Schepis v. Burtch (In Re Pursuit Capital Management, LLC)
2017 U.S. App. LEXIS 20889
| 3rd Cir. | 2017Background
- Pursuit Capital Management (debtor) filed Chapter 7; trustee (Burtch) identified potential avoidance and related claims as estate assets and sought to sell them to monetize the estate.
- Trustee negotiated a sale to a Creditor Group; initial agreement for $125,000, then an auction was ordered after objections by the debtor-related parties (the Pursuit Parties).
- Live auction adjourned; trustee solicited sealed final bids. Creditor Group submitted $180,001; Pursuit Parties declined to submit a sealed bid and later withdrew earlier bids. Trustee moved to sell to Creditor Group on an "as-is, where-is" basis.
- Bankruptcy Court approved the sale, finding trustee exercised sound business judgment, the sale price was fair, and purchaser acted in good faith. Sale closed and Creditor Group promptly sued on the purchased claims.
- Pursuit Parties appealed the Sale Order without obtaining a stay; District Court dismissed the appeal as statutorily moot under 11 U.S.C. § 363(m). Third Circuit affirmed, concluding the appeal is moot.
Issues
| Issue | Plaintiff's Argument (Pursuit Parties) | Defendant's Argument (Creditor Group / Trustee) | Held |
|---|---|---|---|
| Whether § 363(m) mootness bars the appeal of the Sale Order where no stay was obtained | The sale order preserved defenses and the Pursuit Parties need not have obtained a stay; also trustee lacked authority to assign avoidance powers | § 363(m) requires a stay; absent a stay a good-faith purchaser’s title is protected and reversal that affects sale validity is barred | Appeal is statutorily moot under § 363(m); no stay was obtained and reversal would affect sale validity |
| Whether purchaser acted in good faith and paid value for estate property | Creditor Group’s conduct / auction modifications were not in good faith; trustee discriminated in applying auction rules | Trustee and Creditor Group complied with procedures, conducted competitive bidding, and no collusion or fraud is shown | Bankruptcy Court’s finding of good faith and adequate value was not clearly erroneous; purchaser qualifies for § 363(m) protection |
| Whether reversal or modification of the Sale Order would affect the validity of the sale | Court can rule that trustee lacked authority to transfer avoidance powers without disturbing ownership; purchaser assumed risk via "as-is" clause | The ability to prosecute avoidance claims was a central bargained-for element; divesting that power would destroy the asset’s value and the sale’s commercial purpose | Ruling that avoidance powers did not transfer would affect the validity of the sale; therefore relief on that ground is barred by § 363(m) |
| Whether auction-procedure modifications (adjournment; sealed bids) were improper | Trustee improperly modified court-approved procedures and then applied them discriminatorily against Pursuit Parties | Modifications were within trustee’s discretion, made because Pursuit Parties’ conduct prevented completion of an open auction; Pursuit Parties had opportunity to bid | Modifications and application were within trustee’s discretion; no bad faith shown |
Key Cases Cited
- Cinicola v. Scharffenberger, 248 F.3d 110 (3d Cir.) (standard of review for bankruptcy court factual findings)
- In re ICL Holding Co., 802 F.3d 547 (3d Cir.) (good-faith purchaser protection; § 363(m) limitation on challenges that would "claw back" a sale)
- In re Abbotts Dairies of Pa., Inc., 788 F.2d 143 (3d Cir.) (definition of good faith and value in judicial sales)
- Pittsburgh Food & Bev. Inc. v. Ranallo, 112 F.3d 645 (3d Cir.) (policy favoring finality of bankruptcy sales under § 363(m))
- Krebs Chrysler-Plymouth, Inc. v. Valley Motors, Inc., 141 F.3d 490 (3d Cir.) (appeal moot under § 363(m) where reversal would affect sale validity)
- In re Brown, 851 F.3d 619 (6th Cir.) (discussion of § 363(m) and protection of good-faith purchasers)