388 Route 22 Readington v. ( 2021 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
__________
No. 20-2629
___________
In re: 388 ROUTE 22 READINGTON HOLDINGS, LLC,
Debtor
SB BUILDING ASSOCIATES LIMITED PARTNERSHIP,
Appellant
________________
Appeal from United States District Court
for the District of New Jersey
(D.C. Civil Action No. 3:20-cv-01252)
District Judge: Freda L. Wolfson
________________
Submitted Under Third Circuit L.A.R. 34.1(a)
on September 28, 2021
Before: AMBRO, KRAUSE, and BIBAS, Circuit Judges
(Opinion filed: October 15, 2021)
___________
OPINION*
___________
*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.
AMBRO, Circuit Judge
Appellant SB Building Associates Limited Partnership is the sole owner of 388
Route 22 Readington Holdings, LLC (the “Debtor”). SB is seeking to reverse an order
by the United States Bankruptcy Court for the District of New Jersey authorizing the
trustee for the Debtor, Bunce Atkinson (the “Trustee”), to sell the Debtor’s property to
Leon Kitovksy under 11 U.S.C. § 363. SB appealed the sale order to the District Court,
but after the sale closed the Court dismissed the appeal as moot under § 363(m). SB now
appeals that dismissal. As we agree that the property was sold for appropriate value, we
affirm the District Court’s order.
I.
The Debtor has one significant asset: property located at 388 Route 22,
Readington, New Jersey. In 2011, Iron Mountain Information Management, LLC, which
held the mortgage on the property, obtained a foreclosure judgment. To avoid a sheriff’s
sale, the Debtor filed for Chapter 11 bankruptcy. Litigation ensued; eventually the
Debtor and Iron Mountain agreed to a payment plan. This arrangement, however, was
short-lived. The Debtor filed for bankruptcy a second time in 2018. The Bankruptcy
Court converted the proceeding to a Chapter 7 liquidation and allowed Iron Mountain to
foreclose on the Debtor’s property.
Iron Mountain gave the Trustee until the end of September 2019 to sell that
property. He hired a realtor, David Zimmel, to market it. Zimmel received one written,
preliminary offer for $5,000,000, but the Trustee turned it down because, in addition to
being unsigned and permitting cancellation for “any reason or for no particular reason,”
2
Supp. App. 81–82, the proposal requested a due diligence period that would have
required the sale to take place after the end of the previously agreed foreclosure stay
period. Plus, the offer contained two significant contingencies: (1) positive resolution of
ongoing litigation to gain access to the public sewer system; and (2) receipt of an
exemption from local zoning ordinances to allow a non-conforming use.
Instead, the Trustee and Iron Mountain arranged for an auction in December
2019. Twenty-two prospective buyers inspected the property, and fifteen made deposits
to participate in bidding. Leon Kitovsky won with a bid of $3,200,000. The Bankruptcy
Court approved the sale, which closed in March 2020. The sale price was sufficient to
pay Iron Mountain and all claims against the Debtor’s bankruptcy estate in full while still
providing a distribution of over $100,000 to SB.
But SB maintains that the price was inadequate and moved to stay the sale. The
Bankruptcy Court, the District Court, and our Court all denied the request. SB then
appealed the sale order, and the District Court dismissed the appeal as moot per § 363(m).
As noted, SB now appeals the dismissal.
II.
Bankruptcy Code § 363(b) permits a trustee to sell the property of a bankruptcy
estate. 11 U.S.C. § 363(b). Subsection (m) promotes the finality of such sales. It
provides that
[t]he reversal or modification on appeal of an authorization
under subsection (b) . . . of this section of a sale or lease of
property does not affect the validity of a sale or lease under
such authorization to an entity that purchased or leased such
property in good faith, whether or not such entity knew of the
3
pendency of the appeal, unless such authorization and such
sale or lease were stayed pending appeal.
Put simply, § 363(m) moots a challenge to a sale when “(1) the underlying sale or lease
was not stayed pending the appeal, and (2) the court, if reversing or modifying the
authorization to sell or lease, would be affecting the validity of such a sale or lease.”
Schepis v. Burtch (In re Pursuit Cap. Mgmt., LLC), 874 F.3d 124, 135 (3d Cir. 2017). To
reach this two-part test, we must first ask whether the buyer “purchased . . . the property
in good faith.” Id. (quoting § 363(m)) (alterations omitted). That requires a purchase for
“appropriate value.” Id. at 137. The sole issue on appeal is whether Leon Kitovsky
bought the property for appropriate (or fair) value.
SB challenges the Bankruptcy Court’s decision on both legal and factual grounds.
It argues the Bankruptcy Court misapplied the law by suggesting that a non-collusive
auction is always sufficient to conclude value was paid. SB also challenges the Court’s
factual findings and its decision not to hear additional testimony. We consider each
argument in turn.
SB faults the Bankruptcy Court for applying a per se rule that the results of a non-
collusive auction conclusively establish fair value. But this misstates its decision. The
Court found “that a properly advertised and actively participated in auction produces the
best possible measure of fair value” and “[t]he lack of any irregularity in the auction
process coupled with 15 qualified bidders is strong evidence that the $3.2 million sale
price is fair value.” Supp. App. at 126, 129. Its opinion correctly aligns with our holding
in Pursuit Capital that, absent collusion, “a competitive auction strongly indicates that a
4
purchaser has paid appropriate value for estate assets.” In re Pursuit Cap. Mgmt., 784
F.3d at 137; see also In re Abbotts Dairies of Pa., Inc., 788 F.2d 143, 149 (3d Cir. 1986)
(holding that while “an auction may be sufficient to establish that one has paid ‘value’ for
the assets of a bankrupt,” it does not establish value when there is collusive conduct).1
Here there was no allegation of collusion, leading the District Court to conclude—
properly—that the auction was strong evidence that the purchaser paid fair value for the
property.
In addition, the Bankruptcy Court’s factual findings were not clearly erroneous. It
found the auction was well marketed and generated substantial interest from numerous
potential bidders. Ultimately fifteen prospective buyers deposited money to participate in
the auction, and the property was sold for approximately 40% more than its assessed
value in 2014. And as the District Court explained, considerable additional evidence also
supported the Bankruptcy Court’s decision.
SB has not identified any persuasive reason that the Bankruptcy Court’s
conclusion was incorrect. In that Court, SB argued a $5,000,000 offer was a better
indicator of value than the auction result. The Court, however, concluded it was
“illusory.” Supp. App. at 124. It explained that Iron Mountain was under no obligation
to give the Trustee more time to close the sale (as that offer required) and the offer
1
We need not decide if Pursuit Capital misrepresented the holding of Abbotts Dairies
when it stated that “a public auction, as opposed to appraisals and other evidence, is the
best possible determinant of the value of assets.” 874 F.3d at 136 (alterations omitted).
Regardless whether a public auction is always the “best possible” way to determine the
value of assets, Pursuit Capital instructs that a competitive auction is highly probative
and, if competitive, can be sufficient to determine an asset’s fair value. See id. at 138.
5
“contain[ed] two substantial, perhaps insurmountable, contingencies” (resolution of the
sewer-capacity litigation and obtaining a non-conforming use exemption). Id. Nor did
the Court err in declining to hear additional testimony or order a new assessment because
it already had sufficient evidence to determine that the purchase was for fair value. There
is no clear indication that additional evidence was needed when it already had the sale
price from a competitive auction. In particular, the Court found that the auctioneer
accurately described the property’s sewer access and concluded that the auction
advertising was adequate. This was sufficient evidence to conclude that the property was
sold for appropriate value.
* * * * *
It has now been ten years since Iron Mountain obtained the foreclosure judgment.
Over that decade SB used the bankruptcy process to delay repeatedly the sale of the
Debtor’s property. But proceedings eventually end. Section 363(m) serves to promote
the finality of sales, and the District Court properly recognized that SB’s challenge to the
sale fails as moot. Accordingly, we affirm its order dismissing SB’s appeal.
6