Rai v. Henderson (In re VCR I, LLC)

Case Type:
Case Status:
19-60163 (5th Circuit, Dec 19,2019) Not Published
Affirmed the dismissal of appeal as statutorily moot under 11 USC 363(m). The record amply supported the bankruptcy court's findings that the purchasers were "good faith" purchasers, despite disclosed connections which the objecting party used to argue fraud and collusion. Noting that the "blunt finality" of section 363(m)'s statutory mootness doctrine "might be harsh," the Court concluded that such result is a fair trade-off for attracting investors and helping effectuate the debtor's rehabilitation. Slip op. at 5 (quoting Cinicola v. Scharffenberger, 248 F.3d 110, 122 (3d Cir. 2001)).
Procedural context:
After the debtor failed to sell its property during its chapter 11 case, the chapter 7 trustee obtained authority to sell the debtor's real properties to two different buyers. Dr. Pradeep Rai, a member of the debtor, objected to the sale and was overruled by the bankruptcy court. Dr. Rai appealed the order to the district court, but he did not obtain a stay pending appeal. Thus, the trustee conveyed the properties to the purchasers, and the district court dismissed Rai's appeal as moot. Dr. Rai appeals that decision to the Court of Appeals for the Fifth Circuit.
The debtor owned four tracts of land and attempted to sell one of the tracts (Tract 4) during its chapter 11 case. No sale was approved prior to the conversion to chapter 7. Once in chapter 7, the trustee held an auction process to sell all of the property to the highest bidder(s). The trustee marketed the properties, including direct mailing, publication notices, posted notices and other indirect marketing efforts. The trustee then held an auction that was well-attended, albeit from local real estate investors only. The auction process resulted in total bids that were 150% greater than the trustee's pre-sale estimates and a sale price on Tract 4 that was four times greater than the price proposed by the debtor before conversion. One of the issues that arose during the sale hearing was a series of connections between bidders who shared a broker, as well as the fact that the trustee's son sometimes worked for the auctioneer. All parties testified that these connections did not chill the bidding, and the bankruptcy court found no evidence of collusion by the bidding parties or their brokers. On appeal, the Fifth Circuit agreed that the evidence presented at the sale hearing supported the bankruptcy court's "good faith" findings for the purchasers. First, the Fifth Circuit noted that a broker representing two bidders did not show collusion -- if anything, the broker would have had the incentive to increase (not decrease) the purchase price to increase his commission. Second, the Court of Appeals rejected Dr. Rai's position that the trustee's marketing efforts adversely impacted the purchasers' good faith. While the trustee arguably could have marketed the properties differently, the Court noted that "[i]t is brazen for Rai to [object] when the company he helped run tried to sell Tract 4 just a couple years earlier for less than 1/3 of what it sold for at auction." Finally, with regard to the connection between the auctioneer and the trustee's son, the Court of Appeals noted that "[i]t is unclear how this additional conjecture amounts to fraud that undermines the competitive nature of the auction or otherwise casts doubt on the economic evidence that the land was sold for value at a competitive auction."
Owen, Haynes and Costa (per curiam)

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