Official Committee of Unsecured Creditors v. Interforum Holding LLC et al

Filing 14

ORDER signed by Judge J P Stadtmueller on 7/7/11: AFFIRMING the bankruptcy court's finding of good faith; GRANTING 3 appellee Amalgamated Bank's Motion to Dismiss the Appeal as Moot; and DISMISSING this appeal as moot. (cc: all counsel)(nm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
____________________________________________
OFFICIAL COMMITTEE OF UNSECURED CREDITORS,
Appellant,
v.

Case No. 11-CV-219

INTERFORUM HOLDING LLC, et al.,
Appellees.
______________________________________________________

ORDER
On March 1, 2011, appellant Official Committee of Unsecured Creditors (the
“Committee”) appealed from an order of the United States Bankruptcy Court for the
Eastern District of W isconsin (“bankruptcy court”) approving the sale of substantially
all of debtor’s assets free and clear of liens, claims, encumbrances, and interests to
Amalgamated Bank, as Trustee of Longview Ultra Construction Loan Investment
Fund f/k/a Longview Ultra 1 Construction Loan Investment Fund (“Amalgamated
Bank” or the “Bank”) and authorizing the debtor to assume and assign executory
contracts and unexpired leases to Amalgamated Bank. In response to the appeal,
Amalgamated Bank has filed a motion to dismiss the appeal as moot. In support of
its motion, Amalgamated Bank argues that the sale has already been consummated,
that it qualifies as a good-faith purchaser pursuant to 11 U.S.C. § 363(m), and,
therefore, the Committee’s failure to obtain a stay pending appeal renders its current
appeal moot. For the reasons set forth below, the court affirms the bankruptcy
court's finding of good faith, and holds that this appeal is moot under § 363(m) of the

Bankruptcy Code because no effective relief can be granted. The Court will,
therefore, dismiss this appeal.

BACKGROUND
On December 23, 2009, the debtor filed a voluntary petition for relief under
Chapter 11 of Title 11 of the United States Bankruptcy Code. (Voluntary Pet.)
(Docket #1-6). The debtor’s primary asset was real estate located in Milwaukee,
W isconsin. (Id.). Amalgamated Bank is a secured creditor of the debtor with a
properly perfected pre-petition lien on substantially all of the debtor’s assets,
including the property and debtor’s cash. (Appellee’s Br. in Supp. at 2).

On

October 22, 2010, the debtor filed an Amended Sale Procedures Motion, seeking the
entry of an order establishing certain procedures to be followed in connection with
the auction and sale of debtor’s assets pursuant to 11 U.S.C. §§ 105(A) and 363.
(Sale Procedure Mot.) (Docket #1-20). As described in the motion, Amalgamated
Bank agreed to act as a stalking horse bidder1 in an auction of the debtor’s assets
with a credit bid of $55,000,000 pursuant to an Asset Purchase Agreement. (Id.).
Several parties filed various objections to the Amended Sales Procedure Motion.

1

The goal of an asset sale in the bankruptcy context is to maximize the recovery of value
for the bankruptcy estate. To that end, the purpose of a “stalking horse” bid or offer is to establish
a framework for competitive bidding and to facilitate a realization of that value. 2 L. Distressed
Real Est. § 28B:9. For example, a stalking horse bidder will reach an agreement with the debtor
to purchase assets prior to a court-supervised auction of those assets. Id. Because typically the
bid will be exposed to higher and better bids at auction, the agreement often provides for a
“break-up fee” to compensate the stalking horse bidder for “setting the floor at auction, exposing
its bid to competing bidders, and providing other bidders with access to the due diligence
necessary to enter into an asset purchase agreement.” Id.

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Following hearings on October 27, 2010, and November 8, 2010, to resolve these
objections, the bankruptcy court entered an order establishing sale procedures and
approving the Asset Purchase Agreement, among other things. (Sale Procedures
Order) (Docket #1-58). No party appealed the Sale Procedures Order.
The Sale Procedures Order established extensive procedures governing the
sale of the debtor’s assets, including requirements for Qualified Bidders and
Qualified Bids. (Id.). Qualified Bids were required to propose a purchase price for the
debtor’s assets consisting of cash or non-cash consideration with a value
determined by Houlihan Lokey (“Houlihan”), a consultant hired to assist with the
marketing of the debtor’s assets, to be equal to $55,000,000 plus additional cash at
closing in an amount not less than $1,000,000. (Id. at 5-6).
Subsequent to the entry of the Sale Procedures Order, the debtor’s assets
were marketed by Houlihan in accordance with the procedures set forth in the Order.
(See generally Dec. 23, 2010 Hearing Tr.) (Docket #1-78). Houlihan ultimately
received bids from five bidders other than Amalgamated Bank, but none of the bids
constituted a Qualified Bid pursuant to the Sale Procedures Order – none of the bids
met the $55,000,000 plus $1,000,000 minimum threshold. (Id. at 106-07). The
highest bid submitted by a bidder other than Amalgamated Bank was $48,000,000.
(Id.). Because no Qualified Bids were received, no auction of the debtor’s assets
was held, and the debtor then sought court approval for the sale to Amalgamated
Bank as the stalking horse bidder, all in accordance with the Sale Procedures Order.

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On December 23, 2010, the bankruptcy court held a hearing on approval of
the sale of debtor’s assets to the Bank per the Bank’s bid of $55,000,000. At the
hearing, the bankruptcy court determined that the sale of the debtor’s assets was
conducted in good faith and that the debtor had exercised good business judgment
in connection with the sale. (Id. at 122). On December 27, 2010, Amalgamated Bank
submitted a proposed order approving the sale. (Proposed Order) (Docket #1-68).
On January 2, 2011, the Committee filed its objections to the proposed Sale Order,
challenging many aspects of the Sale Order. (Docket #1-73). On January 5, 2011,
the bankruptcy court held a hearing on the objections, reaffirmed its finding of good
faith, overruled a majority of the Committee’s objections, and approved the proposed
form of the Sale Order with only a few minor revisions not relevant to this appeal.
(Jan. 5. Hearing Tr.) (Docket #1-83). On January 7, 2011, the bankruptcy court
entered the Sale Order approving the sale of substantially all of the assets of the
debtor to Amalgamated Bank and certifying that Amalgamated Bank was a good
faith purchaser. (Sale Order) (Docket #1-75). As part of the sale, Amalgamated
Bank agreed to provide a carve-out from its collateral of up to $600,000, including
an estimated payment of approximately 10% for the holders of unsecured claims.
(Id. at 14).
On January 17, 2011, the Committee filed this appeal of the Sale Order but
did not seek a stay pending appeal pursuant to Fed. R. Bankr. P. 8005. (Docket #1).
Because the Sale Order was not stayed, Amalgamated Bank’s assignee, Park

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Lafayette Property Holdings, LLC, closed the sale transaction on January 27, 2011.
(Appellee’s Br. in Supp. at 8).
DISCUSSION
In support of its motion to dismiss, Amalgamated Bank argues that the
Committee’s appeal of the bankruptcy court’s sale order is moot because the
Committee failed to obtain a stay pending appeal and the sale to the Bank as a good
faith purchaser already occurred. On the other hand, the Committee argues that its
appeal is not moot for failure to obtain a stay because the Committee is challenging
the good faith of the purchaser on appeal. In this case, there is no dispute that the
bankruptcy court’s order approving sale was not stayed pending appeal to this court.
According to 11 U.S.C. § 363(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.
Id. Pursuant to § 363(m), the Seventh Circuit has consistently held that where an
appellant fails to obtain a stay pending appeal of an order authorizing the sale of
estate property to a good faith purchaser, the appeal is rendered moot by the
occurrence of the sale. In re Vetter Corp., 724 F.2d 52, 55 (7th Cir. 1983) (“In the
case of a bankruptcy sale, the failure to obtain a stay of the sale, pending appeal,
allows the sale to be completed, thus preventing an appellate court from granting
relief and thereby rendering the appeal moot.”); In re Sax, 96 F.2d 994, 997-98 (7th
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Cir. 1986) (finding that Ҥ 363(m) and the cases interpreting it have clearly held that
a stay is necessary to challenge” a court-approved sale of property of a debtor to a
good faith purchaser); In re CGI Industries, Inc., 27 F.3d 296, 299 (7th Cir. 1994)
(“[W ]e have repeatedly held that when a party challenges the bankruptcy court's
order approving the sale of estate property to a good faith purchaser, it must obtain
a stay of that order pending appeal, lest the sale proceed and the appeal become
moot.”).
However, it is also true that a stay is not necessary when an appeal
challenges whether the purchaser is a good faith purchaser pursuant to § 363(m).
See In re Sax, 796 F.2d at 997 n.4 (“a stay is not required to challenge a sale on the
grounds that an entity did not purchase in good faith.”); In re Andy Frain Servs., Inc.,
798 F.2d 1113 (7th Cir. 1986) (considering the issue of good faith on appeal instead
of summarily dismissing the appeal for mootness even though no stay had been
obtained by the appellant because appellant had challenged the good faith of the
purchaser on appeal); Petroleum & Franchise Funding, LLC v. Bulk Petroleum
Corp., 435 B.R. 589 (E.D. W is. 2010) (finding that failure to obtain stay pending
appeal did not render appeal from the sale order moot where appellant challenged
bankruptcy court's certification as to purchaser's good faith). Accordingly, the fact
that the Committee is challenging the good faith of Amalgamated Bank in purchasing
the debtor’s property means the Committee’s failure to obtain a stay is not
automatically grounds for dismissal.

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The Committee argues that the simple fact that it challenges the good faith of
the purchaser on appeal allows it to survive Amalgamated Bank’s motion to dismiss.
The Committee cites to this court’s decision in Bulk Petroleum, 435 B.R. 589, as
support for this proposition. In Bulk Petroleum, the court considered only the
question of whether a challenge to the good faith of a purchaser pursuant to
§ 363(m) obviates the necessity that the appellant obtain a stay pending appeal. Id.
at 591-93. However, in its ruling, the court also noted that, at the motion to dismiss
stage, it was not necessary to evaluate the merits of whether the purchaser acted
in good faith. Id. at 591.

Instead, the court found it sufficient that the appeal

challenged the good faith purchaser status of the appellee and that the appellant had
proffered evidence in support of its contention. Id.

W hile the court’s delay of

consideration of the issue of good faith may have been warranted in the context of
that case, Bulk Petroleum does not stand for the proposition that the issue of good
faith can never be considered at the motion to dismiss stage.

Indeed, courts

routinely consider the issue of good faith in the context of a motion to dismiss. See
e.g., In re Tempo Tech. Corp., 202 B.R. 363, 367 (D.Del. 1996) (“Thus, where the
good faith of the purchaser is at issue, the district court is required to review the
bankruptcy court's finding of good faith before dismissing any subsequent appeal as
moot under section 363(m).”); Raskin v. Malloy, 231 B.R. 809 (N.D.Okla. 1997)
(considering a motion to dismiss pursuant to § 363(m) and concluding that additional
briefing was required on the issue of good faith only because the court did not have

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the complete record from the bankruptcy court); In re Second Grand Traverse
School, 100 Fed.Appx. 430, 433 (6th Cir. 2004) (finding “[i]t was not error for the
district court to consider the issue of good faith in the context of a motion to dismiss
under § 363(m)”); In re HNRC Dissolution Co., 2005 W L 1972592, at *5 (E.D.Ky.
Aug. 16, 2005) (determining the issue of good faith at the motion to dismiss stage).
W hile the Seventh Circuit has not squarely addressed this issue, the court finds that
consideration of whether Amalgamated Bank was a good faith purchaser pursuant
to § 363(m) is proper at this stage of the proceedings because a determination can
be made on the record of the bankruptcy court, and the appellant had an opportunity
to contest the bad faith of Amalgamated Bank in response to the Bank’s motion to
dismiss. Accordingly, the court turns to the question of whether the bankruptcy
court’s determination of good faith was in error.
Good faith is a factual finding reviewed for clear error. Hower v. Molding
Systems Engineering Corp., 445 F.3d 935, 938 (7th Cir. 2006) (citing In re Smith,
286 F.3d 461, 464 (7th Cir. 2002)). The burden of proof is placed on the party
alleging bad faith or seeking reconsideration of a good faith finding. Id. W hile the
Bankruptcy Code does not define good faith nor state how it is to be established,
the Seventh Circuit has said that “‘the requirement that a purchaser act in good faith
. . . speaks to the integrity of his conduct in the course of the sale proceedings.’” In
re Andy Frain Servs., Inc., 798 F.2d at 1125 (quoting In re Rock Industries
Machinery Corp., 572 F.2d 1195, 1198 (7th Cir. 1978)). Typically, “fraud, collusion

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between the purchaser and other bidders or the trustee, or an attempt to take
grossly unfair advantage of other bidders” will destroy a purchaser’s good faith
status. Id.
Appellant contends that the bankruptcy court’s finding of good faith is
erroneous. The Committee’s argument that Amalgamated was not a good faith
purchaser is predicated on the Committee’s view that “the sale constituted an
improper sub rosa plan of reorganization which short-circuited the purpose and
protections afforded to all interested parties under the Bankruptcy Code.”
(Appellant’s Resp. Mot. Dismiss at 6). The Committee asserts that the Bank’s lack
of good faith is evidenced by the following: the debtor failed to show that the assets
will substantially diminish in value; the debtor and the Bank received significant
benefits throughout the bankruptcy without filing a plan of reorganization and a
disclosure statement; the failure to file a plan and disclosure statement prevented
sufficient notice, opportunity to object, and opportunity to vote on the Plan; the
property was sold to the Bank after approximately one year, which was sufficient
time to file a plan and disclosure statement; the sale was predicated upon multiple
compromises of potential claims by the estate which were not supported by sufficient
justification; the sale and carve-out benefitted one set of creditors over another set
of similarly situated creditors without evidencing a distinction between them; the sale
resulted in payments to management which, under a plan, would violate the absolute
priority rule; details of the settlement reached with certain creditors were not

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disclosed; neither the debtor nor the Bank made any showing as to why the sale,
absent a plan, is necessary or in the best interests of the estate; the sale dictates the
entire outcome of the Chapter 11 case; neither the debtor nor the bank had a basis
for an expedited sale as the property was sold back to the bank similar to a
foreclosure sale; the bank refused to hold the auction when the auction could have
increased bids as was testified to at the hearing by Patrick Gillan; and the carve-out
for unsecured creditors is not reasonable considering the costs and expenses.
(Appellant’s Resp. Mot. Dismiss at 6-7).
However, the majority of these contentions do not actually speak to
Amalgamated Bank’s alleged bad faith within the meaning of § 363. As the Seventh
Circuit has made clear, bad faith in the § 363 context refers to bad faith in the
conduct of negotiations, something that the Committee has not demonstrated. In re
Rock Industries Machinery Corp., 572 F.2d at 1198. To the contrary, the record is
rife with evidence of the Bank’s good faith effort to find bidders for the debtor’s
property. For instance, the record reflects that Amalgamated Bank made substantial
efforts to find bids for the highest reasonable value. Most notably, the Bank hired
Houlihan as a consultant to assist with the marketing of the debtor’s assets. The
testimony of Patrick Gillan (“Mr. Gillan”), Senior Vice President of Houlihan, reflects
that Houlihan, at the direction of Amalgamated Bank, worked diligently to find
Qualified Bids. For example, Mr. Gillan testified that the agreement between
Amalgamated Bank and Houlihan was typical of other engagements in that the Bank

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wanted to get the highest and best price for the property. (Dec. 23, 2010 Hearing Tr.
at 102) (Docket #1-78). Mr. Gillan also testified that it was his impression that
Amalgamated Bank wanted Houlihan to find a bidder for the property that would
ultimately buy it. (Id. at 106). Mr. Gillan testified that the terms of the agreement
between the Bank and Houlihan provided Houlihan with an incentive to pursue the
highest and best price for the property. (Id. at 103). Mr. Gillan testified that to market
the property, Houlihan did the following: (1) prepared a 60-100 page package
describing the investment; (2) prepared an extensive investor list, including 50-100
targets to actively call and e-mail; (3) broadly marketed the property by e-mail
through a real estate distribution system; (4) contacted over 2,600 investors by
e-mail and 185 investors by telephone and follow up e-mail; (5) obtained 38 signed
confidentiality agreements from individuals interested in accessing the online data
room for the property; and (6) conducted site visits for potential investors to visit the
property. (Id. at 103-05). Despite these efforts, no party other than Amalgamated
Bank submitted a qualified bid by the bid deadline. (Id. at 106-07).
Furthermore, the bankruptcy court heard testimony from James Freel (“Mr.
Freel”), Senior Vice President and Chief Real Estate Officer of the Asset
Management and Trust Division of Amalgamated Bank. Mr. Freel testified that the
Bank offered $55,000,000 as its stalking horse credit bid because it felt that amount
represented a fair value for the property. (Id. at 81). Mr. Freel also testified that if a
party had submitted a Qualified Bid in an amount acceptable to Amalgamated Bank,

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the Bank would have consented to the sale to that party. (Id. at 82-83). Indeed, Mr.
Freel averred that a sale to a party other than the Bank was Amalgamated Bank’s
objective when it engaged Houlihan to market the property. (Id.) Mr. Freel testified
that the Bank acted in good faith, did not act in contravention of law, did not collude
with any party, did not discourage any party from bidding on the property, did not
instruct Houlihan to refrain from speaking to bidders, and had not entered into any
agreements with third parties to sell the property after the transfer of title to the Bank.
(Id. at 83-84).
Moreover, there is no evidence indicating that the debtor and Amalgamated
Bank failed to comply with the bidding and auction procedures as set forth in the
Sale Procedures Order. Indeed, no party, not least of all the Committee, filed an
appeal of that Order. Thus, the Committee’s contention that the Bank’s failure to
conduct an auction evidences the Bank’s bad faith is without merit. Pursuant to the
Sale Procedures Order, an auction of the debtor’s assets was only to occur if the
debtor received one or more Qualified Bids in addition to Amalgamated Bank’s
Qualified Bid. (Sale Procedures Order at 9) (Docket #1-58). No Qualified Bids other
than Amalgamated Bank’s bid were received and, thus, no auction was required.
On the other hand, at the hearing before the bankruptcy court, though the
Committee cross-examined both Mr. Gillan and Mr. Freel, it did not elicit any
testimony indicating that the Bank purchased the property in bad faith, nor did it offer
any other evidence demonstrating that Amalgamated was not a good faith

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purchaser. The only evidence the Committee points to as support for its challenge
to the Bank’s good faith status is the testimony of Mr. Gillan in which he states that
after the formal submission of all bids, some bidders informed Houlihan that they
may have been able to submit a higher bid. (Dec. 23, 2010 Hearing Tr. at 109).
However, Mr. Gillan categorized these statements as “soft comments” and further
noted that no bidder actually submitted a higher bid and no bidder ever indicated that
they could reach or even come close to bidding at the Qualified Bid level. (Id.).
Based on this evidence, the bankruptcy court determined that the sale was
conducted in good faith and that the debtor had exercised good business judgment
in connection with the sale. (Id. at 122). The bankruptcy court explicitly found that
there was no evidence of collusion or of any attempt to discourage bidders from
participating in the auction. (Id. at 126). Specifically, the bankruptcy court stated:
“I think looking at the sale as a whole, there is simply not any evidence that there has
been anything other than a good faith effort to conduct the sale in a way that would
maximize the benefit for all creditors, not the least of whom of course is
Amalgamated.” (Id. at 128).2 The court also noted that simply because the bidding
process did not “pan out” in the way the Committee wanted, this was not “an after
the fact demonstrator of bad faith.” (Id. at 127).

2

The Committee objected to many aspects of the Sale Order and, in light of these
objections, another hearing was held on January 5, 2011. At this hearing, the bankruptcy court
reaffirmed its finding of good faith and stated yet again that it did “not hear one iota of evidence that
the bank did not comply with the procedures that were outlined in the Sale Order.” (Jan. 5, 2011
Hearing Tr. at 15) (Docket #1-83).

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Furthermore, the court found that the sale was not an attempt to subvert the
plan process. (Id. at 124). Significantly, it addressed the Committee’s concerns over
a confidential settlement agreement that occurred between Amalgamated Bank and
another creditor, Hunzinger Construction Company (“Hunzinger”). At the bankruptcy
court hearing and now on appeal, the Committee argues that the terms of that
settlement agreement should have been disclosed and also that the carve-out given
to the unsecured creditors as a part of the asset sale did not benefit the unsecured
creditors to the same degree as Hunzinger benefitted from the settlement with
Amalgamated Bank. Accordingly, the Committee argues that the carve-out and the
sale are not fair and that the sale was not conducted in good faith. The bankruptcy
court responded to this argument by noting that Hunzinger decided to file an
adversary proceeding, not against the debtor, but against Amalgamated Bank,
another creditor. (Id. at 124-25). These two parties resolved their dispute and the
debtor was not a party to the settlement. (Id.) Therefore, there was no requirement
that the terms of that settlement be disclosed. (Id.). Moreover, the bankruptcy court
found that Amalgamated Bank’s settlement with Hunzinger, even if it resulted in
disparate treatment among creditors, was not evidence that the sale of assets was
conducted in bad faith. Specifically, the bankruptcy court found that the other
creditors had the same opportunity as Hunzinger to file an adversary proceeding
against Amalgamated Bank, but chose, for whatever reason, not to do so. (Id.). In

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light of this fact, the bankruptcy court noted it was unreasonable for the Committee
to now argue that the sale of assets was unfair and conducted in bad faith. (Id.)
The bankruptcy court’s findings are not clearly erroneous. They are well
supported by substantial evidence in the record. There was no evidence on the
record of collusion, fraud, or an attempt to take grossly unfair advantage of other
bidders. In fact, there is only evidence to the contrary – that Houlihan made
extensive efforts to market the debtor’s property. And, while there is evidence of
some communication and cooperation between Amalgamated Bank and the debtor,
the Committee has not shown that the communication and cooperation amounted
to anything other than a good faith attempt to maximize the recovery of value of the
property for the benefit of the bankruptcy estate.

Furthermore, the fact that

Hunzinger may be benefitting differently than other creditors due to its decision to
file a lawsuit against Amalgamated Bank, and the fact that the settlement terms have
not been disclosed to the Committee, is not evidence of bad faith, especially
because the debtor was not a party to this separate proceeding and all the creditors
had the same opportunity as Hunzinger did to file an adversary proceeding against
Amalgamated Bank. Accordingly, this court is satisfied that the bankruptcy court’s
conclusion that the sale was made in good faith is correct.
Because the appellant did not obtain a stay of the sale order and because the
sale was made in good faith, Amalgamated Bank’s motion to dismiss pursuant to 11
U.S.C. § 363(m) will be granted and this appeal will be dismissed.

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Accordingly,
IT IS ORDERED that the bankruptcy court’s finding of good faith be and the
same is hereby AFFIRMED;
IT IS FURTHER ORDERED that appellee Amalgamated Bank’s Motion to
Dismiss the Appeal as Moot (Docket #3) be and the same is hereby GRANTED; and
IT IS FURTHER ORDERED that this appeal be and the same is hereby
DISMISSED as moot pursuant to 11 U.S.C. § 363(m).
The clerk of court is ordered to enter judgment accordingly.
Dated at Milwaukee, W isconsin, this 7th day of July, 2011.
BY THE COURT:

J.P. Stadtmueller
U.S. District Judge

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