.

Case History

Revel AC, Inc. (“Revel”) opened a casino in Atlantic City in April 2012. Revel, 802 F.3d at 561. As part of its plans for the casino, Revel entered into a lease agreement with IDEA Boardwalk, LLC (“IDEA”) to run two upscale nightclubs and a beach club at Revel's casino. Id. The lease was originally for a 10-year term, and required IDEA to contribute $16 million to the projected $80 million cost of construction for the clubs, in addition to making monthly rental payments as Revel's lessee. Id. In June 2014, Revel filed a “Chapter 22″ bankruptcy, and in its first-day filings, requested permission from the bankruptcy court to sell its casino business free and clear of all liens and interests, including IDEA's lease. Id. IDEA filed an objection to the proposed sale, requesting that the bankruptcy court block Revel from selling the casino stripped of IDEA's lease, and citing 11 U.S.C. ' 365(h) in support of its request. Id. at 562. IDEA also filed a lawsuit against Revel seeking to enjoin it from engaging in any conduct that would prevent IDEA from operating its clubs on the leased premises, and seeking a declaratory judgment that, “under applicable law, the Lease is a lease of non-residential real property … and as such, is entitled to all relevant statutory protections … of 11 U.S.C. ' 365(h).” Id.

Three days before the sale hearing, Revel filed a response to IDEA's objection to the sale, arguing that ' 365(h) does not disable Revel's authority under ' 363(f) to sell property free of an existing leasehold interest, and that Revel could satisfy one of ' 363(f)'s five conditions to allow such lease stripping to take place. Id. at 563. Mainly, Revel argued that a bona-fide dispute existed with respect to the validity of IDEA's lease, and that Revel could thus satisfy ' 363(f)(4). Id. Ultimately, the bankruptcy court entered an order approving the sale of the casino free and clear of all existing tenancies and/or possessory rights, including IDEA's lease (the “Sale Order”). Id. at 564. IDEA appealed the order and moved to stay the effect of the bankruptcy court's order. Id. In its stay motion, IDEA noted that if the bankruptcy court's order were not stayed, IDEA's appeal would risk becoming moot by operation of 11 U.S.C. ' 363(m). Id. at 564-65. The bankruptcy court denied IDEA's request for a stay, as did the District Court. Id.

The Third Circuit

On appeal, the Third Circuit first recognized that it had previously provided “little direction on how to balance the four stay factors” when determining the appropriateness of a stay pending appeal. Id. at 567. The majority (as noted below, this was a split decision with a dissenting opinion) then began its analysis by summarizing the process undertaken by courts in weighing the four factors, and noted that the most “critical” of the four factors, according to the United States Supreme Court, are the first two ' whether the stay movant has demonstrated: 1) a strong showing of the likelihood of success; and 2) whether it will suffer irreparable harm, i.e., harm that cannot be prevented by a successful appeal. Id . at 568 (citing Nken v. Holder , 556 U.S. 418, 434 (2009)).

With respect to the first factor, the Third Circuit reasoned that a movant may demonstrate that a strong showing exists if “there is a reasonable chance, or probability, of winning.” Id. at 568-69. With respect to the second factor, the court reasoned that an applicant must demonstrate that irreparable injury is “likely,” and not just a mere possibility. Id. at 569. Last, the Third Circuit summarized that once an applicant satisfies the first two factors, then courts will weigh the likely harm to the movant against the irreparable harm to stay opponents (i.e., the “balancing of harms”) and take into account where the public interest lies. Id.

Sliding-Scale Approach

Critically, in considering the weight to be applied to the four stay factors, the Third Circuit discussed what is often referred to as the “sliding-scale” approach. Id. Under this approach, if a stay movant can demonstrate that it has a strong likelihood of success on the merits, the court will place less weight on whether the balance of harms is in the stay movant's favor. Id. at 569-70. Thus, according to the majority, if a stay movant has a particularly strong case on the merits, a stay is permissible even if the balance of harms and the public interest weigh against the stay movant.

It was the propriety of using this “sliding-scale” analysis that divided the Third Circuit. In the minority opinion, the dissent argued that that the approach failed to honor the court's precedent of a conjunctive four-part test to obtain a stay. Id. at 575-76. According to the dissent, a stay movant must demonstrate all four of the stay factors. Id. at 576. The dissent disagreed with the notion that a stay movant could be granted a stay upon a “particularly strong showing on just a single factor,” even if other stay factors would weigh against the movant. Id. While the majority noted that requiring a stay movant to satisfy all four factors has the potential to be unfair to stay movants, the dissent disagreed. The dissent argued that a four-part conjunctive test was not unfair because stay relief was an extraordinary remedy and should require a high bar to obtain it. Id.

Ultimately, in weighing the four stay factors, the majority ruled that the analysis should proceed as follows: “Did the stay movant make a sufficient showing that (a) it can win on the merits … and (b) will it suffer irreparable harm absent a stay? If it has, we balance the relative harms considering all four factors using a sliding scale approach. However, if the movant does not make the requisite showings on either of these first two factors, the inquiry into the balance of harms and the public interest is unnecessary and the stay should be denied.” Id. at 571. The majority then applied the foregoing analysis to IDEA's stay request and found that the factors weighed in its favor.

Principally, the Third Circuit reasoned that IDEA success on the merits of its appeal “was all but assured,” and that IDEA had demonstrated that it would suffer irreparable harm should the stay not be granted. The Third Circuit found that Revel's own showing of irreparable harm was insufficient to tip the balance in its favor, and that while public interest would favor denying the stay request, that alone could not prevent granting IDEA's stay request. The Third Circuit accordingly reversed the district court, and stayed the portion of the Sale Order allowing Revel to sell the casino free and clear of IDEA's lease. Id. at 575.

Implications

Revel provides an important analysis for any party seeking to avoid losing its appeal rights due to the doctrine of equitable mootness. The doctrine is not a perfect science, and its application can be hard to predict. Yet, if applied, it results in draconian harm to an appellant by precluding appellate review of, and relief from, a lower court order. The basic theory behind the doctrine is that if the acts authorized by the entry of the appealed take place and the unwinding of these acts is impractical to impossible and/or would harm unsuspecting third parties that acted on reliance of the lower court order, then equity should require the appeal to be dismissed. Obviously, a stay that precludes the acts from taking place would preclude the application of equitable mootness as well. Moreover, as noted below, the act of seeking a stay from lower courts, in and of itself, may help ward off application of equitable mootness, even if the lower courts deny the request for a stay.

This was the case in two recent opinions handed down by the Third Circuit and the U.S. Court of Appeals for the Ninth Circuit. In In re Transwest Resort Properties, Inc., 801 F.3d 1161 (9th Cir. 2015), the Ninth Circuit held that a lender's appeal from an order confirming a Chapter 11 debtor's cramdown was not equitably moot when the lender diligently sought a stay and the court could grant effective relief. Similarly, in In re One2One Communications, LLC , 2015 WL 4430302 (3d Cir. July 21, 2015), the Third Circuit reversed the district court's dismissal of an appeal after finding that the circumstances would not make it difficult to retract the confirmed plan, and that there was little “limited evidence of potential third-party injury.”

In both instances, the appellants unsuccessfully sought to obtain a stay from the lower courts, yet their attempts to do so resonated with the circuit courts and weighed in their favor when the circuit courts decided that the doctrine of equitable mootness would not be applied. It is in this context that Revel is also relevant. Not only is a stay pending appeal the surest way to avoid the quagmire that is equitable mootness, but courts assessing whether a party's appeal is equitably moot (presumably when a stay pending appeal has not been granted) will take into account whether the appellant sought to protect its rights to the fullest extent possible by seeking a stay pending appeal. For both these reasons, the Third Circuit's guidance in Revel is significant.

Notably, the Third Circuit is not the only circuit to endorse a “sliding-scale” analysis to a stay pending appeal. As cited by the court in Revel, the U.S. Courts of Appeal for the Second, Sixth and Seventh Circuits have all discussed the notion that the probability of the stay movant's success on the merits is inversely proportional to the balance of harms when considering whether to grant a stay pending appeal. See Mohammed v. Reno , 309 F.3d 95 (2d Cir. 2002); Mich. Coal. of Radioactive Material Users, Inc. v. Griepentrog , 945 F.2d 150 (6th Cir. 1991); In re A & F Eners., Inc. II, 742 F.3d 763 (7th Cir. 2014). Some lower courts, however, have taken a stricter approach in line with the Revel dissent's analysis. See In re Metiom, Inc., 318 B.R. 263 (S.D.N.Y. 2004) (“[M]ovant's failure to satisfy one prong of the standard for granting a stay pending appeal of a bankruptcy court order dooms the motion.”) (internal quotations omitted); In re McIntyre Building Co., Inc., 2011 WL 1434691, at * 6 (Bankr. M.D. Ala. Apr. 14, 2011) (“The failure to establish any one prong necessary [sic] results in denial of the motion.”); Jet Networks FC Holding Corp. v. Goldberg , 2009 WL 1616375, at * 2 (S.D. Fla. June 9, 2009) (“The movant must show satisfactory evidence on all four criteria, and the failure to satisfy one prong is fatal to the motion.”). Accordingly, it is important for an appellant to fully understand its court's position on this subject before it determines how to present its arguments for a stay pending appeal.

Conclusion

Regardless of the standard applicable to a request for a stay pending appeal in your jurisdiction, seeking relief is almost a necessity if there is any chance that the implementation of the order from which you are appealing would give rise to an equitable mootness argument. This is not only because appellate courts will look at how vigorously an appellant sought to protect its rights when balancing the equities of equitable mootness, but because if you succeed in obtaining a stay, your client will not be subjected to the less than clear doctrine of equitable mootness and the problems it raises. And with the Third Circuit's recently published guidance in Revel, at least appellants have an effective and up-to-date roadmap on how to avoid equitable mootness altogether.

Brian L. Shaw is a member and Allison B. Hudson is an associate of Shaw Fishman Glantz & Towbin LLC, a boutique law firm in Chicago focusing on business bankruptcy and insolvency, litigation and commercial real estate. The authors can be reached at [email protected] and [email protected], respectively.