Mission Product Holdings, Inc. v. Schleicher & Stebbins Hotels ( 2020 )

United States Court of Appeals
For the First Circuit
No. 19-9004
IN RE: OLD COLD, LLC,
Debtor.
MISSION PRODUCT HOLDINGS, INC.,
Appellant,
v.
SCHLEICHER & STEBBINS HOTELS, L.L.C.;
OLD COLD, LLC,
Appellees.
APPEAL FROM THE BANKRUPTCY APPELLATE PANEL
FOR THE FIRST CIRCUIT
Before
Howard, Chief Judge,
Selya and Kayatta, Circuit Judges.
Robert J. Keach, with whom Lindsay Z. Milne, Letson B.
Douglass, and Bernstein, Shur, Sawyer & Nelson, P.A. were on brief,
for appellant.
Christopher M. Candon, with whom Sheehan Phinney Bass & Green
PA was on brief, for appellee Schleicher & Stebbins Hotels, L.L.C.
October 1, 2020
KAYATTA, Circuit Judge. On its third appeal before us
in the bankruptcy proceedings of debtor Old Cold, LLC ("debtor"),
creditor Mission Product Holdings, Inc. ("Mission") now challenges
an order of the bankruptcy court granting creditor Schleicher &
Stebbins Hotels, L.L.C. ("S & S") relief from the automatic stay
imposed by section 362 of the Bankruptcy Code. See 11 U.S.C.
§ 362(a). In addition to challenging the stay relief order on its
merits, Mission argues that the bankruptcy court lacked
jurisdiction to issue the order because Mission's prior appeal of
a bankruptcy court ruling was then still pending. Seeking to trump
Mission's jurisdictional argument, S & S contends that any
challenge to the bankruptcy court's order granting stay relief is
moot because the debtor has disbursed all assets remaining in the
estate to S & S. We reject both parties' jurisdictional arguments
and affirm on the merits.
I.
We have previously chronicled the long and tumultuous
fight between Mission and S & S over the debtor's assets.1 So we
1 See Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139
S. Ct. 1652 (2019), rev'g 879 F.3d 389 (1st Cir. 2018), aff'g in
part, rev'g in part 559 B.R. 809 (B.A.P. 1st Cir. 2016), aff'g in
part, rev'g in part 541 B.R. 1 (Bankr. D.N.H. 2015); Mission Prod.
Holdings, Inc. v. Old Cold, LLC (In re Old Cold, LLC), 879 F.3d
376 (1st Cir. 2018), aff'g 558 B.R. 500 (B.A.P. 1st Cir. 2016),
aff'g 542 B.R. 50 (Bankr. D.N.H. 2015); Mission Prod. Holdings,
Inc. v. Schleicher & Stebbins Hotels, L.L.C. (In re Old Cold, LLC),
602 B.R. 798 (B.A.P. 1st Cir. 2019).
- 2 -
repeat as succinctly as possible only those facts key to this
appeal.
A.
In 2012, the debtor granted Mission exclusive and non-
exclusive licenses to use and distribute several of its
intellectual property assets (the "Agreement"). When the parties'
relationship soured, Mission exercised its contractual right to
terminate the Agreement, triggering a provision calling for a two-
year wind-down period. Hoping to end any wind-down sooner, the
debtor sought to terminate the contract immediately by claiming
Mission had breached the Agreement. The parties entered
arbitration over that dispute, with the arbitrator ruling in favor
of Mission as to liability but making no findings with respect to
damages due to the intervening filing of the debtor's Chapter 11
petition.
B.
In its petition for Chapter 11 bankruptcy, the debtor
listed S & S as the only secured creditor, with a $5.55 million
claim of pre-petition advances stemming from credit extended prior
to the bankruptcy filing. The debtor listed Mission as an
unsecured creditor, with a contingent, unliquidated, and disputed
claim, and an executory contract.
Shortly after filing for Chapter 11 protection, the
debtor moved for debtor-in-possession financing from S & S. The
- 3 -
bankruptcy court granted this motion in a series of orders, with
its final order allowing up to $1.45 million in post-petition
financing, secured by a first-priority perfected lien on the
debtor's estate. As part of this final order, the court confirmed
the "validity, extent, perfection or priority of [S & S's]
security interests" and pre-petition liens of $5.5 million, with
the order itself perfecting the $1.45 million post-petition
amount. The court also set November 12, 2015 (pre-petition), and
December 31, 2015 (post-petition), as deadlines for any challenges
to these lien-validity findings. Those deadlines passed with
neither Mission nor any other party lodging any objection.
C.
The debtor also sought to reject the Agreement with
Mission under the terms of the Bankruptcy Code. The bankruptcy
court granted the request "subject to [Mission's] election to
preserve its rights under [ ] § 365(n)" of the Bankruptcy Code.
Clarifying the extent of these section 365(n) rights, the
bankruptcy court stated that Mission's non-exclusive intellectual
property license survived the rejection but that Mission's
exclusive distribution rights and trademark license did not. In
re Tempnology, LLC, 541 B.R. 1, 6–7 (Bankr. D.N.H. 2015). We
affirmed. Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re
Tempnology, LLC), 879 F.3d 389, 405 (1st Cir. 2018).
- 4 -
On June 11, 2018 (the same day that S & S filed the
currently-at-issue motion for relief from the automatic stay),
Mission petitioned the Supreme Court for a writ of certiorari
seeking review of our affirmance. The Supreme Court granted the
petition in part on October 26, 2018 (a month after the bankruptcy
court granted the sought-after stay relief but before the relief
order took effect), to answer the following question: "Whether,
under § 365 of the Bankruptcy Code, a debtor-licensor's
'rejection' of a license agreement -— which 'constitutes a breach
of such contract,' 11 U.S.C. § 365(g) -— terminates rights of the
licensee that would survive the licensor's breach under applicable
non-bankruptcy law." See Petition for a Writ of Certiorari at i,
Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 397(2018) (No. 17-1657) (mem.). On May 20, 2019, the Supreme Court
reversed our ruling, holding that
under Section 365, a debtor's rejection of an
executory contract in bankruptcy has the same
effect as a breach outside bankruptcy. Such
an act cannot rescind rights that the contract
previously granted. Here, that construction
of Section 365 means that the debtor-
licensor's rejection cannot revoke the
trademark license.
Mission Prod. Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652,
1666 (2019).
- 5 -
D.
While Mission and S & S did battle, the debtor moved to
sell all its assets at auction pursuant to 11 U.S.C. § 363. The
bankruptcy court appointed an examiner and approved the sale motion
in September and October 2015, respectively. S & S agreed to be
a stalking horse bidder, and the bankruptcy court authorized S & S
to credit bid "up to and including the post-petition amounts loaned
to" the debtor and "an additional $5,650,000" as listed on the
debtor's Schedule D.
The auction took place on November 5, 2015. In its first
bid, Mission included $200,000 of debtor cash as some sort of
supposed consideration for the sale, stating that the bid would
"leave $200,000 worth of cash in the debtor" and that "[Mission
is] leaving $[200,000] of the cash [it was] otherwise . . . going
to buy in the debtor." In an effort to bid similarly to Mission,
S & S also began to demand fewer than all of the debtor's assets,
with the debtor's counsel describing S & S's bid as "strik[ing]
the provisions of the . . . acquired assets, similar to those
struck by Mission" and thereby "leav[ing] back" or "leav[ing]
behind" various estate assets. As a result, both parties' final
bids left behind in the estate an identical subset of debtor
assets, worth approximately $800,000 (the debtor's inventory, its
accounts receivable, and $600,000 of cash). Perhaps seeking to
clarify each other's view regarding the precise treatment of these
- 6 -
debtor assets post-auction, the following exchange took place
between the debtor's counsel (Desiderio) and Mission's counsel
(Keach):
MR. KEACH: So [S & S is] leaving $800,000 of
assets in the estate. The estate gets to
liquidate those and keep the money?
MR. DESIDERIO: It’s more than that. They’re
leaving—
MR. KEACH: Well, if it was 800 for us, it’s
going to be 800 for them.
MR. DESIDERIO: . . . Yes. That’s right.
Which means we value [S & S]’s last bid at
$2,257,000.
Eventually, S & S incrementally increased its credit bid beyond an
amount Mission was willing to contribute in cash and won the
auction.
Mission objected to the sale procedures and final
determination that S & S had fairly won. It argued that the debtor
miscalculated S & S's bid; that the auction was conducted in bad
faith; and that S & S should not have been able to credit bid as
much as it did because much of that credit was in fact equity.
After the Examiner entered a report determining that the valuation
was fair and the transaction arms-length, the bankruptcy court,
after a two-day evidentiary hearing, entered a sale order approving
the sale of the debtor's assets to S & S pursuant to an Asset
Purchase Agreement between the two parties (APA). In re
Tempnology, LLC, 542 B.R. 50 (Bankr. D.N.H. 2015). The bankruptcy
court rejected Mission's arguments, concluding that S & S was
- 7 -
entitled to credit bid in the amount that it did because the
secured claim listed on the debtor's schedule D was not subject to
a bona fide dispute, as Mission had never previously disputed the
secured claim. Id. at 68–70. The court similarly refused either
to treat these claims as equity or find that S & S was not a good
faith purchaser. The court also found no collusion between the
debtor and S & S, and that the auction was otherwise fair. Id. at
70–72.
The APA memorializing the sale distinguishes between two
sets of debtor assets resulting from the sale: the Acquired Assets
and the Excluded Assets. The former included, free and clear of
all encumbrances, all of the debtor's assets save the Excluded
Assets, which were specifically identified as such in the APA. As
is customary in a transaction liquidating a debtor's assets, the
sale proceeds received by the debtor on the sale became subject to
all encumbrances that had been attached to the Acquired Assets.
We found a challenge to the entry of the sale order moot. Mission
Prod. Holdings, Inc. v. Tempnology, LLC (In re Old Cold LLC), 879
F.3d 376, 389 (1st Cir. 2018).
As to the left-behind Excluded Assets, neither the APA
nor the sale order purported to change in any way the status or
treatment of those assets, all of which had long been subject to
S & S's lien. The APA simply omitted the Excluded Assets from the
valuation of the bid, instead calculating only the dollar value
- 8 -
given for the Acquired Assets, presumably on the assumption that,
because both S & S's and Mission's final bids included exactly the
same list of Excluded Assets, the precise valuation of those assets
was irrelevant to the ordinal ranking of each bid.
In February 2016, S & S sought to acquire one of those
Excluded Assets, the debtor's inventory, free and clear of its
liens, with the liens attaching to the proceeds of this second
sale. Mission challenged this proposed inventory sale, but it did
not dispute that the assets were subject to S & S's liens. Rather,
it challenged S & S's assertion that its intellectual property
rights restricted any other party from acquiring this inventory,
arguing that such a restriction would contradict the terms of the
APA (allowing the sale of these assets by the debtor to achieve
the highest value) and would evidence collusion between S & S and
the debtor. The bankruptcy court agreed with Mission that such an
IP restriction would have rendered the terms of the auction suspect
but approved the inventory sale, concluding that the price
(accounting cost) was fair and that the sale of the inventory to
S & S does not contradict the APA as long as the debtor would have
been free to sell the inventory to any party, which it had
unsuccessfully sought to do.
E.
With that history in mind, we turn to the motion on
appeal. On June 11, 2018, S & S filed a motion for relief from
- 9 -
the automatic stay imposed in bankruptcy proceedings under 11
U.S.C. § 362(a), to which the debtor assented. S & S claimed that
it had valid, first-priority, perfected liens exceeding $5 million
on the debtor's assets, and that the only remaining property in
the estate was $527,292 in cash (the proceeds of the aforementioned
inventory sale). It thus argued that the debtor lacked equity in
the remaining property and, because the debtor had assented to the
motion, that the property was not needed to effect a
reorganization. See id. § 362(d)(2).
Mission objected. First, it argued that the then-
pending petition for a writ of certiorari divested the bankruptcy
court of jurisdiction to decide the stay relief motion because, if
stay relief were granted, S & S would be able to strip the estate
of assets that could be used to satisfy any judgment that might
flow from Mission's appeal in the event the Supreme Court were to
side with Mission. Second, it argued that S & S no longer had a
security interest in that property because, as part of the auction
and sale, S & S had supposedly agreed either to recontribute those
assets back into the estate free and clear of its liens or to waive
those liens as part of the bidding process. Mission also stated
that it wished for limited discovery into how the non-lawyer
principals viewed the Excluded Assets after the auction, arguing
that this might show that the debtor and/or S & S believed them to
be unencumbered.
- 10 -
After a preliminary hearing, the bankruptcy court asked
for supplemental briefing on whether S & S retained its liens on
the remaining assets. Mission argued that "the assets were
unencumbered because the Debtor said so at the Auction, S & S was
silent, and the entire sale (and appellate) process proceeded on
that mutual belief" and that "the bid values asserted at the
Auction and found at the Sale Hearing dictated that the
Recontributed Assets were unencumbered."
After a hearing on September 18, 2018, the bankruptcy
court granted the stay relief motion. As to Mission's
jurisdictional argument, the court concluded that the "practical
concern" that there may be no assets left in the estate to satisfy
a possible administrative claim resulting from the Supreme Court
appeal did not divest the bankruptcy court of jurisdiction "to
decide an issue that is not the subject of a pending appeal." It
also refused Mission's request for limited discovery, noting that
stay relief motions are "summary proceedings" and "there are not
sufficient issues of fact that would bear on the determination of
the motion."
The bankruptcy court also rejected Mission's assertion
that S & S's liens were somehow no longer valid. First, it noted
that there was no dispute that the liens were valid right before
the auction. Second, it reviewed the auction transcript, beginning
with Mission's bid proposing to "leave behind" certain assets,
- 11 -
which proposal S & S ultimately matched. The bankruptcy court
pointed out that there was no discussion of how Mission could
conceivably extricate any left-behind assets from the liens
attached to those assets. Hence, there was no reason to think
that S & S, in matching Mission's bid, proposed to undertake such
a gratuitous elimination of its own liens. Because the liens were
valid before the auction and there was no evidence that anything
happened to them at the auction, the bankruptcy court concluded
that S & S had met its burden of showing that there was no equity
in the property and, because the debtor assented to the motion,
the property was not necessary for an effective reorganization.
Mission sought a stay of this order from the bankruptcy
court pending its appeal (electing to go to the Bankruptcy
Appellate Panel (BAP), see 28 U.S.C. § 158), which the bankruptcy
court granted in part, extending to November 28, 2018, Federal
Rule of Bankruptcy Procedure 4001's automatic fourteen-day stay of
such orders so that Mission could seek a further stay of the relief
order from the BAP. On November 27, 2018, the BAP denied Mission's
request for a further stay, concluding that Mission had shown
neither a likelihood of success on the merits nor irreparable
injury absent relief, so the stay relief order took effect. The
next day, S & S demanded the remaining cash from the debtor, and
the debtor complied. The BAP then affirmed the bankruptcy court,
concluding that both it and the bankruptcy court had jurisdiction
- 12 -
and that the bankruptcy court did not abuse its discretion in
granting S & S's motion for relief allowing it to foreclose on its
liens in the debtor's remaining cash. Mission Prod. Holdings,
Inc. v. Schleicher & Stebbins Hotels, L.L.C. (In re Old Cold, LLC),
602 B.R. 798, 831 (B.A.P. 1st Cir. 2019). Mission appealed.
II.
A.
We begin by deciding whether Mission's failure to obtain
a stay of the relief order and the subsequent disbursement of the
debtor's remaining assets have rendered this appeal moot.
Presenting what seems to be a hybrid of Article III, equitable,
and 11 U.S.C. § 363(m) theories of mootness, S & S contends that
we can neither order disgorgement of these funds nor grant Mission
any other form of relief, even were we to decide the appeal in
Mission's favor. In support, S & S relies principally upon Soares
v. Brockton Credit Union, where we held that "when the debtor fails
to obtain a stay pending appeal of the bankruptcy court's . . .
order setting aside an automatic stay and allowing a creditor to
foreclose on property, the subsequent foreclosure and sale of the
property renders moot any appeal." 187 F.3d 623 (1st Cir. 1998)
(per curiam) (table), 1998 WL 1085827 (quoting Matos v. Matos (In
re Matos), 790 F.2d 864, 865 (11th Cir. 1986)). In S & S's view,
this rule applies here even though the purchaser of the assets is
the creditor who is a party to the appeal, citing Greylock Glen
- 13 -
Corp. v. Community Savings Bank, 656 F.2d 1, 4-5 (1st Cir. 1981),
and where the asset is only cash. The BAP thought otherwise.
We agree with the BAP that the disbursement of the funds
to S & S did not moot this appeal. Every case cited by S & S
involved a subsequent foreclosure and sale of property by the
creditor, not a mere disbursement of cash.2 But "[u]nlike other
assets . . . (e.g. real property, conveyances), cash is a fungible
item." United States v. $46,588.00 in U.S. Currency & $20.00 in
Canadian Currency, 103 F.3d 902, 904 n.5 (9th Cir. 1996) (quoting
Attorney General Policy Directive 87-1 (Mar. 13, 1987)) (holding
that the comingling of the cash in question with other cash did
not deprive the court of jurisdiction). Even under the less
stringent doctrine of equitable mootness (the applicability of
which to stay relief orders we need not decide), the failure to
obtain a stay pending appeal, by itself, does not provide
2 See 255 Park Plaza Assocs. Ltd. P'ship v. Conn. Gen. Life
Ins. Co. (In re 255 Park Plaza Assocs. Ltd. P'ship), 100 F.3d 1214,
1216 (6th Cir. 1996) (concluding moot where a lack of a stay
"permits a sale of a debtor's assets"); Oakville Dev. Corp. v.
FDIC, 986 F.2d 611, 613 (1st Cir. 1993) (holding the same for a
foreclosure sale as well as noting the constitutional aspects of
the mootness issue); Miami Ctr. Ltd. P'ship v. Bank of N.Y., 838
F.2d 1547, 1550 (11th Cir. 1988)(conveyance of real property title
to a land trust); Egbert Dev., LLC v. Cmty. First Nat’l Bank (In
re Egbert Dev., LLC), 219 B.R. 903, 905-06 (B.A.P. 10th Cir. 1998)
(finding moot where "the moving creditor subsequently conducts a
foreclosure sale"); Boudreau v. U.S. Bank Tr., N.A. (In re
Boudreau), No. 61-cv-10747, 2017 WL 740993, *2–3 (D. Mass.
Feb. 24, 2017) (holding the foreclosure sale of home rendered an
appeal moot).
- 14 -
"sufficient ground for a finding of mootness." Rochman v. Ne.
Utils. Serv. Grp. (In re Pub. Serv. Co. of N.H.), 963 F.2d 469,
473 (1st Cir. 1992). Rather, such mootness requires "the
challenged bankruptcy court order [to have] been implemented to
the degree that meaningful appellate relief is no longer
practicable." Hicks, Muse & Co. v. Brandt (In re Healthco Int'l,
Inc.), 136 F.3d 45, 48 (1st Cir. 1998). In contrast to a case
where we are unable to return title to the estate because it has
been transferred to a good faith purchaser, we simply cannot say
that ordering a party on appeal to disgorge mere cash is
impracticable and does not afford meaningful appellate relief.
See Spirtos v. Moreno (In re Spirtos), 992 F.2d 1004, 1006–07 (9th
Cir. 1993) (finding no mootness where the creditor "stripped the
plans of their assets" but there was no foreclosure or sale and
the receiving party was a party to the appeal and knew of the
appeal at time it took that action, as the court could fashion
relief by ordering the money returned to the estate); Salomon v.
Logan (In re Int'l Envtl. Dynamics, Inc.), 718 F.2d 322, 326 (9th
Cir. 1983) (holding the court could fashion relief where there
were simply "erroneously disbursed funds").
S & S points out that a real property transfer can also
be unwound in theory if the property is still in the hands of the
original transferee, who is a party to the appeal, yet we still
treat such a transaction as irrevocable, mooting a post-transfer
- 15 -
challenge. See Greylock, 656 F.2d at 3–4. But we recognized in
so holding that such a real property transferee was "entitled to
bid upon the [foreclosed] property with the assurance that its
title to the property would not be affected by appellate review
months or even years later," just like any other potential buyer.
Id. at 4. That holding depended on the text of former Bankruptcy
Rule 805, which did not distinguish between a mortgage holder and
any other potential purchaser who acquired the property in good
faith. Id. But that rule, and its modern equivalents, are not at
issue where there is no judicial sale order or an actual
"purchase[r]" relying on that order. See 11 U.S.C. §§ 363(m),
364(c). So there is no risk of undermining "the integrity of the
judicial sale process upon which good faith purchasers rel[y]."
Miami Ctr. Ltd. P'ship v. Bank of N.Y., 838 F.2d 1547, 1553, 1555–
56 (11th Cir. 1988) (quoting Markstein v. Massey Assocs., Ltd.,
763 F.2d 1325, 1327 (11th Cir. 1985)) (discussing the complicated
reliance interests the court would be disturbing were it to unwind
aspects of a real estate transfer even to a designee of the
creditor-appellee). In short, Greylock is distinguishable, and we
find no similar text or policy interests that warrant extending
its holding to the present facts.
Moreover, the Supreme Court rejected the argument that
the disbursement of the remaining cash from the estate mooted its
consideration of the § 365(n) appeal, noting that, if successful,
- 16 -
Mission "can seek the unwinding of prior distributions to get its
fair share of the estate." Mission Prod. Holdings, Inc., 139 S.
Ct. at 1661. It would be inconsistent to now hold that any such
relief is so implausible as to preclude our review of this order.
Accordingly, we find no basis to conclude this appeal is equitably
moot, moot under Article III, or moot under the provisions of the
Bankruptcy Code and rules.
B.
Having concluded that Mission's appeal is not moot, we
next answer whether the granting of Mission's petition for a writ
of certiorari divested the bankruptcy court of jurisdiction to
decide the stay relief motion. We review de novo a determination
regarding jurisdiction under the divestiture rule. United States
v. Rodríguez-Rosado, 909 F.3d 472, 477 (1st Cir. 2018). On appeal,
we look through the BAP's holding and review the bankruptcy court's
decision directly. PC P.R., LLC v. Empresas Martínez Valentín
Corp. (In re Empresas Martínez Valentín Corp.), 948 F.3d 448, 455
n.6 (1st Cir. 2020) (citing DeMore v. Lassman (In re DeMore), 844
F.3d 292, 296 (1st Cir. 2016)).
Mission argues that the stripping of assets from the
debtor's estate sought by the stay relief motion deprived Mission
of the same assets to which it would have looked in satisfaction
of the claim it was pursuing on appeal. In Mission's view, this
purported relatedness between S & S's claim for stay relief and
- 17 -
Mission's claim for breach of the agreement caused the lower court
to lose jurisdiction to make that determination. Mission relies
primarily on Whispering Pines Ests., Inc. v. Flash Island, Inc.
(In re Whispering Pines Ests., Inc.), where the BAP held that the
bankruptcy court was divested of jurisdiction to grant stay relief
because the foreclosure of the property at issue in the stay relief
motion "directly implicated the matter under the appeal," namely,
the appropriateness of a "[p]lan providing for the sale of the
Property." 369 B.R. 752, 75960 (B.A.P. 1st Cir. 2007).
As we have just discussed, though, if S & S had no right
to the assets, we could order a disgorgement in this case. And
the Supreme Court recognized that the disbursement of the cash had
no impact on its ability to decide Mission's appeal as long as
there was "any chance of money changing hands." Mission Prod.
Holdings, 139 S. Ct. at 1660. In Whispering Pines, possible
confusion could have occurred with a competing equitable order
requiring the disposal of a specific piece of property through a
different mechanism than the appeal specifically provided for,
thus interfering with the rights determined in the appeal. 369
B.R. at 759. We discern no similar possibility of confusion here,
where the appeal concerned only the merits, rather than the
priority of Mission's claim against the debtor. The bankruptcy
court's determination that any claim by Mission would be junior to
S & S's claim as a secured creditor therefore did not take away
- 18 -
any benefit that the Supreme Court appeal might purport to grant
Mission. Simply put, contrary to Mission's assertion that the
stay relief order would "impermissibly interfere with the rights
on appeal," we find no such interference.
C.
We now turn to the merits of Mission's challenge to the
bankruptcy court's order granting S & S the requested relief from
the automatic stay. Such orders are generally reviewed for an
abuse of discretion. Mitsubishi Motors Corp. v. Soler Chrysler-
Plymouth, Inc., 814 F.2d 844 (1st Cir. 1987). The bankruptcy
court's discretion was limited, though, by two preliminary
requirements. First, S & S must show a "colorable claim to
property of the estate." Grella v. Salem Five Cent Sav. Bank, 42
F.3d 26, 32 (1st Cir. 1994) (citing 11 U.S.C. § 362). Second, the
amount of this lien, if valid, must "exceed[] the value of the
property" in question. In re Vitreous Steel Prod. Co., 911 F.2d
1223, 1234 (7th Cir. 1990). In making these findings, the
bankruptcy court was free to consider "any defenses or
counterclaims that bear on" the likelihood of the existence of the
creditor's claimed interest in the property. Grella, 42 F.3d at
34. We review any factual findings for clear error. Fin.
- 19 -
Oversight & Mgmt. Bd. v. Ad Hoc Grp. of PREPA Bondholders (In re
Fin. Oversight & Mgmt. Bd.), 899 F.3d 13, 23 (1st Cir. 2018).
1.
Mission does not dispute that prior to the auction the
debtor had no equity in its property because all of that property
was subject to liens that exceeded the property's value. Mission's
principal argument that relief from the automatic stay was improper
instead hinges on the assertion that, by entering into the APA
without buying all of the debtor's property, S & S implicitly
surrendered its liens on that property. This implication arises,
Mission says, from the discussion at the auction of a commitment
to match Mission's treatment of some debtor assets by leaving them
back or leaving them behind in the estate.3
Waiver is a potential defense that the bankruptcy court
may consider in deciding whether the creditor has a colorable
interest in the property that is the subject of a stay relief
motion. United States v. Fleet Bank of Mass. (In re Calore Express
Co.), 288 F.3d 22, 35 (1st Cir. 2002) (citing Grella, 42 F.3d at
35) (noting that, although a stay relief hearing is not the proper
time for a determination of many substantive rights, the bankruptcy
3 Mission does not contend on appeal that S & S
"recontributed" assets to the estate. Rather, it asserts that it
would have recontributed the Excluded Assets had it won the
auction, and S & S matched this bid structure by agreeing to waive
its liens.
- 20 -
court may "consider" issues of waiver in deciding whether to grant
relief, as a "waived [claim] is no longer colorable"). Neither
S & S’s successful bid, the APA, nor the order approving the sale,
though, contain any reference to such a waiver or release of any
lien, so Mission asks us to imply the presence of one.
Mission points to the fact that, early in the auction,
it increased its bid by "leav[ing] $200,000 worth of cash in the
debtor."4 Mission says we should assume that its bid, if accepted,
would have left those assets in the debtor free and clear of any
liens, citing 11 U.S.C. § 363(f). To be sure, Mission's bid itself
said no such thing. So Mission argues that it did say that it was
leaving the assets "for the estate to liquidate and keep and
distribute to other creditors." But that statement says nothing
about which creditors are to receive the assets that are left
behind.
More fundamentally, the unstated premise of Mission's
argument -- that Mission had the power to eliminate S & S's liens
on the debtor's assets merely by agreeing to leave the assets in
the estate -- makes no sense. Were that premise correct, many
section 363(f) sales would turn into lien laundries. In such a
laundry, a debtor could sell at auction a truck -- in which Party A
4 Alternatively, Mission said it was "buy[ing] $200,000 less
cash." Mission eventually increased the assets left in the estate
to include $600,000 cash, the debtor's inventory, and the debtor's
accounts receivable. S & S's final bid left in the same assets.
- 21 -
has a security interest -- to Party B for $1 plus leaving the truck
itself in the debtor's estate, with Party B perhaps keeping the
rearview mirror for itself. Then, with nary a word of consent
from Party A, the rest of the truck would no longer be subject to
Party A's security interest. Mission provides no caselaw to
justify such alchemy. The Bankruptcy Code itself plainly protects
a security interest even when the assets to which the interests
attach are sold in a section 363(f) sale, 11 U.S.C. § 363(e), which
often means that those security "interests attach to the proceeds
of the sale," H.R. Rep. No. 95–595, at 345 (1977), as reprinted in
1978 U.S.C.C.A.N. 5963, 6302; S. Rep. No. 95–989, at 56 (1978), as
reprinted in 1978 U.S.C.C.A.N. 5787, 5842.5 It would be strange
indeed to conclude that an auction that did not even result in the
sale of that same asset would somehow destroy the security
interest. Mission therefore tries to classify the assets it would
have "recontributed" as neither proceeds of the sale to which the
5See Rosemary E. Williams, Annotation, Special Commentary:
Sales of Property, Other than in Ordinary Course of Business, of
Bankruptcy Estate Free and Clear of Consensual and Nonconsensual
Liens, Claims, and Encumbrances Under § 363(f) of Bankruptcy Code
of 1978 (11 U.S.C.A. § 363(f)),22 A.L.R. Fed. 2d 579 (Originally
published in 2007) (collecting cases) ("While a bankruptcy estate
is required to provide 'adequate protection' to the interests of
lienholders, in the context of a sale free and clear of liens, the
undisputed practice is to state in the sale notice and motion that
all liens, claims, and encumbrances will attach to the sale
proceeds without requiring any determination of their validity,
priority, or interest concurrently with the sale, thus meeting the
requirement of adequate protection in this context.").
- 22 -
liens would attach nor undisturbed assets that were not sold free
and clear of the liens, but rather as something else. But it
offers no explanation as to how such a sale would provide adequate
protection to a secured creditor. And if Mission's bid did not
eliminate any liens, there is no reason that any match of that bid
would do so.
Bereft of support for such an asset reclassification,
Mission argues that a lien waiver was necessarily implicit in the
economics of the bids because both Mission and S & S received
credit for the value of the assets to be left behind. But if two
parties are bidding and each bids the same dozen apples, it matters
not how we value those apples. Moreover, a bid for $100 that
leaves behind $10 worth of apples is indeed worth more ($110) than
a bid for $100 that takes all the apples ($100). And we determine
that worth by looking at the value of the final package to the
estate, which at that auction stage is agnostic regarding which
creditor ends up getting what share of the $110. That S & S was
first in line (and likely knew that it would be unless its liens
were recharacterized as equity) does not change the fact that the
bid maximized the value to the estate.
Even if we were to assume that Mission had come up with
a novel argument that would support the claim that a bidder could
wash assets clean of liens in this manner, there is no reason at
all to assume that S & S intended such an effect as implicit in
- 23 -
its bid. Waiver of a first secured lien on cash is no small matter
-- hardly something that would be offered only on an implication
so tenuous as that claimed by Mission. See In re Calore Express
Co., 288 F.3d at 39 (noting that courts rarely "imply waiver from
mere silence"). In fact, New Hampshire law requires an action or
agreement inconsistent with the existence of the lien to find such
a waiver. City of Portsmouth v. Nash, 493 A.2d 1163, 1165 (N.H.
1985).6 The debtor's counsel agreeing with a mere ambiguous
statement at the auction -- "[t]he estate gets to liquidate those
[assets] and keep the money" -- that is grammatically and logically
consistent with S & S retaining its liens does not suffice.
The Examiner -- whose role was to investigate "the
amount, validity and priority of [S & S's] claims and liens" and
"to prepare and file with the Court a report with regard to the
sale process" -- saw no such implicit waiver. He wrote:
The structure of the bid means that
immediately after closing there are
substantial assets left for creditors the
largest of which is inventory. The assets
left are available to satisfy the remaining
claim of Mission if Mission is correct that
all of the pre-petition [S & S] debt should be
re-characterized as equity. If Mission is
incorrect and the [S & S] pre-petition debt
may not be re-characterized as equity then the
[S & S] security interest reaches all of those
assets.
6 The BAP noted that New Hampshire law governs the debtor's
loan agreements with S & S, and neither party contends otherwise.
- 24 -
He further noted three possible characterizations of the estate
following the sale: (1) S & S's claim is not recharacterized as
equity and thus remains fully secured, (2) S & S's claim is
recharacterized as equity and Mission has an unsecured claim, and
(3) S & S's claim is recharacterized as equity and Mission has an
administrative claim. The report mentions no possibility that
S & S's claims are not equity but its liens were otherwise waived.
Even Mission’s own counsel seemed to discern no such waiver by
S & S, stating that if Mission had won the auction, S & S would
"have claims to whatever the proceeds are," focusing its effort on
recharacterizing S & S's claims as equity and not objecting to the
Examiner's report or the proposed sale on these grounds. Nor did
the experienced bankruptcy judge make mention of any such lien
waiver in either his sale order or the accompanying memorandum.7
Mission finally contends that some of the debtor's
filings describing its cash as "unrestricted" and referring to
sale proceeds being distributed in a "waterfall" imply that its
cash was somehow not subject to any lien. Given the overwhelming
7 Contrary to Mission's assertion, the bankruptcy court also
did not somehow inappropriately shift the burden to Mission to
show the liens were not valid. It recognized that S & S had the
burden of proving its interest in the property. And it found that
S & S produced clear documentary evidence from the court records
that its liens were valid prior to the auction and successfully
demonstrated that nothing that took place during the bidding
process of the auction changed that status. We therefore need not
decide whether the absence of a waiver is something a creditor
seeking relief from stay bears the burden of proving in all cases.
- 25 -
evidence that all of debtor's assets were subject to S & S's liens,
we find S & S's failure to discern and challenge those arguable
inferences in what the debtor said provided no basis for deeming
S & S to have miraculously and for no reason waived its liens.
See In re Calore Express Co., 288 F.3d at 39. In sum, the argument
that S & S waived its liens is poppycock.
2.
Mission next argues that S & S (which had the burden of
proof) failed to meet the quantum of proof necessary to warrant
relief from the automatic stay. Mission argues that the proper
standard for such a motion is for S & S to establish by a
preponderance of the evidence the validity and extent of its liens.
But, as we have explained, there was no question that S & S
possessed valid liens in excess of the value of the debtor's
remaining. So for that reason alone S & S certainly established
the "colorable claim to property of the estate" needed to obtain
relief from the stay. Grella, 42 F.3d at 33.
3.
Finally, leaving no pebble unturned, Mission assigns
procedural error, claiming that under the Bankruptcy Code and rules
it was entitled to limited discovery and an evidentiary hearing
before the bankruptcy court could decide the stay relief motion,
which is a contested matter. The bankruptcy rules do state that
various applicable civil rules and discovery "rules shall apply"
- 26 -
in contested matters -- "unless the court directs otherwise." Fed.
R. Bankr. P. 9014(c) (emphasis added) (citing Fed. R. Bankr.
P. 7026, which incorporates the discovery provisions of Civil
Rule 26). We therefore review a decision to limit the
applicability of these rules and to not grant discovery and a full
evidentiary hearing for an abuse of discretion. See In re
Stavriotis, 977 F.2d 1202, 1204 (7th Cir. 1992); Pub. Serv. Co. of
N.H. v. Hudson Light & Power Dep't, 938 F.2d 338, 346 (1st Cir.
1991) (reviewing a denial of a Rule 56 discovery motion
incorporated by Rule 9014 for an abuse of discretion).
The United States Bankruptcy Court for the District of
New Hampshire has a standing local rule that "Bankruptcy Rule 7026
and LBR 7026-1 shall not apply to contested matters governed by
Bankruptcy Rule 9014 unless otherwise ordered." Bankruptcy
D.N.H.R. 9014-1(a). On top of that, the bankruptcy court
specifically stated that "a further evidentiary hearing would
[not] be required." So there is no doubt that the court did
"direct[] otherwise." We need only decide whether this ruling was
an abuse of discretion.
It clearly was not. As we have explained, Mission's
claim that S & S waived its liens made no sense for a slew of
reasons. Given the written record and the absence of any reason
to think that S & S gratuitously waived its liens, the bankruptcy
court was hardly required to allow a fishing expedition aimed at
- 27 -
unearthing imagined understandings contrary to the record and
common sense. Similarly, there was no need for any evidentiary
hearing. See Hebbring v. U.S. Tr., 463 F.3d 902, 908 (9th Cir.
2006) (holding that where "there [a]re no disputed issues of
material fact," "[t]he bankruptcy court [i]s not required to hold
an evidentiary hearing"), superseded by statute on other grounds,
as recognized in Craig v. Educ. Credit Mgmt. Corp. (In re Craig),
579 F.3d 1040, 1046 n.5 (9th Cir. 2009).
III.
For the foregoing reasons, we affirm the bankruptcy
court's order granting relief from the automatic stay. Costs are
awarded to appellee (S & S).
- 28 -