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Judge Stark Dismisses Appeal of Bankruptcy Court Settlement Order as Equitably Moot

By Evan T. Miller

On November 30, 2012, Judge Leonard P. Stark of the United States District Court for the District of Delaware issued a Memorandum Order in DeAngelis v. Official Committee of Unsecured Creditors, et al. (In re Kainos Partners Holding Co.), Civ. A. 10-560-LPS, 2012 WL 6028927 (D. Del. Nov. 30, 2012), granting, on the grounds of equitable mootness, the Appellee’s motion to dismiss an appeal (the “Appeal”) of the Bankruptcy Court’s order (the “Settlement Order”) approving a global settlement (the “Settlement”) among the Committee, the Debtors, Dunkin’ Brands (and affiliated franchising entities) and Kainos investment entities (collectively, the “Settlement Parties”). The appeal was filed by United States Trustee Roberta A. DeAngelis (“UST”), who sought to vacate a portion of the Settlement.

On July 6, 2009, the Debtors filed their respective petitions for relief under Chapter 11 of the Bankruptcy Code. After commencement of the present appeal, the cases were converted to cases under Chapter 7 of the Bankruptcy Code. During the time the Debtors were in Chapter 11, no plan of reorganization was filed; instead, the Settlement Parties negotiated and entered into the Settlement to effectuate a purchase and sale of substantially all of the Debtors’ assets. The asset purchase agreement submitted to Judge Shannon in the Bankruptcy Court in connection with the Settlement provided for a carve-out that would require Dunkin Brands, Inc. to assign $250,000 (the “Carve-Out”) to the Debtors’ estate, for the sole benefit of general unsecured creditors and unpaid Committee fees. The UST objected on the grounds that, given the number of unpaid administrative claimants and priority unsecured creditors, the Carve-Out would violate the statutory priority scheme. The Bankruptcy Court issued the Settlement Order, ruling that the Carve-Out was a payment by secured creditors in exchange for resolving potential claims and causes of action of the estate against the Debtors’ secured lender.

On appeal, the UST made the same argument regarding priority violation and sought only to vacate the portion of the Settlement governing the Carve-Out. The appellee, the trustee (the “GUC Trustee”) appointed to administer the general unsecured creditor trust (the “GUC Trust”) as established under the Settlement, argued that the appeal should be dismissed as equitably moot because the UST never sought a stay of the Settlement Order; as a result, the GUC Trustee had proceeded to carry out his duties to the beneficiaries of the GUC Trust.

The District Court agreed with the GUC Trustee, finding: (i) the implementation of the Settlement was not stayed, a critical factor in determining whether to dismiss an appeal under the doctrine of equitable mootness; (ii) the terms of the settlement had been substantially consummated; and (iii) the public policy of affording finality to bankruptcy judgments weighed in favor of dismissal. The District Court further ruled that even if it were to reach the Appeal’s merits, it would agree with the Bankruptcy Court that the Settlement did not violate the Bankruptcy Code’s statutory priority scheme, since the Carve-Out came from the secured creditors’ collateral. Thus, the Appeal was dismissed.

A copy of the opinion can be found here.

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