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In re Pursuit Capital Management, LLC

United States Court of Appeals, Third Circuit

October 24, 2017


          Argued June 12, 2017

         On Appeal from the United States District Court for the District of Delaware (D.C. No. 1-15-cv-00801) District Judge: Hon. Richard G. Andrews

          Daniel N. Brogan Stuart M. Brown R. Craig Martin [ARGUED] Counsel for Appellants

          Mark E. Felger Barry M. Klayman Cozen O'Connor Wendy B. Reilly [ARGUED] Counsel for Appellee

          Before: JORDAN, KRAUSE, Circuit Judges and STEARNS [*], District Judge.


          JORDAN, Circuit Judge.

         This case seems at first blush to be about the validity of the sale of legal claims listed as assets in a bankruptcy estate, but, at this point, it is really about whether such merits issues have been preserved for present review. The appointed Trustee reached an agreement to sell the claims to certain of the debtor's creditors (the "Creditor Group"[1]). After the Trustee sought court approval of the sale, the parties against whom the claims are now being asserted (the "Pursuit Parties"[2]) objected to the sale and sought to purchase the claims themselves. The various players engaged in negotiations and a bidding process, and the Trustee eventually decided to sell the claims to the Creditor Group for $180, 001. Over objections raised by the Pursuit Parties, the Bankruptcy Court approved the sale. The Pursuit Parties did not seek a stay, and the sale closed. The Creditor Group then immediately sued on the claims in the Bankruptcy Court.

         The Pursuit Parties appealed to the District Court, challenging, among other things, the Trustee's ability to sell the claims. The District Court dismissed the appeal as statutorily moot under 11 U.S.C. § 363(m), because the Pursuit Parties had not obtained a stay and their requested remedy, if entered, would affect the validity of the sale. The Pursuit Parties now appeal to us. Like the District Court, we conclude that the appeal is statutorily moot under 11 U.S.C. § 363(m) and must therefore be dismissed.

         I. Background[3]

         A. The Bankruptcy Filing and Initial Agreement

         Pursuit Capital Management, LLC ("Pursuit" or the "Debtor") is a Delaware limited liability company and former general partner in investment funds. Anthony Schepis and Frank Canelas founded Pursuit and acted as its managing members. Pursuit in turn formed Pursuit Capital Management Fund I, L.P. and, later, Pursuit Opportunity Fund I, L.P. Those two funds were created to "acquire securities for trading and investment appreciation." (Opening Br. in Support of Mot. to Dismiss, Docket No. 8 at 5, Claridge Assocs., LLC v. Schepis (In re Pursuit Capital Management, LLC), No. 16-50083 (Bankr. D. Del.) (hereinafter "In re Pursuit").) They "invest[ed] substantially all of their assets in offshore entities formed under the laws of the Cayman Islands." (Id.) Pursuit was the general partner of those entities and focused on their day-to-day management.

         Pursuit voluntarily petitioned for Chapter 7 bankruptcy on March 21, 2014, after it became liable on legal judgments for $5 million. Jeoffrey L. Burtch was appointed as the Trustee of the Pursuit estate. When Pursuit filed its schedules of assets and statements of financial affairs, it listed essentially no assets but indicated that it had a "[p]otential indemnification claim" against one of the funds it managed (JA at 84), as well as claims connected to two other cases. The financial statements revealed that Pursuit's gross income for 2011 was $645, 571.22 from Pursuit Capital Management Fund I, L.P., "which was subsequently transferred to [Pursuit's] members" in early 2013. (JA at 102.) According to the Creditor Group, Schepis and Canelas, as the sole owners and managers of the company, "enrich[ed] themselves at the expense of the Debtor's creditors, and engaged in corporate machinations to avoid paying money owed to the Debtor[.]" (Complaint, In re Pursuit, Docket Nos. 1 & 2.) More specifically, the Creditor Group said that Schepis and Canelas "secretly transferred to themselves ... $645, 571 in cash held in the Debtor's bank account, in exchange for no consideration." (Id.) That transfer may trigger an avoidance claim under the Bankruptcy Code, which allows a trustee to rescind certain transfers of property from a debtor's estate. See, e.g., 11 U.S.C. §§ 544, 547, and 548. According to the Trustee, selling the potential avoidance claim was advisable because the bankruptcy estate had no funds available to "administer the estate, let alone [to] pursue the claim[] and litigation[.]" (JA at 181.)

         The Trustee negotiated with the Creditor Group, and, on March 2, 2015, he filed a motion for a court order approving an agreement to "settle, transfer and assign" the avoidance claim and other potential claims to that group.[4](JA at 182.) The Creditor Group agreed to purchase the claims for $125, 000 in exchange for a concession that it "shall be permitted to bring the ... [c]laims in the Bankruptcy Court, and [is] deemed to have standing to bring such claims in the Bankruptcy Court." (Id.) The Trustee stated in his motion for approval of the sale that, "[i]n [his] business judgment, the [Creditor Group's offer] represent[ed] a fair and reasonable price for the claims[.]" (JA at 185.) The Trustee also stated that he was willing to entertain "additional proposals for the assets on similar terms" as an "additional test of ... fairness[.]" (JA at 188.)

         Ten days later, on March 12, 2015, the Pursuit Parties filed an objection to the Trustee's sale motion, arguing primarily that a lack of good faith undermined the fairness of the agreement, and that the deal did not maximize the value of the estate. In light of that objection, the Bankruptcy Court directed that the Trustee entertain purchase offers from the Pursuit Parties. After discussions between the Trustee and the Pursuit Parties, during which the Pursuit Parties offered $147, 500 for the claims, the Trustee decided that an auction was the best means to maximize value for the estate. He sought and received the Bankruptcy Court's permission to conduct one.

         B. The Auction

         To establish ground rules, the Trustee filed a motion for approval of proposed auction procedures, including a provision that the Trustee be allowed to modify the procedures "as he deem[ed] appropriate to comply with his fiduciary obligation[, ]"[5] to determine in his "sole discretion" the highest and best bid, to reject any bid that he deemed inadequate, [6] and to negotiate individually or openly with each bidder.[7] (JA at 241.) The Bankruptcy Court approved that motion "in [its] entirety." (JA at 254.)

         The auction took place by teleconference on July 7, 2015, with the Pursuit Parties and the Creditor Group as the only interested bidders. The Trustee initially stated that the Pursuit Parties' prior offer of $147, 500 was the highest and best, and the bidding proceeded from there in $10, 000 increments. Before it could be concluded, the auction abruptly adjourned because the lawyer for the Pursuit Parties asserted that he had a scheduling conflict.[8] But, the Trustee stated before adjourning that the Pursuit Parties' last bid of $170, 000 was preferred to any others that had been made to that point.

         The Trustee subsequently proposed eight alternative dates as options to reconvene the auction, though none was acceptable to all of the parties. Instead of postponing the process further, on July 24, 2015, the Trustee requested final sealed bids from the parties, to be delivered no later than July 30, 2015. On that date, the Trustee received one sealed bid from the Creditor Group for $180, 001 and he received nothing from the Pursuit Parties. In fact, not only did the Pursuit Parties fail to submit a bid, they also informed the Trustee that they were withdrawing their prior bids from consideration. Not surprisingly, then, the Trustee agreed to sell the claims to the Creditor Group, after some additional negotiations and modifications to the bid. A day later, the Trustee announced that he would seek approval of the sale agreement at a hearing on August 10, 2015.

         The sale agreement between the Trustee and the Creditor Group specified that the Creditor Group would acquire a set of claims, including the avoidance claim that is the primary focus of the merits arguments in this case. The agreement also stated that the Creditor Group would pursue the claims "at their cost and expense [and] ... [a]ny net recovery will be paid into the estate for distribution to all creditors[.]" (JA at 423-24.) Additionally, the agreement contained no representations or warranties regarding the claims, and they were to be sold on an "as is[, ] where is" basis. (JA at 501.)

         Before the date of the sale approval hearing, the Pursuit Parties filed a motion to adjourn it, which prompted a hearing to address that request. The Trustee stated at that time that he had been prepared to move forward with the Creditor Group's sealed bid, but he was wavering because the Pursuit Parties had just "made a new offer" by email that had different terms from their previous offer and was for "a higher dollar amount than the proposal by the [C]reditor [G]roup."[9] (JA at 492, 514.) Citing the "difficult spot" that he was in because "[his] job ... is to maximize value[, ]" the Trustee deferred to the Bankruptcy Court's judgment, stating that he was not opposed to a temporary adjournment so long as a definitive date was set to resolve the matter. (JA at 514-16.) The Creditor Group strongly opposed the Pursuit Parties' motion for an adjournment, arguing that there had been delay enough, that each delay harmed the value of the claims they sought to purchase, and that they should prevail in the auction because they had abided by the rules during the final sealed bidding process.

         The Bankruptcy Court rejected the Pursuit Parties' request to adjourn the sale hearing. The Court stressed that the Pursuit Parties did not submit a final bid when requested and that there was concern with "the way th[e] Court and other parties' schedules and th[e] Court's orders [were] being ignored, to some extent, by the Pursuit Parties." (JA at 521.) The Bankruptcy Court thus ruled that the sale hearing would go forward and, if the Trustee wanted to change his mind about selling to the Creditor Group, he could do so. After that hearing, the Pursuit Parties made a new offer of $220, 000 to the Trustee, again via email, conditioned on the Trustee declaring the Pursuit Parties to be the prevailing bidder. The Trustee ultimately rejected that offer.

         C. The Sale Approval Hearing

         The hearing to approve the sale took place on August 10, 2015. At the outset, the Pursuit Parties asked the Court to reopen the auction rather than proceed with the hearing. They then and there presented the Trustee with yet another offer - apparently one that had not been discussed previously - in the amount of $205, 750 and with modified terms that would "settle[] ... [the] avoidance claim[.]"[10] (JA at 441-43.) After reviewing the new offer, the Trustee again acknowledged that he was in a difficult situation, but then stated that he was "prepared to move forward on the motion [to approve the sale agreement, ]" if the Court agreed, because, "in the end ... the few dollars won't make a bit of difference to the creditors of th[e] estate, and the creditors of th[e] estate are in the [C]reditor [G]roup[.]"[11] (JA at 449.)

          The Bankruptcy Court, after reviewing the history of the case, including the Pursuit Parties' litigating and bidding behavior, rejected their request to reopen the auction. The sale approval hearing continued with the Court allowing the Trustee to testify and be subject to cross-examination. While cross-examining the Trustee, counsel for the Pursuit Parties attempted to present yet another offer, this time for $250, 000, but the Court did not permit counsel to bid "from the podium." (JA at 471.) After the Trustee's testimony, the Pursuit Parties laid out, among other arguments, three objections to approval of the sale motion: 1) the bid accepted by the Trustee was not the highest bid; 2) the auction procedures had not been complied with; and 3) an avoidance claim cannot be prosecuted by parties other than the trustee, in a Chapter 7 context.

         The Trustee countered by stating that the Creditor Group's bid was the best and highest that was offered "in accordance with the rules."[12] (JA at 484.) He agreed that the claim was sold on an "as-is, where-is" basis (JA at 485), but, at least under the Creditor Group's bid, there was a possibility for recoveries from the claims that would be advanced against the Pursuit Parties and would "flow into the estate and be shared by creditors[.] Under [the Pursuit Parties'] revised proposal ... there would be no opportunity for additional monies flowing into the estate." (JA at 484-85.) The Trustee also argued that, when changes to the procedures were made, they were in accordance with the modification provision in those court-approved rules. (JA at 484-86.)

         When the arguments concluded, the Bankruptcy Court granted the Trustee's motion to approve the sale agreement. The Court applied the "sound business purpose test[, ]" In re ICL Holding Co., 802 F.3d 547, 551 (3d Cir. 2015) (citing In re Montgomery Ward Holding Corp., 242 B.R. 147, 153-54 (Bankr. D. Del. 1999)), and, in relevant part, found that the Trustee had exercised sound business judgment and that the sale price was fair because $180, 001 - with a potential additional recovery - was substantially higher than the original $125, 000 offer. The Court also found that, because there was no evidence of collusion, the Trustee and the Creditor Group had acted in good faith.

         After reviewing those factors, the Bankruptcy Court responded to the Pursuit Parties' arguments and objections. It reiterated its denial of the request to reopen the auction, reasoning that the need to uphold the integrity of the auction process outweighed the potential of a higher bid under the circumstances. In the same vein, the Court stated that it had "no reason to quarrel with the trustee's decision that the offers made by the Pursuit Parties subsequent to the closing of the auction are not highest and better[, ]" taking into account the potential additional recovery to the estate from a successful suit on the claims. (JA at 428.) The Court also rejected the Pursuit Parties' complaint about the modification of the auction procedures because the Trustee had been empowered to make such a change when the auction procedures were first presented for approval. While it agreed that the Pursuit Parties should be able to raise "any and all defenses they have to whatever litigation is brought, " the Bankruptcy Court did not take a position on whether an avoidance claim could be prosecuted by parties other than the Trustee. (JA at 429.) With that, the Court approved the sale and entered an order (the "Sale Order") to that effect on August 27, 2015.

         D. The Appeals and the Creditor Group's Assertion of the Purchased Claims

         The Pursuit Parties promptly appealed the Sale Order to the District Court. Of utmost importance, however, they did so without first seeking a stay of the order. In their appeal, the Pursuit Parties argue "that the Bankruptcy Court erred in entering the Sale Order because the Trustee alone is authorized to prosecute the causes of action arising under the Bankruptcy Code, and the Trustee lacked authority to assign the causes of action to a non-fiduciary third party." (JA at 52.) They also argue that the Bankruptcy Court's findings of good faith are erroneous. Within those arguments are challenges to the integrity of the auction process as well as an allegation that the auction procedures were applied to them prejudicially.

         Meanwhile, the Creditor Group has promptly pursued the claims it purchased. They filed an adversary proceeding against the Pursuit Parties in the Bankruptcy Court, [13] and that case has progressed concurrently with the appeal of the Sale Order to the District Court and then the appeal to us. In the adversary proceeding, the Pursuit Parties moved to dismiss, arguing that the Creditor Group "do[es] not own the causes of action asserted in the complaint and [is] not entitled to prosecute [it, ]" (JA at 53), because avoidance powers are reserved "solely and exclusively" for a bankruptcy trustee. (JA at 52.) In the alternative, they moved to stay the adversary proceedings pending their appeals.

         The District Court ruled that the appeal of the Sale Order is statutorily moot under 11 U.S.C. § 363(m) because no stay had been obtained and any reversal or modification of the sale would naturally affect the validity of the sale. The District Court also rejected the Pursuit Parties' arguments attacking the good faith and the integrity of the auction process and its procedures. The Court specifically declined to rule on whether a trustee can properly transfer avoidance claims and whether non-trustee parties can prosecute such claims. It recognized that the Pursuit Parties were attempting to get a merits ruling:

[I]t would seem that [a request by the Pursuit Parties that the Court decide the Creditor Group has no power to prosecute the claims even though they may own them] is essentially that [it] decide the motion to dismiss that is currently pending in [the] separate case before the Bankruptcy Court. I do not think that this is procedurally appropriate relief.

(JA at 55.) Instead, the District Court determined that:

finding that the Trustee lacked authority to transfer the causes of action though not nullifying the sale would affect its validity and demonstrate that the sale was flawed. Such a finding would impact the terms of the bargain struck by the buyer and seller. If the Bankruptcy Court had declined to approve the sale of the causes of action, [the ...

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