Adobe Oilfield Svc, Ltd. v. PNC Bank, N.A.

Case: 13-50335 Document: 00512492747 Page: 1 Date Filed: 01/08/2014
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 13-50335 January 8, 2014
Lyle W. Cayce
In the Matter of: ADOBE TRUCKING, INCORPORATED, Clerk
Debtor
------------------------------------------------------
ADOBE TRUCKING, INCORPORATED;
ADOBE DRILLING SERVICES, LIMITED,
Appellants
v.
PNC BANK, NATIONAL ASSOCIATION, PAUL FRANK, VICE
PRESIDENT; M&I BUSINESS CREDIT, LLC, CT CORP SYSTEM,
SERVICE AGENT; LAND HOLDING, LLC; PAUL FRANK,
Appellees
Appeals from the United States District Court for
the Western District of Texas
USDC No. 7:12-CV-031
Before BARKSDALE, PRADO, and HAYNES, Circuit Judges.
PER CURIAM:*
Adobe Trucking, Inc. (ATI) filed for Chapter 11 bankruptcy on 23
November 2010, after which this adversary proceeding was removed from state
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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court. The bankruptcy court ruled in favor of PNC Bank (PNC). ATI and
Adobe Drilling Services, Ltd. (ADS) (collectively, Appellants) appealed to the
district court, which affirmed.
Appellants claim: the bankruptcy court erred in ruling (1) there was a
consummated foreclosure sale; (2) the parties’ agreement was not manifestly
unreasonable; (3) PNC’s actions regarding the sale were commercially
reasonable; (4) there was no fraudulent transfer; and (5) PNC owed no
fiduciary duty to Appellants. (Concerning several issues, they assert also that
the bankruptcy court failed to comply with Federal Rule of Civil Procedure
52(a)(1) (requiring court acting as trier of fact to state fact-findings and legal
conclusions separately)). AFFIRMED, essentially for the reasons stated by the
bankruptcy and district courts.
I.
In December 2006, Appellants entered into a revolving credit and
security agreement (the agreement) for a $37.5 million, five-year revolving-
credit facility with various financial institutions, including PNC, which would
serve as the lead bank and agent for all the lenders. The agreement provided
New York law would govern, and that, inter alia, upon Appellants’ default,
PNC could exercise the right to foreclosure of the security interests granted.
In that regard, PNC could take possession of the collateral and sell it without
judicial process. Further, the collateral could be sold “at any time or place, in
one or more sales, at such price or prices, and upon such terms, either for cash,
credit or future delivery” as PNC could elect, regardless of whether it possessed
the collateral.
The same day the parties entered into the agreement, PNC obtained
landlord waiver agreements from Adobe Oilfield Services (AOS), Adobe
Ironworks (AI), and Mesquite Bean (Mesquite) (sister entities with control over
the premises on which collateral was located). Despite Appellants’ failure to
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abide by the terms of the agreement, the parties amended it on two occasions:
in March 2007, increasing the available credit to $43 million; and, that July,
increasing it to $47.5 million.
Shortly after the second amendment, Appellants’ capital expenditures
for the 2007 fiscal year exceeded the specified limit. Appellants continued to
default in other ways; for instance, they failed to achieve the minimum rig-
fleet inventory utilization rate. On several occasions, PNC gave Appellants
notice of default under the agreement.
During the first half of 2008, oil prices steadily rose to a high of $145 per
barrel, leading to a high demand for drilling rigs. By January 2009, however,
the prices had dropped to a low of $35 per barrel. As a result, by the fall of
2008, Appellants elected to suspend most drilling operations.
As of early December 2008, with Appellants still in default under the
agreement, PNC (and the other lenders) chose to exercise their default
remedies. On 23 December 2008, PNC provided Appellants with its first
written request that Appellants immediately relinquish possession and control
of the collateral, and that they provide a list of locations of all their assets.
Appellants neither acknowledged nor complied with this request. By 31
December 2008, PNC provided Appellants with a foreclosure notice, stating the
public foreclosure sale of the collateral would occur at 11:00 a.m. on 16 January
2009.
PNC subsequently provided Appellants with multiple written requests
for possession of the collateral, to no avail. For example, in a 14 January 2009
letter from PNC to Appellants, they were requested, inter alia, to “cooperate
with PNC to make the collateral available . . . and to provide information
regarding [its] location and status”. Appellants responded by asserting PNC
was given possession of eight rigs during a December 2008 meeting, but PNC
claims it never received possession. Appellants also offered to move the rigs to
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a location of PNC’s choice for 80% costs (an offer PNC rejected) and otherwise
declined to cooperate.
On 6 January 2009, PNC placed a notice of sale in The Dallas Morning
News, the Odessa American, and the Midland Reporter-Telegram (and on their
respective websites). The notice provided: PNC would conduct a public sale to
the highest qualified bidder for the collateral; the date, time, and place at
which the sale would occur; PNC reserved the right to credit bid and purchase
the collateral; and a detailed description of the collateral.
Although not in possession of the collateral, PNC foreclosed on 16
January 2009 as scheduled. Fifty minutes before foreclosure, AOS and AI filed
a state-court action against Appellants and PNC, claiming liens on the
collateral. Two bids were made at the foreclosure sale: a $1 million opening
bid, and PNC’s winning $41 million credit bid. One hour after the sale,
Appellants filed a cross-claim against PNC. That same day, PNC transferred
all of its interest in the collateral to an affiliate, with PNC authorized to take
possession of the collateral. PNC advised AOS, AI, and Mesquite of its intent
to remove the collateral from their premises, but all responses suggested they
would not permit removal.
In March 2009, after finding PNC was continually and wrongfully
refused access to the collateral, a state court enjoined AOS, AI, and Mesquite
from interfering with, or preventing, PNC from removing the collateral. After
it was removed, PNC held an auction—through another entity—on 29-30 April
2009, attended by hundreds of bidders. Although the collateral had been
prepared for auction, most of it could not be sold. The auction netted only
approximately $10 million.
After ATI filed for bankruptcy on 23 November 2010, this adversary
proceeding was removed from state court. Appellants raised several issues
before the bankruptcy court, including whether: the agreement was manifestly
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unreasonable; the foreclosure sale was commercially reasonable under the
proceeds and procedures tests; there was a fraudulent transfer for less than
reasonably equivalent value; there were damages for the loss of any surplus;
there was a breach of a fiduciary duty or misappropriation of fiduciary
property; there was a contract for, charge, or receipt of usurious interest; and
there was fraud, conversion, or theft. In re Adobe Trucking, Inc., No. 10-70353,
2011 WL 6258233, at *10-14 (Bankr. W.D. Tex. 15 Dec. 2011).
In its opinion, the bankruptcy court first set out the secured parties’
rights to dispose of collateral after default under Article 9 of the Uniform
Commercial Code and New York law. Id. at *4. The court noted the term
“commercially reasonable” lacks a uniform definition, but explained the
purpose of the U.C.C.’s provisions requiring a commercially reasonable sale is
“to produce the highest price possible for the collateral” (although price is not
the sole factor). Id. Ultimately, “the inquiry into commercial reasonableness
is a fact-intensive one that requires an examination of all circumstances of the
liquidation”, with the secured party carrying the burden of proof as to the
commercial reasonableness for each aspect of the disposition. Id. at *5
(citations omitted).
The bankruptcy court noted New York courts have adopted both the
proceeds and procedures tests to evaluate the commercial reasonableness of a
sale. Id. at *8. Under the former, such reasonableness is based solely on the
difference between the price received at the foreclosure sale and the price the
collateral previously sold for, or whatever the court determines is the
collateral’s fair-market value. Id. at *5. Under the latter, the focus is “on how
the sale was conducted and the efforts made by the creditor to achieve the best
price”. Id. at *7.
The bankruptcy court also considered the effect of credit agreements on
a sale’s commercial reasonableness. Id. at *9-10. Along this line, although
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parties may not waive the requirement of a commercially-reasonable
disposition of collateral, U.C.C. § 9-603 expressly permits “parties [to]
determine by agreement the standards measuring the fulfillment of the rights
of a debtor . . . and the duties of a secured party”, as long as those “standards
are not manifestly unreasonable”. Id. at *9 (quoting N.Y. U.C.C. § 9-603)
(internal quotation marks omitted). If a credit agreement exists between
parties, the agreement is not manifestly unreasonable, and a subsequent
foreclosure sale is conducted in accordance with that agreement, then the
foreclosure sale is likely commercially reasonable. See id. at *9-10.
When considering whether the agreement was manifestly unreasonable,
the bankruptcy court explained that the U.C.C.’s restrictions on parties’
abilities “to define what is commercially reasonable”, are meant “to prohibit
agreements [that relieve] secured creditors ‘from virtually all responsibility
with respect to the collateral’”. Id. at *9 (quoting Orix Credit Alliance, Inc. v.
East End Dev. Corp., 688 N.Y.S.2d 191, 192 (2d Dep’t 1999)). The bankruptcy
court found: “The . . . [a]greement provided reasonable standards for the
foreclosure process, but did not purport to waive the rights of [Appellants]
under the [U.C.C.]”. Id. at *10. Thus, the agreement was ruled not manifestly
unreasonable. Id. at *14.
Next, considering the commercial reasonableness under the proceeds
test, the bankruptcy court noted that “[p]roperty offered at a foreclosure sale
frequently produces a price substantially less than market value” and that
New York courts consistently decline to “disturb a foreclosure sale . . . except
. . . where the price alone is so inadequate as to shock the court’s conscience”.
Id. at *11 (citations omitted). Upon considering the evidence presented during
the five-day trial, the bankruptcy court accepted the $33.85 million value
advanced by PNC, but also suggested, that, even if it accepted Appellants’
estimated value, the $41 million credit bid would still be 67% of the alleged
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value of the collateral. Id. at *11, *14. Therefore, the sale was ruled
commercially reasonable under the proceeds test. Id.
When considering whether the sale was commercially reasonable under
the procedures test, the bankruptcy court discussed three claims by
Appellants: (1) PNC did not prepare the collateral for sale, nor did PNC give
prospective buyers an opportunity to inspect it; (2) a higher price could have
been obtained if PNC had delayed the sale or sold the collateral in a different
manner; and (3) only two prospective buyers attended the sale. Id. at *12-13.
The bankruptcy court noted that Appellants, in violation of the
agreement, prevented PNC from taking possession of the collateral prior to the
sale. Id. at *12. Moreover, under the agreement, Appellants agreed it would
be commercially reasonable “to fail to incur expenses reasonably deemed
significant by [PNC] to prepare [the collateral] for disposition”, and that PNC
was authorized to sell the collateral, in the event of default, with or without
possession of the collateral at the time or place of the sale. Id. at *12-13
(internal quotation marks omitted). Additionally, New York law permits
secured parties to dispose of collateral “in its present condition or following any
commercially reasonable preparation or processing”. Id. at *12 (citing N.Y.
U.C.C. § 9-610). The bankruptcy court also found that “[w]here a debtor denies
the secured party access to the collateral, it cannot complain about the
commercial reasonableness of not making the collateral available”. Id. at *13
(citing Cantrade Private Bank Lausanne Ltd. v. Torresy, 876 F. Supp. 564, 569
(S.D.N.Y. 1995)).
As to Appellants’ final claims regarding the commercial reasonableness
of the sale under the procedures test, the bankruptcy court determined PNC
was under no obligation to delay it, because the agreement tracked New York
law (permitting the sale of collateral at public or private sale, at any time or
place). Id. And, finally, the bankruptcy court determined: “The fact that a
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disposition of collateral draws only one or a small number of bids does not,
without more, render a sale unreasonable”. Id. (citing Bankers Trust Co. v.
J.V. Dowler & Co., Inc., 390 N.E.2d 766, 770 (N.Y. 1979)). Thus, the sale was
ruled commercially reasonable under the procedures test. Id. at *14.
Based on the foregoing rulings, the bankruptcy court concluded, “[f]or
similar reasons”, there was: no fraudulent transfer for less than reasonably
equivalent value; no damages for loss of any surplus; no fiduciary duty and,
therefore, no breach of fiduciary duty nor any misappropriation of fiduciary
property; no contract for, charge, or receipt of usurious interest; and, no fraud,
conversion, or theft. Id.
Appellants appealed to district court, making essentially the same
claims as are presented to this court. See Adobe Drilling Servs., Ltd. v. PNC
Bank, N.A., No. MO-12-CA-31, mem. op. (W.D. Tex. 11 Mar. 2013). Appellants
claimed the sale was not commercially reasonable under the proceeds test
because the collateral was worth approximately $81 million, rather than PNC’s
$41 million credit bid and ultimate sale price. Id. at *8.
The district court explained the $81 million valuation was based on an
appraisal from 2008 and so had to be discounted. Id. at *8-9. The district court
ruled that, even if the bankruptcy court had determined the collateral was
worth $81 million, the $41 million credit bid and sale price would still have
been reasonable because it exceeded 50% of the $81 million, an amount that
did not “shock the court’s conscience”. Id. at *9 (citing, inter alia, DeRosa v.
Chase Manhattan Mortg. Corp., 782 N.Y.S.2d 5, 9-10 (1st Dep’t 2009)
(upholding sale for 45% of market value)). Therefore, the district court ruled
the bankruptcy court did not err in finding the foreclosure sale was
commercially reasonable under the proceeds test. Id. at *9-10.
Next, the district court considered Appellants’ contention that the
bankruptcy court erred in holding the foreclosure sale was commercially
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reasonable under the procedures test. Id. at *10. The district court determined
the bankruptcy court, despite Appellants’ claims, concluded PNC’s alleged
failure to prepare the collateral for sale was excused by Appellants’ denying
PNC access to it. Id. at *10. Moreover, as the bankruptcy court had noted,
neither the agreement nor New York law required PNC to prepare the
collateral before foreclosure. Id. The district court explained that, under New
York law, the fact a greater selling price could have been obtained at a different
time or by using different methods was not dispositive on whether a sale was
commercially reasonable. Id. at *11.
According to the district court, the bankruptcy court found that: under
the agreement, the collateral could be sold at either a public or private sale and
at any time or place, and could be advertised in publications or media of
general circulation; and, New York law does not require a seller to advertise a
foreclosure sale in any specific type of media or for a specific amount of time.
Id. The district court ruled that, because the sale complied with the agreement
and New York law, the bankruptcy court did not err in holding the sale was
commercially reasonable under the procedures test. Id.
The district court also considered Appellants’ claim that the bankruptcy
court erred in finding the agreement was not manifestly unreasonable. Id. at
*12-13. Appellants took issue with two subsections: § 11.1(a), permitting PNC
to sell the collateral without its possession, at one or more private or public
sales, at any time or place, and at such price(s) and upon such terms for cash,
credit, or future delivery as PNC may elect; and § 11.1(b), allowing certain
actions in connection with the sale that would not be considered commercially
reasonable if the parties had not agreed otherwise. Id. at *12. Accordingly,
Appellants claimed they essentially waived their right to a commercially
reasonable sale through these two subsections. Id. The district court
concluded the bankruptcy court disagreed because “[i]t held that[,] to be
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‘manifestly unreasonable,’ a credit agreement must relieve creditors ‘from
virtually all responsibility with respect to the collateral’”. Id. at *12-13
(quoting East End Dev. Corp., 688 N.Y.S.2d at 192 (citation omitted)).
Furthermore, although the specified subsections gave PNC broad authority
and allowed certain actions regarding the sale that otherwise would have been
unreasonable, neither subsection waived the requirement of a commercially
reasonable disposition of the collateral entirely. Id. at *13. Thus, the district
court ruled the bankruptcy court did not err in holding the agreement was not
manifestly unreasonable. Id.
The final issues raised by Appellants and considered by the district court
were whether the bankruptcy court failed to make sufficient findings of fact
and conclusions of law to support ruling that there was no fraudulent transfer
for less than reasonably equivalent value and that PNC did not owe a fiduciary
duty to Appellants. Id. Noting the bankruptcy court issued a 24-page opinion
containing findings of facts and conclusions of law, id. at *14, the district court
ruled: the bankruptcy court’s holding that there was no fraudulent transfer
for less than reasonably equivalent value was supported by its determining the
sale was commercially reasonable, id.; and the rulings were sufficient as to
Appellants’ fiduciary claims because, under New York law, the relationship
between a debtor and creditor is not fiduciary in nature, id. at *14-15 (citing
Schroeder v. Capital One Fin. Corp., 665 F. Supp. 2d 219, 225 (E.D.N.Y. 2009));
and, therefore, the bankruptcy court’s findings of fact and conclusions of law
were sufficient for appellate review. Id. at *15.
II.
This court reviews “the decision of a district court, sitting as an appellate
court, by applying the same standards of review to the bankruptcy court’s
findings of fact and conclusions of law as applied by the district court”. In re
TransTexas Gas Corp., 597 F.3d 298, 304 (5th Cir. 2010) (citation and internal
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quotation marks omitted). The bankruptcy court’s findings of fact are reviewed
for clear error; its conclusions of law, de novo. In re Morrison, 555 F.3d 473,
480 (5th Cir. 2009) (citation omitted). “[S]trict application of the clearly-
erroneous rule is particularly important where, as here, the district court has
affirmed the bankruptcy judge’s findings”. Orix Credit Alliance, Inc. v. Harvey
(In re Lamar Haddox Contractor, Inc.), 40 F.3d 118, 120 (5th Cir. 1994)
(citation and internal quotation marks omitted). A factual finding is clearly
erroneous when, “although there is evidence to support it, the reviewing court
is left with the definite and firm conviction that a mistake has been
committed”. Id. (citation and internal quotation marks omitted). In addition,
“[t]he bankruptcy judge’s opportunity to make first-hand credibility
determinations entitles its assessment of the evidence to deference”. In re
Perry, 345 F.3d 303, 309 (5th Cir. 2003) (citation omitted).
A court acting as the trier of fact “must find the facts specially and state
its conclusions of law separately”. Fed. R. Civ. P. 52(a)(1). Nevertheless,
findings “are not a jurisdictional requirement of appeal. Furthermore, cursory
findings and conclusions or even the complete lack of findings and conclusions
does not necessarily require [reversal] if a full understanding of the issues on
appeal can nevertheless be determined by the appellate court”. In re Tex.
Extrusion Corp., 836 F.2d 217, 221 (5th Cir. 1988) (citations omitted).
III.
After reviewing the record and the briefs, and essentially for the reasons
stated by the bankruptcy and district courts in their well-reasoned opinions,
the judgment is AFFIRMED.
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