Mission Product Holdings, Inc. v. Old Cold, LLC

Mission Product Holdings, Inc. v. Old Cold, LLC, 1st Cir. Bankr. App. Panel app. I
The Bankruptcy Appellate Panel for the First Circuit affirms the bankruptcy court's order approving the sale of substantially all of the assets of Debtor.
Procedural context:
On December 18, 2015 the bankruptcy court entered an order for the approval of the sale of substantially all of debtor's assets to Schleicher & Stebbins Hotels, LLC (S&S). An unsuccessful bidder, Mission Product Holding appealed the sale order challenging the court's approval and its finding that Schleicher was a good faith purchaser. The bankruptcy court acknowledged that it needed to apply a heightened level of scrutiny to the sale because the sale was to occur outside a confirmed plan of reorganization, and because it involved a sale to an insider. It appointed an examiner, as per the US Trustee's request. The examiner, after attending hearings, the auction and conducting an independent investigation, supported the sale. Then, the court approved the sale. On appeal the appellees argue that ir should be dismissed as it is statutorily moot pursuant to section 363(m) or equitably moot since Mission failed to obtain a stay pending appeal, the sale was complete and the panel was unable to fashion a remedy.
S&S was the Debtor’s majority equity owner, largest unsecured creditor, post-petition debtor-in-possession financier, stalking horse bidder, and successful purchaser. Originally S&S had an indirect ownership interest in the Debtor. The principals of S&S, Mark Schleicher (“Schleicher”) and Mark Stebbins (“Stebbins”), were, until July 2015, members of the Debtor’s management committee. Mission was the counterparty to a Co-Marketing and Distribution Agreement. debtor and Mission ended in arbitration after attempting to terminate the agreement. The arbitrator entered a partial final award in favor of Mission maintaining the effectiveness of the agreement before the filing of the petition. During 2015 debtor accepted to convert a portion of S&S’ remaining unsecured debt to equity interests in the Debtor. S&S became the majority owner of the Debtor. In July 2015 the Debtor’s financial situation had not improved, and it became apparent that a workout between S&S and the Debtor would be necessary. The parties tried to discuss the possible terms of a forbearance agreement but both Stebbins and Schleicher resigned from the Debtor’s management committee and issue a notice of Default to the debtor for fialure to make payments on a line of credit owed to S&S. Debtor hired counsel to to assess its options and the possibility to sell its assets. debtor's counsel involved in negotiations with counsels for S&S after 5 potential buyers declined to do so. debtor and S&S negotiated an Asset Purchase Agreement which was filed the same date of the filing of the petition on September 1, 2015. In addition, debtor seek authority to obtain post petition financing form S&S, along with the authorization for the sale of the assets free and clear of liens. the US trustee requested the conversion to chapter 7 or the appointment of an examiner.the court pproved the US trustee's request. Mission opposed to the sale and joined the US Trustee's request for the appointment of an examiner. the court approved the procedures in connection to the sale and allow S&S to credit bid. After several more rounds of bidding, Mission submitted its final bid, which totaled $2,600,000 (the “Mission Final Bid”), consisting of the following: (1) $1,800,000 in cash paid by Mission; (2) $600,000 of the Debtor’s cash to be excluded from acquired assets and left in the estate; (3) $80,000 of the Debtor’s accounts receivable to be excluded from acquired assets and left in the estate; and (4) $120,000 of the Debtor’s inventory to be excluded from acquired assets and left in the estate. The Debtor accepted the Mission Final Bid as being higher than the previous S&S bid. Following the Mission Final Bid, S&S made its final bid totaling $2,700,000 (the “S&S Final Bid”) consisting of the following: (1) $750,000 credit bid of DIP Financing; (2) $657,000 pre-petition unsecured debt which S&S would assume in the amounts scheduled by the Debtor, excluding disputed claims and any rejection damage claims, but reserving the right to attempt to negotiate settlements with each creditor; (3) $600,000 of the Debtor’s cash to be excluded from acquired assets and left in the estate; (4) $80,000 of the Debtor’s accounts receivable to be excluded from acquired assets and left in the estate; (5) $120,000 of the Debtor’s inventory to be excluded from acquired assets and left in the estate; (6) $50,000 of post-petition accounts payable which S&S would assume; and (7) $443,000 credit bid of pre-petition debt. Stebbins testified that in making the S&S Final Bid, S&S altered its bidding strategy in two ways. First, it mirrored Mission’s bid structure to make it easier to compare the two bids and second, it reduced the amount of its credit bid of pre-petition debt to avoid a further challenge by Mission. The Debtor accepted the S&S Final Bid. Mission declined to be designated as the backup bidder, protesting that the Mission Final Bid was in fact higher and better than the S&S Final Bid. Thereafter, on November 6, 2015, the Debtor filed a notice in the bankruptcy court that it had accepted the S&S Final Bid. Mission filed an objection to the proposed sale on several grounds: that S&S' final bid was inferior to its bid; that the court should deny that credit-bi and recharacterize S&S claim as equity, the auction was conducted in bad faith and that the sale should be denied as a sub rosa plan. The examiner filed his report were concluded that S&S final bid was superior to Mission Final Bid. He also concluded that Mission and all other creditors would receive better treatment through the proposed sale to S&S than through the only realistic alternative—liquidation. afterwards the court conducted an evidentiary hearing to consider the proposed sale and the objections, the court heard testimony and admitted exhibits into evidence. In its opinion and order dated December 18, 2015, the court made a thorough and detailed factual findings and conclusions based on the record and determined: (1) there was a valid business reason for a sale prior to a confirmed plan of reorganization, and the proposed sale to S&S made good sense in the overall context of the reorganization as there was no alternative that would yield a benefit to creditors; (2) the marketing of the Debtor’s assets was sufficient and appropriate; (3) there was “no evidence in the record establishing any misconduct or collusion in the sale process by the Debtor and S&S”; (4) Mission’s assertions that the Debtor’s constant inflation of the value of S&S’ bids evidenced collusion and misconduct were refuted by “simple math”; (5) Mission failed to demonstrate a compelling reason why S&S’ credit bidding rights under § 363(k) should be limited; (6) the record did not support Mission’s assertion that the Debtor was substantially controlled by Stebbins; (7) the proposed sale was not a de facto plan and creditors “were afforded protections consistent with the statutory safeguards attendant to the Chapter 11 confirmation process”; (8) there was “no evidence of fraud, collusion, or any other tainting of the sale process,” and Mission failed to demonstrate the proposed sale was anything other than an arm’s length transaction; and (9) S&S was a good faith purchaser and entitled to the protections afforded by § 363(m). as to the finding that S&S was a good faith purchaser, the court also concluded that S&S purchased for value and there is no evidence of fraud, collusion, or any other tainting of the sale process in the record. Mission did not seek to alter or amend the sale order. the Debtor completed the transaction and closed the sale on December 18, 2015. Mission filed the notice of appeal on December 28, 2015. On appeal Mission contended: (1) S&S was an interested insider and the evidence presented at the Sale Hearing, as well as the post-sale conduct of the Debtor and S&S, are direct evidence of collusion between them; and (2) the bankruptcy court erroneously applied the common business judgment standard rather than the heightened scrutiny standard when considering the proposed sale to an insider. The Panel disagree.
Lamoutte, Hoffman, and Cary

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