Trustee Nancy J. Gargula v. New Energy Corp

Filing 16

MEMORANDUM AND ORDER overruling Natural Chem's objections to the bankruptcy report and recommendation; adopts the bankruptcy courts report and recommendation, and DENIES Natural Chems motion for withdrawal of certain matters to United States District Court and motion for stay pending ruling by United States District Court. Signed by Judge Robert L Miller, Jr on 3/22/2013. (kds)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
SOUTH BEND DIVISION
IN THE MATTER OF,
NEW ENERGY CORP.,
DEBTOR.

NATURAL CHEM HOLDINGS, LLC,
vs.
UNITED STATES DEPARTMENT OF
ENERGY.

)
)
)
)
)
)
)
)
)
)
)
)

CAUSE NO. 3:13-CV-205
RELATED UNITED STATES
BANKRUPTCY COURT FOR THE
NORTHERN DISTRICT OF INDIANA
CAUSE NO. 12-33866

MEMORANDUM AND ORDER
Natural Chem Holdings, LLC, which objected in the bankruptcy court to the
sale in an auction of the debtor’s assets, moves to withdraw the reference of
certain matters to the bankruptcy court and stay the proceedings in the
bankruptcy court until Natural Chem can be heard further on its contention that
collusive bidding influenced the auction. Natural Chem attended, but didn’t bid
or object at the auction. For the reasons that follow, the court concludes that (1)
Natural Chem doesn’t have standing to seek to withdraw matters to the district
court and/or to stay matters; (2) if Natural Chem is properly in this court, it
hasn’t shown any of the things that must be shown for a district court to
withdraw reference of a matter to a bankruptcy court; and (3) if Natural Chem is
properly here and withdrawal is proper, Natural Chem hasn’t made the showings
necessary for a stay. Accordingly, the court denies Natural Chem’s motion.

I
Under the Bankruptcy Amendments and Federal Judgeship Act of 1984,
district courts have original jurisdiction over all cases arising under Title 11 of the
Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may, as this district has,
N.D. Ind. L.R. 200-1(a)(1), automatically refer those cases to the district’s
bankruptcy court. See 28 U.S.C. § 157(a). Hence, the voluntary chapter 11
bankruptcy petition that New Energy Corp. filed in November 2012 began its
progress in the bankruptcy court by virtue of that automatic referral. A “district
court may withdraw, in whole or in part, any case or proceeding referred [to a
bankruptcy court], on its own motion or on timely motion of any party, for cause
shown,” 28 U.S.C. § 157(d), and cannot do so without such a withdrawal. Home
Ins. Co. of Illinois v. Adco Oil Co., 154 F.3d 739, 741-742 (7th Cir. 1998).
New Energy Corp. is an ethanol plant in South Bend, Indiana. Five days
after filing its chapter 11 petition, New Energy filed motions to sell substantially
all its assets and to establish bidding procedures for that sale. After notice of the
hearing and an opportunity for filing objections, the bankruptcy court granted the
motion to set bidding procedures and set a deadline of January 30, 2013 for any
objections to the sale motion. A hearing on the sale was set for February 5.
Natural Chem Holdings, LLC, expressed interest in bidding at the auction,
but didn’t comply with the bidding procedures. Bidders were required to make a
good faith bid deposit of $250,000, and Natural Chem deposited only a tenth of
that amount. Natural Chem submitted what it considers to have been “bids,” but
2

concedes that its “bids” didn’t conform to the bidding procedures the bankruptcy
court had approved. The auction was held on January 31. The successful bidder
was Maynards Industries (1991) Inc. and Biditup Auctions Worldwide, Inc.
Natural Chem believes the procedures were violated because while the entities in
the successful joint venture each had complied with the original bidding
procedures, the joint venture (which formed during the auction) hadn’t done so.
Natural Chem also believes the rules were changed during the auction.
On February 4, Natural Chem opposed New Energy’s request for an order
approving the sale based on what it deemed illegal collusion. The bankruptcy
court allowed Natural Chem (and the City of South Bend, which also opposed the
sale motion) to participate in the February 5 hearing. The bankruptcy court heard
evidence and argument, found no credible evidence of collusion, expressed doubts
about Natural Chem’s standing to participate in the bankruptcy action, overruled
Natural Chem’s objection, and granted the debtor’s sale motion.
Natural Chem followed with a flurry of filings in the bankruptcy court
relating to the sale of the ethanol plant. The bankruptcy court denied several of
Natural Chem’s motions (including its motion to reconsider the approval of the
sale) on February 26. On the same day, Natural Chem filed its motion to withdraw
reference with the bankruptcy court; the next day, Natural Chem filed its notice
of appeal with the bankruptcy court, directed to the denial of the motion to
reconsider. The bankruptcy court noted that Natural Chem had filed no motion
to stay pending appeal, leaving everyone free to proceed with the sale. The record
3

on appeal arrived at the district court on March 20, and an appellate case has
been opened.
On March 14, the bankruptcy court entered its report and recommendation
that this court deny Natural Chem’s motion for withdrawal of reference and
motion for stay pending ruling. On March 18, the ethanol plant was sold to the
successful bidders for a total purchase price of $2.5 million. This court heard
argument on the motions on March 21. For the reasons that follow, the court
denies Natural Chem’s motion for withdrawal of reference and motion for stay.

II
A
Debtor New Energy Corp. and creditor United States Department of Energy
argue that Natural Chem doesn’t have standing to challenge the auction or the
debtor’s motion to approve the sale; the trustee, the successful bidder, and the
creditors’ committee agree. New Energy made the same argument in the
bankruptcy court. The bankruptcy court responded that it was interested
whenever anyone raised the issue of fraud on the court and collusion in a bidding
process. Without deciding the standing issue, the bankruptcy court allowed
Natural Chem to present evidence regarding the sale process and the auction.
After hearing the evidence. the bankruptcy court found that Natural Chem
was not qualified to bid at the auction. The bidding procedures required a bidder
to make a good faith bid deposit of $250,000 and submit an asset purchase
4

agreement, but the bankruptcy court determined Natural Chem made a deposit
of only $25,000 and didn’t submit a conforming asset purchase agreement. The
bankruptcy court also heard testimony about the alleged collusive conduct at the
auction. At the conclusion of the hearing, the court questioned its decision to treat
Natural Chem as a party in interest in light of the evidence presented at the
hearing that it was not a qualified bidder, but nevertheless ruled on the merits of
Natural Chem’s allegations and overruled the objection and denied the motion
opposing the approval of the sale.
Natural Chem contends it has standing as an unsuccessful bidder at the
auction. The trustee is granted the authority to challenge a bankruptcy sale
transaction under 11 U.S.C. § 363(n), and an unsuccessful bidder whose injury
or pecuniary loss “is the speculative profit it might have made had it succeeded
in purchasing property at an auction” typically can’t challenge a sale. In re Hat,
310 B.R. 752, 758 (Bankr. E.D. Cal. 2004). But as Natural Chem emphasizes, this
exclusion isn’t absolute. Unsuccessful bidders can challenge the equity of a
bankruptcy sale transaction. In re Colony Hill Assocs., 111 F.3d 269, 274 (2d Cir.
1997) (citing In re Harwald Co., 497 F.2d 443, 444-445 (7th Cir. 1974)). Under this
theory, however, standing is based “on the assumption that sales tinged by fraud,
mistake or unfairness would generally result in an accepted bid below that which
might have been expected in a fair, free market situation” and by challenging the
“intrinsic structure of the sale, [the unsuccessful bidder] brings himself within the
zone of interests which the Bankruptcy Act seeks to protect and to regulate.” In
5

re Colony Hill Assocs., 111 F.3d at 274 (quoting In re Harwald Co., 497 F.2d 443,
444-445 (7th Cir. 1974)). Standing to challenge a bankruptcy court decision
generally involves a party that was directly and adversely affected pecuniarily by
the bankruptcy court’s order and with an interest within the zone protected or
regulated by the Bankruptcy Act. In re HST Gathering Co., 125 B.R. 466, 467
(W.D. Tex. 1991).
An unsuccessful bidder’s pecuniary loss is the profit that might have come
to be if he had won the auction. Natural Chem contends it was an unsuccessful
bidder that participated in the auction. After an extensive hearing, the bankruptcy
court found that Natural Chem wasn’t qualified to bid at the auction because it
hadn’t made the required good faith bid deposit or filed a conforming asset
purchase agreement. The other parties emphasize that not only was Natural Chem
unqualified to bid, it didn’t actually place any bids at the auction. Natural Chem
was present at the auction, and CEO Robert Salazar states in his affidavit that
Natural Chem “filed two bid proposals, one a purchase proposal and the other a
lease option proposal.” The Department of Energy says the bids to which Natural
Chem refers were a bid deposit and a lease option proposal, not bids to purchase
the assets immediately. Mr. Salazar also claims Natural Chem filed “all other
required documents,” including an asset purchase agreement. Mr. Salazar
concedes Natural Chem tendered a $25,000 deposit, but says the debtor and the
Department of Energy had the discretion to allow changes to the bid procedures,
and Natural Chem asked to be allowed to participate in the auction without
6

submitting the required $250,000 deposit. According to Mr. Salazar, New Energy
didn’t accept Natural Chem’s proposals. The affidavit isn’t clear whether Mr.
Salazar refers to the purchase and lease option proposals, the proposal that
Natural Chem be allowed to participate without making the full deposit, or all of
the above. Natural Chem was an unsuccessful bidder that was not qualified to
participate in the auction.
Natural Chem’s claim also falls outside the zone of interest protected by the
Bankruptcy Act. The bankruptcy statutes governing sales by trustees are meant
to protect the estate and the creditors, not potential purchasers. In re HST
Gathering Co., 125 B.R. at 468. The standing granted to unsuccessful bidders,
whose interest is obtaining the property, is correlated with the creditors’ interest
in maximizing their recovery from the estate. In re Moran, 566 F.3d 676, 682 (6th
Cir. 2009). The two interests must align for an unsuccessful bidder to have
standing. In re Moran, 566 F.3d at 682. The bankruptcy court found the bidding
at the auction increased after the joint venture was formed. The trustee and
creditors oppose Natural Chem’s motions and emphasize the cost of the delay and
litigation imposed on all parties. Cf. In re Hat, 310 B.R. at 755 (trustee didn’t
oppose the unsuccessful bidder’s motion for reconsideration); In re Colony Hill
Assocs., 111 F.3d at 272 (secured creditor initially amenable to unsuccessful
bidder participating in the auction). Natural Chem seeks nullification of the sale,
but Natural Chem doesn’t suggest that it will bid more than the current sale price
or that a new sale would result in a higher sale price.
7

The Department of Energy says Natural Chem’s quest to nullify the sale is
causing a small estate to diminish its assets quickly and the time spent litigating
against a party without a financial interest in the estate is costing the creditors
a lot of money. While the cost of litigation in general isn’t a reason to defeat
standing for an unsuccessful bidder, Natural Chem’s allegations of collusion are
harming the creditors, not helping maximize their recovery. Natural Chem’s
interest is simply not aligned with the creditors, so it lacks standing to challenge
the sale as an unsuccessful bidder.

B
Natural Chem’s motion to withdraw reference alluded to a variety of
supporting facts and reasons: it had demanded a jury demand; it claimed a denial
of its due process rights; the sale order hearing was conducted on too little notice
for Natural Chem; the debtor and successful bidders were refusing to provide
discovery; the bankruptcy court hadn’t acted in a timely manner on Natural
Chem’s motion to compel discovery; the bankruptcy court failed to find the facts
that Natural Chem had established when it was trying to prove bidder collusion;
the bankruptcy court failed to act against the bidder collusion; and the debtor’s
assets would be sold if the district court didn’t act.
Explaining that the sale of the New Energy assets changes things, Natural
Chem appears to have discarded all the bases for its motion to withdraw save one.
Natural Chem asks the court to withdraw reference so that this court can stay the
8

proceedings in the bankruptcy court — specifically, to prevent disposal of the
proceeds of the sale that gives rise to Natural Chem’s concern in the bankruptcy
court and in this court.
Natural Chem concedes that it has found no authority for the proposition
that a district court can withdraw reference for the sole purpose of granting a stay.
Indeed, under such circumstances, it’s difficult to define precisely what part of the
bankruptcy case the district court would purport to withdraw. The court assumes
Natural Chem seeks withdrawal of the stay motion it filed (or might not have filed,
since it didn’t comply with court rules, see N.D. Ind. L.B.R. B-9013-1(a)) in the
bankruptcy court and the motion to reconsider, since it now seeks no other relief
in this court. Analysis of such a request under the traditional yardstick for
withdrawal of reference demonstrates why withdrawal solely to stay would rarely
(if ever) be permissible, and is impermissible in this case.
In deciding whether good cause exists for withdrawal, district courts
consider “whether withdrawal would promote judicial economy or uniformity and
efficiency in bankruptcy administration; whether it would reduce forum shopping;
whether it would cause delay and costs to the parties; whether a particular court
has familiarity with the case; whether parties have demanded a jury trial; and
whether a core or non-core proceeding is involved.” Abrams v. DLA Piper (US) LLP,
No. 2:12-CV-19, 2012 WL 1714591, at *3 (N.D. Ind. May 15, 2012). None of these
factors favor withdrawal of the reference.

9

Whether a claim is a core matter has been said to be the most important of
these factors. In re Conseco Fin. Corp., 324 B.R. 50, 53 (N.D. Ill. 2005). Approval
of the sale of property of a debtor’s estate is a core proceeding. 28 U.S.C. §
157(b)(2)(N). Natural Chem demanded a jury trial, but it appears to have no right
to a jury determination of the equitable and discovery-related issues as to which
the demand relates. See Orion Pictures Corp. v. Showtime Networks, Inc. (In re
Orion Pictures Corp.), 4 F.3d 1095, 1102 (2d Cir. 1993). The bankruptcy court’s
familiarity with this case exceeds that of the district court (though both courts are
in the same district, so this factor carries little weight). At the hearing on Natural
Chem’s motions in this court, the other parties were unanimous in reporting the
costs they are suffering even in delaying things long enough to discuss withdrawal
of the reference.
A withdrawal motion’s timeliness has been called the “threshold question,”
Davis v. Mahlmann (In re Mahlmann), 149 B.R. 866, 869 (N.D. Ill. 1993), given the
importance of expeditiousness in bankruptcy proceedings. See In re BaldwinUnited Corp., 57 B.R. 751, 753 (S.D. Ohio 1985) (“If a motion could have been
filed earlier and it is filed at a time when it could delay and consequently
jeopardize the reorganization, it would not be timely.”). The motion’s timing loudly
suggests that withdrawing this reference would encourage and increase forum
shopping. Natural Chem filed its motion when its pleas for relief in the bankruptcy
court failed, both originally and on reconsideration. Natural Chem is appealing the
bankruptcy court’s denial of the reconsideration motion. An attempt to vest both
10

appellate and original jurisdiction in the district court looks, walks, and quacks
like forum shopping. See, e.g., In re Powelson, 878 F.2d 976, 983 (7th Cir. 1989).
Withdrawal of this reference would impede judicial economy, unless it is assumed
that this court should look over its own shoulder in dual capacities as trial and
appellate court.
Withdrawal of the reference would be inconsistent with case law that has
developed around 28 U.S.C. § 157(d).

C
Even if this court had good cause to withdraw the reference, the court
wouldn’t do so because Natural Chem hasn’t made the showing necessary for the
stay it seeks. A party seeking a bankruptcy stay must show each of the factors
required for nearly any injunctive relief: a substantial probability that it will
succeed on the merits; it will suffer irreparable harm if the stay is denied; the
potential harm to the movant from erroneous denial of the motion outweighs the
irreparable harm an erroneous injunction would cause the parties to be enjoined;
and the stay will serve the public. See In re The Antioch Co., 435 B.R. 493, 497
(Bankr. S.D. Ohio 2010).
Robert Salazar’s affidavit establishes a better than negligible chance of
success on the merits. The chance of success is no greater than that because it’s
likely that success on the appeal will require Natural Chem to show that the
bankruptcy court abused its discretion as a fact-finder, which is among the most
11

difficult burdens in the law. But it can’t be said that Natural Chem’s chances of
succeeding on the appeal are entirely nil.
What was just said, of course, assumes that “success on the merits” relates
to the appeal that has recently reached this court. It seems odd that “success on
the merits” in one case should consist of success in another case, but ours is an
odd case.
Even assuming that Natural Chem has shown a reasonable likelihood of
success on the merits, it has shown no irreparable harm. It didn’t satisfy the preannounced requirements for participation in what the bankruptcy court found to
have been a fairly conducted auction. Natural Chem sees it differently, of course:
it sees itself as having chosen not to participate under rules the debtor claimed
would apply, then watched as the debtor applied different rules to bidders who
had qualified. But even if that might be true, National Chem has made no
representations that if the auction and sale are walked back for a new auction, it
would outbid the joint venture that purchased the plant for $2.5 million. There is
an interest in losing out in a fair auction — and it bears repeating that after two
tries in the bankruptcy court, Natural Chem hasn’t persuaded a fact-finder that
this wasn’t a fair auction — but it doesn’t seem to be the sort of irreparable harm
that should bring a bankruptcy to a dead stop.
Even assuming that Natural Chem would suffer some sort of irreparable
harm, the trustee, the debtor and the creditors unanimously informed this court
that they are losing and/or spending money every day Natural Chem extends the
12

proceedings. Natural Chem has made no effort to compare the irreparable harm
it says it will suffer without a stay to the financial loss being suffered by everyone
in the bankruptcy proceeding.
Natural Chem isn’t entitled to a stay under the law.

III
Natural Chem hasn’t shown that it has standing to move to withdraw the
reference to the bankruptcy court or to move to stay disposal of the proceeds of
the sale of most of the debtor’s assets. Natural Chem hasn’t shown that
withdrawal of the reference to the bankruptcy court is proper under today’s
understanding of the law. Natural Chem hasn’t shown that a stay of the
bankruptcy proceedings would be a proper — or perhaps even a permissible —
exercise of the district court’s discretion. For these reasons, as well as those set
forth in the report and recommendation, the court (1) OVERRULES Natural
Chem’s objections to the bankruptcy court’s report and recommendation, (2)
ADOPTS the bankruptcy court’s report and recommendation, and (3) DENIES
Natural Chem’s motion for withdrawal of certain matters to United States District
Court and motion for stay pending ruling by United States District Court.
SO ORDERED.
ENTERED:

March 22, 2013
/s/ Robert L. Miller, Jr.
Robert L. Miller, Jr., Judge
United States District Court
13