IN RE: OLD COLD LLC, f/k/a Tempnology, LLC, [*] Debtor.
OLD COLD LLC, f/k/a Tempnology, LLC and SCHLEICHER AND STEBBINS HOTELS LLC, Appellees/Cross-Appellants. MISSION PRODUCT HOLDINGS, INC., Appellant/Cross-Appellee,
FROM THE BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT
J. Keach, with whom Lindsay K.Z. Milne and Bernstein, Shur,
Sawyer & Nelson, P.A. were on brief, for
Christoper M. Desiderio, with whom Daniel W. Sklar and Nixon
Peabody LLP were on brief, for appellee/cross-appellant Old
Christoper M. Candon, with whom Sheehan Phinney Bass &
Green PA was on brief, for appellee/cross-appellant
Schleicher & Stebbins Hotels LLC.
Torruella, Lynch, and Kayatta, Circuit Judges.
KAYATTA, CIRCUIT JUDGE.
11 debtor Tempnology, LLC ("Debtor") auctioned off
its assets pursuant to section 363 of the Bankruptcy Code.
Schleicher and Stebbins Hotels LLC ("S&S") was
declared the winning bidder over Mission Product Holdings,
Inc. ("Mission"). With the bankruptcy court's
approval, Debtor and S&S completed the sale. On appeal,
Mission now asks that we order the bankruptcy court to unwind
the sale and treat Mission as the winning bidder. Because the
sale to S&S was completed and S&S is a good faith
purchaser entitled to protection under section 363(m), we
affirm without reaching the merits of Mission's various
challenges to the sale. Our explanation follows.
made specialized products -- such as towels, socks,
headbands, and other accessories -- designed to remain at low
temperatures even when used during exercise. It marketed
these products under the "Coolcore" and "Dr.
Cool" brands. S&S is an investment holding company
with its primary interest in hotels. Prior to Debtor's
bankruptcy, S&S owned a majority interest in Debtor.
Until just under two months before Debtor commenced this
Chapter 11 proceeding, Mark Schleicher and Mark Stebbins --
S&S's two principals -- sat on Debtor's
three years before petitioning for bankruptcy, Debtor
executed a Co-Marketing and Distribution Agreement with
Mission. This Agreement granted Mission a nonexclusive,
perpetual license to Debtor's intellectual property and
an exclusive distributorship for certain of Debtor's
manufactured products. The Agreement forbade Debtor from
selling the covered products in Mission's exclusive
territory, which included the United States.
the relationship between Mission and Debtor soured, Mission
exercised its contractual right to terminate the Agreement
without cause on June 30, 2014. This election triggered a
two-year "Wind-Down Period" through July 1, 2016,
during which Mission's rights remained in effect. Debtor
responded by seeking to terminate the Agreement for cause,
claiming as a breach Mission's hiring of Debtor's
former president. Unlike Mission's election, Debtor's
termination for cause, if effective, would have terminated
the Agreement without a Wind-Down Period. The dispute went
before an arbitrator, who found that Debtor's attempted
termination for cause was improper, potentially entitling
Mission to damages for Debtor's failure to abide by the
Agreement leading up to arbitration. The hearing to determine
the amount of these damages has been stayed pending the
resolution of Debtor's bankruptcy petition.
parties' relationship deteriorated, so too did
Debtor's financial results. Debtor posted multi-million
dollar losses in 2013, 2014, and 2015, for which it blames
the Agreement with Mission. To combat its liquidity problems,
Debtor took on increased debt. S&S, which had already
made substantial loans to Debtor, loaned additional money,
and Debtor obtained a secured line of credit with
People's United Bank for approximately $350, 000. In
2014, after deciding that it would only continue lending to
Debtor on a secured basis, S&S acquired People's
United Bank's line of credit. S&S increased the
secured loan limit, first to $4 million, and later to $5.5
million. This tactic allowed S&S to gradually convert its
unsecured debt into secured debt.
failed to improve financially. On July 13, 2015, Debtor's
management committee and Stebbins met to discuss Debtor's
outstanding debt. At this meeting, S&S and Debtor agreed
to the outline of a forbearance agreement, which was
memorialized and signed four days later. The forbearance
agreement provided for an additional $1.4 million in funding
for Debtor on the condition that it file for bankruptcy and
sell substantially all of its assets in a section 363 sale.
See 11 U.S.C. § 363(b).
and Schleicher both stepped down from Debtor's management
committee following the July 13 meeting. Thereafter, neither
had contact with Debtor's management regarding
Debtor's operation or subsequent bankruptcy.
then engaged Phoenix Capital Resources, a crisis management,
investment banking, and financial services firm, to explore
its options. Phoenix concluded that Debtor's best route
was to be put up for sale. It then solicited approximately
five companies to serve as the stalking horse bidder for
Debtor's assets. In the context of a bankruptcy sale, a
stalking horse bidder is an initial bidder whose due
diligence and research serve to encourage future bidders, and
whose bid sets a floor for subsequent bidding. See
ASARCO, Inc. v. Elliott Mgmt. (In re
ASARCO, L.L.C.), 650 F.3d 593, 602 n.9 (5th Cir. 2011).
None of the firms solicited by Phoenix were interested in
taking on the expense of this role. In August of 2015,
Phoenix approached S&S, which agreed to be the stalking
September 1, 2015, Debtor filed a petition for Chapter 11
bankruptcy. On the same day, S&S formally became the
stalking horse bidder by signing an agreement to purchase
Debtor's assets for $6.95 million, composed almost
entirely of forgiven pre-petition debt owed by Debtor to
S&S. This strategy of offsetting a purchase price with
the value of a secured lien is called credit bidding, and it
is permitted in a section 363 sale "unless the court for
cause orders otherwise." 11 U.S.C. § 363(k). A
provision in the Agreement also left Debtor able to back out
in favor of a superior bid at the auction.
next day, Debtor moved for approval of its proposed asset
sale procedures. It also moved to reject a number of its
executory contracts, including the Mission Agreement. The
bankruptcy court ultimately granted that motion, and
Mission's challenge to that order is the subject of our
separate opinion issued this date in appeal No. 16-9016.
the stalking horse bidder -- S&S -- was an insider of
Debtor, both the United States Trustee and Mission sought the
appointment of an independent examiner to evaluate the
proposed sale and bidding procedures. Although Debtor
initially resisted, it ultimately concurred in the
recommendation. The court agreed, and appointed an examiner.
October 8, the bankruptcy court held a hearing on the sale
motion. In light of a concern raised in the examiner's
interim report and echoed by the court about S&S's
pre-petition credit bid, S&S agreed at the hearing to
change the composition of its stalking horse bid and to lower
its value from approximately $7 million to just over $1
million. Its revised bid consisted of $750, 000 in
post-petition debt and the assumption of about $300, 000 in
pre-petition liabilities. As the bankruptcy court concluded,
this agreement was a concession intended to defer to a later
day a possible fight over S&S's credit-bidding
bankruptcy court approved the sale procedures on October 8,
after which Phoenix sent 164 emails to companies that Phoenix
determined might be interested in bidding for Debtor's
assets. Included with its standard email was a
confidentiality agreement and an invitation to visit a data
room, in which Phoenix had deposited Debtor's
confidential business information. Despite conducting 112
follow-up calls, and a few visits by interested companies to
the data room, Phoenix failed to secure any party -- other
than Mission and S&S -- willing to bid at the auction.
Potential bidders were deterred by, among other things,
Debtor's poor financial track record, its dispute with
Mission, the size of the market opportunity, and
S&S's ability to credit bid. Debtor had also given
Phoenix a list of parties not to contact, comprised of
Debtor's customers. Debtor believed that these customers
would be less likely to continue their relationship with
Debtor if they knew that Debtor was undergoing an asset sale,
and that their withdrawal would further threaten Debtor's
already precarious financial viability.
an affiliate, S&S continued to lend to Debtor during the
run-up to the auction. S&S included the full amount of
this disbursed and imminent loan -- $750, 000 -- as
post-petition debt in a revised stalking horse bid, submitted
at the beginning of October.
November 2, 2015, Mission placed a qualifying overbid of $1.3
million, entitling the company to bid at auction. Three days
later, on November 5, Debtor's counsel held an auction
for Debtor's assets, at which S&S and Mission were
the only bidders. The bid procedures allowed negotiations to
be conducted off the record. Although S&S had revised its
stalking horse bid to exclude forgiven pre-petition debt, its
first bid at auction -- for a total of $1.4 million --
included such a credit bid. Mission then asserted that
S&S had no right to credit bid pre-petition debt, and
announced that it would bid under protest for the remainder
of the auction. The next opportunity to bid went to Mission.
To beat S&S's proposal, Mission increased the value
of its previous bid, to the apparent confusion of some
present, by agreeing to leave in the estate $200, 000 in
cash, thus increasing the total value of its bid to $1.5
million. Bidding continued to proceed in this fashion:
S&S increased its bid using credit, and Mission agreed to
leave additional assets in the estate, including Debtor's
finished goods inventory and accounts receivable. Given
Mission's bidding structure, Debtor then revalued its
accounts receivable and inventory to reflect their
liquidation value as opposed to their book value. This
revaluation reduced the bidding value of the accounts
receivable by twenty percent, to $80, 000, and the bidding
value of the inventory by ninety percent, to $120, 000.
Mission's counsel, after being informed that Debtor would
recalculate the inventory value, responded that "[a]s
long as it's apples to apples, I don't care."
Mission's counsel did not object to the new figures after
Debtor announced them.
parties then broke for lunch. Back on the record,
Debtor's counsel informed those present that, after a
negotiation between Debtor's counsel and S&S off the
record, S&S intended to adopt Mission's bid structure
by leaving assets in the estate. In its next bid, S&S
credit bid only its post-petition debt, assumed all
pre-petition liabilities other than rejection damages and
disputed liabilities, assumed post-petition accounts payable,
and left in the estate all accounts receivable, inventory,
and cash. In subsequent bidding, S&S increased its bid by
credit bidding pre-petition debt, and Mission increased its
bid with cash. Mission soon ceased to bid and declined to be
designated the backup bidder, ending the auction.
S&S's winning bid, for a total value of $2.7 million,
consisted of forgiven pre-petition debt, forgiven
post-petition debt, the assumption of post-petition accounts
payable, the assumption of certain pre-petition unsecured