Fulmer v. Fifth Third Equip. Fin. Co. (In Re Veg Liquidation, Inc.) , 931 F.3d 730 ( 2019 )

United States Court of Appeals
For the Eighth Circuit
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No. 18-1786
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In re: Veg Liquidation, Inc., formerly known as Allens, Inc.; All Veg, LLC,
lllllllllllllllllllllDebtors.
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R. Ray Fulmer, II,
lllllllllllllllllllllAppellant,
v.
Fifth Third Equipment Finance Company; Ryder Integrated Logistics, Inc.;
International Paper Company; URS Real Estate, LP; Ball Metal Food Container,
LLC; Syngenta Seeds, Inc.; Teneo Securities, LLC; Andrew Torgove; Lazard
Middle Market LLC; Lazard Freres & Co. LLC; Alvarez & Marsal, North
America, LLC; Alvarez & Marsal Private Equity Performance Improvement, LLC;
Jonathan Hickman; Sager Creek Vegetable Company, formerly known as Sager
Creek Acquisition Corp., now known as 412, Inc.; 1903 Onshore Funding, LLC;
Cortland Capital Market Services, LLC; Sankaty Credit Opportunities, IV, L.P.;
Sankaty Credit Opportunities, IV, L.P. (Caymanian), correctly named as, Sankaty
Credit Opportunities, (Offshore Master) IV; Sankaty Middle Market Opportunities
Fund, L.P.; Sankaty Middle Market Opportunities Fund, L.P. (Caymanian),
correctly named as, Sankaty Middle Market Opportunities Fund, (Offshore
Master), L.P.; Does 1-100; Alvarez & Marsal Holdings, LLC; 412, Inc., formerly
known as Sager Creek Vegetable Company, formerly known as Sager Creek
Acquisition Corp.; Sankaty Credit Opportunities, (Offshore Master) IV; Sankaty
Middle Market Opportunities Fund, (Offshore Master), L.P.,
lllllllllllllllllllllAppellees.
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Appeal from the United States Bankruptcy
Appellate Panel for the Eighth Circuit
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Submitted: January 17, 2019
Filed: July 26, 2019
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Before SMITH, Chief Judge, COLLOTON and ERICKSON, Circuit Judges.
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COLLOTON, Circuit Judge.
R. Ray Fulmer, II, a Chapter 7 bankruptcy trustee, sued a number of parties
involved in the sale of a bankruptcy estate’s assets under 11 U.S.C. § 363. The
bankruptcy court1 dismissed Fulmer’s claims on the ground that they were either
impermissible collateral attacks on an earlier order approving the sale or without
merit. The court also denied Fulmer leave to file a second amended complaint. The
Bankruptcy Appellate Panel affirmed. Fulmer appeals to this court, and we affirm.
I.
The dispute arises from bankruptcy proceedings for Allens, Inc., an Arkansas
food canning enterprise. After encountering financial difficulties, Allens filed for
Chapter 11 bankruptcy in October 2013. The bankruptcy court authorized bidding
procedures for the sale of substantially all of Allens’s assets. Allens then moved to
sell the assets under 11 U.S.C. § 363(b) and (f), which authorize the sale of a
bankruptcy debtor’s assets when certain conditions are met.
1
The Honorable Ben T. Barry, Chief Judge, United States Bankruptcy Court for
the Eastern and Western Districts of Arkansas.
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Allens identified Seneca Foods Corporation as the “Stalking Horse”
purchaser—that is, the potential purchaser whose opening bid would set the floor at
the auction—and prepared a “stalking horse asset purchase agreement” between
Allens and Seneca Foods. The bankruptcy court granted the motion for sale after
notice and a hearing. Allens then served a “Notice of Bid Procedures, Sale Hearing
and Objection Deadlines” for the auction on more than 5,000 creditors and parties in
interest through a noticing agent.
The auction occurred between February 3 and 6, 2014. At the auction, a
marketing firm retained by Allens estimated the net value of each bid submitted. The
marketing firm ultimately valued Seneca’s opening bid at approximately $117
million, whereas the unadjusted price in the stalking horse asset purchase agreement
had been $148 million. Sager Creek Acquisition Corp., an entity formed by a group
of second lienholders, also submitted a bid, which the marketing firm valued at $160
million. Allens ultimately deemed Sager Creek the successful bidder for the estate’s
assets, but the final asset purchase agreement reflected a sale price of just under $125
million. After a hearing, the bankruptcy court issued a detailed order approving the
sale to Sager Creek. No appeals were taken, and the sale closed on February 28,
2014.
Within a few months, the bankruptcy court converted the proceeding to a
Chapter 7 bankruptcy and appointed Fulmer as trustee of the bankruptcy estate.
Fulmer brought this action in February 2016, and filed a first amended complaint in
April 2016.
In his amended complaint, Fulmer names more than twenty defendants
allegedly connected in various ways to the sale of the Allens assets. He groups them
into three categories: the “Committee Defendants,” who were members of the
unsecured creditors committee in the Chapter 11 proceeding; the “Fiduciary
Defendants,” who were retained by Allens to serve as financial advisors in the
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proceeding; and the “Sager Creek Defendants,” who held interests in Allens as
second lienholders. The amended complaint asserts fourteen causes of action, all
arising from the defendants’ alleged conduct in connection with the sale proceedings.
The defendants moved to dismiss the complaint for failure to state a claim. See Fed.
R. Bankr. P. 7012(b).
The bankruptcy court dismissed the complaint and denied as futile Fulmer’s
request for leave to file a second amended complaint. The court determined that
Fulmer did not plead a plausible claim of fraud on the court, collusion among bidders
under 11 U.S.C. § 363(n), or for post-judgment relief from the sale order under
Federal Rule of Civil Procedure 60(b). The court concluded that the trustee’s other
claims were barred by the finality of the order approving the asset sale under § 363,
and that the proposed amended complaint would be futile. The Bankruptcy Appellate
Panel (BAP) affirmed.
In an appeal from a decision of the BAP, we are a second reviewing court. We
review de novo both the bankruptcy court’s grant of a motion to dismiss for failure
to state a claim, and the court’s denial of leave to amend that rests on a legal
conclusion of futility. In re Archdiocese of Saint Paul & Minneapolis, 888 F.3d 944,
950 (8th Cir. 2018); In re Senior Cottages of Am., LLC, 482 F.3d 997, 1001 (8th Cir.
2007).
II.
A.
The first issue on appeal is whether Fulmer’s claims constitute an
impermissible collateral attack on an asset sale in bankruptcy that was consummated
under 11 U.S.C. § 363. To evaluate this contention, it is necessary to review Fulmer’s
allegations in the first amended complaint.
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As Fulmer tells it, the Committee Defendants and the Sager Creek
Defendants—all of them creditors of Allens—were at risk of receiving less than full
repayment as bankruptcy loomed in 2013. The Sager Creek Defendants’ loans were
only partially secured, and Seneca’s stalking horse bid, if successful, would have
relegated $30 million of those defendants’ claims to unsecured creditor status. The
Committee Defendants, for their part, held at least $72 million in unsecured claims
for accounts receivable. The Committee Defendants had also received more than $18
million from Allens in the ninety days preceding the bankruptcy, such that a trustee
potentially could avoid those transfers under 11 U.S.C. § 547(b).
Fulmer alleges that before the initial bankruptcy filing, one of the Committee
Defendants, Ball Metal Food Container Corp., executed an undisclosed agreement
with the Sager Creek Defendants. The agreement, according to Fulmer, provided that
Ball would receive a lucrative contract with a new entity formed by the Sager Creek
Defendants (i.e., Sager Creek Acquisition Corp.) if that entity was the successful
bidder in a § 363 sale for Allens’s assets. Ball ultimately had one of the largest
claims as a member of the unsecured creditors’ committee in the Chapter 11
proceedings.
Fulmer then claims that the Fiduciary Defendants, who were aware of the
agreement between Ball and the Sager Creek Defendants, manipulated the valuations
of the bids at the auction. The terms of Seneca’s bid, Fulmer explains, would have
left $32.9 million in real estate and $74 million in ninety-day avoidance claims with
the Allens estate. The terms of Sager Creek’s final bid, by contrast, gave Sager Creek
all of those assets, with a covenant not to pursue the avoidance claims. Yet despite
these differences, the Fiduciary Defendant assisting Allens at the auction valued
Seneca’s bid at $117 million and valued Sager Creek’s bid at $160 million. Fulmer
contends that as a result of these actions, the defendants collectively divested the
Allens estate of at least $74 million in avoidance claims and up to $32.9 million in
real estate and personal property.
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Based on this episode, Fulmer brought numerous claims against the defendants,
including allegations of breach of fiduciary duty, fraudulent transfer, conversion,
inducing breach of contract, intentional interference with contractual relations and
prospective economic relations, negligent interference with prospective economic
relations, deceptive trade practices, and an equitable claim for rescission and
reformation. Fulmer argues that the bankruptcy court erred by characterizing these
claims as a collateral attack on the February 2014 sale order, and by misapplying
principles of res judicata and collateral estoppel.
Fulmer’s contention brings to the fore this court’s decision in Regions Bank v.
J.R. Oil Co., 387 F.3d 721 (8th Cir. 2004). Regions Bank, following In re Met-L-
Wood Corp., 861 F.2d 1012 (7th Cir. 1988), held that an order authorizing a sale free
and clear of liens under § 363 “is shielded from collateral attack . . . by virtue of the
nature of rights transferred under 11 U.S.C. § 363.” 387 F.3d at 732. This is so
because “[a] proceeding under section 363 is an in rem proceeding. It transfers
property rights, and property rights are rights good against the world, not just against
parties to a judgment or persons with notice of the proceeding.” Id. (quoting In re
Met-L-Wood, 861 F.2d at 1017). Plaintiffs are therefore barred from bringing claims
that amount to collateral attacks on the validity of a § 363 sale. In Regions Bank, we
applied that rule where a plaintiff brought RICO claims premised on the defendants’
alleged fraud in connection with a § 363 sale in a bankruptcy to which the plaintiff
was not a party. Id. at 731-32. This court held that the claims were barred “to the
extent [they] relate to the sale.” Id. at 731.
In this case, the bankruptcy court’s February 2014 order approved the sale of
the Allens assets to Sager Creek free and clear of all liens under 11 U.S.C. § 363(b)
and (f). At bottom, Fulmer’s complaint is that Sager Creek won the auction for the
Allens assets with an overvalued bid that was supported by an undisclosed agreement
between an unsecured creditor and the second lienholders who formed Sager Creek.
Fulmer’s contention amounts to an impermissible collateral attack on the February
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2014 sale order under the reasoning of Regions Bank. In the order, the bankruptcy
court determined that “all of the Acquired Assets were subject to a competitive and
good faith bidding process,” and that Sager Creek had “submitted the highest or
otherwise best bid for the Acquired Assets offered at the Auction.” The court also
concluded that the consideration to be provided by Sager Creek was “the highest and
otherwise best offer for the Acquired Assets.” To sustain Fulmer’s claims, a court
would have to contradict those determinations. The finality accorded to asset sales
under § 363 bars Fulmer’s line of attack.
Fulmer’s arguments to the contrary are unconvincing. He first contends that
his complaint does not collaterally attack the February 2014 sale order, because the
defendants were not parties to the order, and he does not seek reversion of title to the
property sold. A sale free and clear under § 363, however, is “a judgment that is good
as against the world, not merely as against parties to the proceedings.” Id. at 732.
The claims barred in Regions Bank likewise did not seek reversion of title; they were
claims for damages under RICO. Id. at 727-28, 731; see 18 U.S.C. § 1964(c). The
Seventh Circuit similarly described a suit seeking “heavy damages” from parties
involved in a § 363 sale as a “thinly disguised collateral attack on the judgment
confirming the sale.” In re Met-L-Wood Corp., 861 F.2d at 1018.
Fulmer also argues that the provisions of the sale order that conflict with his
claims were not “integral” to the sale, so his complaint does not attack the sale order’s
validity. He imports this requirement from 11 U.S.C. § 363(m), which provides that
reversal or modification of a § 363(b) sale on direct appeal does not “affect the
validity of a sale” unless the sale order was stayed pending appeal. 11 U.S.C.
§ 363(m). This court reasoned in In re Trism, Inc., 328 F.3d 1003 (8th Cir. 2003),
that an appeal could “affect the validity of a sale” under § 363(m) only if it
challenged a provision of the sale order that was “integral to the sale of the estate’s
assets.” Id. at 1007.
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Regions Bank did not address whether the bar on collateral attacks is limited
to those that challenge “integral” provisions of a § 363 sale. But if there were such
a limitation, it would be satisfied here. Undermining the sale order’s finding that
Sager Creek’s consideration was “the highest and otherwise best offer for the
Acquired Assets” would “adversely alter the parties’ bargained-for exchange.” Id.
When modifying or reversing a provision of the sale order would have that effect, the
provision is “integral” to the sale. Id.
This is not to say that the rule of finality governing asset sales under § 363
forecloses all suits related to sales of a debtor’s assets. For example, a claim that a
fiduciary’s conduct kept a prospective bidder from securing adequate funding to make
a more competitive bid does not necessarily call into question a bankruptcy court’s
determination that the successful bid was the best offer on the table. See Brown
Media Corp. v. K&L Gates, LLP, 854 F.3d 150, 155, 162-63 (2d Cir. 2017). Nor does
the finality rule bar a claim against a fiduciary for conduct related to a sale where the
transaction was not subject to approval by the bankruptcy court under § 363. See In
re Brook Valley VII, Joint Venture, 496 F.3d 892, 899 (8th Cir. 2007); In re Brook
Valley IV, 347 B.R. 662, 670-71 (B.A.P. 8th Cir. 2006). Where a lawsuit “poses no
threat to the finality of the bankruptcy court’s orders,” Brown Media Corp., 854 F.3d
at 163, it does not conflict with the principles enunciated in Regions Bank and In re
Met-L-Wood. But the finality rule precludes allegations like Fulmer’s that second-
guess the bankruptcy court’s determination that the buyer submitted the best bid for
the assets.
Fulmer also argues that the sale order is simply unenforceable because the
required elements for a sale were not adequately proven. But the finality of a
bankruptcy court’s orders at the conclusion of direct review “[o]rdinarily . . . stand[s]
in the way of challenging their enforceability.” United Student Aid Funds, Inc. v.
Espinosa, 559 U.S. 260, 269 (2010) (internal quotation and brackets omitted). We
agree with the BAP that Fulmer’s freestanding challenge to the sale order, while
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permissible on direct appeal, cannot be raised at this stage. See In re Met-L-Wood,
861 F.2d at 1018.
B.
Fulmer argues alternatively that he is entitled to relief from the sale order
because it was obtained through fraud on the court. A federal court has inherent
equitable power to vacate a judgment that is obtained by fraud on the court. Hazel-
Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 248 (1944). A finding of
fraud on the court, however, “is justified only by the most egregious misconduct
directed to the court itself, such as bribery of a judge or jury or fabrication of
evidence by counsel.” Landscape Props., Inc. v. Vogel, 46 F.3d 1416, 1422 (8th Cir.
1995). The category is narrowly defined, and does not include “fraud between the
parties or fraudulent documents, false statements or perjury.” United States v. Smiley,
553 F.3d 1137, 1144 (8th Cir. 2009) (internal quotation omitted).
Fulmer’s amended complaint falls short of meeting this demanding standard.
Few, if any, of the alleged facts involve conduct directed at the court in the sale
proceedings. Fulmer instead repeats his account of the undisclosed agreement
between Ball and the Sager Creek Defendants, and the Fiduciary Defendants’ alleged
role in helping Sager Creek win the auction with an overvalued bid. He then states
that “[n]ot a candid word of the scheme was disclosed to the Court at the 2/12/14 sale
hearing.” But nondisclosure, even of a side agreement affecting the outcome of a
§ 363 sale, does not rise to the level of fraud on the court. We rejected such a claim
in Landscape Properties, holding that a bankruptcy attorney’s failure to disclose a
potentially collusive agreement between prospective bidders “d[id] not even come
close to meeting that standard.” 46 F.3d at 1422. Fulmer’s amended complaint thus
fails to state a plausible claim for fraud on the court.
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Fulmer next contends that he should be granted relief from the sale order under
Federal Rule of Civil Procedure 60. That rule, made applicable to bankruptcy cases
by Federal Rule of Bankruptcy Procedure 9024, sets out grounds upon which a court
may relieve a party from a final judgment or order. Fulmer cites Rule 60(b)(4), which
allows relief when a “judgment is void,” so long as a motion for relief is filed “within
a reasonable time.” Fed. R. Civ. P. 60(c)(1).
Fulmer argues that the sale order is “void” in light of Czyzewski v. Jevic
Holding Corp., 137 S. Ct. 973 (2017). In Jevic, the Supreme Court considered
whether a bankruptcy court may approve the dismissal of a Chapter 11 case that
would distribute assets to creditors in violation of the priority rules that govern
normal distribution plans, without the consent of the affected creditors. Id. at 983.
The Court held that such structured dismissals are not permitted. Id. Fulmer asserts
that the § 363 sale of the Allens assets violated the Bankruptcy Code’s priority rules
in a similar way—that is, that certain creditors with unsecured claims received value
while others with identical priority did not.
Jevic does not win the day for Fulmer. For one thing, Jevic involved a
structured dismissal and did not hold that § 363 sales must conform to normal priority
rules. In fact, the Court noted that some courts in other contexts have approved
priority-violating distributions where they serve “significant Code-related
objectives,” such as maximizing the value of the bankruptcy estate. Id. at 985. But
even if the reasoning of Jevic on priority rules were extended to § 363 sales, it would
not apply in the context of a consummated sale. Whatever force the Bankruptcy
Code’s priority rules might have at a sale approval hearing or on direct review of a
§ 363 sale, see id. at 986, a deviation from those rules does not render final judgments
“void.” See Espinosa, 559 U.S. at 273-76 (holding confirmed bankruptcy plan was
not void for purposes of Rule 60(b)(4) despite failing to comply with statutory
requirement); cf. In re Old Cold LLC, 879 F.3d 376, 388 (1st Cir. 2018) (holding that
Jevic did not add an exception to the text of § 363(m) concerning validity of a sale).
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C.
Fulmer also contends that the bankruptcy court erred by denying as futile his
motion for leave to amend his complaint. In the proposed amendment, Fulmer sought
to raise a claim under Rule 60(b)(4) that the § 363 sale was void for lack of due
process. Due process in bankruptcy generally entitles a party to receive the notice
specified in the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure,
and a judgment is void if the bankruptcy court acted in a manner inconsistent with
due process. Baldwin v. Credit Based Asset Servicing & Securitization, 516 F.3d 734,
737 (8th Cir. 2008).
Fulmer’s proposed due process claim is premised on his assertion that the
defendants secretly agreed to transfer value from Allens to Sager Creek in the form
of avoidance claims and real estate that were purchased for no additional
consideration. Fulmer’s proposed amendment alleges that notice was lacking because
the alleged agreement remained undisclosed. This nondisclosure, he asserts, deprived
the other interested parties of the ability and incentive to scrutinize Sager Creek’s
final bid.
The terms of the Sager Creek bid to which Fulmer principally objects, however,
were stated on the record at the auction hearing. The other interested parties,
including more than 5,000 known creditors, received timely notice of the auction and
the subsequent sale approval hearing. The record before the bankruptcy court
contained the auction transcript and the final versions of the purchase agreements.
And interested parties were permitted to file objections in the approval hearing.
These proceedings thus afforded interested parties adequate notice and opportunity
to be heard with respect to their claims on the Allens estate. If any wrong was
perpetrated by the maintenance of a secret agreement among the defendants, it was
not a deprivation of due process in the bankruptcy court. The February 2014 sale
order is not void for lack of due process, and such a claim would have been futile.
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Fulmer’s proposed amendment also adds details about the disputed
transactions, but the alleged acts remain the same. Fulmer asserts that the Sager
Creek Defendants and Ball had much to lose if Seneca ended up as the successful
bidder for Allens’s assets. The Sager Creek Defendants and Ball made an agreement
to support Sager Creek Acquisition Corp., Fulmer claims, and they did not adequately
disclose that agreement. The Fiduciary Defendants allegedly played a role by
overvaluing Sager Creek’s last-minute bid. Fulmer contends that although the
bankruptcy court approved the sale, the court acted without an adequate
understanding of how the bids compared to one another.
Fulmer’s claims in the proposed amendment, like those in the complaint that
was dismissed, would undercut the principal findings of the February 2014 sale order,
because they are premised on the alleged inferiority of Sager Creek’s bid. They are
thus barred by the finality rule governing asset sales under § 363. See Regions Bank,
387 F.3d at 731-32; In re Met-L-Wood, 861 F.2d at 1017-18. As for fraud on the
court, despite new conclusory language, the proposed complaint does not point to any
affirmative misrepresentation on a defendant’s part that was directed to the
bankruptcy court. The bankruptcy court thus did not err in concluding that the
proposed amendment would be futile.
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The judgment of the bankruptcy court is affirmed.
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