In re A&F Enterprises, Inc., II Has Something in Common with the Little Sisters of the Poor

The power of an appellate court in the federal system to stay the orders of lower courts or to enjoin conduct that lower courts have refused to enjoin, so as to preserve the appellate court’s jurisdiction to review those orders on ultimate appeal, is clearly established yet infrequently invoked. In addition to other potential sources, the power derives from the All Writs Act, 28 U.S.C. § 1651, which gives all federal courts the authority to “issue all writs necessary or appropriate in aid of their respective jurisdictions.”

Recently, attention was given to this power when the Supreme Court granted an injunction to the Little Sisters of the Poor. The Sisters had filed suit against the Secretary of Health and Human Services, seeking a determination that the Government cannot compel them to offer contraceptive insurance coverage to employees of their hospitals, as is generally required under the Affordable Care Act. When the district court in Denver denied the Sisters a preliminary injunction, they sought an injunction from the Tenth Circuit, which denied it (Appeal No. 13-1540, Dec. 31, 2013). But, on further application to the Supreme Court, first Justice Sotomayor and then the entire Court granted the requested relief.  (No. 13A691, Jan. 24, 2014).

On February 7, 2014, the Seventh Circuit used this same power to stay orders of the bankruptcy court in Chicago, after both the bankruptcy judge and the district judge assigned to the appeal of the orders had denied stays pending appeal. In re A&F Enterprises, Inc., II (No 13-3192).

The substantive issue is one that only a bankruptcy lawyer could love. Given that the Bankruptcy Code gives a Chapter 11 debtor until confirmation of its plan to decide whether to assume or reject its executory contracts, including its franchise agreements, 11 U.S.C. § 365(d)(2), but only 120 days after filing the case to assume or reject unexpired leases of nonresidential real property, 11 U.S.C. § 365(d)(4), how long does the debtor get when its franchise agreements and leases (seventeen of them in three states for this IHOP franchisee) are so tightly joined by cross-default provisions that losing the leases terminates the franchise agreements? Both the bankruptcy judge who deemed the leases rejected when the debtor took no action to assume or reject them within the 120-day period and held the franchise agreements expired under the cross-default provisions, and the district judge to whom the debtor appealed, thought the debtor’s position so lacking in likelihood of success on the merits that they denied stays of the orders. Clearly, by the time the appeal is decided, the assets will have disappeared, likely to a buyer in good faith whose title could not be upset even if the orders were reversed.  11 U.S.C. § 363(m).

The debtor appealed the denial of stay to the Seventh Circuit. While the denial of the stay was not a “final decision” of the district court under 28 U.S.C. § 1291, it was, under Circuit precedent, In re Forty-Eight Insulations, Inc., 115 F.3d 1294, 1300 (7th Cir. 1997), an order “refusing” an injunction, and thus appealable to the Court of Appeals under 28 U.S.C. § 1292(a)(1). And, as noted above, the All Writs Act would in any event have given the Seventh Circuit authority to issue a stay “in aid of” its jurisdiction. Just as the Supreme Court could reach down to protect the rights of the Little Sisters of the Poor pending consideration of their appeal by the Tenth Circuit, the Seventh Circuit had full authority to prevent A&F Enterprises from ceasing to exist while the district court considers its appeal.

The Seventh Circuit thought much more of the debtor’s likelihood of success on the merits than the lower courts had, but in the end conceded that “the legal issue does not have a clear-cut answer.” Slip op. at 7. It decided to grant the stay because it thought the balance of the harms weighed heavily in the debtor’s favor. Id. at 8-12. It stayed the bankruptcy court’s orders “until final disposition of A&F’s appeal.” Id. at 12. One assumes that the court meant the appeal in the district court (since that is the only appeal now pending), not a future appeal to the Seventh Circuit. But it is a good guess that the orders will remain stayed until the Seventh Circuit itself disposes of any subsequent appeal on the merits from the district court.