Contributed by Ginger Ellison.
In In re Blackwater Enterprises, Inc., the Honorable Robert A. Gordon of the United States Bankruptcy Court for the District of Maryland observed the president of the debtor company make multiple attempts to halt or delay the 363 sale of the debtor estate’s only asset. After watching one failed card trick after another, Judge Gordon ran out of patience and directed the spotlight on the long list of motions that Mr. Rainer T. Rose had brought forth since the case was converted to chapter 7. Noting that these motions often lacked legal foundation and that Mr. Rose consistently failed to offer evidentiary support of his position, Judge Gordon characterized Mr. Rose’s behavior as an outright refusal to progress toward solvency and found that Mr. Rose had acted in bad faith. He dismissed the motion for stay pending appeal of the 363 sale on the basis that Mr. Rose raised no novel arguments that he could not have raised at the sale hearing, and that his arguments were, in fact, meritless.
On August 23, 2012, Blackwater Enterprises filed a voluntary petition in chapter 11. After several months of inactivity, the U.S. Trustee filed a motion to convert or dismiss on January 8, 2013. After a hearing, the case was converted to chapter 7.
Worried that the chapter 7 trustee would not sell the estate’s sole asset at a sufficiently high price, Mr. Rose brought forward a flurry of oppositions and motions in clear attempt to forestall the foreclosure process. These included a motion to reconsider conversion and a motion to reconsider the 363 sale, as well as a notice of appeal and a motion for stay pending appeal.
In the motion to reconsider conversion, the debtor failed to identify any error of law committed by the bankruptcy court. Instead, it merely asserted that the trustee’s listing price for the asset of $1.42 million was too low and that this created an unusual circumstance in light of the asset’s substantial equity. Finding that (a) any arguments regarding the creation of an unusual circumstance should have been made at the prior hearing and (b) the debtor had failed to execute its fiduciary obligations as debtor-in-possession, the court denied the motion for reinstatement in chapter 11.
At the August 2, 2013 363 sale hearing, Mr. Rose and the debtor requested authorization of an auction sale; yet, neither submitted any evidence to establish why an auction sale should be chosen over a 363 sale. The court denied their request and entered the sale order.
On August 26, 2013, Mr. Rose filed the motion to reconsider the 363 sale under Fed. R. Civ. P. 60(b), arguing that the chapter 7 trustee’s marketing efforts were deficient and that the appraisal that the chapter 7 trustee relied upon was not rendered by a licensed appraiser. Neither of these arguments had been raised at the sale hearing. Noting this and the history of the case, the court found that the estate and its creditors would be better served by the trustee’s sale than its nullification. It denied reconsideration of the 363 sale.
Mr. Rose then filed a notice of appeal of the order denying reconsideration of the sale, as well as a motion for stay pending appeal.
Fourth Circuit Test for Stay Pending Appeal: Noteworthy Dicta Commenting on the Debtor’s Use of an Appraisal in Connection With its Motion for a Stay Pending Appeal of a 363 Sale
Relying on Fourth Circuit precedent, the bankruptcy court held that an appellant seeking a stay pending appeal must show that (1) there is a likelihood of success on the merits of the appeal, (2) the appellant will suffer irreparable injury if the stay is denied, (3) other parties will not be substantially harmed by the stay, and (4) the public interest will be served by granting the stay.
The court cited Fourth Circuit case law holding that motions for relief from a final order under Rule 60(b)(3) require movants to establish clear and convincing evidence that (1) the defense is meritorious, (2) the appellant was prevented from fully presenting before judgment, (3) due to the adverse party’s fraud, misrepresentation, or misconduct. In evaluating the appellant’s likelihood of success on the merits, the court directed that the analysis must begin with the sale hearing. In doing so, the court sought to ensure, first and foremost, that the rules were not being used to raise issues that the movant had a full and fair opportunity to raise at the original hearing but failed to do so. Finding that nothing prevented Mr. Rose from asserting his objections at the sale hearing, the bankruptcy court ruled that Mr. Rose could not legitimately seek relief.
Interestingly, the court held in dicta that, standing alone, the motion to reconsider the 363 sale would be meritless even if Mr. Rose’s alleged appraisal was brought into evidence at the original sale hearing. The court noted that the bid received by the chapter 7 trustee amounted to $1.42 million, whereas Mr. Rose’s alleged appraisal came in at $1.7 million. According to Judge Gordon, a difference of approximately 20% in the contested appraisals would be insufficient to convince the court that the proposed 363 asset sale should be nullified. Judge Gordon viewed actual bids as being more determinative of value than expert appraisals, noting that Mr. Rose introduced no competing bids to showcase that the proposed sale price was not the best price available in the marketplace. Altogether, he was not convinced that there was a likelihood of success on the merits.
For the same reasons, the court ruled that Mr. Rose suffered no prejudice. It also found that entering a stay pending appeal would introduce the risk that the existing bidder would be scared away. Noting that one creditor was already owed 17 months of prepetition payments, while others have waited more than one year, the court ruled that the creditor group as a whole will be substantially injured by the entry of a stay. Under the fourth and final factor, the court found that no legitimate interest, public or otherwise, would be served by allowing for the stay.
Looking Ahead (and Considering Alternate Scenarios)
It rapidly became evident that the court was not willing to assist Mr. Rose in stalling the 363 sale of his company’s only asset in In re Blackwater Enterprises, Inc., finding that he failed to meet any of the four factors required under the test for a stay pending appeal. The dicta regarding the basic irrelevance of the debtor’s appraisal attempting to show the inadequacy of a sale price for approximately 20% less than the appraisal is interesting and helpful guidance to practitioners—courts are generally more interested in actual market prices where such prices exist, not theoretical prices. Of course, the court’s view of this debtor’s appraisal may have been colored by his previously questionable behavior throughout the case. It would be interesting to know how the court would have ruled had the debtor instead brought in a bona fide bid for 20% greater than the sale price in considering the motion to stay and the motion to reconsider. The issue of later bids is one we have considered before and that seems to interest those involved in the restructuring world, including those of us at the Weil Bankruptcy Blog.
Copyright © 2019 Weil, Gotshal & Manges LLP, All Rights Reserved. The contents of this website may contain attorney advertising under the laws of various states. Prior results do not guarantee a similar outcome. Weil, Gotshal & Manges LLP is headquartered in New York and has office locations in Beijing, Boston, Dallas, Frankfurt, Hong Kong, Houston, London, Miami, Munich, New York, Paris, Princeton, Shanghai, Silicon Valley, Warsaw, and Washington, D.C.