Bankruptcy Court Grants Limited Stay of Proceeding Pending District Court's Decision on Defendants' Request for Interlocutory Appeal
Haskell v. Goldman, Sachs & Co. (In re Genesis Health Ventures, Inc.), 367 B.R. 516 (Bankr. D. Del. 2007) (Judge Peter J. Walsh)
In this adversary proceeding commenced by investors in reorganized debtor Genesis Health Ventures, the non-debtor defendants requested leave of the United States District Court for the District of Delaware to take an interlocutory appeal from a decision of the Bankruptcy Court denying the defendants, who were senior secured debt holders, the protections of 11 U.S.C. § 1144. The defendants moved for a stay of proceedings pending the district court’s decision. The bankruptcy court granted a limited stay of the proceedings, balancing the need to move forward with the possibility that the request may remain before the district court for an extended period without being decided.
The plaintiffs in this adversary proceeding in the United States Bankruptcy Court for the District of Delaware were a group of 275 investors that owned 55% of the outstanding debentures of the debtor, Genesis Health Ventures, Inc., worth over $205 million. The plaintiffs’ claims were subordinate to $1.3 billion in senior secured debt held by the defendants. The plan of reorganization in the debtor’s case was confirmed in 2001, and awarded 94.3% of newly issued equity in the debtor to the defendants, and just 3.8% to the debenture holders. This figure represented a very small return on the claims of the plaintiffs.
Approximately two and a half years after the plan confirmation date, the plaintiffs commenced an adversary proceeding that alleged that the debtor and defendants conspired to artificially deflate the debtor’s historic and projected EBITDA, convincing the court that the new equity in the debtor was of little value, and that, therefore, the senior secured debt holders were entitled to receive the vast majority of the shares. Plaintiffs contended that if accurate figures were presented to the court, they would have shown that there was enough value to pay off all junior creditors, including the plaintiffs.
In an earlier proceeding, the court granted the defendants’ motion to dismiss, holding that the plaintiffs claims were barred as untimely under 11 U.S.C. § 1144, and under the doctrines of res judicata and collateral estoppel. The United States District Court for the District of Delaware affirmed as to the claims against the debtor, but reversed and remanded as to the defendants, directing the bankruptcy court to reconsider whether section 1144 would apply to the defendants, who were all non-debtors. On remand, the bankruptcy court decided that the claims against the defendants were not barred under section 1144 because an award of damages against the defendants would not upset the confirmed plan, but ruled that the plaintiffs were barred from pursuing claims of EBITDA manipulation that came to light prior to confirmation. However, the court found that plaintiffs alleged that defendants orchestrated four EBITDA manipulations that plaintiffs did not discover until after plan confirmation. The court also denied defendants’ motion to dismiss with respect to those manipulations, applying the fraud exceptions to the doctrines of res judicata and collateral estoppel.
The defendants filed a motion in the district court for interlocutory appeal of the bankruptcy court decision, and requested that the bankruptcy court stay proceedings and extend the time for defendants to file an answer to the complaint. That request was the subject of the instant opinion.
In deciding whether to grant a motion to stay, the court is required to consider (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.
As to the likelihood of success on the merits, although the court expressed confidence that its opinion on the issue of whether section 1144 applied to claims for damages against non-debtors was correct, it acknowledged that this was an issue that had not been addressed in a reported opinion in the Third Circuit and that therefore there might be substantial grounds for a difference of opinion.
The court also found that if the stay were not granted, the defendants would have to expend significant resources defending the action, even though the district court might later reverse the bankruptcy court. Therefore, the defendants would have lost the benefit of protection from litigation over a confirmed plan that section 1144 was supposed to provide. Meanwhile, the court held that there was little grounds to find that the plaintiffs would be injured if the stay was granted. Although the plaintiffs articulated concerns that the passage of time would impair their ability to present evidence in support of their claims, the court credited defendants’ observation that the plaintiff waited two and a half years after plan confirmation to bring the action. Finally, the court found that the “public interest” factor favored the defendants because, although it is not in the public interest to let a case languish on the docket awaiting trial, it also not preferable to require parties to go to the expense of preparing for trial when a reversal on interlocutory appeal could moot all that expensive preparation.
Although overall the factors weighed in favor of the defendants, the court expressed concern about the loss of evidence because of the passage of time. Accordingly, the court crafted a compromise by granting defendants a stay of proceedings to expire at the earliest of (1) six months from the date of the issuance of the opinion (May 4, 2007); (2) entry of a ruling by the district court denying defendants’ motion for leave to appeal; (3) entry of a ruling by the district court affirming the bankruptcy court. Defendants were also granted two weeks following the expiration of the stay to answer the plaintiffs’ complaint.
