In Re: Magnesium Corporation of America
MEMORANDUM & ORDER granting in part 15 Motion to Dismiss. Because the Renco Appellants failed to obtain a stay of the sale, the Court grants the motion except as to the question of whether there was a good faith purchaser. And because the Bank ruptcy Court did not err in concluding that there was a good faith purchaser, the Court dismisses the appeal. The Appellants' appeal is moot except to the extent that they make a good faith purchaser challenge, and the Bankruptcy Court did no t err in concluding that AEM was a good faith purchaser. The Court accordingly grants the Trustee's motion to dismiss in part, and the Court also dismisses this appeal. This resolves Docket Number 15. The Clerk of the Court is respectfully requested to close this case, and as further set forth herein. (Signed by Judge Alison J. Nathan on 7/18/2017) (ras)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
Magnesium Corporation of America
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The Renco Group, Inc. & Ira Leon Rennert,
Lee E. Buchwald,
ALISON J. NATHAN, District Judge:
In this bankruptcy case, Appellee Lee E. Buchwald, as Trustee for the Renco bankruptcy
estate, has moved to dismiss the appeal filed by the Renco Group, Inc. & Ira Leon Rennert
(collectively, the "Renco Appellants") challenging the Bankruptcy Court's decision to approve
the Trustee's sale of a litigation interest. Because the Renco Appellants failed to obtain a stay of
the sale, the Court grants the motion except as to the question of whether there was a good faith
purchaser. And because the Bankruptcy Court did not err in concluding that there was a good
faith purchaser, the Court dismisses the appeal.
This case has a long procedural history, which the Court only briefly outlines here.
On August 2, 2001, Debtors Magnesium Corporation of America ("MagCorp") and
Renco Metals, Inc., wholly owned subsidiaries of The Renco Group, Inc., filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code. Bank. Ct. Dkt. No. 1; Mot. at 5
The facts set herein are largely taken from the underlying Bankruptcy Court docket, No. 01-bk-14312, and the
docket in this particular case.
(Dkt No. 16); Opp. at 4 (Dkt No. 20); Buchwald v. Renea Grp., 539 B.R. 31, 35 (S.D.N.Y.
2015). In 2003, the Bankruptcy Court converted the case to Chapter 7 and appointed Appellee
Buchwald as Trustee. Bank. Ct. Dkt Nos. 400, 419.
In 2003, the Trustee initiated an adversary proceeding against the Renco Group and
others. The Trustee alleged that, while the debtors were insolvent, they illegally and fraudulently
arranged a $150 million note offering to finance certain dividends and stock redemptions. In re
Magnesium Corp. ofAm., No. 13-cv-7948 (AJN) (S.D.N.Y.) (Dkt No. 36). The case was
withdrawn from the Bankruptcy Court and assigned to the undersigned on December 12, 2013.
The case proceeded to trial in February 2015. The jury returned a multimillion dollar
verdict in the Trustee's favor on claims of fraudulent conveyance, aiding and abetting fraudulent
conveyance, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and unjust
enrichment. See Buchwald, 539 B.R. at 35. After subsequent litigation over the prejudgment
interest rate that should apply, a judgment was entered in the amount of $183,698,246.58 (plus
post-judgment interest) against the Renco Group and $29,500,847.12 (plus post-judgment
interest) against Ira Rennert. In re Magnesium Corp. ofAm., No. 13-cv-7948 (AJN) (S.D.N.Y.)
(Dkt No. 425). The Renco Group and Rennert filed appeals, and the Trustee filed a cross-appeal
on the issue of prejudgment interest. In re Magnesium Corp. ofAm., No. 13-cv-7948 (AJN)
(S.D.N.Y.) (Dkt Nos. 424, 426).
In March 2016, while the appeals were pending, the Trustee decided to sell a partial
interest in this judgment. Mot. at 8. On July 18, 2016, after a hearing, the Bankruptcy Court
approved the Trustee's notice of auction and proposed bidding procedures. Bank. Ct. Dkt No.
724. Accordingly, an auction was held on August 11, 2016. 8/23/16 Tr. at 27 (Dkt No. 16-2).
The Renco Appellants sought to participate as bidders in the auction, but the Trustee denied them
access on the ground that they had submitted an unqualified bid. Id. at 28, 30-31, 94. During the
auction, two bids were submitted. Id. at 38. Bidder AEM won the auction, agreeing to pay
$26.2 million for the right to collect the first $50 million of the approximately $213 million
judgment, should the $213 judgment be affirmed on appeal. 8/23/16 Tr. at 7-8, 18; 9/7/16 Tr. at
8 (Dkt No. 16-1).
On August 23, 2016, the Bankruptcy Comi held a sale hearing regarding whether to
approve this sale. 8/23/16 Tr. at 7; see 11 U.S.C. § 363(b) (noting that the trustee "may use, sell,
or lease ... property of the estate" only "after notice and a hearing"). Present at the hearing were
the three largest creditors of the bankruptcy estate: the Renco Appellants, the Environmental
Protection Agency, and an ad hoc consortium of Renco Metals noteholders ("Noteholders").
8/23/16 Tr. at 3-4. Together, the Noteholders hold approximately 75% of the unsecured notes
issued by the debtors in this case. 8/23/16 Tr. at 3; 917 /16 Tr. at 10. At the hearing, the Trustee
justified the sale on the ground that it would introduce immediate liquidity into the bankruptcy
estate and that it hedged against the risk that the $213 million judgment would be reversed on
appeal because, even if the judgment were reversed, the $26.2 million sale price would still be
available for distribution to the creditors. 8/23/16 Tr. at 18, 22, 28, 40-42. As the Trustee
explained, while he obtained a "tremendous victory against the Renco Group and Ira Rennert"
during the trial before the undersigned, "all litigation is fraught with peril and unpredictability,"
so "he made a business decision to ... monetize a portion of the net proceeds" potentially
recoverable from the debtors. Dkt No. 16-3 at 2. The Renco Appellants and Noteholders
objected to the sale, arguing, among other things, that was no need to introduce liquidity into the
bankruptcy estate, that the sale removed approximately $25 million from the creditors if the
judgment was affirmed on appeal, and that there was no evidence that AEM was a good faith
purchaser. 8/23/16 Tr. at 9, 41-42, 56-59, 70, 73. After hearing oral argument, the Bankruptcy
Court approved the sale and entered a sale order. 8/23/16 Tr. at 92. It also explicitly found that
AEM was a good faith purchaser. 8/23/16 Tr. at 94-96. The Bankruptcy Court denied the
Noteholders' request to stay the sale pending appeal. 8/23/16 Tr. at 103; 917116 Tr. at 7. The
Renco Appellants did not request a stay. See id.; see also Mot. at 2.
The Renco Appellants and Noteholders appealed the Bankruptcy Court's approval of the
sale to this Court. The Renco Appellants filed an appeal on August 30, 2016 in case number 16cv-6822. The Noteholders filed an appeal the next day in case number 16-cv-6844. On
September 1, 2017, the Noteholders filed an emergency motion to stay the sale order pending
appeal. In re Magnesium Corp. ofAm., No. 16-cv-6844 (S.D.N.Y. (Dkt No. 4). The cases were
originally assigned to the Honorable Denise L. Cote, who held oral argument on the emergency
motion on September 7, 2016. 9/7/16 Tr. at 4. After hearing argument, Judge Cote denied the
motion to stay the sale order. 917116 Tr. at 46; Dkt No. 10. Accordingly, the sale of the Renco
litigation interest to AEM closed on September 8, 2016. Dkt No. 17-2; Mot. at 9.
On September 21, 2016, the case was reassigned from Judge Cote to the undersigned as
related to the earlier case that resulted in the approximately $213 million verdict. The Trustee
filed a motion to dismiss the appeal. Dkt No. 15. A few weeks later, the Noteholder Appellants
voluntarily dismissed their appeal. In re Magnesium Corp. ofAm., No. 16-cv-6844 (S.D.N.Y.
(Dkt Nos. 19, 20). The Renco Appellants remained in the case and filed an opposition to the
Trustee's motion to dismiss. Dkt No. 20.
On March 8, 2017, the Second Circuit Court of Appeals affirmed this Court's judgment
that followed the jury trial against the Renco Group in the related case. See Matter of
Magnesium Corp. ofAm. Nos. 15-2691-bk, 2017 WL 946729, at *4 (2d Cir. Mar. 8, 2017).
Accordingly, the approximately $213 million verdict against the Renea Group and Ira Rennert is
The Court now resolves the motion to dismiss and this appeal.
The Trustee seeks to dismiss the Renea Appellants' bankruptcy appeal on two grounds.
First, the Trustee contends that the appeal is moot because the bankruptcy court and district court
refused to stay the sale of the litigation interest. Mot. at 10-11. Second, the Trustee argues that
the Renea Appellants, who did not participate in the challenged auction, lack standing to pursue
this appeal. Mot. at 17-18. As explained below, the Court concludes that the appeal is moot
except as to the question of whether AEM was a good faith purchaser and that the Renea
Appellants do have standing to raise this issue. The Court nonetheless dismisses the appeal
because the Bankruptcy Court did not err in concluding that the sale was made to a good faith
Because the Sale Has Consummated and No Stay Was Granted, The Appeal
Is Limited to the Narrow Issue of the Good Faith of the Purchaser.
Section 363(m) of the Bankruptcy Code limits appellate jurisdiction over a sale order.
That provision states:
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.
11 U.S.C. § 363(m). In interpreting this provision, the Second Circuit has held that "appellate
jurisdiction over an unstayed sale order issued by a bankruptcy court is statutorily limited to the
narrow issue of whether the property was sold to a good faith purchaser." In re Gucci, 105 F.3d
83 7, 83 9 (2d Cir. 1997) (emphasis omitted); see also In re WestPoint Stevens, Inc., 600 F.3d 231,
250 (2d Cir. 2010) ("We repeat that we lack jurisdiction to review the Sale Order unless a stay
has been entered or there is a challenge to the 'good faith' aspect of the sale."); Deep v. Danaher,
310 F. App'x 433, 434 (2d Cir. 2009) ("Our review of the authorization of a sale in bankruptcy
court is limited to whether the sale was made to a good faith purchaser unless 'authorization and
... sale ... were stayed pending appeal."' (ellipses in original) (quoting 11 U.S.C. § 363(m)).
Applying that rule here, because the Bankruptcy Court and Judge Cote both denied the motion to
stay the sale order, see 917116 Tr. at 7, 46, the only issue cognizable before this Comi on appeal
is whether the sale was made to a good faith purchaser.
The parties do not appear to disagree with this conclusion. Although the Trustee argues
that "the appeals are statutorily moot and must be dismissed" in absolute terms, he later concedes
that appellate jurisdiction does exist as to the "limited ... issue of good faith." Mot. at 10.
Similarly, the Renea Appellants admit that the only issue they may raise on appeal is a challenge
to the Bankruptcy Cami's determination that AEM was a good faith purchaser. Opp. at 9-10.
The Court therefore grants the Trustee's motion to dismiss except as to the question of whether
AEM was a good faith purchaser.
The Renco Appellants Have Standing to Challenge the Bankruptcy Court's
Good Faith Purchaser Finding.
In addition to arguing that the appeal is statutorily moot, the Trustee also contends that
the Ren co Appellants lack standing to bring this appeal. Mot. at 17-18. The Court disagrees.
"To have standing to appeal from a bankruptcy court ruling in this Circuit, an appellant
must be an 'aggrieved person,' a person directly and adversely affected pecuniarily by the
challenged order of the bankruptcy court." Gucci, 126 F.3d at 388 (citations and quotation
marks omitted). This test is "stricter than Article Ill's 'injury in fact' test for standing." Id.
Accordingly, the Second Circuit has held that "unsuccessful bidders usually lack standing to
challenge a bankruptcy court's approval of a sale." Id. The Trustee appears to argue that,
because the Renco Appellants were not permitted to participate in the auction, they are at best
"unsuccessful bidders" who cannot challenge the Bankruptcy Court's approval of the sale of the
Ren co litigation interest. See Mot. at 17-18.
The Trustee ignores, however, that the Second Circuit recognizes an exception to the
general rule that unsuccessful bidders lack standing. In re Colony Hill Assocs., 111 F.3d 269,
273 (2d Cir. 1997) ("[T]he rule denying standing to unsuccessful bidders is not absolute.").
Specifically, the Second Circuit has held that "an unsuccessful bidder challenging the intrinsic
fairness of the sale has standing to appeal an order directing that sale." Gucci, 126 F.3d at 388.
The Second Court has further concluded that challenges to the Bankruptcy Court's determination
that the sale was made to a good faith purchaser fall within this "intrinsic fairness" exception.
See WestPoint, 600 F.3d at 250; Gucci, 126 F.3d at 388; Colony Hill, 111 F.3d at 274. In other
words, unsuccessful and "disqualified" bidders do have standing to raise a good faith purchaser
challenge. See Colony Hill, 111 F.3d at 273-74 (holding that a party had standing to raise the
good faith purchaser issue, even though the bankruptcy court had "refused to allow [the party] to
bid based on its own failure to comply with the court-approved bidding procedures."). The
Court therefore rejects the Trustee's argument that the Renco Appellants lack standing, at least
with respect to this narrow issue.
The Bankruptcy Court Did Not Err in Concluding the Sale Was Made to a
Good Faith Purchaser.
Having concluded that the good faith purchaser issue is not moot and that the Renco
Appellants have standing to raise this argument, the Court turns to the narrow issue properly
before it, namely, whether the Bankruptcy Court erred in finding that AEM was a good faith
A court reviewing the conclusions of a bankruptcy court "exercise[es] de novo review
over the legal standards applied and examin[ es] its findings of fact for clear error." Gucci, 126
F.3d at 390. "The 'good-faith purchaser' determination is a mixed question of law and fact."
Id.; see also In re MSR Resort Golf Course LLC, No. 13 Civ. 2448(KPF), 2014 WL 67364, *6
(S.D.N.Y. Jan. 7, 2014).
Although the Bankruptcy Code does not define the meaning of "good faith purchaser,"
the Second Circuit has provided context to the term. See Gucci, 126 F.3d at 390; Colony Hill,
111 F.3d at 276; In re Metaldyne Corp., 421 B.R. 620, 625 (S.D.N.Y. 2009). Specifically, the
Second Circuit has "adopted a traditional equitable definition: 'one who purchases the assets for
value, in good faith and without notice of adverse claims."' Gucci, 126 F.3d at 390 (quoting
Wille main v. Kivitz, 764 F.2d 1019, 1023 (4th Cir. 1985)). "Typically, the misconduct that
would destroy a purchaser's good faith status at a judicial sale involves fraud, collusion between
the purchaser and other bidders or the trustee, or an attempt to take grossly unfair advantage of
other bidders." Colony Hill, 111 F.3d at 276 (citation omitted). The "good faith" inquiry
focuses on "the integrity of [the purchaser's] conduct during the course of the sale proceedings;
where there is a lack of such integrity, a good faith finding may not be made." In re Lehman
Bros. Holdings, Inc., 415 B.R. 77, 84 (S.D.N.Y. 2009) (quoting Gucci, 126 F.3d at 390). During
the sale hearing, the Bankruptcy Court correctly identified this governing legal standard. 8/23/16
Tr. at 94 (Bankruptcy Court stating "that the good faith of a purchaser is shown by the integrity
of the purchaser's conduct during the course of the sale proceedings" and that "a purchaser's
good faith is lost by a showing of fraud, collusion between the purchaser and other bidders, or
the trustee, or an attempt to take grossly unfair advantage of other bidders").
In their briefing, the Renco Appellants do not make any specific, factual arguments
suggesting that AEM was not a good faith purchaser. For example, Appellants do not argue that
AEM committed fraud or that there was collusion between AEM, the other bidder, or the
Trustee. See Opp. at 9-12. Rather, Appellants' sole argument in this appeal is that the
Bankruptcy Court erred in making a good faith finding because "the Trustee put forth no
evidence of good faith." Opp. at 11; see id. at 10-11 (arguing that "there is no doubt that the
Bankruptcy Court's finding that AEM was a good faith purchaser was clearly erroneous and
unfounded" because the Trustee failed to meet its "affirmative burden ... to present evidence" of
good faith); id. at 12 ("[T]he Bankruptcy Court's finding in the Sale Order that AEM was a good
faith purchaser was not supported by evidence and such a finding was clearly erroneous.")
Appellants' argument fails, however, because the Trustee did proffer evidence of good
faith, and the Bankruptcy Court relied on such evidence when rendering its good faith finding.
For example, the Bankruptcy Court noted that there was a "robust marketing process" and that it
had evidence before it "that the agreement between AEM and the trustee was negotiated at arm's
length and in good faith." 8/23/16 Tr. at 95; see Lehman Bros. Holdings, Inc., 415 B.R. at 81-82
(affirming good faith finding when there was evidence that "the post-bankruptcy sale ... had
been negotiated 'aggressively' and 'at arm's length"'). Additionally, the Bankruptcy Court
noted the "evidence in the record ... that the auction increased the consideration ... being paid
by AEM." 8/23/16 Tr. at 95. Specifically, during the auction process, the amount AEM agreed
to pay increased (from $25 million to $26.2 million) while the amount AEM would receive if the
judgment was affirmed decreased (from $53,750,000 to 50 million), thereby improving the
benefit to the estate in an amount "just shy of $5 million." 8/23/16 Tr. at 28. As the Bankruptcy
Court reasoned, the fact that the auction process improved the benefit to the bankruptcy estate
further suggests that AEM was a good faith purchaser. See Colony Hill, 111 F.3d at 276 (noting
that a good faith purchaser is someone who pays "value" for the auctioned property). And
finally, the Bankruptcy Court found, and the Appellants appear to concede as much, that "no
evidence, whatsoever, of any kind of collusive bidding or improper agreements or
understandings between and among the parties was put forward." 8/23/16 Tr. at 95. As
mentioned, the Renco Appellants make no claim that there was actually bad faith in this case;
they argue solely that there was no evidence of good faith. But courts in this district have
repeatedly relied on the lack of any evidence of bad faith when affirming a good faith purchaser
finding. See, e.g., Neogenix Oncology, Inc. v. Gordon, No. CV 14-4427 (JFB) (AKT), 2017 WL
1207558, at *11 (E.D.N.Y. Mar. 31, 2017) (rejecting argument of bad faith when the challenging
party failed to proffer "any independent factual or evidentiary basis" to suggest the purchaser did
not act in good faith); MSR Resort Golf Course, 2014 WL 67364, at *7 (rejecting challenge
premised on lack of good faith when "[t]he Appellant simply ha[d] not provided any reason to
doubt the Bankruptcy Court's [good faith] conclusion"); Metaldyne, 421 B.R. at 625 (affirming
good faith finding when the challenger "fail[ed] to cite to any portion of the record supporting
th[e] assertion" that the bankruptcy court erred in finding good faith); Bace v. Babitt, No. 07 Civ.
2420(WHP), 2008 WL 800579, at *3 (S.D.N.Y. Mar. 25, 2008) (affirming good faith purchaser
finding when "[t]here is no evidence to contradict the Bankruptcy Court's finding that [the
purchaser] conducted its negotiations with the Trustee in good faith and at arm's length"). Here,
the Renco Appellants ignore the fact that the Trustee did actually present evidence of good faith,
and they proffer no arguments or factual support suggesting that AEM was a bad faith purchaser.
For these reasons, the Court rejects Appellants' argument that there was no evidence of good
faith and holds that the Bankruptcy Court did not err in concluding that the Renco litigation
interest was sold to a good faith purchaser.
As explained above, the Appellants' appeal is moot except to the extent that they make a
good faith purchaser challenge, and the Bankruptcy Court did not err in concluding that AEM
was a good faith purchaser. The Court accordingly grants the Trustee's motion to dismiss in
part, and the Court also dismisses this appeal. This resolves Docket Number 15. The Clerk of
the Court is respectfully requested to close this case.
6t,Q \\ ,
rk, New York
United States District Judge
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