Black
Filing
44
OPINION. (Signed by Judge Nelva Gonzales Ramos) Parties notified.(mserpa, 2)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
CORPUS CHRISTI DIVISION
In Re:
PAUL BLACK,
Appellant,
VS.
MICHAEL B. SCHMIDT, et al,
Appellees.
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§ CIVIL ACTION NO. 2:11-CV-258
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OPINION
This is an appeal of the United States Bankruptcy Court’s determination to
approve a sale agreement negotiated by Toby Shor, Seashore Investments Management
Trust, and 2004 GRAT (collectively, Shor) and to reject a settlement agreement
negotiated by Paul Black and a number of his business entities1 (collectively, Black), as
well as offers from Walter Oblach. At issue are:
• “Order Granting Joint Motion of Seashore and Michael B. Schmidt,
Chapter 7 Trustee for the Debtors,2 to Sell Certain Assets of the
Debtors’ Estates Pursuant to Bankruptcy Code Section 363(b) and to
Approve Sale Agreement,” D.E. 22-38;
• “Findings of Fact and Conclusions of Law on Joint Motion of Seashore
and Michael B. Schmidt, Chapter 7 Trustee, to Sell Certain Assets of
1
The Notice of Appeal includes Paul Black, Individually and on behalf of Land & Bay Gauging, LLC, SGW
Interests, LLC, BNP Operating, LLC, 5302 Mandell Property, LP, 5302 Mandell Property I, LLC, BNP Commercial
Properties, LLC, BNP Commercial Properties, Ltd., HBP Ltd, HBP Partners, Ltd., BNP Networks, LLC, 500 N.
Water, LLC, 5262 Staples, LLC, BNP Holdings, Ltd., 500 N. Water St. Property I, LLC, 500 N. Water St. Property,
LP, 5262 Staples, Ltd., 5262 GP, LLC, 5262 Staples II, Ltd, 5262 Staples GP II, LLC, Bistro CP, LLC, Black
Commercial Holding, LLC, Black Energy Resources Co., BNP Exploration Company, CCEX, LLC, Intrepid Oil &
Gas, LLC, PBF Investments, Ltd., RPH Financial Investments Corp., TSE Equities I, LLC, James Black, III, James
Black IV, and Wendy Bennett. The Notice of Appeal refers to all of these parties as the “Black Entities.” This
Opinion will refer to them as “Black” or “Black Entities.”
2
Hereafter, referred to as “Trustee.”
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the Debtors’ Estates Pursuant to Bankruptcy Code Section 363(b) and to
Approve Sale Agreement,” D.E. 22-39; and
• Oral rulings in the July 26, 2011 hearing, the transcript of which is filed
as D.E. 22-55, and which are incorporated into the Order, D.E. 22-38.
As a preliminary matter, Shore and the Trustee move to dismiss the appeal as moot under
11 U.S.C. § 363(m). D.E. 24, 26. For the reasons set out below, the motions to dismiss
are GRANTED IN PART and DENIED IN PART. All issues other than “good faith” are
dismissed as moot. For the further reasons set out below, the Court OVERRULES
Black’s issue regarding “good faith” and AFFIRMS the Bankruptcy Court’s Order.
BACKGROUND
Paul Black (Black), members of his family, and a number of business entities in
which he owns an interest have been in litigation with Toby Shor, Seashore Investments
Management Trust, and 2004 GRAT (collectively, Shor) for several years and in several
venues over Shor’s monetary investments in, and loans to, Black’s enterprises. Two of
Black’s businesses, BNP Petroleum Corporation3 and BNP Oil & Gas Properties, Ltd.,4
(jointly referred to as BNP or Debtors), were placed into bankruptcy proceedings and
jointly administered as Chapter 7 liquidation cases, with Michael B. Schmidt (Trustee)
appointed as Trustee for each. D.E. 22-11.
On August 17, 2010, after the automatic stay of bankruptcy was lifted to permit
the state court litigation of certain claims, Shor obtained an arbitration award against
3
An involuntary Chapter 7 petition was filed against BNP Petroleum on April 3, 2009. On August 5, 2009, the
Bankruptcy Court entered an order for relief under Chapter 11. By Order of October 13, 2010, the case was
converted back to a Chapter 7 and Michael B. Schmidt, who had previously served as Litigation Trustee, was
appointed to serve as the Chapter 7 Trustee. D.E. 22-11.
4
BNP Oil & Gas Properties, Ltd. filed a voluntary petition under Chapter 11 on September 22, 2009. On October
13, 2010, this case was converted to Chapter 7, with Schmidt appointed Trustee. D.E. 22-11.
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Black of approximately $30 million. The award was confirmed in the form of a judgment
in PBF Investments, Ltd. v. Toby Shor, et al, No. 09-60343-3, in the County Court at Law
No. 3, Nueces County, Texas (State Court Action) on April 6, 2011. D.E. 22-65. Based
on the findings of Douglas J. Brickley, Examiner (D.E. 22-67) and the arbitration panel’s
findings of fact and conclusions of law, the Trustee filed against both Shor and Black an
action entitled Michael B. Schmidt, Trustee v. Paul Black, et al, Adversary No. 10-2022,
in the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi
Division (Adversary Proceeding). D.E. 22-63.
In the Adversary Proceeding, the Trustee claimed that both sets of defendants had
benefited from improper transfers from the Debtors, alleging, inter alia, theories of
fraudulent transfer and conversion, and seeking a turnover of property of the Estates.
D.E. 22-11; 22-63 (Third Amended Complaint). Along with her answer to the Adversary
Proceeding complaint, Shor filed a counterclaim against the Trustee, seeking attorney’s
fees. D.E. 22-64. Shor further filed an objection to the Trustee’s request for attorney’s
fees as an administrative expense in the bankruptcy cases. See D.E. 22-55, p. 75.
Shor took action to collect on the $30 million judgment through the state court and
in this Court.5 D.E. 22-66 (Application for Turnover Order). With Shor’s effort to obtain
turnover of Black’s ownership interest in his businesses through the State Court Action
looming, Black negotiated with the Trustee a settlement of the Adversary Proceeding
(Black Settlement). The resulting agreement was dated June 8, 2011. D.E. 22-61. As a
result of that agreement, Black transferred his ownership interests in his businesses to the
5
See Zephyrus v Shor, No. 11-cv-329 (S.D. Tex., Feb. 13, 2013), aff’d, No. 13-40456, 558 Fed. App’x 439 (5th
Cir. March 14, 2014) (per curiam).
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Trustee and thus escaped being ordered to turn those interests over to Shor. D.E. 22-31,
pp. 17-18; 22-61. The settlement and its concomitant transaction were recited in open
court in the State Court Action. D.E. 22-31, pp. 17-18; 22-55, p. 58.
Because of the fact that the Trustee was acting on behalf of the Debtors’ Estates,
the Black Settlement was expressly “subject to final approval from the Bankruptcy
Court.” D.E. 22-61, p. 2. “The Parties agree that they will seek the entry of an order by
the Bankruptcy Court authorizing the implementation of all actions contemplated by this
Agreement.” Id. at 6. That qualification was disclosed to the state court. D.E. 22-31, p.
27. Nothing in the Black Settlement expressly precluded the Trustee from negotiating
any other agreements that might better resolve the issues confronting the Estates. Neither
did the Black Settlement provide any disincentives that would compensate Black if the
Trustee failed to get the Black Settlement approved.
According to the Black Settlement, Black agreed to pay the sum of $1.5 million as
follows:
Monthly proceeds paid to the Trustee generated from
operations of Black Entities, equal to 10% of the net
proceeds, of each operation of all Black Entities and which
are payable on a month-to-month basis from the Effective
Date of the Settlement Agreement. Nothwithstanding, [sic]
Black shall make to the Trustee minimum monthly payments
of $6,000 per month, beginning July 1, 2011 and continuing
with regular monthly payments thereafter of no less than
$6,000 until July 1, 2021 when the entire remaining unpaid
balance shall be due.
D.E. 22-61, p. 3. Performance of this payment schedule was secured by Black’s transfer
of his ownership interests in the Black Entities to the Trustee, to be reconveyed to Black
upon payment in full or upon final liquidation of all Estate assets. Id. at 2.
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There was no provision for any up-front cash payment and the success of the
Black Settlement depended upon the financial performance of the Black Entities, with
Paul Black’s cooperation. Moreover, the Black Settlement would not end all of the
bankruptcy-related litigation. The bankruptcy case would have to remain open for many
years pending receipt of the full $1.5 million and the Trustee would still have to litigate
the claims against Shor as well as the dispute regarding administrative expenses.
After the Black Settlement was executed, but before it was approved by the
Bankruptcy Court, Shor offered and the Trustee accepted a competing agreement.
According to the Sale and Conveyance of Estates’ Rights, Settlement and Mutual Release
(Shor Sale, D.E. 22-60), Shor would purchase the Trustee’s claims against Black in the
Adversary Proceeding in exchange for a cash payment of $216,000. Id. at 2. In addition,
from the proceeds of any collection from Black (net of contingent legal fees), Shor would
pay the Trustee 50% of the first $500,000 recovered and 10% of all other amounts
recovered up to a total amount of $1.75 million. Id. at 3. Shor had incentive to collect
and had her $30 million judgment as a head start.
Also part of the Shor Sale was: (a) Shor’s withdrawal of her objection to the
Trustee’s administrative expenses; (b) the liquidation of Shor’s claims against BNP; and
(c) the subordination of Shor’s claim to those of other BNP creditors except Black. D.E.
22-60. Mutual releases would then end the Adversary Proceeding claims between Shor
and the Trustee and the transfer of the claims against Black would remove the Trustee
from the Adversary Proceeding altogether, ending the Estates’ generation of
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administrative expenses for litigation. Like the Black Settlement, the Shor Sale was
subject to Bankruptcy Court approval. Id. at 6-8.
Pursuant to his contractual and statutory obligations to do so, the Trustee filed
motions in the Bankruptcy Court for approval of both the Black Settlement and the Shor
Sale. However, the Trustee clearly advocated the court’s approval of the Shor Sale,
which would preclude approval of the Black Settlement. By the date of the hearing, a
third player, Walter Oblach (Oblach), had entered the scene, making an offer to purchase
the Trustee’s causes of action against Black, promising more up-front cash than the Shor
Sale and a greater contingent recovery from any collections.
However, Shor
demonstrated that Oblach was a long-time friend of Paul Black, and a resident of
Venezuela, who did not appear before the Court to support his offer or demonstrate his
ability to fulfill his promises. Oblach had testified on Black’s behalf in the arbitration
against Shor and his incentive to prosecute the claims against Black and to collect on
them was treated with due skepticism. D.E. 22-31, pp. 56, 74, 77, 81.
After notice and hearing, on July 26, 2011, the Bankruptcy Court approved the
Shor Sale as being in the best interest of the Estates. D.E. 22-38, 22-39. The following
day, Black filed his Emergency Expedited Motion Seeking Stay Pending Appeal. D.E.
22-41. The Bankruptcy Court held an expedited hearing. D.E. 22-43, 22-48, 22-51, 2256.
When asked what Black sought to stay by the court’s order, Black’s counsel
responded:
Well, the effects of the Court’s rulings last week. There was
a settlement approval, there was a—excuse me, a settlement
denial and a sale approval. There’s a doctrine of mootness
that applies in the event that the stay’s not in effect. Of
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course, I guess we can go back to the District Court and ask
for the Court to consider the Stay Pending Appeal at that
point, but we figure—it’s our position that with the Trustee
being in possession of the property and with the—that
property being [sic] constituting security for the Trustee and
the prospect of that property being lost, that there could be
some irreparable harm and damage; not only to Mr. Black
but also to the estates as a result of the consequences of a
failure to grant a Stay Pending Appeal.
D.E. 22-56, pp. 5-6 (emphasis added).
The Bankruptcy Court noted that Shor had
already paid the $216,000 required by the Shor Sale and the judge imposed a one-week
stay, suggesting that, if a longer stay was required, it should be sought and obtained in
this Court. D.E. 22-56, pp. 7-9. As part of that ruling, the Trustee was informed that he
should re-convey the interests in the Black Entities that had been conveyed to him
pursuant to the rejected Black Settlement at the expiration of the one-week stay unless
this Court imposed an additional stay. Id. at 10.
Black then filed his Notice of Appeal (D.E. 1-2) centered on the argument that the
first-negotiated Black Settlement precluded the Trustee from negotiating and advocating
the approval of the Shor Sale. D.E. 23. At the same time, he sought an emergency stay
in this Court. D.E. 2. Judge Rainey issued a temporary stay pending additional time to
consider the matter. D.E. 11. Shor then filed an emergency motion seeking termination
of the temporary stay, complaining that Black was wasting the assets subject to collection
pursuant to the Bankruptcy Court order on appeal and that a lender on one of the assets
was seeking foreclosure. D.E. 15. Judge Rainey granted Shor’s motion, terminated the
temporary stay, and denied Black’s request for any further stay. D.E. 21.
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Black did not seek any relief from this Court’s denial of the stay. So Shor and the
Trustee released their claims against each other in the Adversary Proceeding and Shor
was then free to, and in fact did, pursue collection of her judgment for both herself and
the Trustee against Black. At the same time the parties briefed the merits of this appeal,
they briefed Shor’s motion to dismiss the appeal as moot because no stay was preventing
the parties from taking action in reliance upon the Bankruptcy Court’s order of sale. D.E.
24, 26, 28, 30.
MOTIONS TO DISMISS
A. Appeals of Sale Orders are Subject to Being Mooted Absent a Stay
Mootness is a jurisdictional issue. If a controversy becomes moot during the trial
or appellate process, the court involved must dismiss the suit for want of jurisdiction.
Securities & Exchange Commission v. Medical Committee for Human Rights, 404 U.S.
403, 407 (1972) (discussing mootness under the U.S. CONST. art. III “case or
controversy” clause). The federal courts are not empowered to issue advisory opinions
“on an abstract or hypothetical question.” Benton v. Maryland, 395 U.S. 784, 788
(1969). Mootness arguments can thus be pressed by the court or any party at any time.
North Carolina v. Rice, 404 U.S. 244, 246 (1971) (raising the issue sua sponte on
appeal); Locke v. Board of Public Instruction, 499 F.2d 359, 363-64 (5th Cir. 1974)
(same).
Statutory mootness with respect to Bankruptcy Court orders allowing the sale of
estate property is set out in 11 U.S.C. § 363(m) as follows:
The reversal or modification on appeal of an authorization
under subsection (b) or (c) of this section of a sale or lease of
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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.
This provision “patently protects, from later modification on appeal, an authorized sale
where the purchaser acted in good faith and the sale was not stayed pending appeal.” In
re Energytec, Inc., 739 F.3d 215, 218 (5th Cir. 2013) (quoting Gilchrist v. Westcott (In re
Gilchrist), 891 F.2d 559, 560 (5th Cir. 1990)).
The Seventh Circuit faced the question whether § 363(m) mootness applied if the
challenge on appeal was to the bankruptcy court’s jurisdiction to enter the sale order in
the first place. In re Sax, 796 F.2d 994, 997 (7th Cir. 1986) (quoted with approval by the
Fifth Circuit in Gilchrist). The Seventh Circuit held that the bankruptcy court had
jurisdiction to determine its jurisdiction. Id. at 998. The bankruptcy court’s holding that
it had jurisdiction to enter the sale order was a determination that could not be appealed
properly without a stay pending appeal, despite the usual maxim that subject matter
jurisdiction may be raised at any time. Id. This demonstrates that the statutory mootness
issue is stringent and broad.
The section “codifies Congress’s strong preference for finality and efficiency in
the bankruptcy context, particularly where third parties are involved.” Hazelbaker v.
Hope Gas, Inc. (In re Rare Earth Minerals), 445 F.3d 359, 363 (4th Cir. 2006); see also
Hardage v. Herring Nat'l Bank (In re Hardage), 837 F.2d 1319, 1323 n. 3 (5th Cir. 1988)
(Section 363(m) provides finality). By providing good faith purchasers with a final order
and removing the risks of protracted litigation, § 363(m) “allows bidders to offer fair
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value for estate property[,]” which “greatly benefits both the debtor and its creditors.” In
re Rare Earth Minerals, 445 F.3d at 363.
There is one exception arising out of the language of § 363(m), itself, which
requires a sale protected by mootness to be an “authorization to an entity that purchased
or leased such property in good faith.”
Because of this qualification, a party may
challenge a sale order without a stay pending appeal if the challenge is to the purchaser’s
good faith and that error was preserved in the bankruptcy court. Sax, supra at 997 n.4
(lack of good faith may be challenged if raised on appeal); Gilchrist, supra at 561 (lack
of good faith must first be challenged in the bankruptcy court proceedings (citing Moody
v. Empire Life Ins. Co. (In re Moody), 849 F.2d 902, 905 (5th Cir. 1988) for the
requirement of preserving this particular claimed error).
Shor, joined by the Trustee, argues that no stay pending appeal is in place and that
the sale transactions approved by the Bankruptcy Court have been substantially
completed. D.E. 24, 26. Therefore, § 363(m) has mooted the appeal. Black responds
that § 363(m) does not apply because: (a) Shor and the Trustee have not consummated
the sale, with the exception of Shor’s payment of $216,000 which is held in trust pending
appeal, making this Court’s ability to grant relief possible and making a stay superfluous;
and (b) the Shor Sale was not the product of good faith as required to trigger the statute.
B. The Required Stay Pending Appeal Was Not Superfluous.
In Taylor v. Lake (In re Cada Investments, Inc.), 664 F.2d 1158 (9th Cir. 1981),
the Ninth Circuit held that the mootness doctrine did not moot the appeal of an order
approving the sale of a tract of real estate because the sale was made subject to appeal.
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However, the facts in Taylor are substantially different from ours. In Taylor, the receiver
had tried to sell the property at public auction but had received no suitable bids. After the
bankruptcy court authorized a private sale of the property, Taylor offered to purchase it
for $300,000. Before the receiver accepted that offer, a general creditor in the case
informed the receiver that another potential buyer would offer more. Lake, who was
willing to pay $350,000 had tried, but had been unable to get through to the receiver to
make his offer prior to the bankruptcy court’s order approving the sale.
Upon the creditor’s motion, the bankruptcy court set aside the order approving the
Taylor sale and Lake subsequently obtained an order approving the sale to him for
$350,000. In the meantime, Taylor had appealed the order setting aside the Taylor sale
approval order. So the bankruptcy court’s order approving the Lake sale expressly made
the order subject to the outcome of the Taylor appeal. The case did not involve an appeal
of the Lake sale order, itself. And the Lake sale order would not take effect if Taylor
succeeded in his appeal. In essence, the Lake sale order was accompanied by a stay
pending appeal by its own terms.
In contrast, the bankruptcy approval order approving the Shor Sale does not make
it subject to appeal. The only relevant provision in the agreement between the Trustee
and Shor is that which requires the $216,000 cash payment to be held in trust pending
appeal. Other provisions of the Shor Sale were permitted to, and did in fact, proceed.
Shor pursued her collection efforts against Black without the Trustee’s interference. The
Trustee conveyed the ownership interests in the Black Entities that he had obtained from
Black to Shor. Shor took possession of properties owned by the Black Entities and
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liquidated what she could.
No “subject to appeal” provision prevented substantial
consummation of the sale order that Black now seeks to defeat.
Pursuant to the foregoing discussion, the Court rejects Black’s argument that no
stay was necessary because the contractual agreement was not substantially consummated
but remained subject to appeal. The Court further holds that, without a stay pending
appeal, the only issue that Black may challenge is that of Shor’s “good faith.” Thus the
motions to dismiss (D.E. 24, 26) are GRANTED IN PART, dismissing as moot all bases
for appeal other than Shor’s “good faith.”
C. Black May Challenge Shor’s Good Faith
With respect to “good faith,” the Court finds that Black preserved the issue in the
Bankruptcy Court by (a) denying in his response those paragraphs of the Trustee’s
motion to approve the Shor Sale that addressed good faith and (b) by offering proposed
findings of fact and conclusions of law related to a lack of good faith. Trustee’s Motion,
D.E. 22-14, pp. 3, 9; Black’s Response, D.E. 22-24, pp. 3, 4; Proposed Findings of Fact
and Conclusions of Law, D.E. 22-33, pp. 11-12. The Court further finds that Black has
raised the issue of “good faith” by response to the motions to dismiss and in his appellate
briefing in this Court. D.E. 23, 28. Therefore, reading Black’s “good faith” challenge
broadly and for the reasons set out above, the Court DENIES IN PART the motions to
dismiss with respect to Black’s claim that Shor did not purchase in good faith.
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APPEAL OF SHOR’S GOOD FAITH
The Bankruptcy Court made multiple findings of fact and conclusions of law in
connection with its determination that the Shor Sale was negotiated and proposed for
approval in good faith and that Shor was a bona fide purchaser, including:
• The Black Settlement “was announced in court and it contained no
bargain for, no-shop provision, nor did it contain any fiduciary out
limitations. And subsequent to that agreement Ms. Shor negotiated with
the Trustee and reached a, what the Trustee believed was a better
agreement which the Trustee then had a fiduciary obligation to bring to
the Court’s attention and has filed a motion to approve that.” D.E. 2255, p. 94. There were no break-up or topping fees involved, either.
D.E. 22-55, pp. 62, 66.
• It is “ORDERED that Seashore is a bona fide purchaser in good faith
entitled to all of the protections of Bankruptcy Code section 363(m),
and the sale transaction may not be avoided under Bankruptcy Code
section 363(n) . . . .” D.E. 22-38, p. 2.
•
“Good faith. The [Shor Sale] has been proposed, negotiated and
entered into by the Trustee and Seashore without collusion, in good
faith, and from arm’s-length bargaining positions. . . . Seashore is a
bona fide purchaser of the assets described in the Motion and has
proceeded in good faith in all respects in connection with this
proceeding. Accordingly, Seashore is entitled to all of the protections of
Bankruptcy Code Section 363(m). Neither the Trustee nor Seashore
have engaged in collusion or in any conduct that would cause or permit
the transaction to be avoided under Bankruptcy Code section 363(n).”
D.E. 22-39, pp. 1-2. See also, D.E. 22-39, p. 10.
Black’s only appellate issue that challenges the “good faith” determination and the only
issue that this Court may consider is that stated as: whether “[t]he Bankruptcy Court
abused its discretion and erred when making the following findings of fact: Findings, ¶ B
– That the [Shor Sale] was negotiated and entered in good faith and arm’s-length
bargaining positions.” Issue A(i)(a), Appellant’s Brief, D.E. 23, p. 7. All of the other
issues and sub-issues are moot and have been dismissed.
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Generally speaking, the Fifth Circuit has acknowledged that, “In reviewing the
rulings of the bankruptcy court on direct appeal and the district court sitting in
bankruptcy, we review findings of fact for clear error and conclusions of law de novo.
We review mixed questions of law and fact de novo.” TMT Procurement Corp. v.
Vantage Drilling Co. (In re TMT Procurement Corp.), 764 F.3d 512, 519 (5th Cir. 2014)
(per curiam) (internal citations omitted).
More specifically, the Fifth Circuit has
acknowledged that the standard of review to be applied to the Bankruptcy Court’s good
faith findings under § 363 is “a matter of some confusion in our circuit.”
TMT
Procurement, 764 F.3d at 520-21.
On the one hand, we have stated that when a district court
hearing a bankruptcy appeal dismisses an appeal from the
bankruptcy court as moot, we review that dismissal de novo.
In re Ginther Trusts, 238 F.3d at 688. Similarly, the Sixth
Circuit has held that “good faith” is a mixed question of law
and fact. In re Revco D.S., Inc., 901 F.2d 1359, 1366 (6th
Cir.1990) (reviewing finding of “good faith” under § 364(e)).
This would suggest that the good faith determinations by the
lower courts are subject to a de novo determination. On the
other hand, we have previously reviewed a bankruptcy court's
“good faith” determination under § 363(m) for clear error. In
re Beach Dev. LP, No. 07–20350, 2008 WL 2325647, at *2
(5th Cir. Jun. 6, 2008). District courts in our circuit have
done the same. In re Camp Arrowhead, Ltd., 429 B.R. 546,
550–52 (W.D. Tex. 2010).
TMT Procurement, supra at 521 n.24. The Fifth Circuit, holding that their decision was
the same under either standard of review, did not resolve the confusion in that case or in
any other case in the four months between the date the TMT Procurement opinion was
issued and the present. However, as in TMT Procurement, the standard of review does
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not make a difference to the challenge to the Bankruptcy Court’s “good faith” finding in
this case.
Black’s argument is predicated entirely on the fact that the Trustee had executed
the Black Settlement, had acted upon the Black Settlement in the State Court Action, and
then entered into confidential negotiations with Shor resulting in the Shor Sale, which
effectively prevented the Black Settlement from being approved. According to Black,
even though the Black Settlement was expressly subject to Bankruptcy Court approval, it
precluded the Trustee from considering or seeking the approval of any other offers.
As briefed, the question for this Court is whether the Trustee could, in good faith,
negotiate more than one agreement—agreements that are inconsistent with each other—
to resolve certain claims, pending the Bankruptcy Court’s determination of which
agreement to approve. Nothing in Black’s briefing squarely addresses the good faith of
Shor, as purchaser. However, the Court construes the briefing broadly, and will address
whether complaints about the Trustee’s negotiation of the Shor Sale reflect upon Shor or
demonstrate a lack of good faith on the part of the Trustee that taints the entire
transaction. This evaluation must be made in the context of the Trustee’s obligation to
the BNP Estates and to the Bankruptcy Court. The Trustee’s duties determine whether he
acted in good faith in negotiating and advocating the Shor Sale over the Black
Settlement.
The Fifth Circuit has characterized the “good faith” required by § 363(m) as a lack
of “fraud, collusion between the purchaser and other bidders or the trustee, or an attempt
to take grossly unfair advantage of other bidders.” E.g., Bleaufontaine, Inc. v. Roland
15 / 18
Int’l (In re Bleaufontaine, Inc.), 634 F.2d 1383, 1388 n.7 (5th Cir. 1981) (quotation
marks omitted). At issue here is the Trustee’s duty to entertain all serious offers. Cadle
Company v. Mims (In re Moore), 608 F.3d 253, 264-65 (5th Cir. 2010). He must do so
because he has the duty to maximize the value of the estate. Commodity Futures Trading
Comm'n v. Weintraub, 471 U.S. 343, 352 (1985).
For that reason, no agreement is final and enforceable until approved by the
bankruptcy court—as expressly set out in both the Black Settlement and the Shor Sale.
“Everyone who deals with a bankruptcy trustee in a
transaction that is not in the ordinary course of business is
charged with the knowledge that the law may require court
approval . . . .” A proposed settlement may bind the parties,
but it does not bind the courts; otherwise, the approval
process would be meaningless.
Moore, 608 F.3d at 266 (quoting Goodwin v. Mickey Thompson Entertainment Group,
Inc. (In re Mickey Thompson Entm’t Group, Inc.), 292 B.R. 415 (9th Cir. BAP 2003).
Yet, nothing about an agreement’s “binding” nature can preclude the Trustee from
entertaining additional offers.
As a general matter, the trustee must demonstrate that the
proposed sale price is the highest and best offer, though a
bankruptcy court may accept a lower bid in the presence of
sound business reasons, such as substantial doubt that the
higher bidder can raise the cash necessary to complete the
deal.
Moore, 608 F.3d at 263 (citing 3 COLLIER ON BANKRUPTCY ¶ 363.02[1][f] (15th ed. rev.
2009)).
Under these Fifth Circuit guidelines, and reviewing the record as a whole, the
Court agrees with the Bankruptcy Court’s assessment that the Trustee had a duty to
16 / 18
entertain Shor’s offer, which precludes treating the Black Settlement as final or exclusive.
The Trustee further had the duty to advocate the offer that he deemed to be the highest
and best offer. According to the evidence, Shor’s offer provides some guaranteed value,
has a greater potential recovery on the contingent future percentage of collections than
that promised by the Black Settlement, and ends controversies that diminish the estate
through administrative expenses. Oblach’s offer, while potentially involving a larger
recovery, suffered from Oblach’s failure to appear and demonstrate his ability and
willingness to make his offer work. Given Oblach’s personal friendship with Black, the
Trustee and the Bankruptcy Court were correct to discount the sincerity or ultimate
likelihood of success of Oblach’s promises, which required adverse actions against his
long-time, personal friend.
The fact that the Shor negotiations were confidential cannot be actionable. The
Trustee’s negotiations with Black were also confidential and both agreements, once
made, had to be fully disclosed to the Court and to all parties in an approval process
involving a hearing at which all parties could be heard. The fact that the Shor Sale
included the withdrawal of Shor’s objections to the Trustee’s professional fees does not
change the analysis because that part of the agreement was fully disclosed and subject to
court approval. There was no evidence that the agreement was fraudulent, collusive, or
took advantage of any other bidder simply because the professional fee issue was an issue
disposed of by the agreement. It certainly provides a benefit to the estate to eliminate the
additional fees and expenses that it would cost to litigate the issue. And if the expenses
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were truly improper, then nothing about the Shor Sale agreement prevented any other
party from voicing their own objection.
Black also argued that the Trustee should have engaged a formal sale procedure,
soliciting additional bids for the claims against Black that the Estates had to sell.
“Whether to impose formal sale procedures is ultimately a matter of discretion” that we
leave to bankruptcy courts. Moore, 608 F.3d at 265 (quoting Mickey Thompson, 292 B.R.
at 422). The Trustee testified, and it was uncontroverted, that there is no market for the
sale of contentious litigation. D.E. 22-31, p. 51. Nothing that Black has briefed calls into
question Shor’s status as a good faith purchaser with respect to the provisions of the Shor
Sale.
CONCLUSION
Thus there was no proof of fraud, collusion, or the taking of unfair advantage of
other bidders connected with the Shor Sale. Motions for Bankruptcy Court approval of
both the Black Settlement and the Shor Sale were properly noticed with an opportunity
for hearing. The Court FINDS, under both a de novo and clear error review, that the
Bankruptcy Court did not err in determining that Toby Shor, Seashore Investments
Management Trust, and 2004 GRAT are good faith purchasers under 11 U.S.C. § 363(m)
and the Bankruptcy Court’s order approving the Shor Sale (D.E. 22-38) is AFFIRMED.
ORDERED this 27th day of January, 2015.
___________________________________
NELVA GONZALES RAMOS
UNITED STATES DISTRICT JUDGE
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