WILLIAM T. THURMAN, U.S. Bankruptcy Judge.
The matter before the Court is the Motion Pursuant to Federal Rule Of Bankruptcy Procedure 9019 to Approve Settlement Agreement By and Between CS Mining, LLC and David J. Richards, LLC d/b/a Western US Mineral Investors, LLC (the "WUMI Motion") filed by the Debtor and debtor-in-possession, CS Mining, LLC (the "Debtor" or "CSM").
Through the WUMI Motion, the Debtor seeks approval of a settlement proposal
The Court received and thoroughly reviewed the responses to the WUMI Motion filed by the Official Committee of Creditors Holding Unsecured Claims (the "UCC");
On July 21, 2017, the Court conducted an evidentiary hearing on the WUMI Motion (the "Hearing"). At the Hearing, Donald J. Detweiler, Francis J. Lawall, Joanna J. Cline, Jeff Tuttle, and Troy Aramburu appeared on behalf of the Debtor; Ralph R. Mabey, Adelaide Maudsley, Pedro
At the Hearing, the Debtor orally withdrew its Motion Pursuant to Federal Rule Of Bankruptcy Procedure 9019 to Approve Settlement Agreement By and Between CS Mining, LLC and Waterloo Street Limited,
The Court has considered the relevant pleadings filed in connection with the WUMI Motion, the arguments of the parties, testimony of witnesses, evidence presented at the Hearing, and the Court has conducted an independent review of the applicable law. In addition, the Court takes notice of the docket in this case, as of the date of the Hearing. After the Hearing, the Court took the matter under advisement. The Court issues this Memorandum Decision, making its findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure ("FRCP") 52(a) and Federal Rule of Bankruptcy Procedure ("FRBP" or "Rule") 7052.
The Waterloo Parties argue that the WUMI Motion should be denied because the WUMI Settlement Agreement lacks good faith, benefits insiders, abridges Waterloo's rights to be heard on its claims against WUMI, and was not properly approved by the Debtor's board of managers. The Debtor and WUMI assert that the WUMI Settlement Agreement meets the Kopexa standards, is a result of good faith and fair dealings, and will facilitate any
This Court has jurisdiction over the WUMI Motion pursuant to 28 U.S.C. §§ 157(b)(2) and 1334. Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. This matter is core pursuant to 28 U.S.C. § 157(b)(2)(O). The statutory bases for the relief requested by the WUMI Motion are 11 U.S.C. § 105, Federal Rule of Bankruptcy Procedure 9019 and Local Rule 9019-1.
This Memorandum Decision is detailed, but necessarily so, in the Court's opinion. The WUMI Motion brings to the forefront the dynamics of corporate authority, alleged insider dealings, the competing interests of various secured creditors vying for limited resources, claims amongst the secured creditors as to priority, recharacterization, equitable subordination, and the interpretation of the law of the case. A review the history of the case from the outset and how the Debtor got here is necessary to give the ruling the proper context.
A brief overview of the Debtor's corporate structure and relevant parties thereto is important as it relates to the WUMI Motion.
The Debtor is a limited liability company organized on June 20, 2011, and existing under the laws of the State of Delaware. Three members, all of whom are parties to a limited liability company agreement (the "CSM Operating Agreement") own the Debtor.
SMP is owned by DXS; PacNet; Skye Mineral Investors, LLC ("SMI"); and Clarity Copper, LLC ("Clarity Copper").
Prior to June 1, 2017, the Debtor's board of managers (the "Board") consisted of three people: (1) Marshall Cooper ("Cooper"), the DXS and PacNet designee; (2) Clinton Walker ("Walker"), the designee of Clarity Copper; and (3) David J. Richards ("Richards"), the designee of SMI. Additional members on the Board were appointed after June 1, 2017. Clarity Copper appointed John Bryan, SMI appointed Sturges Karban, and DXS and PacNet appointed Thomas K. Reilly.
The Court will briefly discuss the Debtor's lending structure, as it is relevant to the WUMI Settlement Agreement and disputes amongst the Board managers. The Debtor has three primary pre-petition secured lenders: SMP, WUMI and Noble/Waterloo.
On November 10, 2011, CSM, as borrower, and SMP, as lender, entered into a loan modification agreement (the "SMP Loan"). In connection with the SMP Loan, SMP was granted a security interest in all of the Debtor's assets. In its schedules, the Debtor lists an obligation to SMP in a disputed amount of $27,309,249.78 and an undetermined collateral value.
On August 10, 2012, CSM, as borrower, and WUMI, as lender, entered into a loan and security agreement (the "WUMI Loan"). The WUMI Loan gave WUMI a senior-lien on substantially all of the Debtor's assets. On August 10, 2012, CSM and SMP entered into a debt subordination agreement in favor of WUMI (the "SMP Subordination Agreement"). Per the SMP Subordination Agreement, SMP agreed to subordinate its debt and lien to WUMI's debt and lien under the WUMI Loan.
In its schedules, the Debtor lists an obligation to WUMI in a disputed amount of $24,407,274.00 and an undetermined collateral value.
Richards is the founder of WUMI. WUMI was previously managed by three individuals: Robert Lautz ("Lautz"), controlling three manager positions; and Richards and Walker, each controlling one manager position. Lautz represents WUMI majority member St. Cloud and Walker represents WUMI minority member Clarity Copper. Richards represented WUMI minority member David Richards, LLC ("Richards, LLC"),
Richards and Walker are both on the boards of the Debtor and SMP (Debtor's holding company). Richards and Walker control SMP members SMI and Clarity Copper, respectively. Finally, Richards and Walker previously controlled WUMI, Richards had an interest in WUMI, and Walker currently has an ownership interest and economic stake in WUMI, through Clarity Copper.
On August 12, 2014, CSM, as borrower, and Noble, as lender, entered into a loan and security agreement, later purchased by Waterloo on December 31, 2015 (the "Noble/Waterloo Loan"). In its schedules, the Debtor lists an obligation to Waterloo in a disputed amount of $34,755,133.23 and an undetermined collateral value.
On August 12, 2014, CSM, WUMI and Noble entered into an agreement (the "Intercreditor
On March 10, 2015, CSM and WUMI entered into an agreement whereby, inter alia, CSM was allegedly required to notify WUMI to gain its consent before drawing down more than $29,750,000.00 of the Noble/Waterloo Loan (the "10th Amendment").
Waterloo alleges that Richards and Walker entered into the 10
The following organizational chart is helpful in understanding the Debtor's corporate structure, board members, secured lenders and their relations to each other, the WUMI Settlement Agreement, and any upcoming sale of all or substantially all of the Debtor's assets. The chart, prepared by the Court, is included for illustrative purposes only.
During the pendency of this case, several adversary proceedings have been filed that relate to the WUMI Claim and the pre-petition lending arrangements of the Debtor, WUMI and Waterloo. The adversary proceedings and claims alleged thereunder are relevant herein because through the WUMI Settlement Agreement, the Debtor seeks to settle the disputed WUMI Claim.
On July 1, 2016, the complaint filed by plaintiffs Clarity Copper and SMI against defendants PacNet, DXS, Sanjiv Noronha, Copper, Waterloo and Noble was removed to this Court (Clarity Copper v. Waterloo).
On July 21, 2016, Waterloo and PacNet filed a complaint against WUMI ("Waterloo v. WUMI Adversary").
On February 17, 2017, the Debtor filed a complaint against WUMI (the "WUMI Adversary").
On February 17, 2017, the Debtor filed a complaint against Noble and Waterloo (the "Waterloo Adversary Proceeding").
On May 22, 2017, Waterloo and PacNet filed an objection to the WUMI Claim pursuant to § 502(a) and Rule 3007 (the "Waterloo Claim Objection").
Headquartered in Milford, Beaver County, Utah, the Debtor is in the business of mining and processing copper and other metals and materials. An involuntary petition was filed against the Debtor on June 2, 2016.
On May 15, 2017, the Debtor filed its first motion to approve a settlement agreement with WUMI (the "First WUMI Motion").
On July 5, 2017, the Court conducted a hearing on the WUMI Motion. At that hearing, the Debtor notified the Court that it had recently received a cash bid for the purchase of substantially all of the Debtor's assets from Tamra and, as a result, the Debtor requested to continue the hearing so the Board and the Debtor's Chief Restructuring Officer, FTI Consulting (the "CROs"), could evaluate the bid. The Debtor also notified the Court that it intended to file the Waterloo Motion and Waterloo Settlement Agreement, in connection with the bid from Tamra. The Court granted Debtor's request to continue the hearing and set both the WUMI Motion and Waterloo Motion for hearing on July 17, 2017 and July 18, 2017 (the "Continued Hearings").
At the Continued Hearing, the Court found that notice of the Waterloo Motion was insufficient and thus further continued the Continued Hearings to July 21, 2017.
At the Hearing, held July 21, 2017, the Debtor notified the Court it wished to seek approval of the WUMI Motion and withdrew the Waterloo Motion.
The WUMI Settlement Agreement is made in connection with the WUMI Adversary and the WUMI Claim. In summary, the Settlement Agreement requests the following:
2) resolution of the WUMI Claim by allowing WUMI a secured claim and validly perfected lien in the amount of $23,000,000.00 (the "WUMI Secured Allowed Claim"), which WUMI Allowed Secured Claim shall not be subject to challenge by any party on any grounds, including challenges related to the nature, extent, validity and priority of the WUMI Allowed Secured Claim and WUMI shall not be obligated to convert any portion of the WUMI Allowed Secured Claim to equity in SMP or the Debtor, nor shall the WUMI Allowed Secured Claim be subject to subordination or recharacterization;
3) payment of $1,000,000.00 to the Debtor's estate exclusively from any consideration paid or payable to WUMI in whole or partial satisfaction of the WUMI Allowed Secured Claim (the "Cash Consideration");
4) subordination of the assets securing the WUMI Allowed Secured Claim (the "WUMI Collateral"), as set forth in the WUMI Loan, SMP Subordination Agreement and the Intercreditor Agreement, to certain other claims in this case (the "Priority Obligations"), which include the first priority liens and claims granted to the DIP Lenders, other pre-petition liens as defined in the Final DIP Financing Order,
5) opportunity for WUMI, or any successor-in-interest or purchaser of the WUMI Allowed Secured Claim, to credit bid, up to the value of the WUMI Collateral, at any auction or sale of Debtor's assets, provided, such bid is deemed a qualified bid and the bidder provides sufficient cash to Debtor's estate to pay all of the Priority Obligations;
6) resolution of all claims by and between the Debtor and WUMI without releasing or resolving any direct or individual claims the Debtor may hold against any individual participants, directors or officers of WUMI, nor releasing or resolving any derivative claims the Debtor may hold against its own directors or officers; and
7) mutual releases as it relates to the WUMI Adversary and WUMI Claim.
On August 5, 2016, the Debtor filed an application to employ its CROs.
The CROs were retained to substantially enhance the Debtor's ability to successfully reorganize for the benefit of all parties in interest. With that, the CROs engaged in a marketing process designed to sell all or substantially all of the Debtor's assets pursuant to a § 363 sale (the "Sale Process"). To facilitate the Sale Process, the Board executed consents ceding authority and power to the CROs to run and complete the Sale Process, including negotiating and executing any documents and filing any motions that the CROs deemed necessary, appropriate, or desirable in connection with the Sale Process.
The Sale Process is governed by certain orders of this Court,
At the Telephonic Board Meeting, the Board voted to quash the CROs' authority with respect to any agreements that granted releases on behalf of the Debtor.
The Court received several responses to the WUMI Motion from interested parties. The primary objection came from the Waterloo Parties. The Waterloo Objection asserts that the WUMI Motion fails the Kopexa analysis because, as they argue:
1) Waterloo could continue its adversary against WUMI at no cost to the estate; 2) the Debtor has a substantial probability of success on the merits of the WUMI Adversary Proceeding due to an alleged admission by Walker under the equitable subordination claim; 3) the WUMI Motion was not entered into in good faith and lacks the necessary fairness because the WUMI Settlement is an insider transaction by Richards and Walker, which requires a higher
In response to the Waterloo Parties, the Debtor argues that the WUMI Settlement satisfies the applicable standard of review under Kopexa and should be approved because 1) the Debtor has met its burden in showing that the WUMI Settlement is in the best interest of the estate as it would resolve the WUMI Claim and WUMI Adversary and save the estate time and resources; 2) the WUMI Settlement provides for subordination of the WUMI Collateral to the Priority Obligations; 3) WUMI's right to credit bid enhances the Sale Process and thus benefits the estate; and 4) the $1,000,000.00 Cash Consideration to be paid by WUMI benefits the estate because it is completely unencumbered.
The Debtor also argues that the WUMI Motion should be granted because 1) any statements or wrongful acts by Walker are not the acts of WUMI and would not necessarily equate to an automatic right of equitable subordination of the WUMI Claim; 2) the CSM Operating Agreement governs the company and the Board was not required to obtain the prior written consent of DXS, but rather only needed approval of the majority of the Board for the WUMI Settlement to be approved; 3) the WUMI Settlement contains proper board approval per the CSM Operating Agreement because the Board made informed decisions when voting in favor of the WUMI Settlement Agreement; and 4) the Board was not required to review the standards as set forth in Kopexa when voting to approve a settlement, rather, the court is obligated to consider the Kopexa standards, and the standard applicable to the Board is the business judgment standard.
WUMI primarily asserts that Walker and Richards are not insiders, the WUMI Motion was negotiated in good faith and the contents and results of the WUMI Settlement Agreement are fair and reasonable. Noble argues that the WUMI Motion should be denied to the extent it establishes the WUMI Claim as allowed due to the pending disputes surrounding the parties pre-petition lending arrangements. The UCC supports the WUMI Motion. The Debtor resolved any objections by Caterpillar, Komatsu and Brahma and these parties supported the WUMI Motion at the Hearing.
The Waterloo Parties objected to the notice of the WUMI Motion because it is related to a potential asset purchase agreement ("APA") for the sale of Debtor's assets, between the Debtor and WUMI related parties ("Utah Copper"). This potential APA between the Debtor and Utah Copper was referred to by several parties at the Hearing and is apparently in the works. The final version has not been shared with Waterloo or filed with the Court. The Debtor stated that it only sought approval of the WUMI Motion as filed with the Court on June 19, 2017 —
The procedures for approving a settlement, and the entities to whom notice is given, are governed by Rules 9019(a), 2002(a)(3) and 2002(i). See Collier on Bankruptcy ¶ 9019.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). Rule 9019(a) requires notice "to creditors, the United States trustee, the debtor [...] and to any other entity as the court may direct." Rule 2002(a)(3) requires that parties in interest receive twenty-one days' notice of the hearing by mail "unless the court for cause shown directs that notice not be sent[.]" Fed.R.Bankr.P. 2002(a). Notice may also be limited by court order. Fed. R.Bankr.P. 2002(i), (m); In re Southern Medical Arts Co., Inc., 343 B.R. 250, 255 (10th Cir. BAP 2006). "The nature of the compromise or settlement being presented and its importance to the estate, along with the need for expedition, will determine the notice that will have to be given in any particular case. In any event, the notice need only be the best notice practical under the circumstances." Collier, supra, ¶ 9019.01 (quotations omitted).
Parties in interest received about thirty-two days' notice before the Hearing to conduct a thorough review and conduct any discovery regarding the WUMI Motion. Accordingly, as a preliminary matter, the Court finds that notice of the WUMI Motion is appropriate under the circumstances. The objection to notice by the Waterloo Parties is overruled.
There are several basis for the Court's decision to deny the WUMI Motion.
For the most part, the standard of review for the WUMI Motion is not in dispute. The Debtor has properly briefed the standard of review in which this Court must consider a settlement motion under Rule 9019, citing to applicable case law and in particular In re Dennett, which states:
The Court adopts the Kopexa standard as set forth and reiterated in In re Dennett. See In re Kopexa Realty Venture Co., 213 B.R. 1020 (10th Cir. BAP 1997). In addition, when determining the reasonableness of a settlement, the Court may consider whether the settlement is the product of good faith, arm's-length negotiations between the parties. See In re Kaiser Steel Corp., 105 B.R. at 977 ("[F]indings as to good faith ... are simply part and parcel of the court's consideration of whether the settlements were fair and equitable to the estate"); In re The Heritage Org., L.L.C., 375 B.R. 230, 260 (Bankr. N.D. Tex. 2007) ("the court should consider' the extent to which the settlement is truly the product of arms-length bargaining, and not of fraud or collusion") (quoting Matter of Cajun Elec. Power Co op., Inc., 119 F.3d 349, 356 (5th Cir. 1997)).
Turning to the WUMI Motion, the Court will now analyze each of the four prongs as outlined in Kopexa and other considerations to determine if the WUMI Settlement Agreement is in the best interest of the estate.
With respect to the first factor, the Debtor believes its probability of success in the WUMI Adversary is less than certain. The primary dispute in the WUMI Adversary is whether WUMI was obligated, under the WUMI Loan, Intercreditor Agreement and other agreements, to convert its interest in the WUMI Loan into equity in SMP pursuant to the Mandatory Conversion Clause. The WUMI Adversary is very fact intensive and involves several parties but the Debtor (and Waterloo) seem to have the better arguments. The Court is not saying that WUMI would not prevail if the case was tried on the merits.
The Court finds that Debtor's probabilities of success in the WUMI Adversary are less than certain. Accordingly, the uncertainty of Debtor's success in the WUMI Adversary weighs in favor of approving the WUMI Settlement Agreement.
The second factor weighs in favor of approving the WUMI Settlement Agreement due to the difficulty associated in collecting funds for the benefit of the estate. The Debtor may have some difficulty seeking to disallow or reduce the WUMI Claim. After an expensive and protracted litigation process it is very unlikely there will be any funds for payment to unsecured creditors of Debtor's estate. However, the WUMI Settlement Agreement provides for the benefit of the Cash Consideration, free and clear of any liens or claims of the DIP Lenders, Waterloo, SMP or any other creditor alleging or asserting a secured claim or lien against the Debtor or the Debtor's bankruptcy estate. Additionally, through the settlement, the WUMI Claim will be subordinated and reduced by approximately $1,926,036.00. Accordingly, the Court finds there would be some difficulty associated with collection in the WUMI Adversary and attempting to do so may be more detrimental than beneficial to the estate. Alternatively, this factor is neutral, as the Debtor is not attempting to collect a judgment.
The Court finds this factor in neutral. The WUMI Adversary raises issues both with respect to the extent, validity, and priority of the WUMI Claim and with respect to possible breaches of fiduciary duties. The issues in the WUMI Adversary are fact intensive and extremely complex. Additionally, litigating the underlying matter would be time consuming and very costly for the Debtor. However, the Waterloo Parties also assert similar claims against WUMI. The expense to the estate would be drastically reduced if Waterloo pursued and finalized its claims against WUMI in the Waterloo v. WUMI Adversary. Accordingly, the Court finds that this factor is neutral.
This factor is neutral. The majority of creditors have indicated their support for the WUMI Settlement Agreement. The Court understands that the paramount interest of the creditors, in particular the UCC, favors a settlement which will facilitate the Debtor's reorganization and Sale Process. Also, the Cash Consideration and subordination of the WUMI Claim may be beneficial to creditors. However, as discussed further herein, and as the Waterloo Parties argue, a settlement that primarily benefits parties closely related to the Debtor may not be in the best interest of creditors and the estate.
Accordingly, on its face, it might appear that the WUMI Motion meets the Kopexa standard. However, there are other considerations which the Court must analyze. See Reiss v. Hagmann, 881 F.2d 890, 892 (10th Cir. 1989) (the decision of a bankruptcy court "to approve the settlement [...] must be an informed one based upon an objective evaluation of developed facts.").
On June 16, 2017, the Board held a special meeting, which counsel for the Waterloo Parties objected to for various reasons.
The Waterloo Parties argue that the Board should have allowed a vote by the "4 disinterested members" — meaning a vote by the three new members and Cooper. However, Cooper is not a disinterested member for the same reasons Richards and Walker are not disinterested. Cooper has a strong interest opposing the WUMI Settlement and for similar reasons Richards and Walker support the WUMI Settlement. Accordingly, the Court finds that the WUMI Settlement Agreement was approved by a majority of the newly appointed members of the board (2 to 1), as well as by a majority of the full board (4 to 2) and thus contains the requisite board approval.
The Court also finds that the Board members are required to make informed decisions based on their business judgment. The Board members were not required to analyze the settlement proposal presented to them using the Kopexa factors, or any other case law, when making their business decisions.
The Board's approval of the WUMI Settlement Agreement is a questionable use of the business judgment afforded to the Debtor. However, for the limited purpose of ruling on the WUMI Motion, the Court finds that the Board authorized the Debtor to enter into and seek approval of the WUMI Settlement Agreement.
The Tenth Circuit has made clear that an insider may be defined by their close relationship to the debtor. See In re U.S. Med., Inc., 531 F.3d 1272, 1276 (10th Cir. 2008) ([T]here are two distinct types of insiders, first those entities specifically mentioned in the statute [...] i.e. per se insiders, or second those not listed in the statutory definition, but who have a sufficiently close relationship with the debtor that ... conduct is made subject to closer scrutiny than those dealing at arm's length with the debtor.") (first brackets added) (internal brackets and quotation marks omitted); In re Kunz, 489 F.3d 1072, 1079
As members of the Board, Richards, Walker, Cooper, Karban, Bryan, and Reilly are statutory per se insiders as the term is defined by § 101(31)(B). Walker recently resigned as a WUMI manager but still holds an economic interest in WUMI though Clarity Copper.
Walker maintains his ownership in WUMI, through Clarity Copper, and will benefit economically if WUMI benefits. Richards may no longer have an ownership interest in WUMI but it appears that he stands to gain from any transaction that benefits WUMI due to his relationship with the DIP Lenders.
The WUMI Motion is not an arms-length transaction and must be examined with closer scrutiny. See In re Drexel Burnham Lambert Grp., Inc., 134 B.R. 493, 498 (Bankr. S.D.N.Y. 1991) (holding "closer scrutiny of insider agreements should be added to the cook book list of factors that Courts use to determine whether a settlement is fair and reasonable."); In re HyLoft, Inc., 451 B.R. 104, 113 (Bankr. D. Nev. 2011) ("While insider status alone is not fatal to dealings between a debtor and an insider, the court must scrutinize these dealings more carefully."); In re Med. Software Sol., 286 B.R. 431, 445 (Bankr. D. Utah 2002) (requiring
Karban, Bryan and Reilly are new members of the Board and have voted in favor of their respective member designees. Thus, as of now, the decisions of Richards and Walker will hold the majority (and if a unanimous consent of the Board is required, there will be grave difficulty in coming to the same). Accordingly, the relationship between WUMI, Richards and Walker compels the Court to conclude that WUMI has gained an advantage and is an insider in this transaction.
At the Hearing, CRO Beckman, on behalf of the Debtor and its Board, in exercise of their business judgments, stated that the WUMI Settlement is in the best interest of the creditors and the estate. The Waterloo Parties disagree and argue that the business judgments of the CROs are dubious, at best, as discussed below.
In multiple cases, this Court has stated that it will not second-guess the Debtor's business judgment when reasonable, exercised in good faith, and within the scope of the Code. See In re Curlew Valley Assocs., 14 B.R. 506, 513-14 (Bankr. D. Utah 1981); In re Eurogas, Inc., 560 B.R. 574, 585-86 (Bankr. D. Utah 2016).
Here, the CROs' business judgment is not reasonable and was not exercised in good faith. The contents of the Telephonic Board Meeting held the day before the Hearing bear heavily on the CROs' business judgment. In pertinent part, the meeting minutes provide:
The CROs were retained to, inter alia, facilitate the Debtor's reorganizational process by resolving the impasse amongst
The CROs' business decision lacks good faith due to the Board's restrictions on the CROs' authority and recommendation to act in the best interest of the estate. Moreover, with limited authority to act in the best interest of the estate, the CROs could not exercise sound business judgment regarding the WUMI Settlement Agreement.
In support of the CROs' decision to support the WUMI Motion, David John Beckman, representing the CROs, gave several reasons at the Hearing: 1) the WUMI Settlement would settle the WUMI Claim and benefit the estate; 2) the $1,000,000.00 Cash Consideration would provide an immediate benefit to the estate; 3) litigation costs would be decreased if WUMI and the Debtor settled; 4) the WUMI Claim would be subordinated to Priority Obligations; 5) the UCC supports the WUMI Motion and does not support the Waterloo Motion; 6) the credit bid by WUMI would enhance the Sale Process; 7) the Board voted for the WUMI Motion at the Telephonic Board Meeting; and 8) the WUMI Motion will keep a bidder in hand for the Debtor's upcoming sale.
Beckman's strongest factor was the last factor — keeping a bidder at the table. Approval of the WUMI Motion would eliminate the Tamra bid that was properly vetted by the CROs.
All of the other reasons mentioned by Beckman were present when both the WUMI Motion and Waterloo Motion were open for consideration and Beckman made clear that the Waterloo Motion was in the best interest of the estate. Beckman also said that the offer from the WUMI parties had not been fully reviewed by the CROs and Beckman was unsure if the WUMI parties provided sufficient proof of funds to close the proposed transaction.
The majority of the Board, in particular Richards and Walker, significantly undermined the CROs' authority to ensure the Sale Process was favorable to Richards and Walker. The Court finds that the CROs' business judgment is very questionable because it was not exercised in good faith. The Debtor zealously sought to employ the CROs to bring in stability for the
There is another basis for denying the WUMI Motion.
At the heart of this case are the disputes under the Intercreditor Agreement. Waterloo argues that its only source of recovery is from the resolution of the Waterloo Adversary and Waterloo Claim objection. The WUMI Settlement does not release or resolve any direct claims Waterloo may have, or hold, against WUMI. However, if approved, the WUMI Settlement would dissolve the Waterloo Claim Objection by deeming the WUMI Claim an allowed claim and resolve any equitable subordination and recharacterization claims alleged in the Waterloo Adversary and Waterloo Claim Objection.
Waterloo argues that pursuant to § 502 the Waterloo Claim Objection cannot be settled by the Debtor and WUMI in the WUMI Settlement Agreement without the Court's consideration of its claim objection at a noticed hearing under § 502(b). Relying primarily on In re The C.P. Hall Co., 513 B.R. 540 (Bankr. N.D. Ill. 2014) and Overton's, Inc. v. Interstate Fire & Cas. Ins. Co. (In re SportStuff, Inc.), 430 B.R. 170 (8th Cir. BAP 2010), Waterloo argues that a directly injured creditor who has objected to a claim under § 502 has a right for that objection to be heard and fully adjudicated on the merits without those rights being abridged or modified in a settlement motion under Rule 9019.
The Waterloo Claim Objection is pending before the Court and has not been resolved. Section 502(b) provides: "[I]f such objection to a claim is made,
In C.P. Hall, the court applied the clear language of the Code and held that it could not consider or approve a 9019 settlement motion because the non-settling creditor was entitled to receive a ruling on his claim objection prior to approval of the settlement agreement. That case states, "[t]he court's obligation to rule on a claim objection is mandatory, and the creditor's right to a ruling is also unqualified. Nothing in the Code subordinates that right to the trustee's duty to administer the estate, let alone his agreement with a creditor that the creditor's claim will be allowed." In re The C.P. Hall Co., 513 B.R. at 544. See also In re SportStuff, Inc., 430 B.R. at 181 (settlement motion cannot be used to deprive non-settling party of its rights to be heard on the merits of its claims against settling party.)
The Debtor makes the exact opposite argument. Relying on In re The Heritage Org., L.L.C., the Debtor points to the holding which states, "(i) there is no direct conflict between § 502 and Rule 9019, (ii) the rules do not dictate that claim objections be heard before settlement motions, (iii) requiring litigation on the merits would undermine the policy of promoting settlements in bankruptcy, and (iv) the debtor, as a fiduciary under the Code, has the duty to all creditors to resolve claims
The Tenth Circuit has not ruled on this precise issue; however, the Tenth Circuit has made very clear that when the language of the Code is unambiguous there is no need to venture into policy interpretations. See United States v. Manning, 526 F.3d 611, 614 (10th Cir. 2008) ("We begin by examining the statute's plain language. If the statutory language is clear, our analysis ordinarily ends. It is a well established [sic] law of statutory construction that, absent ambiguity or irrational result, the literal language of a statute controls.") (internal citations and quotation marks omitted). See also King v. Burwell, ___ U.S. ___, 135 S.Ct. 2480, 2483, 192 L.Ed.2d 483 (2015) ("If the statutory language is plain, the Court must enforce it according to its terms."); Baker Botts L.L.P. v. ASARCO LLC, ___ U.S. ___, 135 S.Ct. 2158, 2169, 192 L.Ed.2d 208 (2015) ("Our unwillingness to soften the import of Congress' chosen words even if we believe the words lead to a harsh outcome is longstanding, and that is no less true in bankruptcy than it is elsewhere.... Our job is to follow the text even if doing so will supposedly undercut a basic objective of the statute.") (internal citations and quotation marks omitted); Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 130 S.Ct. 1784, 1795, 176 L.Ed.2d 582 (2010) ("We normally assume that, when Congress enacts statutes, it is aware of relevant judicial precedent."); Mallo v. IRS, 774 F.3d 1313, 1324-25 (10th Cir. 2014) ("[T]he plain language meaning of the Bankruptcy Code should rarely be trumped [even though the Code] at times is awkward, and even ungrammatical that does not make it ambiguous."). (internal citations omitted).
The C.P. Hall case is persuasive as it applies the unambiguous language of the Code. Section 502 makes clear that "the court" is to "determine" a claim objection under section 502(b) of the Code. When a party files an objection to a claim, their rights to be heard on the claim objection should not be abridged or modified by a settlement.
The result may be that bankruptcy courts would be required to resolve claim objections before approving a settlement. See In re Kaiser Aluminum Corp., 339 B.R. at 94.
Concluding otherwise would strip creditors of their claim objection rights under the clear language of the Code. Further, "a hearing under Rule 9019 would provide no solace to the objecting creditor." In re The C.P. Hall Co., 513 B.R. at 545-46. A Rule 9019 hearing is not a full blown trial. "The obligation of the court [at a hearing on a Rule 9019 Motion] is to canvass [] the issues and see whether the settlement falls below the lowest point in the range of reasonableness." In re Dennett, 449 B.R. at 144. See also In re SportStuff, Inc., 430 B.R. at 181 ("The opportunity to object to a settlement does not take the place of a trial on the merits [...] litigants with pending claims [...] had the right to a trial on the merits, inasmuch as Fed. R. Bank. P. 7001(7) requires an adversary proceeding for the imposition of an injunction. The Settlements and Settlement Injunction deprived the [litigants] of that right.").
If the Settlement were approved Waterloo would be prejudiced because it would be prevented from possibly equitably subordinating the WUMI Claim, which is its primary contention in this case. It may be the case that the validity of the Waterloo equitable subordination claims against WUMI are not successful. However, § 502(b) requires this Court to "determine" and adjudicate the Waterloo Claim Objection on the merits. Accordingly, the WUMI Motion cannot be used to estop the rights of Waterloo to pursue the Waterloo Claim Objection and the WUMI Claim cannot be deemed "allowed" through the WUMI Settlement Agreement.
A final basis for denying the WUMI Motion revolves around the last issue of credit bidding, the WUMI Settlement Agreement, if approved, would allow WUMI to credit bid its secured claim at a sale of the Debtor's assets.
Per the Bid Procedures Order, entered in this case about eight months ago, pre-petition secured creditors are not entitled to submit a credit bid for some or all of the
A Court can prevent a secured creditor from credit bidding when doing so would enable the maximum value to the estate though fair and competitive bidding, rather than freezing the sale process, and when preventing credit bidding is determined to be in the best interest of the estate. Thus, at the moment, the Court finds no reason to modify the provision in Bid Procedures Order relating to credit bidding.
Under the Bankruptcy Code, credit bidding at a sale under § 363(b) is a right for secured lenders. That right is provided in § 363(k), which states:
Credit bidding rights are not without its limits. See In re Fisker Auto. Holdings, Inc., 510 B.R. 55, 59 (Bankr. D. Del. 2014) (stating, "the right to credit bid is not absolute") (quoting In re Philadelphia Newspapers, LLC, 599 F.3d 298, 315 (3d Cir. 2010), as amended May 7, 2010).
First, the right applies to "the holder of a lien securing an
Further, Congress amended credit bidding rights in 1984 to prevent a credit bid for "cause". See 11 U.S.C. § 363(k); Collier, supra, ¶ 363.LH. Cause is not defined by the Code but left to the court to determine on a case-by-case basis. See In re: Aéropostale, Inc., 555 B.R. 369, 414 (Bankr. S.D.N.Y. 2016) (citing cases discussing "cause"). The Court has discretion in its determination of cause. Id. at 415 (courts should not act "freewheeling" but rather courts should "balance the interests of the debtor, its creditors, and the other parties of interests in order to achieve the maximization of the estate and an equitable distribution to all creditors") (citations and internal quotations omitted).
Cause may be found to deny credit bidding if allowing lien holders to bid at a sale would benefit an insider, impede or delay a successful reorganization strategy, chill the bidding process, and reduce the overall benefits to the estate. See In re Philadelphia Newspapers, LLC, 599 F.3d at 315) (citing a "variety of cases" where the court found cause to deny credit bidding). This list is non-exhaustive.
The WUMI Settlement Agreement, if approved, would allow WUMI, or any successor-in-interest or purchaser of the WUMI Allowed Secured Claim, to credit bid, up to the value of the WUMI Collateral, at any auction or sale of Debtor's assets,
The Debtor and WUMI argue that the Bid Procedures Order should be modified to allow credit-bidding so WUMI has the opportunity to bid on the sale of Debtor's assets. The Debtor states that new evidence and facts not available at the time the Bid Procedures Order was entered are sufficient reasons to modify the order. In addition, the Debtor argues that cause has not been shown to deny credit bidding.
The Waterloo Parties argue against the allowance of credit bidding requested in the WUMI Settlement Agreement primarily because 1) WUMI has no right to credit bid because the WUMI Claim is disputed; 2) a joint bid from WUMI and the DIP Lenders would freeze the bidding process because any potential bidder would need to top a bid of approximately $46 million and no evidence suggests that such a willing bidder exists; and 3) WUMI, Richards and Walker are closely tied and credit bidding should not be allowed when it would primarily benefit an insider.
As discussed, the Bid Procedures Order denied the right to credit bid unless the Court entered a further order. The Court has not entered a further order, so, at the moment, this is the law of the case. See Padilla-Caldera v. Holder, 637 F.3d 1140, 1145 (10th Cir. 2011) ("Under the law of the case doctrine, when a court decides an issue of law, that decision should govern all subsequent stages of the litigation."); In re Antrobus, 563 F.3d 1092, 1098 (10th Cir. 2009) ("The doctrine bars reopening a question already decided in an earlier stage of the same litigation, except in narrow and exceptional circumstances.) (internal quotations omitted).
The law of the case doctrine is discretionary, flexible and subject to exceptions in the interest of justice and policy. Padilla-Caldera v. Holder, 637 F.3d at 1145 (citation omitted). Flexibility is allowed in "exceptional circumstances". Id. The Tenth Circuit has recognized three exceptions to this doctrine. The first exception is the new evidence exception, which applies when evidence is found that is new, substantially different, and was previously unavailable. In re Antrobus, 563 F.3d at 1098. Next, the mandate rule says the law of the case doctrine should not apply when there is a dramatic change in controlling legal authority. Padilla-Caldera v. Holder, 637 F.3d at 1145 (citation omitted). The last exception applies when the decision was clearly wrong and is highly unjust. See Rimbert v. Eli Lilly & Co., 647 F.3d 1247, 1251 (10th Cir. 2011). The Court finds the new evidence exception may be applicable in this case. The landscape has changed since the Bid Procedures Order was entered. Thus, a party could seek to modify the Bid Procedures Order by further order of the Court. However, as discussed below, the Court believes there is sufficient cause to maintain the status quo of the Bid Procedures Order, which forbids credit bidding by secured lien holders.
In addition to the Bid Procedures Order being in place, the Court finds cause to
First, WUMI does not have an "allowed claim" which is needed to credit bid — as a starting point. As discussed, supra, Waterloo has objected to the WUMI Claim under § 502(a) and through the Waterloo v. WUMI Adversary.
Next, the evidence presented at the Hearing makes clear that if WUMI and the DIP Lenders were allowed to joint credit bid, the bidding process would be chilled, then frozen. Any potential bidder would need to come up with a bid of over $46 million. The CROs suggested that there are no other parties that could compete with a $46 million bid. Thus, if WUMI were allowed to credit bid, they would almost be guaranteed to walk away with the Debtor's assets.
Finally, cause is found to prevent credit bidding because it would benefit WUMI, who has very close ties (other than as a secured creditor) to the Debtor. See In re Blixseth, No. BKR. 09-60452-7, 2010 WL 716198, at *9 (Bankr. D. Mont. Feb. 23, 2010) (bidding procedures that did not encourage competitive bidding and favored an insider were rejected by the court) Moreover, even if the Court were to amend the Bid Procedures Order to allow credit bidding, it is likely that any potential insider bid would result in several objections, which would, in turn, delay the Sales Process and hamper the reorganization efforts in this case. See In re Family Christian, LLC, 533 B.R. 600, 604 (Bankr. W.D. Mich. 2015) (proposed sales to insiders frequently generate numerous objections).
A Sale Process without of credit bidding procedures that favoring insiders would promote competitive bidding. The Court finds and concludes that it is in the best interest of the estate to deny credit bidding to encourage and promote a robust sales process. The CROs indicated there are potential parties willing to submit cash bids on the Debtor's assets. The Court believes this may be the best option for the CROs to explore.
In light of the foregoing, the Court finds that the Kopexa factors and other considerations weigh in favor of denying the WUMI Settlement Agreement. The WUMI Settlement Agreement lacks good faith. Under the circumstances, the interests of estate are better served without the current compromise offered by the Parties.
For the reasons stated herein, the WUMI Motion is denied. The Waterloo Objection is sustained. The Court directs counsel for the Waterloo Parties to submit a proposed form of order consistent with this Memorandum Decision for the Court's consideration.
