IN RE: OLD COLD, LLC, Debtor. MISSION PRODUCT HOLDINGS, INC., Appellant, v. SCHLEICHER & STEBBINS HOTELS, L.L.C.; OLD COLD, LLC, Appellees.
No. 19-9004
United States Court of Appeals For the First Circuit
October 1, 2020
APPEAL FROM THE BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT
Before Howard, Chief Judge, Selya and Kayatta, Circuit Judges.
Robert J. Keach, with whom Lindsay Z. Milne, Letson B. Douglass, and Bernstein, Shur, Sawyer & Nelson, P.A. were on brief, for appellant.
Christopher M. Candon, with whom Sheehan Phinney Bass & Green PA was on brief, for appellee Schleicher & Stebbins Hotels, L.L.C.
I.
We have previously chronicled the long and tumultuous fight between Mission and S & S over the debtor‘s assets.1 So we repeat as succinctly as possible only those facts key to this appeal.
A.
In 2012, the debtor granted Mission exclusive and non-exclusive licenses to use and distribute several of its intellectual property assets (the “Agreement“). When the parties’ relationship soured, Mission exercised its contractual right to terminate the Agreement, triggering a provision calling for a two-year wind-down period. Hoping to end any wind-down sooner, the debtor sought to terminate the contract immediately by claiming Mission had
B.
In its petition for Chapter 11 bankruptcy, the debtor listed S & S as the only secured creditor, with a $5.55 million claim of pre-petition advances stemming from credit extended prior to the bankruptcy filing. The debtor listed Mission as an unsecured creditor, with a contingent, unliquidated, and disputed claim, and an executory contract.
Shortly after filing for Chapter 11 protection, the debtor moved for debtor-in-possession financing from S & S. The bankruptcy court granted this motion in a series of orders, with its final order allowing up to $1.45 million in post-petition financing, secured by a first-priority perfected lien on the debtor‘s estate. As part of this final order, the court confirmed the “validity, extent, perfection or priority of [S & S‘s] security interests” and pre-petition liens of $5.5 million, with the order itself perfecting the $1.45 million post-petition amount. The court also set November 12, 2015 (pre-petition), and December 31, 2015 (post-petition), as deadlines for any challenges to these lien-validity findings. Those deadlines passed with neither Mission nor any other party lodging any objection.
C.
The debtor also sought to reject the Agreement with Mission under the terms of the Bankruptcy Code. The bankruptcy court granted the request “subject to [Mission‘s] election to preserve its rights under [ ]
On June 11, 2018 (the same day that S & S filed the currently-at-issue motion for relief from the automatic stay), Mission petitioned the Supreme Court for a writ of certiorari seeking review of our affirmance. The Supreme Court granted the petition in part on October 26, 2018 (a month after the bankruptcy court granted the sought-after stay relief but before the relief order took effect), to answer the following question: “Whether, under
under Section 365, a debtor‘s rejection of an executory contract in bankruptcy has the same effect as a breach outside bankruptcy. Such an act cannot rescind rights that the contract previously granted. Here, that construction of Section 365 means that the debtor-licensor‘s rejection cannot revoke the trademark license.
Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652, 1666 (2019).
D.
While Mission and S &
The auction took place on November 5, 2015. In its first bid, Mission included $200,000 of debtor cash as some sort of supposed consideration for the sale, stating that the bid would “leave $200,000 worth of cash in the debtor” and that “[Mission is] leaving $[200,000] of the cash [it was] otherwise . . . going to buy in the debtor.” In an effort to bid similarly to Mission, S & S also began to demand fewer than all of the debtor‘s assets, with the debtor‘s counsel describing S & S‘s bid as “strik[ing] the provisions of the . . . acquired assets, similar to those struck by Mission” and thereby “leav[ing] back” or “leav[ing] behind” various estate assets. As a result, both parties’ final bids left behind in the estate an identical subset of debtor assets, worth approximately $800,000 (the debtor‘s inventory, its accounts receivable, and $600,000 of cash). Perhaps seeking to clarify each other‘s view regarding the precise treatment of these debtor assets post-auction, the following exchange took place between the debtor‘s counsel (Desiderio) and Mission‘s counsel (Keach):
MR. KEACH: So [S & S is] leaving $800,000 of assets in the estate. The estate gets to liquidate those and keep the money?
MR. DESIDERIO: It‘s more than that. They‘re leaving--
MR. KEACH: Well, if it was 800 for us, it‘s going to be 800 for them.
MR. DESIDERIO: . . . Yes. That‘s right. Which means we value [S & S]‘s last bid at $2,257,000.
Eventually, S & S incrementally increased its credit bid beyond an amount Mission was willing to contribute in cash and won the auction.
Mission objected to the sale procedures and final determination that S & S had fairly won. It argued that the debtor miscalculated S & S‘s bid; that the auction was conducted in bad faith; and that S & S should not have been able to credit bid as much as it did because much of that credit was in fact equity. After the Examiner entered a report determining that the valuation was fair and the transaction arms-length, the bankruptcy court, after a two-day evidentiary hearing, entered a sale order approving the sale of the debtor‘s assets to S & S pursuant to an Asset Purchase Agreement between the two parties (APA). In re Tempnology, LLC, 542 B.R. 50 (Bankr. D.N.H. 2015). The bankruptcy court rejected Mission‘s arguments, concluding that S & S was entitled to credit bid in the amount that it did because the secured claim listed on the debtor‘s schedule D was not subject to a bona fide dispute, as Mission had never previously disputed the secured claim. Id. at 68-70. The court similarly refused either to treat these claims as equity or find that S & S was not a good faith purchaser. The court also found no collusion between the debtor and S & S, and that the auction was otherwise fair. Id. at 70-72.
The APA memorializing the sale distinguishes between two sets of debtor assets resulting from the sale: the Acquired Assets and the Excluded Assets. The former included, free and clear of all encumbrances, all of the debtor‘s assets save the Excluded Assets, which were specifically
As to the left-behind Excluded Assets, neither the APA nor the sale order purported to change in any way the status or treatment of those assets, all of which had long been subject to S & S‘s lien. The APA simply omitted the Excluded Assets from the valuation of the bid, instead calculating only the dollar value given for the Acquired Assets, presumably on the assumption that, because both S & S‘s and Mission‘s final bids included exactly the same list of Excluded Assets, the precise valuation of those assets was irrelevant to the ordinal ranking of each bid.
In February 2016, S & S sought to acquire one of those Excluded Assets, the debtor‘s inventory, free and clear of its liens, with the liens attaching to the proceeds of this second sale. Mission challenged this proposed inventory sale, but it did not dispute that the assets were subject to S & S‘s liens. Rather, it challenged S & S‘s assertion that its intellectual property rights restricted any other party from acquiring this inventory, arguing that such a restriction would contradict the terms of the APA (allowing the sale of these assets by the debtor to achieve the highest value) and would evidence collusion between S & S and the debtor. The bankruptcy court agreed with Mission that such an IP restriction would have rendered the terms of the auction suspect but approved the inventory sale, concluding that the price (accounting cost) was fair and that the sale of the inventory to S & S does not contradict the APA as long as the debtor would have been free to sell the inventory to any party, which it had unsuccessfully sought to do.
E.
With that history in mind, we turn to the motion on appeal. On June 11, 2018, S & S filed a motion for relief from the automatic stay imposed in bankruptcy proceedings under
Mission objected. First, it argued that the then-pending petition for a writ of certiorari divested the bankruptcy court of jurisdiction to decide the stay relief motion because, if stay relief were granted, S & S would be able to strip the estate of assets that could be used to satisfy any judgment that might flow from Mission‘s appeal in the event the Supreme Court were to side with Mission. Second, it argued that S & S no longer had a security interest in that property because, as part of the auction and sale, S & S had supposedly agreed either to recontribute those assets back into the estate free and clear of its liens or to waive those liens as part of the bidding process. Mission also stated that it wished for limited discovery into how the non-lawyer principals viewed the Excluded Assets after the auction, arguing that this might show that the debtor and/or S & S believed them to be unencumbered.
After a preliminary hearing, the bankruptcy court asked for supplemental briefing
After a hearing on September 18, 2018, the bankruptcy court granted the stay relief motion. As to Mission‘s jurisdictional argument, the court concluded that the “practical concern” that there may be no assets left in the estate to satisfy a possible administrative claim resulting from the Supreme Court appeal did not divest the bankruptcy court of jurisdiction “to decide an issue that is not the subject of a pending appeal.” It also refused Mission‘s request for limited discovery, noting that stay relief motions are “summary proceedings” and “there are not sufficient issues of fact that would bear on the determination of the motion.”
The bankruptcy court also rejected Mission‘s assertion that S & S‘s liens were somehow no longer valid. First, it noted that there was no dispute that the liens were valid right before the auction. Second, it reviewed the auction transcript, beginning with Mission‘s bid proposing to “leave behind” certain assets, which proposal S & S ultimately matched. The bankruptcy court pointed out that there was no discussion of how Mission could conceivably extricate any left-behind assets from the liens attached to those assets. Hence, there was no reason to think that S & S, in matching Mission‘s bid, proposed to undertake such a gratuitous elimination of its own liens. Because the liens were valid before the auction and there was no evidence that anything happened to them at the auction, the bankruptcy court concluded that S & S had met its burden of showing that there was no equity in the property and, because the debtor assented to the motion, the property was not necessary for an effective reorganization.
Mission sought a stay of this order from the bankruptcy court pending its appeal (electing to go to the Bankruptcy Appellate Panel (BAP), see
II.
A.
We begin by deciding whether Mission‘s failure to obtain a stay of the relief order and the subsequent disbursement of the debtor‘s remaining assets have rendered this appeal moot. Presenting what seems to be a hybrid of Article III, equitable, and
We agree with the BAP that the disbursement of the funds to S & S did not moot this appeal. Every case cited by S & S involved a subsequent foreclosure and sale of property by the creditor, not a mere disbursement of cash.2 But “[u]nlike other assets . . . (e.g. real property, conveyances), cash is a fungible item.” United States v. $46,588.00 in U.S. Currency & $20.00 in Canadian Currency, 103 F.3d 902, 904 n.5 (9th Cir. 1996) (quoting Attorney General Policy Directive 87-1 (Mar. 13, 1987)) (holding that the comingling of the cash in question with other cash did not deprive the court of jurisdiction). Even under the less stringent doctrine of equitable mootness (the applicability of which to stay relief orders we need not decide), the failure to obtain a stay pending appeal, by itself, does not provide “sufficient ground for a finding of mootness.” Rochman v. Ne. Utils. Serv. Grp. (In re Pub. Serv. Co. of N.H.), 963 F.2d 469, 473 (1st Cir. 1992). Rather, such mootness requires “the challenged bankruptcy court order [to have] been implemented to the degree that meaningful appellate relief is no longer practicable.” Hicks, Muse & Co. v. Brandt (In re Healthco Int‘l, Inc.), 136 F.3d 45, 48 (1st Cir. 1998). In contrast to a case where we are unable to return title to the estate because it has been transferred to a good faith purchaser, we simply cannot say that ordering a party on appeal to disgorge mere cash is impracticable and does not afford meaningful appellate relief. See Spirtos v. Moreno (In re Spirtos), 992 F.2d 1004, 1006-07 (9th Cir. 1993) (finding no mootness where the creditor “stripped the plans of their assets” but there was no foreclosure or sale and the receiving party was a party to the appeal and knew of the appeal at time it took that action, as the court could fashion relief by ordering the money returned to the estate); Salomon v. Logan (In re Int‘l Envtl. Dynamics, Inc.), 718 F.2d 322, 326 (9th Cir. 1983) (holding the court could fashion relief where there were simply “erroneously disbursed funds“).
S & S points out that a real property transfer can also be unwound in theory if
Moreover, the Supreme Court rejected the argument that the disbursement of the remaining cash from the estate mooted its consideration of the
B.
Having concluded that Mission‘s appeal is not moot, we next answer whether the granting of Mission‘s petition for a writ of certiorari divested the bankruptcy court of jurisdiction to decide the stay relief motion. We review de novo a determination regarding jurisdiction under the divestiture rule. United States v. Rodríguez-Rosado, 909 F.3d 472, 477 (1st Cir. 2018). On appeal, we look through the BAP‘s holding and review the bankruptcy court‘s decision directly. PC P.R., LLC v. Empresas Martínez Valentín Corp. (In re Empresas Martínez Valentín Corp.), 948 F.3d 448, 455 n.6 (1st Cir. 2020) (citing DeMore v. Lassman (In re DeMore), 844 F.3d 292, 296 (1st Cir. 2016)).
Mission argues that the stripping of assets from the debtor‘s estate sought by the stay relief motion deprived Mission of the same assets to which it would have looked in satisfaction of the claim it was pursuing on appeal. In Mission‘s view, this purported relatedness between S & S‘s claim for stay relief and Mission‘s claim for breach of the agreement caused the lower court to lose jurisdiction to make that determination. Mission relies primarily on Whispering Pines Ests., Inc. v. Flash Island, Inc. (In re Whispering Pines Ests., Inc.), where the BAP held that the bankruptcy court was divested of jurisdiction to grant stay relief because the foreclosure of the property at issue in the stay relief motion “directly implicated the matter under the appeal,” namely, the appropriateness of a “[p]lan providing for the sale of the Property.” 369 B.R. 752, 75960 (B.A.P. 1st Cir. 2007).
C.
We now turn to the merits of Mission‘s challenge to the bankruptcy court‘s order granting S & S the requested relief from the automatic stay. Such orders are generally reviewed for an abuse of discretion. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 814 F.2d 844 (1st Cir. 1987). The bankruptcy court‘s discretion was limited, though, by two preliminary requirements. First, S & S must show a “colorable claim to property of the estate.” Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 32 (1st Cir. 1994) (citing
1.
Mission does not dispute that prior to the auction the debtor had no equity in its property because all of that property was subject to liens that exceeded the property‘s value. Mission‘s principal argument that relief from the automatic stay was improper instead hinges on the assertion that, by entering into the APA without buying all of the debtor‘s property, S & S implicitly surrendered its liens on that property. This implication arises, Mission says, from the discussion at the auction of a commitment to match Mission‘s treatment of some debtor assets by leaving them back or leaving them behind in the estate.3
Waiver is a potential defense that the bankruptcy court may consider in deciding whether the creditor has a colorable interest in the property that is the subject of a stay relief motion. United States v. Fleet Bank of Mass. (In re Calore Express Co.), 288 F.3d 22, 35 (1st Cir. 2002) (citing Grella, 42 F.3d at 35) (noting that, although a stay relief hearing is not the
Mission points to the fact that, early in the auction, it increased its bid by “leav[ing] $200,000 worth of cash in the debtor.”4 Mission says we should assume that its bid, if accepted, would have left those assets in the debtor free and clear of any liens, citing
More fundamentally, the unstated premise of Mission‘s argument -- that Mission had the power to eliminate S & S‘s liens on the debtor‘s assets merely by agreeing to leave the assets in the estate -- makes no sense. Were that premise correct, many
Bereft of support for such an asset reclassification, Mission argues that a lien
Even if we were to assume that Mission had come up with a novel argument that would support the claim that a bidder could wash assets clean of liens in this manner, there is no reason at all to assume that S & S intended such an effect as implicit in its bid. Waiver of a first secured lien on cash is no small matter -- hardly something that would be offered only on an implication so tenuous as that claimed by Mission. See In re Calore Express Co., 288 F.3d at 39 (noting that courts rarely “imply waiver from mere silence“). In fact, New Hampshire law requires an action or agreement inconsistent with the existence of the lien to find such a waiver. City of Portsmouth v. Nash, 493 A.2d 1163, 1165 (N.H. 1985).6 The debtor‘s counsel agreeing with a mere ambiguous statement at the auction -- “[t]he estate gets to liquidate those [assets] and keep the money” -- that is grammatically and logically consistent with S & S retaining its liens does not suffice.
The Examiner -- whose role was to investigate “the amount, validity and priority of [S & S‘s] claims and liens” and “to prepare and file with the Court a report with regard to the sale process” -- saw no such implicit waiver. He wrote:
The structure of the bid means that immediately after closing there are substantial assets left for creditors the largest of which is inventory. The assets left are available to satisfy the remaining claim of Mission if Mission is correct that all of the pre-petition [S & S] debt should be re-characterized as equity. If Mission is incorrect and the [S & S] pre-petition debt may not be re-characterized as equity then the [S & S] security interest reaches all of those assets.
He further noted three possible characterizations of the estate following the sale: (1) S & S‘s claim is not recharacterized as equity and thus remains fully secured, (2) S & S‘s claim is recharacterized as equity and Mission has an unsecured claim, and (3) S & S‘s claim is recharacterized as equity and Mission has an administrative claim. The report mentions no possibility that S & S‘s claims are not equity but its liens were otherwise waived. Even Mission‘s own counsel seemed to discern no such waiver by S & S, stating that if Mission had won the auction, S & S would “have claims to whatever the proceeds are,” focusing its effort on recharacterizing S & S‘s claims as equity and not objecting to the Examiner‘s report or the proposed sale on these grounds. Nor did the experienced bankruptcy judge make mention of any such lien waiver in either his sale order or the accompanying memorandum.7
2.
Mission next argues that S & S (which had the burden of proof) failed to meet the quantum of proof necessary to warrant relief from the automatic stay. Mission argues that the proper standard for such a motion is for S & S to establish by a preponderance of the evidence the validity and extent of its liens. But, as we have explained, there was no question that S & S possessed valid liens in excess of the value of the debtor‘s remaining. So for that reason alone S & S certainly established the “colorable claim to property of the estate” needed to obtain relief from the stay. Grella, 42 F.3d at 33.
3.
Finally, leaving no pebble unturned, Mission assigns procedural error, claiming that under the Bankruptcy Code and rules it was entitled to limited discovery and an evidentiary hearing before the bankruptcy court could decide the stay relief motion, which is a contested matter. The bankruptcy rules do state that various applicable civil rules and discovery “rules shall apply” in contested matters -- “unless the court directs otherwise.”
The United States Bankruptcy Court for the District of New Hampshire has a standing local rule that “Bankruptcy Rule 7026 and LBR 7026-1 shall not apply to contested matters governed by Bankruptcy Rule 9014 unless otherwise ordered.” Bankruptcy D.N.H.R. 9014-1(a). On top of that, the bankruptcy court specifically stated that “a further evidentiary hearing would [not] be required.” So there is no doubt that the court did “direct[] otherwise.” We need only decide whether this ruling was an abuse of discretion.
It clearly was not. As we have explained, Mission‘s claim that S & S waived its liens made no sense for a slew of reasons. Given the written record and the absence of any reason to think that S & S gratuitously waived its liens, the bankruptcy court was hardly required to allow a fishing expedition aimed at unearthing imagined understandings contrary to the record and common
III.
For the foregoing reasons, we affirm the bankruptcy court‘s order granting relief from the automatic stay. Costs are awarded to appellee (S & S).