Lynch v. Vaccaro et al
Filing
34
MEMORANDUM AND OPINION: For the reasons set forth herein, these consolidated appeals are dismissed in their entirety as moot pursuant to Section 363(m) of the Bankruptcy Code. The Clerk of the Court shall close these cases. SO ORDERED. Ordered by Judge Joseph F. Bianco on 3/28/2017. (Zbrozek, Alex)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
_____________________
Nos 16-CV-74 (JFB), 16-CV-415 (JFB),
16-CV-1475 (JFB), 16-CV-1476 (JFB)
_____________________
MAURA E. LYNCH,
Appellant,
VERSUS
STEPHEN S. VACCARO, ET AL.,
Appellees.
_____________________
PATRICIA M. FRANK,
Appellant,
VERSUS
MAURA E. LYNCH, ET AL.,
Appellees.
___________________
MEMORANDUM AND ORDER
March 28, 2017
___________________
JOSEPH F. BIANCO, District Judge:
The instant case is a consolidated set of
four appeals from orders by the Honorable
Alan S. Trust, United States Bankruptcy
Judge, in a voluntary Chapter 11 bankruptcy
proceeding (the “Bankruptcy Proceeding”)
initiated by Maura E. Lynch (“Lynch”). The
appeals’ lengthy factual and procedural
history stems from a divorce action in New
York State court filed by Stephen S.
Vaccaro (“Vaccaro”), Lynch’s former
husband (the “Divorce Action”). During the
course of the Divorce Action, the state court
ordered equitable distribution of certain
marital properties, including a property at 43
Harbor Drive, Sag Harbor, New York
(“Harbor Drive”), which was the subject of
the bankruptcy orders at issue here. 1 After
determining that Lynch had failed to comply
with its equitable distribution order and had
mismanaged Harbor Drive, the state court
appointed Vaccaro as Receiver and directed
that the property be sold and the proceeds be
equally divided.
be marketed and sold at auction pursuant to
procedures established in a separate order.
That decision is the subject of the first
appeal in this consolidated action, No. 16CV-74 (JFB), in which Lynch, as appellant,
seeks reversal of the Excusal Order (the
“Lynch Appeal”).
The state court subsequently found
Lynch in contempt and eventually replaced
Vaccaro as Receiver with Stephen L.
O’Brien (“O’Brien”).
O’Brien then
proceeded with the sale of Harbor Drive,
and the state court authorized him to effect a
contract of sale entered into by Vaccaro and
Patricia M. Frank (“Frank”) while Vaccaro
was still the court-appointed Receiver.
In addition, Frank has filed appeals in
Nos. 16-CV-415 (JFB), 16-CV-1475 (JFB),
and 16-CV-1476 (JFB) challenging three
orders by the Bankruptcy Court concerning
the sale of Harbor Drive (the “Frank
Appeals”). As noted, Lynch contracted with
Vaccaro on or about April 8, 2014 to
purchase Harbor Drive for $1,325,000 (the
“Contract”).
After Lynch filed her
bankruptcy petition, Frank moved on
November 17, 2015 for an order by the
Bankruptcy Court (1) lifting the automatic
stay of sale triggered by the petition;
(2) directing O’Brien to sell Harbor Drive to
Lynch pursuant to the Contract; and
(3) staying a separate eviction proceeding
commenced by Lynch against Frank in New
York State court (the “Stay Motion”).
However, at the December 10, 2015
evidentiary hearing, the Bankruptcy Court
directed sale of Harbor Drive through an
auction process, and Frank then tendered a
new offer of $1,425,000 for Harbor Drive
(the “New Offer”). In a December 22, 2015
order (the “Auction Order”) accompanying
the Excusal Order, the Bankruptcy Court
established procedures for the auction of
Harbor Drive and determined that the New
Offer by Frank would be treated as a
“stalking-horse” bid.
However, before Frank could close on
her purchase of Harbor Drive, Lynch filed a
voluntary Chapter 11 bankruptcy petition on
November 9, 2015. Thereafter, Vaccaro
filed a motion, as amended on November
30, 2015, in the Bankruptcy Court seeking
an order excusing O’Brien’s compliance
with Sections 543(a) and (b) of the
Bankruptcy Code, 11 U.S.C. §§ 543(a)-(b),
in order to allow O’Brien to retain custody
of Harbor Drive rather than delivering
possession to Lynch as the debtor in the
Bankruptcy Proceeding (the “Excusal
Motion”). O’Brien subsequently joined the
Excusal Motion, and after briefing and a
December 10, 2015 evidentiary hearing, the
Bankruptcy Court entered an order on
December 22, 2015 (the “Excusal Order”)
that, among other things, directed that
(1) O’Brien would continue in possession of
Harbor Drive, and (2) Harbor Drive would
On January 12, 2016, the Bankruptcy
Court formally denied Frank’s November
17, 2015 motion (the “Stay Order”), which
is the basis of the appeal in No. 16-CV-415
(JFB). On February 18, 2016, Frank moved
1
Although the Bankruptcy Proceeding implicates
other marital properties, the orders on appeal only
address Harbor Drive. Accordingly, the Court limits
its discussion and analysis to Harbor Drive in this
Memorandum and Order.
2
for reconsideration of both the Auction
Order and the Stay Order, which the
Bankruptcy Court denied on March 10, 2016
(the “Reconsideration Order”).
Frank
appeals the Reconsideration Order in No.
16-CV-1475 (JFB). In the interim, Frank
successfully tendered a winning bid of
$1,865,000 (the “Purchase Price”) for
Harbor Drive at the February 22, 2016
auction, and following two evidentiary
hearings, the Bankruptcy Court ordered on
March 18, 2016 that Harbor Drive be sold to
Frank at the Purchase Price (the “Sale
Order”). Frank then moved to stay the Sale
Order pending appeal, which the Bankruptcy
Court denied on March 24, 2016. The Sale
Order is the subject of the final appeal in
this action, No. 16-CV-1476 (JFB).
A. The Divorce Action
In 2010, Vaccaro commenced the
Divorce Action—Vaccaro v. Lynch, Index
No. 38437-10—in New York Supreme
Court, County of Suffolk (the “State
Court”). (R. at 214.) Following a nine-day
trial, the State Court entered an order on
December 12, 2012, as amended on March
15, 2013, directing, inter alia, equitable
distribution of the parties’ assets. (Id. at
728-55.) The State Court ordered that
Vaccaro and Lynch cooperate to sell Harbor
Drive and evenly divide the proceeds
between them following the satisfaction of
any outstanding mortgages, liens, and
judgments. (Id. at 753-54.) In addition, the
State Court declined to appoint a Receiver at
that time to manage the sale of Harbor
Drive, but said that it would do so if
Vaccaro and Lynch could not work together,
or if one of them thwarted the sale of the
property. (Id. at 755.)
In the Frank Appeals, Frank seeks
(1) reversal of the Stay, Reconsideration,
and Sale Orders; and (2) repayment of the
differential between the Contract price and
the Purchase Price for Harbor Drive, i.e.,
$540,000.
On May 3, 2013, following a motion by
Vaccaro, the State Court appointed Vaccaro
as Receiver for Harbor Drive based on
Lynch’s failure to vacate Harbor Drive and
cooperate in the sale of that property. (Id. at
757-59.) It directed Lynch to leave Harbor
Drive by June 30, 2013 and to make the
property presentable for real estate
showings. (Id.) The State Court entered a
final judgment in the Divorce Action on July
16, 2013, as amended on December 23,
2013, which reiterated that Harbor Drive
was to be equitably distributed. (Id. at 76173.)
***
For the reasons set forth below, the
Court concludes that the Lynch Appeal and
the Frank Appeals are moot pursuant to
Section 363(m) of the Bankruptcy Code, 11
U.S.C. § 363(m), and therefore dismisses
this consolidated action in its entirety.
I. BACKGROUND
The Court assumes the parties’
familiarity with the full facts and procedural
history underlying this action and
summarizes the facts and history relevant to
the instant appeals based on the
Consolidated Bankruptcy Record on Appeal.
(“R.,” No. 16-CV-1476, ECF No. 5.)
The State Court found Lynch in
contempt on November 26, 2013 for, inter
alia, obstructing the sale of Harbor Drive
(id. at 775-80), and on April 1, 2015, it
replaced Vaccaro with O’Brien as Receiver
(id. at 782-87.) The State Court directed
3
O’Brien to prevent waste or mismanagement
of Harbor Drive and to dispose of it in
accordance with its prior order. (Id. at 785.)
However, on Lynch’s motion, the New York
Appellate Division, Second Department
issued an order on March 27, 2015 directing
Vaccaro to show cause as to why the sale of
Harbor Drive should not be stayed pending
Lynch’s appeal of various State Court
orders, and the State Court accordingly
stayed its April 1, 2015 order on April 14,
2015. (Id. at 807.) Subsequently, on May
15, 2015, the Second Department denied
Lynch’s request for a stay of sale, and by
order dated August 25, 2015, the State Court
vacated its April 14, 2015 order, thereby
allowing the sale of Harbor Drive to move
forward. (Id. at 809.)
Bankruptcy Court to stay an ancillary
eviction proceeding initiated by Lynch
against Frank in the Justice Court of the
Town of Southampton. (Id. at 16.)
Further, on September 24, 2015, the
State Court authorized O’Brien to retain
counsel and a broker to sell Harbor Drive in
accordance with the Contract between Frank
and Vaccaro, which had been entered into
by Vaccaro during the period when he
served as Receiver. (Id. at 789-91.) The
Contract, dated April 8, 2014, listed a
purchase price of $1,325,000 by Frank for
Harbor Drive (id. at 825-38), and the State
Court approved a sale of the property for
that price in its September 24, 2015 order
(id. at 791).
1. The December 10, 2015 Evidentiary
Hearing
Subsequently, on November 23, 2015,
Vaccaro filed the Excusal Motion, as
amended on November 30, 2015, seeking an
order pursuant to 11 U.S.C. § 543(d)
excusing O’Brien’s compliance with
Sections 543(a) and (b) of the Bankruptcy
Code that would allow O’Brien to retain
possession of Harbor Drive, rather than
delivering the property to Lynch as the
debtor in the Bankruptcy Proceeding. (Id. at
165-72, 183-94.)
O’Brien joined the
Excusal Motion on December 2, 2015. (Id.
at 219-23.)
After the Stay and Excusal Motions were
fully briefed, the Bankruptcy Court held an
evidentiary hearing on December 10, 2015.
(Id. at 573-673.) Vaccaro, Lynch, Frank,
and O’Brien were all represented by counsel
at that hearing, and O’Brien testified. (Id.)
After reviewing evidence submitted by the
parties and hearing argument from counsel,
the Bankruptcy Court orally granted the
Excusal Motion in part and denied the Stay
Motion in its entirety at the conclusion of
the hearing after first affording the parties
time to privately “work out a mechanism by
which the value of that property [Harbor
Drive] can be quickly maximized for the
benefit of creditors.” (Id. at 654.) With
respect to the Excusal Motion, the
Bankruptcy Court found, after applying the
factors set forth by Judge Spatt in In re Dill,
163 B.R. 221 (E.D.N.Y. 1994), that excusal
was warranted because Lynch
B. The Bankruptcy Proceeding
Before Frank closed on Harbor Drive,
Lynch filed her voluntary petition for relief
under Chapter 11 of the Bankruptcy Code
on November 9, 2015. (Id. at 10.) On
November 17, 2015, Frank filed the Stay
Motion for an order pursuant to 11 U.S.C.
§ 362(d) terminating the automatic stay
triggered by Lynch’s petition in order to
allow Frank to proceed with the purchase.
(Id. at 10-17.)
Frank also asked the
4
“appropriate in this setting to treat the
Franks as a stalking horse purchaser for the
property and to provide to them certain bid
protections in the event of an ultimate
auction sale of the property,” and that there
would “only be an auction if someone
offer[ed] [O’Brien] more money than the
Franks did.” (Id. at 668-69.) 2 Finally, the
Bankruptcy Court refused to enjoin the
eviction proceeding initiated by Lynch
against Frank in state court due to
limitations on the Bankruptcy Court’s
“jurisdiction to restrain the lawful processes
of a sister court.” (Id. at 667.)
ha[d] no viable plan that [was] in the
best interest of [Harbor Drive]. She
ha[d] no tenant. She ha[d] no right
to rent the property. She ha[d] no
buyer and no realistic plan to
maximize the value of the property.
The debtor [Lynch] would argue that
she’s only had a month in
bankruptcy to attempt to come up
with such a plan, but the 43 Harbor
property ha[d] been the subject of
sale orders by the [S]tate [C]ourt for
almost three years.
(Id. at 661.) In addition, the Bankruptcy
Court highlighted Lynch’s failure to pay
pre-petition liens on Harbor Drive (id. at
662), and it therefore “infer[red] and [found]
based upon the debtor’s pre-petition conduct
that she ha[d] mismanaged the 43 Harbor
property by refusing to abide by the lawful
orders of the [S]tate [C]ourt for a protracted
period of time . . .” (id. at 663).
Accordingly, the Bankruptcy Court excused
O’Brien’s compliance with Sections 543(a)
and (b) of the Bankruptcy Code in order to
allow him to retain possession of Harbor
Drive pending sale. (Id. at 664-65.)
2. The Excusal and Auction Orders
On December 22, 2015, the Bankruptcy
Court entered the Excusal Order, which
stated that “pursuant to Section 543(d) of the
Bankruptcy Code, Stephen L. O’Brien (‘the
Receiver’) is excused from complying with
Sections 543(a) and (b) of the Bankruptcy
Code with respect to the parcel of real
property known as 43 Harbor Drive, Sag
Harbor, New York (the ‘Harbor Drive
Property’)”; “the Receiver shall continue in
possession of the Harbor Drive Property”;
and “the Harbor Drive Property shall be
marketed and sold by the Receiver pursuant
to procedures that will be issued by this
Court in a separate order.” (Id. at 553-54.)
The Excusal Order also mentioned
additional marital properties that were the
subject of the Excusal Motion, but it
deferred resolution of the relief requested by
Vaccaro and O’Brien as to those properties
to a later date. (Id. at 554.)
As to the disposition of that property and
Frank’s Stay Motion, the Bankruptcy Court
expressed “concerns about whether or not 43
Harbor is now worth more than the Frank
contract price” (id. at 661) and determined
that it was in the best interests of creditors to
“implement a sale process to ascertain and
obtain the highest and best value for an asset
of the estate” (id. at 665). The Bankruptcy
Court said that it would “enter an order
authorizing [O’Brien] to proceed on [an 11
U.S.C. §] 363(b) process before this Court to
ascertain the highest and best value for the
43 Harbor property.” (Id. at 666.) The
Bankruptcy Court also said that it was
2
During oral argument on the Stay Motion, the
Bankruptcy Court also expressed its view, without
explanation, that the Contract had “expired.” (Id. at
623.)
5
motion for reconsideration. (Tr. of March 9,
2016 Hr’g, No. 16-CV-1476 (JFB), ECF No.
5-11.) The Bankruptcy Court determined
that reconsideration of the Stay Order was
unwarranted because (1) Frank’s motion
was untimely since it was filed more than 14
days after entry of the Stay Order; and
(2) the Bankruptcy Court did not make any
mistake of law or fact in denying the Stay
Motion. (Id. at 91-92.) The Bankruptcy
Court held that the “Bankruptcy Code
clearly supervenes State Court receivership
orders, and this Court has statutory authority
under Section 543 to excuse or condition the
receiver’s noncompliance with Sections 362,
542, and 543 with respect to bankruptcy of
the estate which is precisely what this Court
did in the receiver order entered on
December 22nd.” (Id. at 92.) With respect
to the Auction Order, the Bankruptcy Court
found no grounds for reconsideration
because that decision was interlocutory,
rather than final, and there was no
intervening change in the controlling law,
new evidence, or manifest injustice. (Id. at
93-94.)
On that same day, the Bankruptcy Court
issued the Auction Order, which stated that
it was “in the best interests of [Lynch’s]
bankruptcy estate, its creditors and other
parties-in-interest, for” Harbor Drive to be
sold by O’Brien pursuant to auction
procedures annexed to the Auction Order.
(Id. at 555-57.) The Auction Order also
stated that “Frank, who signed a contract to
purchase the Harbor Drive Property for
$1,325,000.00 has agreed to increase her
offer to $1,425,000.00 and shall be deemed
a stalking horse bidder and a Qualified
Bidder.” (Id. at 556.)
3. The Stay and Reconsideration Orders
On January 12, 2016, the Bankruptcy
Court issued the Stay Order denying Frank’s
Stay Motion.
(Id. at 687-88.)
The
Bankruptcy Court said that, based on its
findings at the December 10, 2015 hearing,
it had concluded that “neither relief from the
automatic stay nor a stay of the eviction
proceedings should not [sic] be granted.”
(Id. at 687.) Subsequently, on February 18,
2016, Frank moved for reconsideration of
the Stay and Auction Orders. (Id. at 122135.)
Frank argued that the Bankruptcy
Court (1) failed to correctly apply New York
law by sua sponte determining that the
Contract had “expired”; (2) deprived Frank
of Due Process by refusing to give effect to
the Contract; and (3) improperly denied
Frank of the protections of 11 U.S.C. §
365(i), which would allow her, as the
purchaser in possession of Harbor Drive, to
enforce the Contract. (Id. at 1221-34.) In
the alternative, Frank asked the Bankruptcy
Court to stay the auction and sale of Harbor
Drive pending appeal. (Id. at 1234-35.)
Finally, the Bankruptcy Court declined
Frank’s request for a stay of sale pending
appeal because (1) as discussed further
below, there was no possibility that Frank
would lose Harbor Drive to another bidder
since she had successfully placed the
winning bid for that property; (2) the
bankruptcy estate would not suffer injury
absent a stay, and would in fact be harmed if
a stay eventually permitted Frank to buy
Harbor Drive for the Contract price, rather
than the higher Purchase Price; and
(3) Frank failed to demonstrate a likelihood
of success on appeal because (a) neither the
Stay Order nor the Auction Order in fact
negated the Contract, and (b) Frank failed to
demonstrate entitlement to the protections of
At a hearing on March 9, 2016, the
Bankruptcy Court orally denied Frank’s
6
substantial considerations for the
Court, and this Court is taking
gravely seriously the allegations of
taint, interference, and intimidation.
11 U.S.C. § 365(i) because that provision is
limited to contracts of sale made by the
debtor, and Lynch was not a party to the
Contract. (Id. at 94-99.) On March 10,
2016, the Bankruptcy Court issued the
Reconsideration Order denying Frank’s
motion for reconsideration of the Stay and
Auction Orders. (R. at 1799.)
The Court’s conclusion from the
testimony and admissible evidence
though is that . . . there’s no actual
evidence before this Court of taint,
interference, or intimidation.
4. The Sale Order
While [an 11 U.S.C. §] 363 sale
process is usually not perfect, there
were no irregularities in this sale
process. There were no violations of
the Court’s bid procedures . . . .
An auction was held for Harbor Drive on
February 22, 2016, and Frank was the
winning bidder with the Purchase Price of
$1,865,000.00.
(Id. at 1724.)
The
Bankruptcy Court then held evidentiary
hearings on February 24, 2016 and March
9, 2016 to determine whether to approve the
sale of Harbor Drive to Frank. (Id. at 15671676; Tr. of March 9, 2016 Hr’g.) The
parties submitted briefs on that issue, and
the
Bankruptcy
Court
specifically
considered Lynch’s contention that Frank
and O’Brien had acted in bad faith during
the auction process. (See, e.g., Tr. of March
9, 2016 Hr’g at 99-100.) After hearing
testimony and reviewing evidence, the
Bankruptcy Court stated the following at the
conclusion of the March 9, 2016 hearing:
So the Court does conclude that there
has been no taint in the sale process
and no violation of the Court’s bid
procedures.
(Id.) Accordingly, the Bankruptcy Court
found that approving the sale of Harbor
Drive to Frank for the Purchase Price was
“in the best interest of the bankruptcy estate
and . . . without any doubt maximized the
value of this asset to this estate.” (Id. at
101.)
On March 18, 2016, the Court issued the
Sale Order, which stated, inter alia, that
This Court expressed significant
concern at the close of the prior
hearing [on February 24, 2016] or at
the adjournment point of the prior
hearing with allegations of taint in
the sale process.
the Court does not find that [Lynch]
has proven either that Frank
interfered with the auction process or
that [O’Brien] failed to comply with
the [Auction] Order; instead, the
Court finds that the Harbor Drive
Property was properly exposed to the
market place through a vigorous
marketing and auction process, and
the bids obtained exceed the value
ascribed to the property by [Lynch]
As the parties are well aware, a
bankruptcy sale process must be
open. It must be clear. It must be
clean. It must be vigorous. There
are no side deals. There are no
secrets, and a[n] auction process in a
bankruptcy case that is tainted raises
7
brief on August 29, 2016, and Lynch
submitted her opposition on September 27,
2016, which Vaccaro joined in part that
same day. Frank filed her reply on October
24, 2016. O’Brien did not submit or join
any briefs in either the Lynch or Frank
Appeals.
and equals or in fact exceeds the fair
market value of the property.
(Id. at 1724-28.) The Sale Order also
authorized O’Brien to sell Harbor Drive to
Frank for the Purchase Price, and the
Bankruptcy Court ordered that “in the event
that the Purchaser consummates the closing
of the sale of the Harbor Drive Property
while an appeal of this Order is pending, the
Purchaser shall be entitled to rely upon the
protection of § 363(m) of the Bankruptcy
Code, absent any stay pending appeal . . . .”
(Id.)
The Court has fully considered the
parties’ submissions, as well as the
voluminous
Consolidated
Bankruptcy
Record on Appeal.
II. STANDARD OF REVIEW
Thereafter, Frank moved on March 21,
2016 for a stay of the Sale Order pending
appeal (id. at 1729-51), which the
Bankruptcy Court denied by order dated
March 24, 2016 (id. at 1800). In accordance
with the Sale Order, O’Brien and Frank
closed on the purchase of Harbor Drive on
March 24, 2016, and the property deed was
transferred to Frank. (Id. at 1801.)
28 U.S.C. § 158(a) vests this Court with
appellate jurisdiction to review final orders
of the Bankruptcy Court. The Court will
review the Bankruptcy Court’s legal
conclusions de novo and its factual findings
for clear error. See In re Hyman, 502 F.3d
61, 65 (2d Cir. 2007); see also In re
Bayshore Wire Prods. Corp., 209 F.3d 100,
103 (2d Cir. 2000) (“Like the District Court,
we review the Bankruptcy Court’s findings
of fact for clear error, . . . its conclusions of
law de novo, . . . its decision to award costs,
attorney’s fees, and damages for abuse of
discretion.”).
C. The Instant Appeals
Lynch filed Notice of Appeal of the
Excusal Order on January 7, 2016, and
Frank appealed the Stay Order on January
25, 2016 and the Reconsideration and Sale
Orders on March 24, 2016. This Court
consolidated the Lynch Appeal and the
Frank Appeals by order dated May 10, 2016.
“The approval of a sale of assets under
section 363 of the Bankruptcy Code is
generally reviewed for abuse of discretion.”
23 Jefferson St. LLC v. 636 Assets, Inc., No.
14-CV-7150 CBA, 2015 WL 5037343, at *3
(E.D.N.Y. Aug. 25, 2015) (citing In re
Motors Liquidation Co., 428 B.R. 43, 51
(S.D.N.Y. 2010)). “A bankruptcy court
abuses its discretion when it arrives at ‘(i) a
decision resting on an error of law (such as
application of the wrong legal principle) or a
clearly erroneous factual finding, or (ii) a
decision that, though not necessarily the
product of a legal error or a clearly
Lynch filed her brief in the Lynch Appeal
on July 15, 2015, and Vaccaro and Frank
filed opposition briefs on September 27,
2016. Lynch then submitted her reply on
October 24, 2016.
With respect to the Frank Appeals, the
parties filed a single set of briefs in all three
actions. Frank filed an amended opening
8
appealable as of right.
erroneous factual finding, cannot be located
within the range of permissible decisions.’”
Motors Liquidation, 428 B.R. at 51-52
(quoting Schwartz v. Aquatic Dev. Grp.,
Inc., 352 F.3d 671, 678 (2d Cir. 2003)).
With respect to the Frank Appeals,
Frank contends that reversal of the Stay,
Reconsideration, and Sale Orders is required
because the Bankruptcy Court violated
Frank’s Due Process rights and denied her
the protections of Section 365(i) of the
Bankruptcy Code by issuing the Auction and
Sale Orders despite Frank’s pre-existing
equitable interest in Harbor Drive based on
the Contract.
Specifically, Frank argues
that the Bankruptcy Court wrongly
determined that the Contract had “expired”
and did not afford her an opportunity to be
heard prior to directing the sale of Harbor
Drive at auction pursuant to 11 U.S.C.
§ 363. Finally, Frank asserts that the
Bankruptcy Court violated the RookerFeldman doctrine by disregarding the State
Court’s September 24, 2015 order approving
the sale of Harbor Drive to Frank for the
Contract price.
III. DISCUSSION
In the Lynch Appeal, Lynch argues that
reversal of the Excusal Order is warranted
because the Bankruptcy Court “committed
clear error and/or abused its discretion when
it determined, without any evidence before
it, that Lynch mismanaged” Harbor Drive.
(Lynch Appellant Br. at 15.) Lynch also
claims that the various “State Court orders
[in the Divorce Action] violated the
Appellate Division’s stay and Lynch’s Due
Process rights [and] improperly influenced
the Bankruptcy Court’s decision.” (Id. at
16.) She thus contends that the Bankruptcy
Court should not have credited the State
Court’s findings as a basis for excusing
O’Brien’s compliance with Sections 543(a)
and (b) of the Bankruptcy Code because
they were unlawful. (Id. at 16-17.)
In her opposition brief, Lynch contends
that (1) Frank waived her right to appeal the
Bankruptcy Court’s order by participating in
the auction of Harbor Drive; (2) the Contract
did not grant Frank any enforceable interests
with respect to that property; and (3) to the
extent that Frank seeks to challenge the
Excusal and/or Auction Orders, that
challenge is procedurally defective because
Frank failed to appeal from those decisions.
Vaccaro joins the first and third of Lynch’s
arguments in his opposition.
Vaccaro argues in opposition that (1) the
Lynch Appeal is constitutionally moot
because the sale of Harbor Drive is a fait
accompli; (2) the Bankruptcy Court
correctly determined that excusal was in the
best interests of the bankruptcy estate’s
creditors; and (3) the Rooker-Feldman
doctrine bars federal review of the State
Court orders. Frank joins the RookerFeldman argument in her opposition brief
and also avers that (1) Lynch has no right
under New York State law to appeal the
May 11, 2013 State Court order appointing
Vaccaro as Receiver; (2) the Lynch Appeal
is moot under Section 363(m) of the
Bankruptcy Code; and (3) the Excusal Order
was interlocutory and therefore not
For the reasons set forth below, the
Court concludes that this consolidated action
is moot under Section 363(m) of the
Bankruptcy Code and that, consequently,
there is no appellate jurisdiction.
Accordingly, the Court dismisses the Lynch
and Frank Appeals in their entirety.
9
[courts] only retain authority to review
challenges to the ‘good faith’ aspect of the
sale.” Id. at 248; see also In re Gucci, 105
F.3d 837, 840 (2d Cir. 1997) (“Gucci I”)
(“[R]egardless of the merit of an appellant’s
challenge to a sale order, we may neither
reverse nor modify the judicially-authorized
sale if the entity that purchased or leased the
property did so in good faith and if no stay
was granted.”).
A. Applicable Law
Section 363(m) of the Bankruptcy Code
provides that the
reversal or modification on appeal of
an authorization under subsection (b)
or (c) of this section of a sale or lease
of property does not affect the validity
of a sale or lease under such
authorization to an entity that
purchased or leased such property in
good faith, whether or not such entity
knew of the pendency of the appeal,
unless such authorization and such sale
or lease were stayed pending appeal.
Moreover, because of “the uniquely
important interest in assuring the finality of
a sale that is completed pursuant to 11
U.S.C. § 363(b) or (c) in bankruptcy
proceedings,”
appellate
courts
lack
jurisdiction under Section 363(m) “to review
the entire Sale Order—not just the actual
sale transaction.” WestPoint, 600 F.3d at
248 (footnote omitted) (citing In re Parker,
499 F.3d 616, 620 (6th Cir. 2007) (“[W]e
begin by dispelling any notion that we sit in
review of the bankruptcy court’s Order of
Sale. Defendant’s attempts to assail the
validity of the bankruptcy court’s Order of
Sale, however indirectly, are statutorily
moot.”)); see also In re Rare Earth
Minerals, 445 F.3d 359, 363 (4th Cir. 2006)
(“Section 363(m) codifies Congress’s strong
preference for finality and efficiency in the
bankruptcy context, particularly where third
parties are involved.”)
11 U.S.C. § 363(m).
In In re WestPoint Stevens, Inc., 600
F.3d 231 (2d Cir. 2010), the Second Circuit
explained that this provision “creates a rule
of ‘statutory mootness,’ which bars appellate
review of any sale authorized by 11 U.S.C.
§ 363(b) or (c) so long as the sale was made
to a good-faith purchaser and was not stayed
pending appeal.” Id. at 247 (citations
omitted). Moreover, “[b]y restricting the
exceptions to the application of section
363(m) to an entry of a stay or a challenge to
the ‘good faith’ aspect of the sale, section
363(m) moots a broader range of cases than
are barred under traditional doctrines of
mootness.” Id. (citing Weingarten Nostat,
Inc. v. Serv. Merch. Co., 396 F.3d 737, 742
(6th Cir. 2005) (“Even if the appeal is not
moot as a constitutional matter because a
court could provide a remedy, . . . § 363(m)
requires that certain appeals nonetheless be
treated as moot absent a stay.”)). Thus, the
Second Circuit has “held in no ambiguous
terms that section 363(m) is a limit on [a
reviewing court’s] jurisdiction and that,
absent an entry of a stay of the Sale Order,
Thus, the Second Circuit highlighted in
WestPoint the danger of opening the door to
collateral attacks on bankruptcy sale orders,
even if the challenge is not to the sale itself,
but rather to some other provision or
procedure pertaining to the sale.
It
cautioned that permitting appellate review
would, inter alia, enable “a purchaser [to]
demand a discount for the purchase of assets
in which the terms and conditions of the sale
cannot be protected from challenge even
10
after closing the sale.” 600 F.3d at 248-49
(citing In re Trism, Inc., 328 F.3d 1003,
1007 (8th Cir. 2003) (“[A] challenge to a
related provision of an order authorizing the
sale of the debtor’s assets affects the validity
of the sale [and therefore falls under section
363(m)] when the related provision is
integral to the sale of the estate’s assets.”)).
In addition, courts in this Circuit and other
Courts of Appeal have correctly held that
“section 363(m)’s strict limitation of issues
on appeal of an unstayed sale order does not
distinguish between jurisdictional and nonjurisdictional challenges [to the Sale
Order].” Motors Liquidation, 428 B.R. at 54
(collecting cases).
submissions and the lengthy history of this
consolidated action, it is clear to this Court
that Section 363(m) and Second Circuit
precedent preclude appellate review of any
aspect
of
the
Excusal,
Auction,
Reconsideration, or Sale Orders, except for
whether Frank purchased Harbor Drive in
good faith. Because the Bankruptcy Court
conducted extensive factual findings on that
issue, and this Court does not find any
evidence of error—much less clear error—
by the Bankruptcy Court, the Lynch and
Frank Appeals are statutorily moot and must
be dismissed. See, e.g., MSR Resort, 2014
WL 67364, at *10 (holding that the appeal
was moot because the “Bankruptcy Court
concluded that” the purchaser acted in good
faith “and this conclusion was not clear
error”).
This “strictly enforce[d]” rule “applies
even when a stay was denied by the district
court after a motion for a stay was timely
made because statutory mootness recognizes
that a reviewing court ‘may be powerless to
undo or rewrite the terms of the
consummated sale.’” Id. at 53 (quoting
Gucci I, 105 F.3d at 840). Thus, a failure to
seek or obtain a stay pending appeal of a
bankruptcy sale order from either a
bankruptcy court or a district court divests a
district court of jurisdiction to review any
aspect of the sale order, except for whether
the purchaser acted in good faith. See id. at
54; WestPoint, 600 F.3d at 248; In re MSR
Resort Golf Course LLC, No. 13 CIV. 2448
KPF, 2014 WL 67364, at *10 (S.D.N.Y. Jan.
7, 2014) (“Because § 363(m) applies and
because the relief the Appellant seeks would
affect the validity of the sale, the Court has
jurisdiction to hear a single argument:
whether the Purchaser qualified as a good
faith purchaser for § 363(m) purposes.”).
1. The Lynch Appeal
Although Lynch appeals the Excusal
Order, rather than the Sale Order, that is a
distinction without a difference under
WestPoint, which made plain that Section
363(m) bars review of not just bankruptcy
sale orders, but also other provisions that are
“integral” to the sale. WestPoint, 600 F.3d
at 248. In that case, the Second Circuit
found that the statutory mootness rule
applied to lien release, claim satisfaction,
and distribution provisions in a sale order
because without them, “there simply could
not be a sale.” Id. at 250 (citing In re
Stadium Mgmt. Corp., 895 F.2d 845, 849
(1st Cir. 1990) (concluding that a certain
condition of the sale was “integral to the sale
and removing it from the sale would have
adversely affected the terms of the sale”)).
Likewise, the Excusal Order was a
necessary precursor to the sale of Harbor
Drive because, among other things, it
directed “that the Harbor Drive Property
B. Analysis
Notwithstanding the parties’ plethora of
11
irreversible steps following the sale.”)).
shall be marketed and sold by [O’Brien]
pursuant to procedures that will be issued by
this Court in a separate order.” (R. at 554.)
Further, reversal of the Excusal Order would
result in delivering possession of Harbor
Drive to Lynch as the debtor in the
Bankruptcy Proceeding pursuant to 11
U.S.C. § 543, thereby negating the sale of
that property to Frank. Accordingly, Section
363(m) applies to that decision.
Here, Lynch advances the same
argument that she asserted before the
Bankruptcy Court: that “during the sale and
bidding process [for Harbor Drive], Frank
actively interfered with the processes in an
effort to affect the outcome of the bid” by
impeding “the marketing and showing of
[Harbor Drive] in an effort to discourage
bidders, and at the auction tried to persuade
the next highest bidder, the Gilbert family,
to refrain from participating in the bid.”
(Lynch Reply Br. at 3-4.) However, where,
as here, “the bankruptcy court determines
that the buyer purchased in good faith, the
appeal is moot unless appellants can
establish that such a finding is clearly
erroneous.” 23 Jefferson St., 2015 WL
5037343, at *4 (citing Dist. Lodge 26, Int’l
Ass’n of Machinists & Aerospace Workers v.
United Techs. Corp., 610 F.3d 44, 51-52 (2d
Cir. 2010)). Upon review of the record—
including the transcripts of the February 24
and March 9, 2016 hearings where the
Bankruptcy Court reviewed evidence and
testimony regarding Frank’s conduct during
the auction of Harbor Drive—this Court is
“not left with ‘the definite and firm
conviction that a mistake [w]as . . .
committed’” by the Bankruptcy Court in its
finding of good faith, as set forth in its
March 9, 2016 oral ruling and the Sale
Order. Dist. Lodge 26, 610 F.3d at 52
(quoting United States v. U.S. Gypsum Co.,
333 U.S. 364, 395 (1948)). 3
Because there is no dispute that Lynch
did not seek, much less obtain, a stay of the
Excusal Order from either this Court or the
Bankruptcy Court, this Court’s jurisdiction
is limited to reviewing her challenge to the
“good faith” aspect of the sale. WestPoint,
600 F.3d at 248. “Although the Bankruptcy
Code does not define the meaning of ‘goodfaith purchaser,’ most courts have adopted a
traditional equitable definition: ‘one who
purchases the assets for value, in good faith
and without notice of adverse claims.’” In
re Gucci, 126 F.3d 380, 390 (2d Cir. 1997)
(“Gucci II”) (citations omitted). “Good faith
of a purchaser is shown by the integrity of
his conduct during the course of the sale
proceedings; where there is a lack of such
integrity, a good faith finding may not be
made.” Id. Moreover, a “purchaser’s good
faith is lost by ‘fraud, collusion between the
purchaser and other bidders or the trustee, or
an attempt to take grossly unfair advantage
of other bidders.’” Id. However, “the
purchaser’s participation in the bankruptcy
or its knowledge of a pending appeal [does
not] imply bad faith.” 23 Jefferson St. LLC
v. 636 Assets, Inc., No. 14-CV-7150 CBA,
2015 WL 5037343, at *4 (E.D.N.Y. Aug.
25, 2015) (citing 11 U.S.C. § 363(m); In re
Ewell, 958 F.2d 276, 280 (9th Cir. 1992)
(“We have applied the mootness rule
whether or not the purchaser is a party to the
appeal or the purchaser has taken
3
In addition to being statutorily moot, the Lynch
Appeal is also equitably moot. “[A]n appeal is
presumed equitably moot where the debtor’s plan of
reorganization has been substantially consummated.”
In re Charter Commc’ns, Inc., 691 F.3d 476, 482 (2d
Cir. 2012). The Second Circuit has held that the
presumption of equitable mootness can be
overcome, however, if . . . (1) ‘the court can
12
Accordingly, because (1) the Excusal
Order was an integral part of the sale of
Harbor Drive; (2) Lynch did not obtain a
stay of the Excusal Order; and (3) the
Bankruptcy Court did not commit clear error
in determining that Frank was a good-faith
purchaser of Harbor Drive, the Lynch
Appeal is moot under Section 363(m) of the
Bankruptcy Code and must be dismissed. 4
2. The Frank Appeals
The same statutory mootness argument
that Frank advances in opposition to the
Lynch Appeal is fatal to her own appeals.
Like the Excusal Order, the Stay and
Reconsideration Orders were both integral
to the sale of Harbor Drive because they
were necessary precursors to Frank’s
eventual purchase of that property at
auction, and the Sale Order clearly falls
within the ambit of Section 363(m) because
it approved a sale pursuant to 11 U.S.C.
§ 363(b). (R. at 1726.) In other words,
reversal of the Stay Order or the
Reconsideration Order—which also denied
reversal of the Auction Order—would
necessarily undo the sale of Harbor Drive,
and thus, Section 363(m) applies. See
WestPoint, 600 F.3d at 248-51 (holding that
that statutory mootness covered contested
provisions that were necessary to transfer
still order some effective relief’; (2) ‘such
relief will not affect the re-emergence of the
debtor as a revitalized corporate entity’; (3)
‘such relief will not unravel intricate
transactions so as to knock the props out
from under the authorization for every
transaction that has taken place and create
an unmanageable, uncontrollable situation
for the Bankruptcy Court’; (4) ‘the parties
who would be adversely affected by the
modification have notice of the appeal and
an opportunity to participate in the
proceedings’; and (5) ‘the appellant pursued
with diligence all available remedies to
obtain a stay of execution of the
objectionable order if the failure to do so
creates a situation rendering it inequitable to
reverse the orders appealed from.’
Bankruptcy Court did not abuse its discretion in
excusing O’Brien’s compliance with Sections 543(a)
and (b) to protect the creditors’ best interests.
Further, although Lynch claims in her reply brief that
she is not seeking reversal of the State Court orders,
and thus the Rooker-Feldman doctrine is
inapplicable, her argument that the Bankruptcy Court
improperly relied on the State Court orders in
granting the Excusal Motion is without merit.
(Lynch Reply Br. at 7-9.) First, to the extent that
Lynch asserts that the State Court violated her Due
Process rights during the Divorce Action, such a
claim is not properly before the Court in this action,
which is an appeal from a federal bankruptcy
proceeding. Second, there is a long tradition of
federal abstention in cases pertaining to family affairs
based on, inter alia, “the strong state interest in
domestic relations matters” and “the competence of
state courts in settling family disputes.” Crouch v.
Crouch, 566 F.2d 486, 487 (5th Cir. 1978) (collecting
cases). In concert with this principle, this Court, like
the Bankruptcy Court, refuses Lynch’s invitation to
impugn the integrity of the State Court proceedings.
Id. (quoting In re Chateaugay Corp., 10 F.3d 944,
952-53 (2d Cir. 1993)).
Since substantial consummation is not in dispute here
because the Bankruptcy Court approved the sale of
Harbor Drive and Frank has obtained title to the
property, Lynch “must satisfy all five of the above
requirements to defeat the presumption of mootness.”
MSR Resort, 2014 WL 67364, at *11. However, she
cannot do so because, at a minimum, she failed to
seek a stay of the Excusal Order and thus cannot
satisfy the fifth factor. See In re Leatherstocking
Antiques, Inc., No. 12 CIV. 7758 ER, 2013 WL
5423995, at *5 (S.D.N.Y. Sept. 27, 2013).
4
Even were this appeal not moot, the Court would
affirm the Excusal Order on its merits based on the
Bankruptcy Court’s factual findings at the December
10, 2015 evidentiary hearing pertaining to Lynch’s
mismanagement of Harbor Drive. In light of those
findings, which are free of clear error, the
13
control of the property). 5
the distribution of the proceeds from a
bankruptcy sale); MSR Resort, 2014 WL
67364, at *9.
Further, although Frank may argue that
awarding her damages in the amount of the
difference between the Contract price and
the Purchase Price—i.e., $540,000—would
not invalidate the sale of Harbor Drive and
thus would not implicate the statutory
mootness rule, WestPoint foreclosed that
argument. In that case, the Second Circuit
said that while it had previously noted that
“it was unclear why ‘an appellate court . . . .
could not order some form of relief other
than invalidation of the sale,’” 600 F.3d at
248 (quoting Gucci I, 105 F.3d at 840 n.1),
it now held that Section 363(m) divests
appellate courts of “jurisdiction to review
the entire Sale Order—not just the actual
sale transaction,” id.
In reaching this
holding, the Court cited the Sixth Circuit’s
decision in Parker, 499 F.3d at 621, which
observed that a “majority of our sister
circuits construe § 363(m) as creating a per
se rule automatically mooting appeals for
failure to obtain a stay of the sale at issue.”
Similarly, the Second Circuit also cited
approvingly the Eleventh Circuit’s opinion
in The Charter Co., 829 F.2d at 1056, which
rejected the appellant-purchaser’s attempt
“to obtain a refund of a portion of the sale
price” because “[o]ne cannot challenge the
validity of a central element of a purchase,
the sale price, without challenging the
validity of the sale itself.” See WestPoint,
600 F.3d at 251; see also id. at 251 n.11
(holding that Section 363(m) also applies to
Likewise, this Court “fail[s] to see how
[it] could order a [$540,000] refund to the
purchaser without affecting the validity of
the sale.” The Charter Co., 829 F.2d at
1056; see also Parker, 499 F.3d at 622
(holding that Section 363(m) precludes
granting relief that would “materially
modify” the value of the sale asset).
Further, allowing Frank to devalue Harbor
Drive by recouping from the bankruptcy
estate the premium she paid above the
Contract price would implicate the policy
concerns that Congress addressed by
enacting Section 363(m). See WestPoint,
600 F.3d at 248-49 (noting that opening a
final sale to an appellate challenge would
encourage “a purchaser [to] demand a
discount for the purchase of assets in which
the terms and conditions of the sale cannot
be protected from challenge even after
closing the sale”). As noted, statutory
mootness
safeguards
“the
uniquely
important interest in assuring the finality of
a sale that is completed pursuant to 11
U.S.C. § 363(b) or (c) in bankruptcy
proceedings,” id. at 248, and thus
“consummation of a sale in bankruptcy
greatly limits the ability of reviewing courts
to fashion effective relief,” Parker, 499 F.3d
at 621.
Accordingly, because Section 363(m)
applies to the Stay, Reconsideration, and
Sale Orders—notwithstanding that Frank
seeks damages in addition to reversal—and
Frank did not obtain a stay of those orders
pending appeal (although she unsuccessfully
sought a stay in the Bankruptcy Court in
conjunction
with
her
motion
for
reconsideration and after issuance of the
5
Moreover, the fact that Frank was the purchaser of
Harbor Drive does not preclude operation of Section
363(m). See In re The Charter Co., 829 F.2d 1054,
1056 (11th Cir. 1987) (“[A]ppellant argues that the
stay requirement does not apply to a purchaser who
challenges the authorization. . . . There is nothing in
the language of section 363(m) to suggest that such
an exception exists.”); accord WestPoint, 600 F.3d at
248-51.
14
Sale Order), this Court’s jurisdiction is
limited to reviewing for good faith. See
Motors Liquidation, 428 B.R. at 53; Am.
Land Acquisition, Corp. v. Pergament, No.
13 CV 4357 SJF, 2014 WL 904963, at *4
(E.D.N.Y. Mar. 6, 2014). As discussed
above, the Bankruptcy Court did not err in
finding that she purchased Harbor Drive in
good faith, and of course, it would be absurd
for Frank to now argue otherwise. Thus, the
Court must dismiss the Frank Appeals as
statutorily moot. See, e.g., MSR Resort,
2014 WL 67364, at *10. 6
Patricia M. Frank is represented by Fredrick
Paul Stern of Fredrick P. Stern, P.C., 2163
Sunrise Highway, Islip, New York 11751.
Stephen Vaccaro is represented by Patrick
Collins of Farrell Fritz, P.C., 1320 RXR
Plaza, Uniondale, New York 11556.
Stephen L. O’Brien is represented by Marc
A. Pergament of Weinberg, Gross &
Pergament, LLP, 400 Garden City Plaza,
Suite 403, Garden City, New York 11530.
IV. CONCLUSION
For the foregoing reasons, these
consolidated appeals are dismissed in their
entirety as moot pursuant to Section 363(m)
of the Bankruptcy Code. The Clerk of the
Court shall close these cases.
SO ORDERED.
______________________
JOSEPH F. BIANCO
United States District Judge
Dated: March 28, 2017
Central Islip, New York
***
Maura E. Lynch is proceeding pro se and
was previously represented in this
consolidated action by Jay S. Hellman and
Kenneth A. Reynolds of Silverman
Acampora LLP, 100 Jericho Quadrangle,
Suite 300, Jericho, New York 11753.
6
Based on the Bankruptcy Court’s factual findings,
which evince no evidence of clear error, and a de
novo review of the applicable law, the Court would
also affirm these orders on their merits.
15
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