In re Revel AC, Inc.

• Decision Date: 30 September 2015
• Docket Number: No. 15–1253.,15–1253.
• Citation: 802 F.3d 558
• Parties: In re REVEL AC, INC., et al., Debtors. Idea Boardwalk, LLC, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

802 F.3d 558

In re REVEL AC, INC., et al., Debtors. Idea Boardwalk, LLC, Appellant.

No. 15–1253.

United States Court of Appeals, Third Circuit.

Argued Feb. 6, 2015.

Opinion filed: Sept. 30, 2015.

Jeffrey A. Cooper, Esquire (Argued), Jonathan I. Rabinowitz, Esquire, Barry J. Roy, Esquire, Rabinowitz, Lubetkin & Tully, Livingston, NJ, for Appellant IDEA Boardwalk LLC.

Michael Viscount, Jr., Esquire, John H. Strock, Esquire, Fox Rothschild, Atlantic City, NJ, Jason N. Zakia, Esquire (Argued), John K. Cunningham, Esquire, White & Case, Miami, FL, for Appellees/Debtors Revel AC, LLC; Revel Atlantic City LLC; Revel Entertainment Group LLC; NB Acquisition LLC; SI LLC.

Stuart J. Moskovitz, Esquire, Freehold, NJ, for Appellee Polo North Country Club Inc.

Richard W. Riley, Esquire, Duane Morris, Wilmington, DE, Sommer L. Ross, Esquire, Duane Morris, Philadelphia, PA, for Appellees Wells Fargo Bank NA; Wells Fargo Principal Lending LLC.

Before: AMBRO, SHWARTZ, and KRAUSE, Circuit Judges.

OPINION OF THE COURT

AMBRO, Circuit Judge.

We seldom focus on how to balance the four factors that determine whether to grant a stay pending appeal despite the practical and legal importance of these procedural standstills. So we take this opportunity to do just that.¹

I. BACKGROUND

In April 2012 Appellee Revel AC, Inc., et al. (“Revel”) opened a 47–story, 710–foot–high resort-casino (which we refer to simply as the “Casino”) in Atlantic City, New Jersey. The Casino was marketed as “a state of the art gaming and resort facility unlike any other in Atlantic City.” Its cost: $2.4 billion, making it the most expensive hotel ever built in Atlantic City. See Tom Corrigan, Atlantic City's Revel Casino Files for Bankruptcy Again, Wall Street J. (June 19, 2014, available at http://www.wsj.com/articles/atlantic–citys–revel–casino–filesfor–bankruptcy–again–1403212625). As part of its plan for the Casino, Revel entered into a lease with Appellant IDEA Boardwalk, LLC (“IDEA”) to run two upscale nightclubs and a beach club. The lease was for a 10–year term (with a 15–year option to extend) and obligated IDEA to contribute $16 million of the $80 million projected cost of construction of the clubs (in addition to its monthly rental payments as lessee).

Unfortunately the Casino's $2.4 billion price tag was no indication of its future success. A sluggish Atlantic City economy and the Casino's inability to turn a profit were too much for Revel to overcome. After a failed sale attempt, Revel's cash flow problems made a (second) trip to bankruptcy the only option.² It filed a so-called “Chapter 22” on June 19, 2014.³ As part of its first-day filings, Revel asked the Bankruptcy Court for permission to sell its assets free and clear of all liens and interests (which includes leases) and to approve bid procedures to allow that sale as quickly as possible. The Court approved the request and set August 7, 2014 as the auction date.

A. Revel's Attempt to Sell the Casino in Bankruptcy

The request to sell the Casino “free and clear” raised the ire of its tenants—among them, IDEA.⁴ Its concern was that, were the sale as proposed to occur, the value of its lease would turn to zero notwithstanding its initial $16 million investment. To protect that investment, IDEA filed objections to the proposed sale. It made clear that its intent was not to scuttle the sale, but to block Revel from selling the Casino stripped of its lease. Citing 11 U.S.C. § 365(h), IDEA argued that, notwithstanding a rejection of that lease, it can retain its possessory interest, as the subsection provides that a

lessee may retain its rights under such lease ... for the balance of the term of such lease and for any renewal or extension of such rights to the extent that such rights are enforceable under applicable nonbankruptcy law.

11 U.S.C. § 365(h)(1)(A)(ii). Alternatively, IDEA contended that even if § 365(h) did not secure its interest, § 363(f) —the Code provision that allows for the sale of an asset free and clear⁵ —was of no use to Revel, as it couldn't satisfy any of the five alternative conditions necessary to trigger a sale under its strictures.

Notwithstanding the objection of IDEA, Revel continued the auction process and embarked on a lengthy marketing campaign, communicating with over 200 potential investors. Unfortunately the market for Revel's assets proved thin, and, because not a single qualified buyer came to the table, the Bankruptcy Court postponed the August 7 auction.

About a month later, on September 2, Revel closed the Casino's doors and barred its tenants, IDEA included, from accessing the Casino premises. When that happened, IDEA gave written notice that (1) it intended to continue operating its beach club and one of its nightclubs notwithstanding the Casino's closure and (2) it expected Revel to continue to abide by the terms of its lease. More specifically, IDEA asked that Revel “continue to honor its obligation under the Lease to provide uninterrupted utility service.” Am. Compl. ¶ 96, IDEA Boardwalk, LLC v. Revel Entm't Grp., LLC, No. 14–01756 (Bankr.D.N.J. Sept. 26, 2014), ECF No. 6. To put its plan into action, IDEA met with representatives from various city agencies to secure approval to operate on a standalone basis and sued Revel to enjoin it from “failing to provide utilities and parking” and engaging in any other conduct “that prevents IDEA from operating the HQ Dayclub and HQ Nightclub in accordance with the terms of the Lease.” Id. ¶ 118. Furthermore, and to assert its rights under § 365(h), IDEA sought a declaratory judgment that, “under applicable law[,] the Lease is a lease of non-residential real property as that term is defined and governed by 11 U.S.C. § 365 and, as such, is entitled to all relevant statutory protections, including, but not limited to[,] 11 U.S.C. § 365(h).” Id. ¶ 144(a).⁶

B. Polo North Becomes “Stalking Horse” Bidder

Revel's continued marketing efforts paid off when it came to terms on September 5, 2014 with Polo North Country Club, an entity controlled by a Florida-based real estate developer. Under the proposed Asset Purchase Agreement, Polo North agreed to buy the Casino for $90 million and to serve as the “stalking horse” bidder at the upcoming auction. If Polo North lost at auction, it would receive $3 million as a break-up fee. If, however, Polo North walked away from the deal, it would surrender its $10 million deposit. The Bankruptcy Court approved Revel's request to modify the auction bid procedures to allow for the payment of the breakup fee and set a revised bid deadline for September 24, 2014. At the postponed auction, which ultimately took place on October 1, the highest bidder was not Polo North but Brookfield U.S. Holdings, LLC, as its $110 million bid topped the $94.5 million all-cash bid of Polo North. The Bankruptcy Court approved the sale to Brookfield on October 7.

Reentering the picture, IDEA argued that “it has the right under Section 365(h) of the [ ] Code to elect to remain in possession and[,] in that event, [Revel] [is] obligated to provide possession and rights appurtenant thereto,” including “various easements for utilities and other services.” Objection of IDEA Boardwalk, LLC ¶¶ 74, 77, In re Revel AC, Inc., No. 14–22654 (Bankr.D.N.J. Oct. 13, 2014), ECF No. 754. IDEA also reaffirmed that, because it “has direct access to the boardwalk and the streets,” it “can operate [its clubs] without impinging ... [Revel's] possessory rights.” Id. ¶ 78.

Before Revel could respond, Brookfield walked away from the deal, thus surrendering its $11 million deposit and bringing Polo North back into the fold as the back-up winning bidder. The Bankruptcy Court thereafter granted Revel's motion to terminate the sale to Brookfield and scheduled a hearing to approve the sale to Polo North.

C. Revel Responds to IDEA at the 11th Hour

Late on the Friday night just three days before the January 5, 2015 sale hearing, Revel filed an “Omnibus Reply” to IDEA's objections. Regarding the latter's § 365(h) argument, Revel urged the Court to follow the Seventh Circuit's decision in Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537 (7th Cir.2003), which held that § 365(h) doesn't disable § 363(f)'s authority to sell property subject to a lease free and clear of that lease and instead triggers only when a debtor seeks to reject a lease under § 365. Id. at 548. Revel also asserted that it could satisfy one of § 363(f)'s five conditions—namely, § 363(f)(4) —because a bona fide dispute exists with respect to the validity of IDEA's lease. According to Revel, though the form of its agreement with IDEA gives the appearance of a lease, because rent was “based entirely on a percentage of the revenue derived from” IDEA's operations, it was not a “true lease[ ] entitled to benefit from the applicable protections set forth in the Bankruptcy Code.” Debtors' Omnibus Reply ¶ 20, In re Revel AC, Inc., No. 14–22654 (Bankr.D.N.J. Jan. 2, 2015), ECF No. 1109.

D. The Sale Hearing

At the sale hearing, the Bankruptcy Court considered the following legal issues: (1) whether sales of property under § 363(f) can wipe out a lessee's possessory interest under § 365(h) ; and (2) whether Revel introduced enough evidence to show that the validity of IDEA's lease was the subject of a bona fide dispute under § 363(f)(4), thus satisfying an eligibility requirement to invoke subsection (f).⁷ Only if the Court found in favor of Revel on each of these two issues could it sell the Casino free and clear of IDEA's lease.

On the first issue, the Bankruptcy Court pointed to a “split of authority”: some courts hold that § 363(f) doesn't cut off a tenant's possessory rights under § 365(h), see, e.g., In re Zota Petroleums, LLC, 482 B.R. 154, 163 (Bankr.E.D.Va.2012), while others go another path to say that § 365(h) “says nothing at all about sales of estate property, which are the province of section 363,” Qualitech, 327 F.3d at 547, the result in the latter case being that sales of property...