In re: Life Enhancement Products, Inc.
NV-17-1086-LTiF
| 9th Cir. BAP | Dec 11, 2017Background
- Life Enhancement Products, Inc. (LEP) filed chapter 11; creditor Samuel Kornhauser held a ~ $2.6M proof of claim based on a state-court judgment and attached documents (pledge agreement, UCC statements) suggesting security interests in Block’s (LEP president) stock and note.
- Kornhauser did not list his claim as secured on the proof of claim form and did not identify LEP assets as collateral on the UCC financing statements.
- A chapter 11 trustee (Proctor) sought to sell substantially all LEP assets to Sierra Nevada Bioscience, LLC for $500,000, free and clear under 11 U.S.C. § 363; trustee questioned whether Kornhauser held any interest in the assets.
- Bankruptcy court held a hearing, found Kornhauser lacked a secured interest or other interest in LEP assets (financing statements failed to identify LEP property), found buyer purchased in good faith, approved sale, and waived the Rule 6004(h) stay.
- Sale closed March 20, 2017; Kornhauser filed a timely appeal and sought a stay pending appeal, which was denied.
- Panel dismissed the appeal as statutorily moot under § 363(m) because the sale closed to a good-faith purchaser and no stay was obtained pending appeal.
Issues
| Issue | Kornhauser's Argument | Trustee/LEP's Argument | Held |
|---|---|---|---|
| Whether the appeal is moot under 11 U.S.C. § 363(m) | § 363(m) inapplicable because sale was authorized under § 363(f) (lien-stripping) | § 363(m) bars appeal because buyer was a good-faith purchaser and sale closed without a stay | Appeal is statutorily moot under § 363(m); DISMISSED |
| Whether Kornhauser had an interest in the assets sold such that § 363(f) applied | Kornhauser claimed a security interest via pledge, promissory note, UCC filings, and judgment against LEP | Trustee and bankruptcy court: Kornhauser failed to prove any security interest or properly perfected lien; UCC did not identify LEP property; judgment not recorded to create lien | Kornhauser did not prove any interest; § 363(f) did not apply |
| Whether the buyer purchased in good faith under § 363(m) | Kornhauser alleged possible sham sale and buyer’s connection to Block | Trustee presented testimony showing proper marketing, overbid process, and bona fides; bankruptcy court found good faith | Buyer was a good-faith purchaser; finding supported by record |
| Whether Clear Channel (In re PW) controls to save lien-stripping relief from mootness | Kornhauser relied on Clear Channel that lien-stripping portion can survive § 363(m) | Trustee: Clear Channel is distinguishable because that appellant indisputably held a lien in the sold property | Clear Channel inapplicable here because Kornhauser did not prove he had a lien in the assets sold |
Key Cases Cited
- Ellis v. Yu (In re Ellis), 523 B.R. 673 (9th Cir. BAP) (standard: de novo review of mootness and jurisdiction)
- Adeli v. Barclay (In re Berkeley Del. Ct. LLC), 834 F.3d 1036 (9th Cir.) (§ 363(m) bars challenges to sales to good-faith purchasers absent a stay)
- Onouli–Kona Land Co. v. Richards (In re Onouli–Kona Land Co.), 846 F.2d 1170 (9th Cir.) (purpose of stay requirement to protect good-faith purchasers)
- Chequers Inv. Assocs. v. Hotel Sierra Vista Ltd. P’ship (In re Hotel Sierra Vista Ltd. P’ship), 112 F.3d 429 (9th Cir.) (party asserting interest bears burden to prove perfected security interest and extent)
- Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25 (9th Cir. BAP) (lien-stripping portion may survive mootness when appellant undisputedly held a lien)