542 B.R. 50
Bankr. D.N.H.2015Background
- Tempnology, LLC (Debtor) sought to sell substantially all assets in Chapter 11; Schleicher & Stebbins Hotels, L.L.C. (S & S) served as stalking horse and was declared winning bidder after an auction; Mission Product Holdings (Mission) was the only other qualified bidder.
- S & S was both the Debtor’s majority equity owner and largest secured creditor; it provided postpetition DIP financing and proposed credit bids (including prepetition and DIP amounts).
- Phoenix Capital marketed the assets (teaser to ~164 prospects; five NDAs; two qualified bidders). An examiner was appointed and issued reports supporting the sale.
- Mission objected, alleging: collusion/insider control by S & S; improper credit bidding and recharacterization of S & S’s debt as equity; inadequate marketing and auction irregularities; and that the sale amounted to a de facto (sub rosa) plan disadvantaging creditors.
- After evidentiary hearings, the bankruptcy court found no collusion, concluded marketing and procedures were adequate, rejected Mission’s recharacterization and credit-bid limitations, held S & S a good-faith purchaser, and approved the sale.
Issues
| Issue | Plaintiff's Argument (Mission) | Defendant's Argument (Debtor / S & S / Examiner) | Held |
|---|---|---|---|
| Whether S & S may credit-bid prepetition and DIP claims under 11 U.S.C. § 363(k) | Credit bidding should be denied or limited because S & S engaged in inequitable "loan-to-own" conduct, its claim amount is disputed, and debt should be recharacterized as equity | S & S timely appears on schedules as secured creditor, DIP advances were court-approved, no inequitable conduct shown, and any recharacterization challenge would not eliminate the secured claim used for the small prepetition credit bid | Court allowed credit bids; no bona fide dispute shown as to claim sufficient to bar credit bidding and Mission failed to prove cause to limit rights |
| Whether S & S’s prepetition loans should be recharacterized as equity | Transactions reflect inadequate capitalization and insider control; loans mirrored equity and thus are equity, not debt | Record lacks loan documents, evidence is meager, independent examiner found only limited potential vulnerability; majority of claim stands as debt | Court declined to recharacterize; Mission failed to carry burden — recharacterization not warranted and would not affect the modest prepetition credit bid |
| Adequacy of marketing and fairness of auction procedures (including mid-auction valuation changes and off-the-record negotiations) | Marketing was inadequate (short period; "do not contact" list suppressed bidders); auction tainted by off-record talks and mid-auction devaluation favoring S & S | Phoenix conducted customary, extensive marketing; "do not contact" list reasonable; value adjustments applied equally; Examiner and witnesses found no prejudice or collusion | Court found marketing and procedures sufficient, no evidence of collusion or unfair advantage, and no prejudice to Mission |
| Whether the sale is a de facto (sub rosa) plan or violates absolute priority / unfair discrimination | Sale functions as an impermissible sub rosa plan: unsecured creditors treated inconsistently and equity (S & S) retains value in violation of absolute priority | Sale is a § 363(b) transaction with business justification, S & S buys assets for debt (not receiving equity distributions), and procedural protections were provided akin to confirmation process | Court held sale was not a de facto plan, did not implicate absolute priority, and provided adequate creditor protections; sale approved |
Key Cases Cited
- Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33 (2008) (discusses preconfirmation § 363 sales versus plan confirmation protections)
- Comm. of Equity Sec. Holders v. The Lionel Corp., 722 F.2d 1063 (2d Cir. 1983) (standards for scrutinizing § 363(b) transactions that resemble reorganizations)
- Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452 (2d Cir. 2007) (concern about sub rosa plans and bypassing Chapter 11 protections)
- In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010) (creditor credit-bid rights are not absolute; courts may limit for cause)
- Granada Wines, Inc. v. New England Teamsters and Trucking Indus. Pension Fund, 748 F.2d 42 (1st Cir. 1984) (creditor class composition and fair treatment under plan-class rules)