In re Hart's Mfg. Co., Inc.

• Decision Date: 19 March 2008
• Docket Number: No. 05-32722-GWE.,05-32722-GWE.
• Parties: In re HART'S MANUFACTURING COMPANY, INC., Debtor.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Tennessee

383 B.R. 720

In re HART'S MANUFACTURING COMPANY, INC., Debtor.

No. 05-32722-GWE.

United States Bankruptcy Court, W.D. Tennessee, Western Division.

March 19, 2008.

COPYRIGHT MATERIAL OMITTED

Law Firm of Martin, Tate, Morrow & Marston, P.C., Adam C. Simpson, Martin, Tate, Morrow and Marston, Ellen B. Vergos, Wyatt, Tarrant & Combs, LLP, Memphis, TN, for Debtor.

MEMORANDUM AND ORDER DENYING CONFIRMATION OF SALE

GEORGE W. EMERSON, JR., Bankruptcy Judge.

The issue before the Court is whether to confirm the sale of real property conducted by auction pursuant to a confirmed plan of liquidation. The issue arises out of a motion by the Debtor-In-Possession, Hart's Manufacturing Co. ("Hart's" or "Debtor") to set aside the auction sale because it would not be in the best interest of creditors and because the proposed sale price is grossly inadequate. The high bidder, Eagle Investment Corp. ("Eagle") objects to the motion, stating that the auction should be confirmed because the purchase price is fair; there is no evidence of fraud, mistake, or collusion; and confirmation of the sale protects the integrity of the liquidation process by promoting finality in judicial sales. The first lienholder, Arkansas Development Finance Authority ("ADFA"), responds to the motion inasmuch as Eagle's high bid would be insufficient to pay of ADFA's lien.

Based upon statements of counsel, witness testimony, stipulated background facts, and the case record as a whole, the Court hereby declines to confirm the sale of the Corning Property because the sale fails to maximize creditor recovery and the proposed price is grossly inadequate. The following findings of fact and conclusions of law are rendered in accordance with Fed. R. Bankr.P. 7052. By virtue of 28 U.S.C. § 157(b)(2)(G), (A), and (O), this is a core proceeding.

I. BACKGROUND

The instant case was filed as an involuntary Chapter 7 petition on August 18, 2005. The case was then converted to a case under Chapter 11 on September 20, 2005, and an Order for Relief was entered on the same day. The Debtor filed a Disclosure Statement and a Summary of the Plan on December 12, 2006, and an Amended Disclosure Statement and a Plan of Reorganization were filed on February 19, 2007. A Confirmation Order was entered on August 17, 2007. The order confirming the plan provides, in pertinent part, for an auction of the Debtor's manufacturing facility located in Corning, Arkansas ("Corning Property") to be conducted. It also provides for the retention of jurisdiction by the Court to determine all matters arising out of the confirmation order. The only other significant asset of the estate is, an anticipated Workers' Compensation bond refund, which the plan directed be used to pay administrative expenses and the claim of the Internal Revenue Service.

Throughout the pendency of the case, Hart's continued to market the Corning Property. With the permission of the Court, Hart's and the real estate agency Burrow Halsey Realty Group, Inc. listed the property for $1,650,000. According to the testimony of Thomas Hart ("Hart"), Secretary of Hart's, the only response was an oral offer of $250,000, which the Debtor rejected.

After two years of unsuccessful marketing, Hart's obtained permission to auction the property through The Maas Companies Inc. ("Maas"). The Corning Property was then opened for inspection and potential bidders were given an auction brochure, a Bidder's Kit containing the Auction Terms and Conditions, and a form Sale Agreement pertaining to the auction of the Corning Property. Each of these documents notified the bidder that any sale of the Corning Property was subject to Court approval. The Auction Terms and Conditions expressly stated in bold print, "A SUCCESSFUL BID AT AUCTION CONSTITUTES A LEGALLY BINDING CONTRACT OF SALE. ALL SALES ARE FINAL, SUBJECT TO COURT APPROVAL." (Capitalization in original.) Before the bidding was opened, the auctioneer specifically reminded the bidders that any sale would remain subject to court approval. Prior to the auction, Eagle also commissioned an environmental investigation of the Corning Property at a cost of $7,305. The Access Agreement between Hart's and Eagle for the environmental investigation (Ex. 6) provided for Eagle to bear all expenses of the investigation.

The auction was conducted on August 17, 2007, and Eagle had the highest bid, $250,000 plus an additional $25,000 Buyer's Premium to be paid directly to the auctioneer. Following the auction, David Libla, on behalf of Eagle, deposited $55,000 in the escrow account of the Debtor's real estate closing attorney, and both Hart, on behalf of Hart's, and Libla, on behalf of Eagle, signed the Sales Agreement. The Sales Agreement, like the Bidder's Kit, auction brochure and Auction Terms and Conditions, noted that the sale remained subject to court approval.

On October 11, 2007, Hart's filed the motion now before the court. Both Hart's motion and Eagle's objection thereto make reference to a proposed bid by MPT to purchase the Corning Property for $957,000. Hart's also filed a motion to approve a stalking horse on February 18, 2008, wherein Hart's proposed a sale of the Corning Property to MPT for $1,100,000. The Court will address the Stalking Horse Motion and any future sale of the Corning Property by separate hearing and order.

A hearing on Hart's motion to set aside the sale was held on February 19, 2008, at which time the Court took the matter under advisement. None of the parties have alleged any mistake, fraud, or collusion in the conduct of the auction.

The Corning Property is situated on approximately 24.6 acres with a 165,000 square foot manufacturing building, a storage shed, and a separate shop building. The property is subject to two duly perfected liens, the first being held by ADFA and the second by MPT Holdings, LLC ("MPT"), a Mississippi limited liability company owned by three of the four brothers who were equity security holders in Hart's. The ADFA lien is approximately $457,000 and the MPT lien is $500,000, for a total secured debt on the property of approximately $957,000. The confirmed plan provides that, upon the sale of the Corning Property, ADFA is to be paid "its allowed, secured claim in full from the proceeds of the sale or, to the extent such proceeds are insufficient, from MPT."

II. DISCUSSION

As a general rule, courts have fairly broad discretion in deciding whether to confirm a sale of estate assets. In re WPRV-TV, Inc., 983 F.2d 336, 340 (1st Cir.1993); Cedar Island Builders, Inc. v. South County Sand & Gravel, Inc., 151 B.R. 298, 302 (D.R.I.1993); Jacobsohn v. Larkey, 245 F. 538 (3rd Cir.1917). The over-arching principle at confirmation is to achieve the highest price for the bankruptcy estate. Matter of Chung King, Inc., 753 F.2d 547, 549 (7th Cir.1985); In re General Insecticide Co., 403 F.2d 629, 631 (2nd Cir.1968). This goal must be balanced, however, against the need for finality in judicial sales. In re Webcor, Inc., 392 F.2d 893, 899 (7th Cir.1968) ("If parties are to be encouraged to bid at judicial sales[,] there must be stability in such sales and a time must come when a fair bid is accepted and the proceedings are ended") (citations omitted); Chung King, 753 F.2d at 550; In re Food Barn Stores, Inc., 107 F.3d 558, 564 (8th Cir.1997); Corporate Assets, Inc. v. Paloian, 368 F.3d 761, 767-768 (7th Cir.2004). In the instant case, such finality becomes particularly important because the auction was held pursuant to a previously confirmed plan.

The court's discretion is significantly broader when deciding whether to confirm a sale than it would be were the court considering setting aside a sale that was previously confirmed by the court. Matter of Chung King, Inc., 753 F.2d 547, 549 (7th Cir.1985); Corporate Assets, Inc. v. Paloian, 280 B.R. 425, 429 (N.D.Ill.2002), aff'd 368 F.3d 761 (7th Cir.2004) (a court has broader discretion to consider the reasonableness of a sale prior to its confirmation); Cedar Island Builders, Inc. v. South County Sand & Gravel, Inc., 151 B.R. 298, 302 (D.R.I.1993) ("Although a bankruptcy court possessed `broad initial discretion in granting or denying confirmation [of a sale of assets],' this range of discretion narrows considerably when a bankruptcy court is determining whether to set aside a prior [sale] confirmation order.") (citations omitted); In re General Insecticide Co., Inc., 403 F.2d 629 (2nd Cir.1968); In re Blue Coal Corp., 168 B.R. 553 (Bankr.M.D.Pa. 1994).

Although the sale was conducted pursuant to a previously confirmed plan, this Court still has the discretion, if not an obligation, to examine the reasonableness of the sale, including whether the sale is in the best interest of creditors and whether the purchase price is adequate. See In re Food Barn Stores, Inc., 107 F.3d 558, 565 (8th Cir.1997); In re Muscongus Bay Co., 597 F.2d 11 (1st Cir.1979); 50A C.J.S. Judicial Sales § 32.

A. Best Interests of Creditors

As stated above, one of the primary aims of the sale confirmation process is to maximize creditor recovery by looking to whether the sale is in the best interest of creditors. Corporate Assets, Inc. v. Paloian, 280 B.R. 425, 428 (N.D.Ill.2002), 368 F.3d 761, 767 (7th Cir.2004); In re Food Barn Stores, Inc., 107 F.3d 558, 564-565 (8th Cir.1997). An application of the "best interest of creditors" test must look at the effect on all creditors, not just general unsecured creditors. 11 U.S.C. § 101(10) (2007) provides that "[t]he term `creditor' means — (A) entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor." See generally In re Superior Siding & Window, Inc., 14 F.3d 240 (4th Cir.1994); In re OptInReal-Real-Big.com, LLC, 345 B.R. 277 (Bankr. D.Colo.2006); In re Shockley, 197 B.R. 677 (Bankr.D.Mont.1996). As part of its inquiry, the Court will consider whether the sale would increase the overall assets of the estate, and...