FERRONE v. CARDIELLO
Filing
8
MEMORANDUM OPINION. Signed by Judge Arthur J. Schwab on 12/18/2014. (lmt)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
ROCK FERRONE,
Appellant,,
14cv1456
LEAD CASE
v.
NATALIE LUTZ CARDIELLO,
Appellee.
14cv1462
MEMBERCASE
ELECTRONICALLY FILED
MEMORANDUM OPINION
This Court has written many times on the numerous appeals that have surfaced with
respect to this Chapter 11 Bankruptcy. Presently before the Court, is Rock Ferrone’s appeal of a
Bankruptcy Court Order that determined that a particular asset – a building – was part of the
bankruptcy estate and thus, subject to the sale of all of the Debtor’s assets.
I. Jurisdiction and Standard of Review
This Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a). A district
court sits as an appellate court in bankruptcy proceedings. In re Michael, 699 F.3d 305, 308 n.2
(3d Cir. 2012).
The standards of review which apply to this case are as follows:
First, this Court cannot disturb the factual findings of a bankruptcy court unless they are
clearly erroneous. In re Gray, 558 Fed. Appx. 163, 166 (3d Cir. March 7, 2014); see also Accardi v.
IT Litig. Trust (In re IT Group, Inc.), 448 F.3d 661, 667 (3d Cir. 2006). A factual finding is “clearly
erroneous” if the reviewing court is “left with a definite and firm conviction that a mistake has been
committed.” In re W.R. Grace & Co., 729 F.3d 311, 319, n.14 (3d Cir. 2011); see also Gordon v.
Lewistown Hosp., 423 F.3d 184, 201 (3d Cir. 2005). Under the clearly erroneous standard, it is the
responsibility of an appellate court to accept the ultimate factual determinations of the fact-finder
unless that determination is either: (1) completely devoid of minimum evidentiary support displaying
some hue of credibility, or (2) bears no rational relationship to the supportive evidentiary data.”
DiFederico v. Rolm Co., 201 F.3d 200, 208 (3d Cir. 2000) (citations omitted).
Second, this Court exercises plenary, or de novo, review over any legal conclusions reached
by the bankruptcy court. In re Ruitenberg, 745 F.3d 647, 650 (3d Cir. March 13, 2014); see also Am.
Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999).
Third, if the Bankruptcy Court’s decision is a mixed question of law and fact, this Court must
break down the determination and apply the appropriate standard of review to each. In re
Montgomery Ward Holding Corp., 326 F.3d 383, 387 (3d Cir. 2003). The Court should “apply a
clearly erroneous standard to integral facts, but exercise plenary review of the court’s interpretation
and application of those facts to legal precepts.” In re Nortel Networks, Inc., 669 F.3d 128, 137 (3d
Cir. 2011) (citation omitted).
Finally, this Court reviews a bankruptcy court’s exercise of discretion for abuse. In re
Friedman’s Inc., 738 F.3d 547, 552 (3d Cir. 2013). A bankruptcy court abuses its discretion when its
ruling rests upon an error of law or a misapplication of law to the facts. In re O’Brien Environmental
Energy, Inc., 188 F.3d 116, 122 (3d Cir. 1999).
II. Factual Background
The following facts are derived from Rock Ferrone’s Brief. See doc. no. 3, p. 3-5.
Rock Ferrone (“Ferrone”) is the sole shareholder of K-Cor, Inc., a Pennsylvania company
that designs, manufactures, and sells newspaper equipment. In 1998, Ferrone purchased the land
comprising an airstrip near Pittsburgh (“Rock Airport”) through an entity known as Rock Airport
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of Pittsburgh, LLC (“RAP”). In 2001, K-Cor, Inc. applied for, and received, a building permit to
construct a new building for its business at Rock Airport. Also in 2001, Huntington Bank (f/k/a
Skye Bank) loaned K-Cor, Inc. $144,000.00 to build this new building at Rock Airport.
After construction of the new K-Cor, Inc. building was complete, RAP agreed to transfer
the building to K-Cor, Inc., and subdivided the Airport Property so that it could make such a
transfer. K-Cor, Inc. made the loan payments to Huntington Bank and paid the insurance on the
building.
III. Procedural Background
The following information was obtained from docket entries filed with United States
Bankruptcy Court for the Western District of Pennsylvania at case no, 09-23155-CMB. The
docket entry numbers cited in this section correspond to case number 09-23155-CMB filed in the
Bankruptcy Court’s docket, unless otherwise noted.
In 2009, RAP filed for relief under Chapter 11 of the Bankruptcy Code. Bk. doc. no. 1.
On October 22, 2012, RAP filed a motion to sell all or substantially all of its assets. Bk. doc. no.
26. On October 31, 2012, K-Cor, Inc. filed an Objection to the sale, claiming it owned its own
building and argued that this particular building should not be sold as part of RAP’s assets. Bk.
doc. no. 230. This document noted, “[b]ecause Rock Ferrone is the principal of K-Cor, Inc. . . .
and [RAP], no deed of conveyance was made between [RAP] and K-Cor, Inc. with regard to the
parcel on which [K-Cor, Inc.] constructed the building . . . ”. Id, ¶ 4.
On April 23, 2013, Bankruptcy Judge Fitzgerald entered an order approving the
appointment of Trustee Natalie Lutz Cardiello. Bk. doc. no. 327. On June 10, 2014, the Trustee
filed an Amended Motion Seeking Order Approving Sale of Property Free and Clear of All
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Liens, Claims, and Encumbrances to Alaskan Property Management, LLC (“Alaskan”) pursuant
to an Asset Sale and Purchase Agreement which had been executed by RAP and Alaskan on
March 6, 2014. Bk. doc. no. 683. On June 27, 2014, the Trustee entered an Order which set
deadlines pertaining to the asset sale from RAP to Alaskan. Bk. doc. no. 742. Within that Order,
the Trustee explicitly stated, “[a]ny response, including a consent to the Motion, shall be filed
with the Clerk of the Bankruptcy Court and served on the Moving Party and their counsel not
later than the last date fixed in the Notice of Sale for Filing Objections to the sale which is
8/11/14.” Bk. doc. no. 742-2.
On August 21, 2014, the Bankruptcy Court held a hearing on the Motion to Sell Property
Free and Clear of Liens Under Section 363(f) filed by Trustee Natalie Lutz Cardiello (bk. doc.
no. 683), and during that hearing, Ferrone asserted that K-Cor, Inc., not RAP, owned the building
and argued that the building should not be included in the asset sale. See bk. doc. no. 929. At
the end of the hearing, the Bankruptcy Court approved the Motion to Sell Property, and in so
doing, determined Alaskan was a good faith purchaser of RAP’s assets, but continued the
evidentiary hearing as to the building which K-Cor, Inc. claimed it owned.
Pursuant to the Court’s Order entered during this August 21, 2014 hearing, on August 26,
2014, K-Cor, Inc. formally filed an Objection to the sale of the building, asserting that RAP did
not own the building, and thus, argued that the building should not be part of sale of assets to
Alaskan. Bk. doc. no. 938. On August 28, 2014, the Trustee filed a Response to K-Cor, Inc.’s
Objection. Bk. doc. no. 939. In her Response, the Trustee noted that on July 11, 2014, the
Trustee’s counsel served Ferrone and K-Cor, Inc. with a subpoena requesting the production of
documents related to K-Cor, Inc.’s claim of ownership, but Ferrone failed to produce any
documents in support of K-Cor’s claim of ownership. Id. As noted above, Ferrone admitted in
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at least one pleading, no deed transferring ownership from RAP to K-Cor, Inc. exists. See doc.
no. 230, ¶ 4. The Trustee also noted that although Ferrone was asking for an extension of time
so that his office administrator/witness could attend a hearing set for September 4, 2014, her
testimony would serve no purpose in light of the complete lack of documentation confirming the
transfer of ownership of the building from RAP to K-Cor, Inc. Bk. doc. no. 939.
On August 28, 2014, Ferrone filed a Motion for Reconsideration of the Bankruptcy
Court’s Order finding Alaskan to be a good faith purchaser of RAP’s assets. Bk. doc. no. 943.
On September 4, 2014, Bankruptcy Court Judge Bohm held evidentiary hearings on
(1) Ferrone’s Motion to Reconsider whether Alaskan was a good faith purchaser, and (2) the
building ownership issue. See bk. doc. nos. 989, 992, 1000 and 1001. That same date,
September 4, 2014, the Bankruptcy Court entered an Order denying Ferrone’s Motion to
Reconsider Alaskan as a good faith purchaser. Bk. doc. no. 993.
On September 10, 2014, the Bankruptcy Court entered an Opinion (bk. doc. no. 1017)
and Order (bk. doc. no. 1018), declaring that Ferrone only proffered self-serving testimony – and
no documentary evidence – that the building at issue was ever conveyed from RAP to K-Cor,
Inc. Ultimately, the Bankruptcy Court concluded that RAP was the owner of the building, and
thus, subject to RAP’s asset sale. Bk. doc. nos. 1017-1018.
On September 16, 2014, the Bankruptcy Court entered an Order Confirming the Trustee’s
Chapter 11 Plan (bk. doc. no. 1031), and simultaneously entered an Order granting the Trustee’s
Motion Seeking Order Approving Sale of Property Free and Clear of All Liens, Claims, and
Encumbrances to Alaskan. Bk. doc. no. 1037.
On September 25, 2014, Ferrone filed an Emergency Motion to Stay the Sale of the
Building at Issue, pending: (1) the Appeal of Bankruptcy Court Order no. 1018 concluding RAP
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– not K-Cor, Inc. was the owner of the building; and (2) his Appeal of Bankruptcy Court Orders
no. 1031 and 1037 concerning the Chapter 11 Plan Confirmation and the sale of property to
Alaskan. See case no. 14-cv-1314 filed in the United States District Court for the Western
District of Pennsylvania.
This Court issued an 11-page Memorandum Order on September 29, 2014, wherein it
applied the 4-part preliminary in junction test, and in so doing, conducted a thorough analysis of
the underlying sale-of-the-building and Alaskan- as-a-good-faith-purchaser matters, and denied
the Stay requested by Ferrone. See case, no. 14-cv-1314 , doc. no. 4. On October 27, 2014, the
United States Court of Appeals for the Third Circuit dismissed Ferrone’s appeal of this Court’s
Order denying the Stay. See case, no. 14-cv-1314 , doc. no. 8.
III. Discussion
The Court begins this Opinion by noting that it has written several extensive Opinions
this year in several related cases – see case nos. 14-cv-0085 (Court Opinion at doc. no. 6), 14-cv0086 (Court Opinion at doc. no. 6), 14-cv-0091 (Court Opinion at doc. no. 12), 14-cv-1105
(Court Opinion at doc. no. 3), and 14-cv-1314 (Court Opinion at doc. no. 4), 14-cv-1195 (Court
Opinion at doc. no. 8), and 14-cv-1196 (Court Opinion at doc. no. 6). At this point, the issue
before this Court on the instant Appeal has been fully and thoroughly litigated before the
Trustee, the Bankruptcy Court, this Court, and to a lesser extent, the Court of Appeals of the
Third Circuit.
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A. Operation of Subsection 363(m) of the Bankruptcy Code
Of all the arguments raised by Ferrone – the Appellant, here – and the arguments raised
by the Trustee – the Appellee here – the argument related to Section 363 of the Bankruptcy Code
appears to be most relevant to this Appeal. The pertinent subsections of Section 363 read as
follows:
(a) In this section, “cash collateral” means cash, negotiable instruments,
documents of title, securities, deposit accounts, or other cash equivalents
whenever acquired in which the estate and an entity other than the estate
have an interest and includes the proceeds, products, offspring, rents, or
profits of property and the fees, charges, accounts or other payments for
the use or occupancy of rooms and other public facilities in hotels, motels,
or other lodging properties subject to a security interest as provided in
section 552(b) of this title, whether existing before or after the
commencement of a case under this title.
(b)(1) The trustee, after notice and a hearing, may use, sell, or lease, other
than in the ordinary course of business, property of the estate, except that
if the debtor in connection with offering a product or a service discloses to
an individual a policy prohibiting the transfer of personally identifiable
information about individuals to persons that are not affiliated with the
debtor and if such policy is in effect on the date of the commencement of
the case, then the trustee may not sell or lease personally identifiable
information to any person unless—
(A) such sale or such lease is consistent with such policy; or
(B) after appointment of a consumer privacy ombudsman in
accordance with section 332, and after notice and a hearing, the
court approves such sale or such lease—
(i) giving due consideration to the facts, circumstances, and
conditions of such sale or such lease; and
(ii) finding that no showing was made that such sale or
such lease would violate applicable nonbankruptcy law.
[b)](2) If notification is required under subsection (a) of section 7A of the Clayton
Act in the case of a transaction under this subsection, then—
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(A) notwithstanding subsection (a) of such section, the notification
required by such subsection to be given by the debtor shall be given by the
trustee; and
(B) notwithstanding subsection (b) of such section, the required waiting
period shall end on the 15th day after the date of the receipt, by the
Federal Trade Commission and the Assistant Attorney General in charge
of the Antitrust Division of the Department of Justice, of the notification
required under such subsection (a), unless such waiting period is
extended—
(i) pursuant to subsection (e)(2) of such section, in the same
manner as such subsection (e)(2) applies to a cash tender offer;
(ii) pursuant to subsection (g)(2) of such section; or
(iii) by the court after notice and a hearing.
(c)(1) If the business of the debtor is authorized to be operated under section 721,
1108, 1203, 1204, or 1304 of this title and unless the court orders otherwise, the
trustee may enter into transactions, including the sale or lease of property of the
estate, in the ordinary course of business, without notice or a hearing, and may
use property of the estate in the ordinary course of business without notice or a
hearing.
[(c)](2) The trustee may not use, sell, or lease cash collateral under paragraph (1)
of this subsection unless—
(A) each entity that has an interest in such cash collateral consents; or
(B) the court, after notice and a hearing, authorizes such use, sale, or lease
in accordance with the provisions of this section.
[(c)] (3) Any hearing under paragraph (2)(B) of this subsection may be a
preliminary hearing or may be consolidated with a hearing under subsection (e) of
this section, but shall be scheduled in accordance with the needs of the debtor. If
the hearing under paragraph (2)(B) of this subsection is a preliminary hearing, the
court may authorize such use, sale, or lease only if there is a reasonable likelihood
that the trustee will prevail at the final hearing under subsection (e) of this section.
The court shall act promptly on any request for authorization under paragraph
(2)(B) of this subsection.
[(c)](4) Except as provided in paragraph (2) of this subsection, the trustee shall
segregate and account for any cash collateral in the trustee's possession, custody,
or control.
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*
*
*
(m) 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.A. § 363.
With respect to Section 363, the Court of Appeals for the Third Circuit has held that sale
authorized under Section 363(b) or Section 363(c), cannot be reversed or modified pursuant to
Section 363(m) where doing so would affect the validity of the sale. See Pittsburgh Food &
Beverage, Inc. v. Ranallo,112 F.3d 645, 649 (3d Cir. 1997) (Chapter 11 debtor’s appeal of asset
sale approval to district court was moot because, due to debtor’s inability to obtain stay pending
appeal and subsequent sale of debtor's subsidiary's assets, district court could not have granted
effective relief without affecting validity of sale).
The Court finds that Pittsburgh Food & Beverage, is controlling on whether Section 363
applies here, given that the Pittsburgh case is so factually similar to the case at bar. In the
Pittsburgh case, Pittsburgh Food & Beverage (“PFB”) appealed two district court orders
dismissing its appeal from a bankruptcy court order which had approved a sale of assets of PFB’s
wholly owned subsidiary, L.E. Smith Glass Company (“Smith”) to American Glass, Inc.
(“American”). One of the appellees the Pittsburgh case was the trustee of PFB, Lawrence
Ranallo.
Once the sale of the assets – including the sale of Smith, the wholly owned subsidiary of
PFB – was approved, PFB (like Ferrone, here) filed a Motion with the Bankruptcy Court to stay
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the sale of assets, (just like Ferrone did here). The Bankruptcy Court in Pittsburgh denied PFB’s
Motion. In this case, the Bankuptcy Court denied Ferrone’s motion to stay.
In both the Pittsburgh case and the instant matter, the interested parties filed a motion
with the District Court asking for a stay of the sale. In both cases, Pittsburgh and the instant
matter, the interested parties were denied the stay of their respective sales by the District Court.
See case no. 14-cv-1105, doc. no. 3; case no. 14-cv-1314, doc. no. 4. Finally, in both the
Pittsburgh case and the instant case, the Trustees, filing as Appellees, argued the Appeals at
issue should be dismissed in accordance with Section 363(m) of the Bankruptcy Code because
providing the Appellants with the relief sought would indeed affect the validity of the sale.
Turning exclusively to the instant matter, the Court agrees with Appellee that Section
363(m) applies here and that if this Court were to grant Ferrone the relief sought by his appeal,
the matter would affect the validity of the sale. This is clearly prohibited by statutory law and
the Court of Appeals’ interpretation of same.
However, Ferrone argues that subsection 363(m) does not apply (and thereby cannot be
used to dismiss his appeal in this case) because a criterion that needs to be satisfied under
subsection 363(m) cannot be met. See Appellant’s Reply brief, doc. no. 6.
Ferrone argues that Alaskan was not a good faith purchaser of RAP’s assets – good faith
being a prerequisite under Section 363(m). However, the Court notes that this issue has been
fully litigated and briefed before the Trustee, the Bankruptcy Court and this Court. See case nos.
14-cv-1195 and 14-1196. This Court has heard two appeals (case nos. 14-cv-1195 and 14-cv1196) and two Emergency Motions to Stay the Sale (case nos. 14-cv-1105 and 14-cv-1314), all
of which related, directly or indirectly, to whether Alaskan was a good faith purchaser. The
Court incorporates by reference its Opinions in each of the two prior Appeals and the two
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Emergency Motion docketed at case numbers 14-cv-1195 (doc. no. 8), 14-cv-1196 (doc. no. 6),
14-cv-1105 (doc. no. 3) and 14-cv-1314 (doc. no. 4). In sum, this Court notes (yet again) that
there is no basis upon which this Court may disturb the Bankruptcy Court’s finding of fact that
Alaskan is indeed a good faith purchaser. Thus, the good faith criteria raised by Ferrone under
Section 363(m) has been met.
Accordingly, this Court finds that Subsection 363(m) applies and as such, the Court
further finds that the Court under Pittsburgh Food & Beverage is obliged to dismiss the Appeal.
B. Ferrone’s 14th Amendment Due Process Rights
Having determined this Appeal must be dismissed, the Court need not consider any of
Ferrone’s other arguments, with one possible exception – his claim that his Due Process Rights
have been violated. It appears as though Ferrone is making both a Fifth and Fourteenth
Amendment claim in this regard.
The Court begins by noting that due process certainly applies to bankruptcy proceedings.
See In re Lazy Days’ RV Center Inc., 724 F.3d 418 (3d Cir. 2013). In Lazy Days, the Court of
Appeals concluded that, “the Takings Clause under the Fifth Amendment only protects property
rights as they are established . . . , not as they might have been established or ought to have been
established.” 724 F.3d at 425, citing Stop the Beach Renourishment, Inc. v. Fla. Dep’t of Env’t
Prot., 560 U.S. 702, 732 (2010).
Ferrone argues that the Bankruptcy Court denied him a request to present testimony
“concerning MSA’s prior efforts to take over the airport.” In support of this argument, Ferrone
suggests that the Bankruptcy Court, during one of the many hearings (but he does not specify
which one) sustained MSA’s objection to Ferrone’s testimony concerning MSA’s meeting with
Ferrone’s former real estate broker, CB Richard Ellis. In short, Ferrone claims that by sustaining
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MSA’s objection to Ferrone’s [potential hearsay] testimony, Ferrone’s due process rights were
violated. The exclusion of hearsay testimony cannot form the basis of a due process rights
violation.
In addition, Ferrone argues that the September 4, 2014 hearing, which was held to discuss
the building ownership issue, should have been continued so as to enable his office administrator
to testify. By not continuing that hearing to allow her to testify or to search for the documents
before the hearing, Ferrone claims his due process rights were violated. However, the
bankruptcy court subpoenaed any documentation concerning a transfer of ownership of this
building months before the hearing date, and the administrator did not produce any documents in
response to the subpoena. In addition, and as noted above, Ferrone admitted in a bankruptcy
pleading that there was no documentation concerning the transfer of ownership of the building,
which under Pennsylvania law and the Statute of Frauds could only be conveyed (and proven)
via a writing. Thus, Ferrone’s witness’ inability to appear at hearing is of no moment.
Accordingly, this Court does not find either of Ferrone’s Due Process arguments
compelling, and finds that they certainly fall exceedingly short of overriding the Court’s
obligation to apply Subsection 363(m) of the Bankruptcy Code.
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IV. Conclusion
Ferrone’s appeal will be dismissed in accordance with 11 U.S.C.A. § 363(m), and the
Court bases this Conclusion not only the brief analysis set forth above but on the more extensive,
and related analyses conducted in case nos. 14-cv-1195 (doc. no. 8), 14-cv-1196 (doc. no. 6), 14cv-1105 (doc. no. 3) and 14-cv-1314 (doc. no. 4). An appropriate Order shall follow.
s/ Arthur J. Schwab
Arthur J. Schwab
United States District Judge
cc:
All Registered ECF Counsel and Parties
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