Stadtmauer v. Tulis (In re Nordlicht)

Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
1 year 6 months ago

Case Type:

Business

Case Status:

Affirmed

Citation:

22-1223-bk (2nd Circuit, Aug 15,2024) Published

Tag(s):

Ruling:

The U.S. Court of Appeals for the Second Circuit held a bankruptcy court did not err in approving a Chapter 7 Trustee's settlement of legal claims filed by Appellants against the debtor and third parties. The Trustee had authority to settle the claims under his strong arm powers; prior activity in a state court case had not resulted in liens on the debtor's assets that were not in bona fide dispute; the settlement was fair and equitable and in the best interests of the estate; the settlement comported with Jevic; and Appellants received due process in connection with the sale of the claims.

Procedural context:

On appeal from the district court's decision affirming the bankruptcy court's approval of a settlement, Appellants raised the same five issues that they had raised in the district court. The Second Circuit explained "[b]ecause [b]ankruptcy court decisions are subject to appellate review in the first instance by the district court, . . . . we engage in plenary, or de novo, review of the district court decision. ... We thus apply the same standard of review that the [d]istrict [c]ourt employed, reviewing the bankruptcy court’s findings of fact for clear error[,] . . . its legal determinations de novo[,] [and its] discretionary rulings . . . for abuse of discretion. ... [W]e review for abuse of discretion a bankruptcy court’s approval of a sale of assets or claims pursuant to 11 U.S.C. § 363. ... We review de novo the legal questions whether the Settlement comported with Jevic and due process."

Facts:

Debtor Mark Nordlict ran a set of hedge funds known collectively as "Platinum." Appellants Richard and Marisa Stadtmauer invested in Platinum. When they asked for the return of their invested funds, Platinum issued them promissory notes guaranteed by Debtor. Platinum then defaulted on the notes and Debtor refused to honor the guaranty, Appellants obtained an arbitration award of nearly $15 million against Debtor. Shortly thereafter, Appellants filed suit to confirm the award in the U.S. District Court for the Southern District of New York and also filed an action in New York state court to pursue Debtor and other defendants based on an alleged scheme to render Debtor judgment proof. The complaint contained four counts under New York law: "(1) actual fraudulent conveyance, (2) constructive fraudulent conveyance, (3) “reverse veil piercing” against the business entities named as defendants, ... and (4) as interim relief, requests for ex parte prejudgment orders of attachment against two pieces of real estate allegedly owned by Nordlicht, but held in the name of his wife[.]" After Appellants filed notices of attachment, the state court confirmed an attachment order against the two properties. Debtor then filed a chapter 7 bankruptcy petition in the U.S. Bankruptcy Court for the Southern District of New York. The state court action was stayed and then removed and removed to the district court, which referred the action to the bankruptcy court as an adversary proceeding. Appellee Mark Tulis became the Chapter 7 Trustee. Appellants filed a claim in Debtor's case, contending it was secured by liens awarded in the state court and pursuant to a sheriff's levy on an order of attachment. The Trustee, exercising strong-arm power under 11 U.S.C. § 544, negotiated with the state court defendants (and other potential defendants) "to settle all claims that could be asserted on behalf of debtor Nordlicht’s bankruptcy estate. [ ] This included the Stadtmauers’ causes of action for actual and constructive fraudulent conveyance, alter ego liability, and any property rights possibly created by an order of attachment awarded to the Stadtmauers in the State Court Action." The Trustee moved the bankruptcy court to approve the settlement, which would generate a $1.5 million payment to the estate. The Stadtmauers then issued a counter-offer of $2 million to the bankruptcy estate seeking "to repurchase the right to litigate their State Causes of Action that the Trustee had taken over. In addition, the Stadtmauers offered not to assert the liens they claimed to hold against the Properties against the $2 million paid to the estate." The Trustee, concluding this was a better offer, moved the court to approve this offer instead, subject to better offers. The bankruptcy court then set a hearing under 11 U.S.C. § 363. The day before the hearing, the state court defendants (and other potential defendants) submitted a new offer pursuant to which Barbara Nordlicht, Debtor's mother and a non-party in the state court action/adversary proceeding, "would (1) pay $2.5 million to the bankruptcy estate to be distributed to the estate’s creditors; (2) reimburse the estate for any costs arising from defending against the Stadtmauers’ claims related to their asserted liens; and (3) fully indemnify and hold harmless the estate to the extent that Barbara Nordlicht would pay an additional $2.5 million to the estate in the event that the Stadtmauers prevailed on their State Causes of Action and collected on any portion of the $2.5 million as higher-priority creditors." Trustee represented at the hearing that this was the best offer presented. No party submitted a superior offer at the hearing; the Stadtmauers instead argued Trustee could not settle with the state court defendants and Barbara Nordlicht because it would dispose of Appellants' perfected liens on the real property, which liens were beyond Trustee's strong-arm power. The bankruptcy court disagreed, holding the liens were in bona fide dispute, and that Trustee was acting in the best interest of the bankruptcy estate, and thus approved Trustee's motion to settle all proposed claims free and clear of any interest encumbering them under 11 U.S.C. § 363(f). The bankruptcy court then entered an order approving the settlement. Appellants appealed this order to the U.S. District Court for the Southern District of New York, "raising five issues: (1) whether the bankruptcy court erroneously concluded that the Trustee had the authority to settle and sell the State Causes of Action (including the attachments); (2) whether the bankruptcy court’s approval of the Settlement effectively reduced the Stadtmauers’ claims, secured by their purported liens, to unsecured claims, and thus violated basic principles of creditor priority as articulated in Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017); (3) whether the bankruptcy court, in approving the April 22 Offer, abused its discretion by failing to follow the proper procedure and the factors set forth in In re Iridium Operating LLC, 478 F.3d 452 (2d Cir. 2007); (4) whether the bankruptcy court had erred in finding the [approved offer] to be superior to the Stadtmauers’ $2 million offer; and (5) whether the bankruptcy court’s approval of the Settlement deprived the Stadtmauers of their property rights in violation of their constitutional right to due process." The district court affirmed the bankruptcy court's decision in full. Appellants took a further appeal to the Second Circuit.

Judge(s):

Livingston, Sack

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