By: Valerie Timmerman
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff Member
A court order for a stay pending appeal temporarily suspends the effect of a judgment while the decision is pending on appeal.[1] In In re Brown, the United States Bankruptcy Court for the Southern District of New York denied a non-debtor ex-spouse’s request for a stay pending appeal of an order expunging her claim to concealed marital assets.[2] According to the court, the appealing ex-spouse did not demonstrate that the possibility of the trustee locating concealed marital assets before the appeal would cause her irreparable injury or that she could plausibly prevail on appeal.[3]
This case arose in connection with two proceedings: a divorce proceeding (the “Matrimonial Action”) in state court and a bankruptcy proceeding in federal court.[4] During the Matrimonial Action, the ex-wife (the “Claimant”) alleged that her ex-husband (the “Debtor”) concealed $12 million in marital assets based on the court-appointed expert’s findings.[5] Five years later, the Debtor commenced a voluntary chapter 7 bankruptcy proceeding.[6] The Claimant subsequently filed an unsecured claim for approximately $6.3 million against the Debtor in his bankruptcy case, premised on the equitable distribution of marital assets—including her share of the fraudulently concealed assets (“Equitable Distribution Claim”).7 In 2019, with the consent of the trustee8 and over the Claimant’s objection, the state court adjudicating the Matrimonial Action entered a Judgment of Divorce requiring the Debtor to pay the Claimant $2.5 million for her share of the equitable distribution.9 With the trustee’s support, the Debtor subsequently filed a Motion to Expunge the Equitable Distribution Claim in the bankruptcy case because the state court’s Judgment of Divorce already directed the Debtor to pay $2.5 million in satisfaction of that claim.10 The bankruptcy court granted the order expunging the claim11 and the Claimant filed a motion for a stay of the claim order pending appeal.12
In considering the request for a stay pending appeal, the bankruptcy court analyzed the following four factors:
(1) whether the movant will suffer irreparable injury absent a stay;
(2) whether a party will suffer substantial injury if a stay is issued;
(3) whether the movant has demonstrated a substantial possibility, although less than a likelihood, of success on appeal; and
(4) the public interest that may be affected.13
The first factor—a showing of probable irreparable injury—is the “principle prerequisite” and “such harm . . . must be ‘actual and imminent.’” 14 Here, the Claimant contended that if the trustee discovered concealed marital assets15 and made final distributions to creditors while her appeal was still pending, she would lose her chance to assert her right to her share.16 However, the Claimant failed to show that the trustee would fully administer the Debtor’s case before the district court resolves the appeal17 because chapter 7 trustees do not distribute to creditors until they have liquidated the estate’s assets18 and bankruptcy cases are only closed after the full administration of the estate and discharge of the trustee.19
Satisfaction of the second factor requires that “the balance of harms [must] tip[] in favor of granting the stay.” 20 But here, the Claimant had not established risk of harm in the first factor, therefore, the balance of harm could not weigh in favor of the relief. 21 The third factor, i.e., the substantial probability test, requires a showing of the likelihood of success to be in between “possible” and “probable.” 22 Here, the Claimant failed because “it is not plausible that on appeal she can demonstrate that she relied on the Debtor's fraudulent disclosures in agreeing to settle the financial issues in the Matrimonial Action” 23 because (1) she was fully aware of the expert’s report on the presence of the Debtor’s concealed assets;24 (2) in signing the divorce term sheet with counsel’s assistance she allocated to having “sufficient information about the Debtor’s finances;” 25 and (3) she ratified the agreement by accepting payments from the Debtor.26 Lastly, the “public interest favors compliance with court orders and timely resolution of litigation.”27 Because the Claimant failed to show that the appeal would be moot without the stay, the interest the public has in ensuring that debtors are truthful about their finances would not be undermined.28
The bankruptcy court denied the Claimant’s motion for a stay, concluding that she had not met her burden under the four factor test.29 Courts have differed on the weight of evidence that must be given for each factor.30 Regardless of the approach used, stays pending appeal are granted only in limited circumstances.31 Here, the court adopted a balancing approach so that “the lack of any one factor is not dispositive to the success of the motion.”32 Lastly, the court elaborated on the balance required between the first factor (probable irreparable injury) and the third factor (probability of success on appeal), stating that “the probability of success that must be demonstrated in applying this factor is inversely proportional to the amount of irreparable injury that the plaintiff will suffer absent the stay.”33
[1] USLegal, https://definitions.uslegal.com/s/stay-pending-appeal/ (last visited Nov. 8, 2020); see In re Brown, No. 18-10617 (JLG), 2020 WL 3264057, at *5 (Bankr. S.D.N.Y. June 10, 2020).
[2] In re Brown, 2020 WL 3264057, at *10.
[3] See id. at *6–7.
[4] Id. at *1.
[5] Id. At *1–2.
[6] See id. at *1.
7 Id.
8 Id.
9 Id. at *2–*3 (citing In re Brown, No. 18-10617, 2020 WL 1237935, at *6–8 (Bankr. S.D.N.Y. March 13, 2020)). The Claimant agreed to the Debtor’s payment of $2.5 million. Id. at *2 (citing In re Brown, 2020 WL 1237935, at *1). However, the Claimant objected to the Debtor’s proposed judgment of divorce providing for the $2.5 million as her share of the equitable distribution, arguing that she merely agreed to accept $2.5 million from the Debtor as a credit against the equitable distribution claim. Id. at *2–*3 (citing In re Brown, 2020 WL 1237935, at *6–*7).
10 Id. at *3 (citing In re Brown, 2020 WL 1237935, at *8).
11 Id. at *4 (citing In re Brown, 2020 WL 1237935, at *10, *12) (explaining that the bankruptcy court granted the order because the equitable distribution of marital assets is incorporated into the Judgment of Divorce and under the doctrine of Res Judicata, the Claimant was barred from asserting the same claim).
12 Id. at *1. On appeal, the Claimant asserted that since the settlement and judgment were procured through the Debtor’s fraudulent concealment of pre-petition assets, a Judgment of Divorce may not bar the reopening of the settlement and judgment; Res Judicata may not apply where the settlement procured by fraud was not litigated; and that since the settlement did not contain language waiving claims to these fraudulently concealed assets, the court erred in expunging a claim that would have value only if the Debtor had concealed assets. See id. at *5 (citing Statement of the Issues to Be Presented on Appeal [ECF No. 131]).
13 Id. at *5 (citing ACC Bondholder Grp. v. Adelphia Commc'ns Corp. (In re Adelphia Commc'ns Corp.), 361 B.R. 337, 346 (S.D.N.Y. 2007)).
14 Id. at *6 (quoting In re Sabine Oil & Gas Corp., 548 B.R. 674, 681 (Bankr. S.D.N.Y. 2016)).
15 Id. (citing Reply ¶1).
16 Id. (citing Stay Motion ¶15).
17 Id. at *7.
18 Id. at *6 (citing In re Quid Me Broad., Inc., 181 B.R. 715, 717–20 (Bankr. W.D.N.Y. 1995)).
19 Id. (quoting 11 U.S.C. § 350(a)).
20 Id. at *7 (quoting ACC Bondholder Grp. v. Adelphia Commc'ns Corp. (In re Adelphia Commc'ns Corp.), 361 B.R. 337, 349 (S.D.N.Y. 2007)).
21 See id.at *7. In the Claimant’s unsuccessful argument, she asserted that creditors would receive an undeserved allocation and thus she would lose her claim to the concealed assets if the trustee discovered and distributed those assets before appeal. Id. (citing Reply ¶ 7).
22 See id. at *7 (quoting In re Sabine Oil & Gas Corp., 548 B.R. 674, 683–85 (Bankr. S.D.N.Y. 2016)).
23 Id. at *8.
24 Id. (quoting In re Brown, No. 18-10617, 2020 WL 1237935, at *15 (Bankr. S.D.N.Y. March 13, 2020)).
25 Id. at *9 (quoting In re Brown, 2020 WL 1237935 at *15).
26 Id. at *8 (quoting In re Brown, 2020 WL 1237935 at *13).
27 Id. at *10 (citing In re Swartout, 554 B.R. 474, 480 (Bankr. E.D. Cal. 2016)).
28 See id. at *10.
29 Id. at *10.
30 See id. at *5.
31 Id. (quoting In re Taub, No. 08-44210, 2010 WL 3911360, at *2 (Bankr. E.D.N.Y. Oct. 1, 2010)).
32 Id. (applying the same approach used in In re Gen. Motors Corp., 409 B.R. 24, 30 (Bankr. S.D.N.Y. 2009)).
33 Id. at *10 (quoting In re Sabine Oil & Gas Corp., 548 B.R. 674, 684 (Bankr. S.D.N.Y. 2016)).