Judge Says Third Circuit Violated Its Own Precedent

A weekly news service that publishes case summaries of the most recent important bankruptcy-law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy reform in...

By Stephanie Cumings

Oct. 2 — The Third Circuit issued an opinion in the Revel Casino bankruptcy case clarifying its approach to issuing stays pending appeal, an issue it said it has provided little direction on in the past.

But Judge Patty Shwartz in her dissent accused the court of creating an entirely new interpretation of the requirements for a stay that breaks with the court's own prior precedent.

The decision could have a big impact because, as the court noted, stays pending appeal are of growing importance in bankruptcy. Furthermore, the Delaware bankruptcy court sits in the Third Circuit and about 27 percent of large Chapter 11 cases were filed in Delaware between fiscal years 2010 and 2014, according to a recent Government Accountability Office report.

Staying $82 Million Sale

The dispute arose when IDEA Boardwalk LLC, one of Revel's tenants that ran two nightclubs and a beach club, tried to stay the order approving an $82 million sale of Revel's assets to the Polo North Country Club. The bankruptcy and district courts both denied IDEA a stay pending its appeal of the sale order.

Due to the time-sensitive nature of the appeal, the Third Circuit reversed the district court on Feb. 6 with a brief order, but later issued the Sept. 30 opinion to give a full rationale for its decision to grant the stay. The bankruptcy court held in June that Polo North must allow tenants like IDEA to continue operating .

The Third Circuit used the opinion to clarify how to balance the four factors that are used to determine if a stay is warranted. Those four factors are: (1) whether there is a likelihood the appeal will succeed; (2) whether the applicant will be irreparably harmed without a stay; (3) whether other parties will be injured by the stay; and (4) the public interest.

Approaches 'Vary Widely.'

The first factor is a major source of confusion because courts vary widely on how likely it must be that the appeal will succeed, the Third Circuit said. Some courts require that the appeal be more likely than not to succeed, while other courts require that it is substantially possible the appeal succeed, but not necessarily a more than 50 percent chance.

The Third Circuit said there should be a reasonable chance of success, meaning better than negligible but not necessarily more likely than not. The court said that the potential harms (factors two and three) should be balanced against each other. The court said that if the potential harms and the public interest weight in favor of a stay and there is a reasonable chance of success on appeal, then the stay should be granted.

Sliding-Scale Approach

However, the court said that if the harms or public interest weigh against the applicant, then a sliding-scale approach must be used to determine how strong the applicant's case for success on appeal must be. If the applicant has a strong likelihood of success on appeal, then that can outweigh harm to other parties or the public interest if those harms aren't sufficiently serious.

The court added that the first two factors are the most critical, so if there is only a negligible chance of success on appeal or a low possibility of injury to the applicant, then the stay must be denied.

District Court Reversed

In this case, the court said there was a high likelihood of success on appeal because IDEA was right regarding the validity of the lease, which was a point of contention in the appeal. The court also found IDEA was more likely to be harmed without the stay because it would lose a profitable business, while any harm to Revel, including the loss of the sale to Polo North, was at best speculative.

The court said that the public interest might weigh slightly in favor of Revel because of the potential loss of jobs if the sale to Polo North did somehow fall through. But using its own sliding scale method, the court found that the factors in favor of the stay outweighed any potential harm to the public interest, and therefore reversed the district court.

Fails to Honor Precedent

In her dissent, Shwartz called the majority's approach a new interpretation of the requirements for a stay.

The [m]ajority's sliding scale' approach for obtaining such equitable relief fails to honor our precedent's conjunctive four-part test to obtain a stay and it would permit relief to be granted upon a particularly strong showing on just a single factor, apparently even if at least one factor weighs against the movant, she said. Shwartz said she believes the failure to satisfy any one of the four factors should preclude granting a stay.

Shwartz argued that the Third Circuit has repeatedly emphasized that all four factors must be independently satisfied to justify the grant of preliminary equitable relief, and the Supreme Court has presented the four-factor test as conjunctive, meaning that all four factors must be satisfied to obtain a stay.

The majority said that Shwartz's approach was impractical with the potential to be deeply unfair. But Shwartz countered that there should be a high bar to obtain a stay because it is intended to be an extraordinary remedy.

Judge Thomas L. Ambro wrote the opinion for the majority and was joined by Judge Cheryl Ann Krause.

Revel was represented by Michael J. Viscount, Jr., of Fox Rothschild, Atlantic City, N.J., and Jason N. Zakia, White Case, Miami.

IDEA was represented by Jeffrey A. Cooper, Jonathan I. Rabinowitz, and Barry J. Roy of Rabinowitz Lubetkin Tully, Livingston, N.J.

To contact the reporter on this story: Stephanie Cumings in Washington at sacree@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com