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Three Appeals of Borders Gift Card Holders Dismissed for Equitable Mootness

Monday, June 3, 2013
ByStephanie M. Acree

Three pending appeals from certain holders of Borders gift cards were dismissed as equitably moot May 22 by the U.S. District Court for the Southern District of New York (Beeman v. BGI Creditors' Liquidating Trust (In re BGI Inc.), S.D.N.Y., No. 1:12-cv-07714-ALC, 5/22/13)

Judge Andrew L. Carter found that the debtor's Chapter 11 plan had been substantially consummated and that the gift card holders, who claimed they had received insufficient notice of the bar date and were seeking to file untimely proofs of claim, had not proven that they satisfied all the factors for overcoming the presumption of equitable mootness.

Not 'Known' Creditors

Borders and seven affiliated debtors filed for Chapter 11 protection in the Southern District of New York in February 2011 (23 BBLR 214, 2/24/11). The bankruptcy court set the deadline for filing proofs of claim at 5:00 p.m. on June 1, 2011, and ordered that notice of the bar date be published in The New York Times. After the liquidation plan was confirmed but before the effective date, two holders of Borders gift cards filed a motion seeking an order to file late proofs of claim in which they argued they had not received adequate notice of the bar date. The card holders also filed a motion seeking to certify a class of all holders of prepetition Borders gift cards.

The gift card holders argued that they were “known” creditors because there was enough information in the debtors' databases to render the gift card holders identifiable as creditors, but the bankruptcy court disagreed. The bankruptcy court found that the gift card holders were “unknown creditors” and that their failure to file timely proofs of claim was not due to excusable neglect. Accordingly, the gift card holders' motion to allow the late proofs of claim was denied and the class action motion was denied as moot (24 BBLR 1096, 8/23/12).

Plan Substantially Consummated

The gift card holders appealed to the district court and argued that the bankruptcy court should have found excusable neglect for their failure to file timely proofs of claim because they were not given adequate notice of the bar date. The appellants argued that the debtors had enough cumulative information about the potential card holders in their databases to render the card holders known creditors.

The appellees argued that the appeals should be ruled equitably moot because the liquidation trust's distribution plan had already been substantially consummated. They also argued that the bankruptcy court was correct in finding that the gift card holders were unknown creditors and therefore notice by publication was sufficient.

Chateaugay Factors

The district court said that “[i]f a Chapter 11 plan has been substantially consummated, the appeal is presumed equitably moot in [the Second] Circuit.” Pursuant to Section 1101(2) of the Bankruptcy Code, “substantial consummation” means: “(A) transfer of all or substantially all of the property proposed by the plan to be transferred; (B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and (C) commencement of distribution under the plan.”

In order to overcome this presumption, a creditor must satisfy all five of the factors set out in Frito-Lay Inc. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944 (2d. Cir. 1993). The five Chateaugay factors are: “(a) the court can still order some effective relief; (b) such relief will not effect 'the re-emergence of the debtor as a revitalized corporate entity'; (c) such relief will not unravel intricate transactions so as to 'knock the props out from under the authorization for every transaction that has taken place' and 'create an unmanageable, uncontrollable situation for the Bankruptcy Court'; (d) the 'parties who would be adversely affected by the modification have notice of the appeal and an opportunity to participate in the proceedings'; and (e) the appellant 'pursue[d] with diligence all available remedies to obtain a stay of execution of the objectionable order if … the failure to do so creates a situation rendering it inequitable to reverse the order subject to the appeal[.]”

Notice by Twitter, Facebook

The court agreed that the appellants had met the first factor. The appellants argued that Borders could have sent emails to its rewards club members, or used Twitter or Facebook to alert gift card holders of their opportunity to assert a claim.

“While there is room for debate regarding how notice should be sent to gift card holders … it seems apparent a solution could be devised to provide notice that is more targeted than publication,” the court said. “Whether an email to Borders's broader customer base, social media platforms, or some other form of communication would appropriately meet due process requirements is an open question. The existence of that question, however, presupposes the [c]ourt's ability to grant relief.”

'Eviscerate' the Trust

The court said that the second factor was inapplicable because the company had liquidated its assets and would not reemerge. With regard to the third factor, the appellants argued that their class claims would only minimally affect the administration of the debtor's estate, but the court disagreed. The court said that if the gift card holders' class was given priority treatment and even if only $50 million of the $210.5 million in unredeemed gift card balances would satisfy the class claims as estimated, it would still “eviscerate[]” the liquidation trust and “[l]ikely, no more distributions would be made to any unsecured creditors, and some creditors would have no recovery whatsoever on their claims.”

The court said that pursuant to the fourth factor, the general unsecured creditors would be the adversely affected parties. The court said that the appellants offered “nothing more than assumptions without any evidence” to support their contention that the unsecured creditors had received notice of the appeal. The court noted that the appellants have the burden of proving that they have satisfied all five factors.

Lack of Diligence

Finally, the court found that the appellants had failed to satisfy the fifth Chateaugay factor. The court said that the appellants did not appear at the confirmation hearing or file objections to the plan, nor did they appeal the confirmation order or seek a stay of the effective date. The court said that the “fact that no stay of distributions was sought by [the appellants] until almost a year after they entered the bankruptcy litigation and the [p]lan was confirmed indicates the lack of diligence with which [the appellants] moved.”

The court was also unpersuaded by the appellants' argument that equitable mootness should not apply to liquidation cases. The court said it was unaware of any binding precedent that would preclude the application of equitable mootness in cases of liquidation rather than reorganization.

Therefore, the court dismissed the gift card holders' appeals as equitably moot.

Clinton A. Krislov of Krislov & Associates Ltd., Chicago, and Daniel A. Zazove and Schuyler G. Carroll of Perkins Coie LLP, Chicago, represented the appellants.

Bruce David Buechler of Lowenstein Sandler PC, Roseland, N.J., represented the appellees.

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