SR Construction v. Hall Palm Springs

Case: 21-11244 Document: 00516714660 Page: 1 Date Filed: 04/17/2023
United States Court of Appeals
for the Fifth Circuit
United States Court of Appeals
Fifth Circuit
FILED
April 17, 2023
No. 21-11244 Lyle W. Cayce
Clerk
In the Matter of: RE Palm Springs II, L.L.C.
Debtor,
SR Construction, Incorporated,
Appellant,
versus
Hall Palm Springs, L.L.C.; RE Palm Springs II, L.L.C.,
Appellees,
______________________________
In the Matter of: RE Palm Springs II, L.L.C.
Debtor,
SR Construction, Incorporated,
Appellant,
versus
RE Palm Springs, L.L.C.; Hall Palm Springs, L.L.C.,
Appellees.
Case: 21-11244 Document: 00516714660 Page: 2 Date Filed: 04/17/2023
No. 21-11244
Appeal from the United States District Court
for the Northern District of Texas
USDC Nos. 3:20-CV-3486, 3:20-CV-3487
Before Higginbotham, Southwick, and Higginson, Circuit
Judges.
Patrick E. Higginbotham, Circuit Judge:
Federal bankruptcy provisions date to the Founding, embedded into
our Constitution as a core tenet of the country’s economic vitality. 1 And with
good reason: “[d]ebt was an inescapable fact of life in early America . . . [that]
cut across regional, class, and occupational lines,” 2 and debtor’s prisons
were antithetical to the new democratic ideal. So, in parallel with the
industrialization and modernization of our markets, the Bankruptcy Code
matured, its execution shifting to an independent court staffed by an array of
able judges selected by merit and expert in the field, 3 giving bankruptcy
courts with their new status a crucial role in freeing the entrepreneurial
energy indispensable to our nation’s economy. It is on this stage that the
current action arrives, an effort to salvage the building of a hotel in the face
of market demands shrunk by the covid virus and other difficulties.
I.
SR Construction held a lien on real property owned by RE Palm
Springs II. 4 The property owner is a corporate affiliate of Hall Palm Springs
1
See U.S. Const. Art. I, § 8, cl. 4 (endowing Congress with the power “[t]o
establish . . . uniform Laws on the subject of Bankruptcies throughout the United States”).
2
BRUCE MANN, REPUBLIC OF DEBTORS: BANKRUPTCY IN THE AGE OF
AMERICAN INDEPENDENCE 3 (2002).
3
See generally Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.
L. No. 98-353, 98 Stat. 333 (1984).
4
RE Palm Springs II was initially named Hall Palm Springs II LLC.
2
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LLC, who had financed the original undertaking for a separate real estate
developer. The latter requested leave of the bankruptcy court to submit a
credit bid to purchase the property from its affiliate, which the bankruptcy
court granted. The bankruptcy court later approved the sale and discharged
all liens. The construction company appealed the bankruptcy court’s credit-
bid and sale orders. Finding that the lender was a good faith purchaser, the
district court affirmed the bankruptcy court and dismissed the appeal as moot
under Bankruptcy Code § 363(m). Now, “[a]cting as a second review
court,” 5 we AFFIRM.
II.
A.
In November 2016, Palm Springs, LLC, a commercial real estate
developer and the original owner of real property in Palm Springs, California,
contracted with SR Construction to develop its Property and build a hotel,
but it did not go well. Approximately a year later, the developer financed the
construction with Hall Palm Springs LLC, 6 securing its loan with a deed of
trust. At the same time, it entered into a separate Subordination Agreement
with the construction company, giving the lender priority of repayment over
the construction company.
The developer terminated the construction company on October 22,
2019, owing it $14,151,000 for the work completed. Nine days later, the
developer and owner defaulted on loan obligations owed to the lender, and
the lender gave notice that it was accelerating the debt. The construction
5
Matter of Lopez, 897 F.3d 663, 668 (5th Cir. 2018) (quoting Official Comm. of
Unsecured Creditors v. Moeller (In re Age Ref., Inc.), 801 F.3d 530, 538 (5th Cir. 2015)).
6
Note that the developer (Palm Springs, LLC) and the lender (Hall Palm Springs,
LLC) are unrelated, and the record does not reveal any overlap in ownership.
3
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company then filed its mechanic’s lien on the Property on November 25,
2019.
B.
In January 2020, the construction company filed suit in California
state court against myriad parties, including both the developer and the
lender, seeking to foreclose on its mechanic’s lien as superior to other liens
and the lender’s deed of trust.
On February 12, 2020, the lender’s president formed an affiliated
corporate entity (the “affiliate”) and became its sole manager and organizer.
Following the lender’s acceleration of the debt, the developer conveyed the
Property to the affiliate pursuant to a conveyance agreement “as an
alternative to foreclosure.” By its terms, the developer would be “released
from [its] obligations with respect to the [l]oan and [the developer] shall be
entitled to a net profits interest in the Property” in the amount of 50 percent.
The affiliate intended to finish construction and develop the hotel, but more
trouble came; “with the impact of the novel coronavirus COVID-19 on the
hospitality industry, coupled with the filing of numerous lawsuits . . . [the
lender] concluded that the sale of the Hotel to a strategic buyer would yield
the maximum value for all parties.”
Within the ensuing six months, the lender and its affiliate undertook
several discrete actions to prepare for bankruptcy. In June 2020, the affiliate
changed its name, and around the same time, the lender retained r2 Advisors
(“r2”), a third-party with relevant experience, to oversee the affiliate’s
restructuring. To ensure arm’s-length objectivity, as represented to the
bankruptcy court, the lender “caused . . . to convey ownership of [the
affiliate] to r2” such that “the entire sales process [wa]s under the control
and supervision of r2.”
4
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Then, on July 22, 2020, the affiliate filed for bankruptcy in the
Northern District of Texas and filed motions for leave to hire a pre-selected
real estate agent, to authorize the affiliate to borrow funds from the lender
(its corporate affiliate), and to approve specific bankruptcy sales and bidding
procedures.
C.
The bankruptcy court held multiple hearings and on August 24, 2020
approved the retention of r2 as the restructuring organization and the bidding
and sales procedures, complimenting the Parties for presenting “a game plan
that could . . . get creditors paid in full quite soon,” observing it “not an
unusual game plan” in high stakes financing. The bankruptcy court then
approved a proposed real estate broker, finding the firm “well qualified” and
lacking any conflicts or impairments. And, finally, it approved the debtor-in-
possession loan from the lender as “the only game in town” with
substantively “reasonable” conditions in light of the circumstances. This left
the lender, as the debtor-in-possession, with the power to veto any sale. The
bankruptcy judge followed with related orders formally approving the needed
processes and personnel.
One of the orders approved an auction and bidding process requiring
a “stalking horse,” 7 McWhinney Real Estate Services, Inc., to submit its bid
on August 28, 2020, alongside a nonrefundable $2.5 million deposit. Other
7
“A stalking horse refers to an entity that is willing to place a bid on a debtor’s
asset in order to either set a baseline bid from which the true value of the estate can be
assessed or serve as a catalyst to inspire other bidders.” In re Energy Future Holdings Corp.,
990 F.3d 728, 744 (3d Cir. 2021) (citations omitted); see also Matter of Walker Cnty. Hosp.
Corp., 3 F.4th 229, 232 n.2 (5th Cir. 2021) (“‘An initial bidder’ in a bankruptcy proceeding
may serve as a so-called ‘stalking horse,’ whose initial research, due diligence, and bid may
encourage later bidders.” (alteration and quotation marks omitted)).
5
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bidders in the auction were required to submit bids and deposits by October
5, 2020, the sale hearing to be held eleven days later.
The marketing and sale of the Property garnered substantial interest.
The real estate brokerage engaged in an aggressive marketing campaign,
hosting site visits from “8 potential buyer groups” and executing
approximately 268 confidentiality agreements from potential buyers seeking
to perform due diligence. Several bids were proposed, though none
conformed to the specified format, timing, or financial arrangements
approved by the bankruptcy court. The stalking horse also submitted a
proposal for $35,450,000, though it ultimately declined to make the deposit
by the deadline and backed out entirely.
Prior to the auction deadline but after the stalking horse had dropped
out, with no outstanding bids, the lender sought leave to submit a credit bid
for the Property pursuant to 11 U.S.C. § 363(k), which confers secured
creditors a right to credit bid their allowed claims. 8 The construction
company opposed, urging that the bid was “premature.” While the
construction company contested the credit bid, the auction proceeded apace,
ultimately garnering only the lender’s credit bid of $37,279,365.74—almost
$2 million more than the floor set by the stalking horse’s proposal.
The bankruptcy court held evidentiary hearings on November 3, 5,
and 6, 2020 regarding the lender’s ability to submit a credit bid and on the
free and clear sale of the Property. In broad strokes, the construction
company argued—as it does here—the sale should not proceed because: 1)
the lender (and intended purchaser) was aware of adverse claims to the
8
See 11 U.S.C. § 363(k) (“At a sale . . . of property that is subject to a lien that
secures an allowed claim, unless the court for cause orders otherwise the holder of such
claim may bid at such sale, and, if the holder of such claim purchases such property, such
holder may offset such claim against the purchase price of such property.”).
6
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Property, namely the construction company’s adversary proceeding as well
as its action in California state court; and 2) because the lender had
fraudulently manipulated the bankruptcy proceedings, including rigging the
bankruptcy sale process, to acquire the Property free and clear of all liens at
the lienholders’ expense, including the construction company’s.
At the culmination of the final hearing, the bankruptcy court approved
the sale. Shortly before the hearing concluded, the construction company
moved for a stay pending appeal, which the bankruptcy court denied. Three
days later, the bankruptcy court issued its formal order granting the lender’s
Motion to submit a bid, and on November 18, 2020, a formal order approving
the sale free and clear of all liens, claims, encumbrances, and interests and,
in so doing, denying the construction company’s motion to stay the sale.
These orders gave rise to this appeal.
Parallel to its objection, the construction company sought to bar the
developer from conveying the Property to the affiliate or another non-party
entity. It filed an adversary proceeding in the bankruptcy court against the
lender, the affiliate, and the developer. The construction company also
brought a separate action in California seeking a determination that its lien
on the Property is senior to the lender’s deed of trust.
D.
The construction company timely filed notices of appeal of the
bankruptcy court’s orders to the district court, which consolidated the
appeals, affirmed the bankruptcy court’s finding that the lender was a good-
faith purchaser, and dismissed the appeal as moot. The construction
company timely appealed.
7
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III.
A purchaser bears the burden of establishing good faith under 11
U.S.C. § 363(m) 9 and a district court’s dismissal of an appeal from
bankruptcy court as moot is reviewed de novo. 10 The standard of review for a
good-faith determination by the bankruptcy court that renders the appeal
moot “is a matter of some confusion in our circuit.” 11 No published opinion
in this Court has weighed in conclusively on the choice between de novo or
clear error review, and one unpublished opinion filed years ago reviewed such
a finding for clear error but with no analysis of the standard. 12 More recently,
this Court declined to reach the question because a determination of good
faith failed “under either standard of review.” 13 We take this path again. As
the lender prevails under de novo review, we need not and hence do not
address the less rigorous clear error standard.
IV.
The Bankruptcy Code makes clear that “[t]he reversal or
modification on appeal of an authorization . . . of a sale . . . of property does
not affect the validity of a sale . . . under such authorization to an entity that
purchased . . . such property in good faith . . . unless such authorization and
9
In re TMT Procurement Corp., 764 F.3d 512, 520 (5th Cir. 2014).
10
See In re Ginther Trusts, 238 F.3d 686, 688 (5th Cir. 2001) (per curiam).
11
In re TMT, 764 F.3d at 521.
12
See In re Beach Dev., LP, No. 07-20350, 2008 WL 2325647, at *1–3 (5th Cir. June
6, 2008) (unpublished) (per curiam) (referencing repeatedly the fact that the parties failed
to show clear error absent analysis as to the correct standard of review).
13
In re TMT, 764 F.3d at 521.
8
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such sale . . . were stayed pending appeal.” 14 “The Bankruptcy Code does
not explicitly define ‘good faith,’” but this Court has “defined the term in
two ways”: (1) a notice-based definition, wherein a “good faith purchaser”
is “‘one who purchases the assets for value, in good faith, and without notice
of adverse claims’”; and (2) a conduct-based definition, meaning one who
does not engage in “‘misconduct’” including, inter alia, “‘fraud, collusion
between the purchaser and other bidders, or an attempt to take grossly unfair
advantage of other bidders.’” 15 We review the construction company’s claim
under each test in turn.
A.
The construction company argues that the lender is not a good faith
purchaser because there were live “adverse claims” of which the lender was
aware. “The Bankruptcy Code does not provide a definition of ‘adverse
claim.’” 16 It only defines a “claim”: (1) the “right to payment, whether or
not such right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured, or unsecured;” or (2) the “right to an equitable remedy for breach
of performance if such breach gives rise to a right to payment, whether or not
such right to an equitable remedy is reduced to judgment, fixed, contingent,
14
11 U.S.C. § 363(m). Here, the authorization and sale of the Property were not
stayed pending appeal. Accordingly, a determination that the lender acted in good faith
moots this appeal. In re TMT, 764 F.3d at 519.
15
In re TMT, 764 F.3d at 521 (citations and footnotes omitted) (first quoting
Hardage v. Herring Nat’l Bank, 837 F.2d 1319, 1323 (5th Cir. 1988); and then quoting In re
Bleaufontaine, Inc., 634 F.2d 1383, 1388 n.7 (5th Cir. 1981)).
16
Id. at 522 (emphasis added).
9
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matured, unmatured, disputed, undisputed, secured, or unsecured.” 17 We
have described this definition of “claim” as “broad[].” 18
The Parties dispute the breadth of this definition when “claim” is
read in conjunction with the word “adverse,” as this Court has not yet
precisely defined “adverse claims.” In In re TMT, we stated only that
“knowledge that there are objections to the transaction is not enough to
constitute bad faith.” 19 In other words, an adverse claim “requires more”
than simply “some creditor . . . objecting to the transaction and . . . trying to
get the district court or the court of appeals to reverse the bankruptcy
judge.” 20
Citing Black’s Law Dictionary, the construction company contends
both that “a claim can be adverse even if it does not arise from a color or
claim of title,” and that its adversary proceedings in the bankruptcy court,
which would “avoid the transfer of the [P]roperty to [the affiliate]” and
“thus remov[e] the [P]roperty from the bankruptcy estate,” are adverse. The
construction company also points to its “pre-petition California state-court
suit asserting that [its] liens are senior in priority to the lender’s deed of trust
and seeking to foreclose on the [P]roperty” as an adverse claim satisfying this
threshold. Finally, the construction company contends that the bankruptcy
and district courts improperly considered the merits of its adversary
proceedings and California suit to influence their findings rather than the
lender’s knowledge of such actions. By contrast, the lender, citing Ballentine’s
Law Dictionary, argues that the term “adverse claim” “connotes an ‘element
17
11 U.S.C. § 101(5).
18
In re TMT, 764 F.3d at 522.
19
Id. (quoting In re EDC Holding Co., 676 F.2d 945, 947 (7th Cir. 1982)).
20
Id. (emphasis added) (quoting In re EDC Holding Co., 676 F.2d at 947).
10
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of hostility under a color or claim of title’” such that neither the objection
nor the state court action nor the federal bankruptcy adversary proceeding
rise to an “adverse claim” required to nullify the sale.
In In re TMT, this Court invalidated a bankruptcy sale because “[t]he
[debtor-in-possession] Lender had knowledge that a third-party, entirely
unrelated to the bankruptcy proceeding, had an adverse claim to the
[property]” in the form of an ownership interest. 21 Given such a claim, this
Court concluded that the lender “d[id] not qualify as a good faith
purchaser,” 22 citing to the Seventh Circuit case Rock Industries, which
connects a “good faith purchaser” to ownership because the “purchaser
[wa]s seeking to extinguish adverse claims to title.” 23 Darby v. Zimmerman
(In re Popp),24 a Ninth Circuit Bankruptcy Appeals Panel took the same
course, reversing a sale order approved by the bankruptcy court because
“[t]he parties dispute[d] title to the [p]roperty” sold. 25 Finally, the Supreme
Court explains that “adverse claims” with regard to good faith purchasers
implies ownership must be disputed, stating that the knowledge required to
vitiate such a label is of “defect in [title], or adverse claim to it.” 26 These
cases make clear that, under the notice-definition of a good faith purchaser,
the threshold for an “adverse claim” is a dispute in ownership interest. The
21
Id.22
Id.23
In re Rock Indus. Mach. Corp., 572 F.2d 1195, 1198 (7th Cir. 1978).
24
323 B.R. 260 (B.A.P. 9th Cir. 2005).
25
Id. at 262.
26
Boone v. Chiles, 35 U.S. 177, 210 (1836) (emphasis added) (“Strong as a plaintiff’s
equity may be, it can in no case be stronger than that of a purchaser, who has put himself in
peril by purchasing a title, and paying a valuable consideration, without notice of any defect
in it, or adverse claim to it.”). Truly, a longstanding precedent.
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district court here held that the construction company “has not asserted an
ownership interest,” “only a mechanic’s lien,” the claims filed by the
construction company do not rise to the level of an “adverse claim” so as to
vitiate the lender’s status as a “good faith purchaser.”
The construction company cites language from Rock Industries that
notice of adverse claims “usually becomes an issue when an alleged good faith
purchaser is seeking to extinguish adverse claims to title of which he had no
actual or constructive notice at the time of sale.” 27 It argues this language
implied that the concern “could also arise in other circumstances” beyond
concerns as to defects in title, such as the one here. But it is equally plausible
that the Seventh Circuit’s inclusion of the qualifier “usually” speaks to the
frequency of title claims or notice thereof, not to the elements of an adverse
claim. Adopting the construction company’s reasoning arguendo, Rock
Industries did not articulate such a scenario, 28 that is even if this lone 44-year-
old out-of-circuit precedent were binding, 29 the inclusion of “usually” is
dicta. 30 A greater concern forecloses lowering the standard to claims below
questions of ownership interests: doing so, as the lender points out, would
open the proverbial floodgates and “countless sales under [S]ection 363 of
the Bankruptcy Code would be invalid,” which, this Court has held, stands
27
In re Rock Indus., 572 F.2d at 1198 (emphases added).
28
See id.29
See, e.g., United States v. Penaloza-Carlon, 842 F.3d 863, 864 & n.1 (5th Cir. 2016)
(holding that other circuits’ decisions are persuasive only).
30
See United States v. Wallace, 964 F.3d 386, 389 (5th Cir.) (stating that where
“discussion” is “established . . . as dicta, [it is] therefore not binding”), cert. denied, 141 S.
Ct. 910 (2020); United States v. Stracener, 959 F.2d 31, 32 (5th Cir. 1992) (“As pure dicta,
the Court’s parenthetical comment does not have binding force.”); Carpenter Paper Co. v.
Calcasieu Paper Co., 164 F.2d 653, 655 (5th Cir. 1947) (“These statements, however, as the
opinion itself shows, were dicta not necessary to the decision of the case and not intended
to have the force of a binding adjudication.”).
12
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antithetical to “Congress’s strong preference for finality and efficiency in the
bankruptcy context.” 31
The construction company also points to two separate actions as
adverse claims. First, the construction company relies on its state court
action filed prior to the bankruptcy petition, which asserts that the
construction company’s lien is superior to the lender’s deed of trust and that
the construction company has the right to foreclose on the Property to
enforce its security interest. But a lien does not confer ownership rights, and
the construction company does not suggest otherwise. The transfer of the
Property by the developer to the affiliate, subject to the encumbrances against
the Property—including the construction company’s—does not implicate
ownership rights or give rise to a distinct ownership dispute, meaning that it
does not constitute an “adverse claim.”
Second, the construction company asserts that the adversary
proceedings in the bankruptcy court brought under California law constitute
“adverse claims,” even under the ownership interest standard. They do not.
Several of the provisions to which the construction company points this
Court, California Civil Code §§ 3439.04–05, make transfers voidable as to
the specific creditor involved in that transaction, not to all creditors. 32 Thus,
under these provisions, that a third party—here, the construction company
—believes the conveyance between two other parties is fraudulent does not
confer to that third party the right to void the transfer.
31
In re Energytec, Inc., 739 F.3d 215, 218–19 (5th Cir. 2013) (quoting Hazelbaker v.
Hope Gas, Inc. (In re Rare Earth Minerals), 445 F.3d 359, 363 (4th Cir. 2006)).
32
The only other provision to which construction company points the court,
California Civil Code § 3439.02, is inapposite, as it simply defines insolvency without
creating a private right of action. See Cal. Civ. Code § 3439.02.
13
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California Civil Code § 3439.07 is the lone salient provision pointed
to by the construction company. It provides for the “[a]voidance of the
transfer or obligation,” among other forms of equitable relief. 33 But as the
district court correctly observed, the lender “was the senior lien holder”
given the subordination agreements lienholders signed—including the
construction company. This contractual agreement neuters the construction
company’s claim to equitable relief under this provision. It follows that the
adversary proceedings in the bankruptcy court do not constitute adverse
claims.
In sum, neither a mechanic’s lien nor an adversary proceeding to find
that a transfer may be voidable (not that it is void) constitute an “adverse
claim” affecting a purchaser’s good faith status in bankruptcy proceedings.
We hold that the lender does not fail this Court’s notice-of-adverse-claims
test and retains its status as a “good faith purchaser.”
B.
The construction company also argues that the lender is not entitled
to “good faith purchaser” status because it engaged in misconduct and fraud.
We disagree. This Court has previously stated that “misconduct” including
“fraud, collusion between the purchaser and other bidders, or an attempt to
take grossly unfair advantage of other bidders” could “destroy a purchaser’s
good faith status.” 34 The construction company argues the lender did just
that, claiming that the lender, both “in preparation for and during the sale
itself” engaged in conduct “specifically intended to affect the sale price or
33
Cal. Civ. Code § 3439.07(a)(1). Notably, the construction company only raises
this provision in its reply brief, but “[a]n appellant abandons all issues not raised and argued
in its initial brief on appeal.” Cinel v. Connick, 15 F.3d 1338, 1345 (5th Cir. 1994) (emphasis
omitted) (collecting cases). Nevertheless, we address this argument on its merits.
34
In re Bleaufontaine, 634 F.2d at 1388 n.7.
14
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control the outcome of the sale.” 35 The construction company cites multiple
data points: (1) the lender’s control over “both the deed of trust and the
[P]roperty encumbered by the deed of trust”; (2) the affiliate’s name change;
(3) the arrangement between the lender and r2; (4) the lender’s engagement
of an allegedly inadequate the real estate broker; (5) the lender’s involvement
in securing the stalking-horse bidder (who ultimately failed to make a bid);
and, most importantly, (6) the bidding procedures themselves. The lender,
on the other hand, argues that the construction company’s data points are
nothing more than “a false narrative, based upon contortions of the facts and
misinterpretations thereof.”
A deeper review betrays the construction company’s argument. It first
cites the lender’s control over “both the deed of trust and the [P]roperty
encumbered by the deed of trust.” That the lender came to obtain both
interests, however, is not nefarious per se. To the contrary, as the district
court found, the lender obtained the deed to secure the loan and obtained the
Property when the developer “defaulted on its loan with [the lender],”
prompting the lender to exercise its contractual right, accelerate the loan, and
strike an agreement to obtain the Property via its affiliated entity in lieu of
foreclosure. The construction company argues that the lender “convinced”
the developer to do so “for no stated consideration.” The record shows
otherwise. Here, the consideration given by the lender consisted of accepting
the property subject to the existing debts as well as the promise to pay out 50
percent of future profits to the developer. This line of inquiry fails to show
misconduct. It rather reflects a market actor responding to market forces and
exercising its contractual rights.
35
In re Gucci, 126 F.3d 380, 390 (2d Cir. 1997).
15
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The construction company also references the affiliate’s name change
from Hall Palm Springs II to RE Palm Springs II, asserting that this was “an
attempt to minimize the appearance of control.” That the bankruptcy court,
the district court, and now this Court have the details of the transactions
belies the idea that changing a name concealed any wrongdoing. 36
The construction company next points to the fact that the lender was
actually financing any payments to r2, and r2 also occasionally spoke with the
lender. Neither fact demonstrates misconduct. The content of these few
conversations, to the extent described in testimony, does not suggest
malfeasance or misconduct. And regarding the financing, the construction
company identifies no other means by which to pay for an objective third-
party like r2 to oversee the bankruptcy. In other words, as the district court
concluded, “[a]lthough [the lender] maintained a form of control over r2 as
the DIP Lender, [the construction company] does not point to any facts or
evidence showing that [the lender] exerted this control to commit a fraud upon
the bankruptcy court.” 37
The construction company raises the lender’s role in choosing the real
estate broker as another datapoint. Even if the lender’s authority to choose
the broker was problematic in the abstract, the choice itself fails to evince bad
faith, as the firm retained was “known [as a] national expert in the hospitality
space” and staffed with “experts in California hotel sales.” And even though
the brokerage’s managing director was not himself licensed in California, he
36
See, e.g., E.E.O.C. v. Boeing Servs. Int’l, 968 F.2d 549, 556 n.7 (5th Cir. 1992)
(“We pause briefly to note that if the issue was before us, we would not hold that a cat was
a dog simply because a defendant called the cat a dog.” (citing William Shakespeare, Romeo
and Juliet, act II, sc. ii (“What’s in a name? That which we call a rose By any other name
would smell as sweet.”))).
37
Emphasis added.
16
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was a licensed broker elsewhere whose practice was “100 percent dedicated
to the hotel space” and who had nearly a decade and a half of experience in
the field. There was no error in declining to read bad faith into the lender’s
choice.
The construction company points to the lender’s selection of the
stalking horse bidder as giving rise to an inference of bad faith because “the
stalking-horse bidder contract did not even contain a bid price.” The
construction company’s recitation of the record omits vital details regarding
the stalking horse, and specifically the consideration at issue. The stalking
horse agreement reads:
The consideration for the purchase of the Property shall be a
purchase price to be mutually agreed upon between Purchaser
and Seller prior to the expiration of the Due Diligence Period
in an aggregate amount that is not less than an amount that is
acceptable to [the lender] . . . with a specific Purchase Price
dollar amount no later than two (2) Business Days after the
expiration of the Due Diligence Period.
The stalking horse submitted a proposal for $35,450,000 at the August 24,
2020 hearing approving the sale motion, days before the deadline and above
the amounts proposed in letters of intent by other potential bidders. While
the stalking horse did not follow through on its proposed bid, failing to make
the required deposit and then pulling out altogether, the credit bid was
substantially higher than the proposed stalking horse bid—almost $2 million
more, or 5% higher—undermining the construction company’s questions of
the stalking horse’s failure to pony up, a question that would have purchase
had the stalking horse’s failure to bid resulted in a substantially lower final
purchase amount. And as for allegations of collusive conduct, the broker
testified that he never spoke with the lender regarding the credit bid. Thus,
the construction company fails to marshal any evidence showing collusive
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activity between the lender and the stalking horse calculated to scare off other
bidders.
Finally, the construction company points to several of the bid
procedures as setting the auction up for failure. The construction company
asserts, for example, that the bid process was too short, inhibiting investors’
ability to inspect the Property and conduct the requisite due diligence prior
to the bid deadline. Yet the marketing campaign produced extensive interest,
notwithstanding its purported brevity: 268 individuals executed
confidentiality agreements for due diligence and seven different investor
groups took a tour of the facility—four toured it multiple times, and one
toured it five times. The process also produced multiple letters of intent for
concededly noncompliant bids (i.e., bids that did not conform to the timing
and pricing requirements), though they were below the stalking horse’s bid.
Moreover, the district court correctly notes that when no conforming bids
were made in the initial bidding timeline, the timeline was extended further
and “came with incentives,” namely “no Overbid Protections . . . and no
break-up fee,” exhibiting additional good faith efforts to solicit external
investment. These facts all support the findings of the bankruptcy and district
courts that the lender and the affiliate worked in good faith to effectuate a
sale to a third party. 38
In another bidding procedure-related contention, the construction
company argues that because “the bid procedures gave [the lender] an
absolute veto right over any bid submitted by any party,” the lender set the
procedures up to fail. But the bankruptcy court made clear that such an
arrangement “is not uncommon” and is instead “just sort of the nature of
38
So, too, does this undermine the construction company’s argument that bad faith
can be inferred because the bidding procedures did not require any party to market the
facility. A lack of a duty to market bears not at all when compared to the actions undertaken.
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No. 21-11244
the beast” in bankruptcy, cutting against an inference of bad faith. Moreover,
there is no evidence in the record that bidders were in any way impaired or
chilled by such a dynamic, further undermining any inference the
construction company would ask this Court to make.
Indeed, despite the construction company’s protests, the facts
substantiate rather than undermine the lender’s status as a “good faith
purchaser.” That the lender disclosed each of the salient facts to the
bankruptcy court strongly favors a finding of good faith, as courts properly
look to the transparency of the process as indicative of one’s intent. 39 The
disclosures, in concert with the lender’s actions to market the Property
(including the lender’s actions to facilitate the marketing campaign such as
“offer[ing] to provide financing to prospective purchasers”), the extension
of the marketing process, and the timing of the lender’s credit bid—after all
other prospective buyers had fallen through—satisfy the lender’s burden of
establishing itself as a good faith purchaser.
Nor can we look away from the circumstances framing the bid process
and the decisions of the bankruptcy and district courts, namely the carrying
costs associated with an unfinished property and the Covid-19 pandemic.
Testimony shows that the monthly carrying costs were approximately
$70,000 and no alternative financing was identified to cover these costs once
the DIP loan expired. Given the Property’s incomplete state and the expiring
39
See In re Xact Telesolutions, Inc., No. 05-CV-1230, 2006 WL 66665, at *6 (D. Md.
Jan. 10, 2006) (collecting cases to demonstrate that when evaluating a party’s status as a
good faith purchaser, “courts have considered whether the sale involved full disclosure to
the court,” which militates strongly in favor of finding good faith); cf. Old Cold, LLC, 558
B.R. 500, 516 n.6 (B.A.P. 1st Cir. 2016) (holding that, in some circumstances, an insider
sale is to be encouraged “so long as the insider status is disclosed at the beginning of the
case, and there is no evidence of collusion” (citing Hower v. Molding Sys. Eng’g Corp., 445
F.3d 935, 939 (7th Cir. 2006)), aff’d sub nom. In re Old Cold LLC, 879 F.3d 376 (1st Cir.
2018).
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funding, the bankruptcy court accurately described the Property as “a
wasting asset.” This further empties the argument that the short timetable—
itself a debated proposition—gives rise to an inference of bad faith.
The Property was conveyed from the developer to the affiliate on
March 13, 2020, and the Grant Deed is dated March 27, 2020, just as the
COVID-19 pandemic—and corresponding lockdowns—began to spread
across the country. 40 The pandemic not only destabilized the current market,
but also created questions about how the industry would look and operate in
a post-COVID world. Put simply, the pandemic dramatically changed not
only the lender’s plans for the Property, but it also severely impacted the
affiliate’s ability to market and sell a hotel, particularly an unfinished one. In
sum, these two factors must also be weighed in considering whether any of
the actions or procedures, particularly with regard to pricing or timing issues,
were performed in bad faith or as a result of sub-optimal external forces
beyond the lender’s control.
The record facts, framed by the external context and circumstances,
make plain that there is no error in the judgments of the able bankruptcy and
district courts. The lender did not engage in fraud and was a “good faith
purchaser.”
****
We AFFIRM.
40
See Big Tyme Invs., L.L.C. v. Edwards, 985 F.3d 456, 460 (5th Cir. 2021) (“As all
are painfully aware, in early 2020 our nation was gripped with an unprecedented public
health emergency caused by COVID-19. On March 11, 2020, the World Health
Organization (‘WHO’) declared a global pandemic in response to the spread of COVID-
19.”); see also In re Approval of the Jud. Emergency Declared in the S. Dist. of California, 955
F.3d 1135, 1136 (9th Cir. 2020) (“The Governor of the State of California declared a
Proclamation of a State of Emergency to exist in California on March 4, 2020.”).
20