Mission Prod. Holdings, Inc. v. Schleicher & Stebbins Hotels, L.L.C. (In re Old Cold, LLC)

• Decision Date: 01 October 2020
• Docket Number: No. 19-9004,19-9004
• Parties: IN RE: OLD COLD, LLC, Debtor. Mission Product Holdings, Inc., Appellant, v. Schleicher & Stebbins Hotels, L.L.C.; Old Cold, LLC, Appellees.
• Court: U.S. Court of Appeals — First Circuit

976 F.3d 107

IN RE: OLD COLD, LLC, Debtor.Mission Product Holdings, Inc., Appellant,

v.Schleicher & Stebbins Hotels, L.L.C.; Old Cold, LLC, Appellees.

No. 19-9004

United States Court of Appeals, First Circuit.

October 1, 2020

Robert J. Keach, with whom Lindsay Z. Milne, Letson B. Douglass, and Bernstein, Shur, Sawyer & Nelson, P.A., Portland, ME, were on brief, for appellant.

Christopher M. Candon, with whom Sheehan Phinney Bass & Green PA, Manchester, NH, was on brief, for appellee Schleicher & Stebbins Hotels, L.L.C.

Before Howard, Chief Judge, Selya and Kayatta, Circuit Judges.

KAYATTA, Circuit Judge.

On its third appeal before us in the bankruptcy proceedings of debtor Old Cold, LLC ("debtor"), creditor Mission Product Holdings, Inc. ("Mission") now challenges an order of the bankruptcy court granting creditor Schleicher & Stebbins Hotels, L.L.C. ("S & S") relief from the automatic stay imposed by section 362 of the Bankruptcy Code. See 11 U.S.C. § 362(a). In addition to challenging the stay relief order on its merits, Mission argues that the bankruptcy court lacked jurisdiction to issue the order because Mission's prior appeal of a bankruptcy court ruling was then still pending. Seeking to trump Mission's jurisdictional argument, S & S contends that any challenge to the bankruptcy court's order granting stay relief is moot because the debtor has disbursed all assets remaining in the estate to S & S. We reject both parties' jurisdictional arguments and affirm on the merits.

I.

We have previously chronicled the long and tumultuous fight between Mission and S & S over the debtor's assets.¹ So we repeat as succinctly as possible only those facts key to this appeal.

A.

In 2012, the debtor granted Mission exclusive and non-exclusive licenses to use and distribute several of its intellectual property assets (the "Agreement"). When the parties' relationship soured, Mission exercised its contractual right to terminate the Agreement, triggering a provision calling for a two-year wind-down period. Hoping to end any wind-down sooner, the debtor sought to terminate the contract immediately by claiming Mission had breached the Agreement. The parties entered arbitration over that dispute, with the arbitrator ruling in favor of Mission as to liability but making no findings with respect to damages due to the intervening filing of the debtor's Chapter 11 petition.

B.

In its petition for Chapter 11 bankruptcy, the debtor listed S & S as the only secured creditor, with a $5.55 million claim of pre-petition advances stemming from credit extended prior to the bankruptcy filing. The debtor listed Mission as an unsecured creditor, with a contingent, unliquidated, and disputed claim, and an executory contract.

Shortly after filing for Chapter 11 protection, the debtor moved for debtor-in-possession financing from S & S. The bankruptcy court granted this motion in a series of orders, with its final order allowing up to $1.45 million in post-petition financing, secured by a first-priority perfected lien on the debtor's estate. As part of this final order, the court confirmed the "validity, extent, perfection or priority of [S & S's] security interests" and pre-petition liens of $5.5 million, with the order itself perfecting the $1.45 million post-petition amount. The court also set November 12, 2015 (pre-petition), and December 31, 2015 (post-petition), as deadlines for any challenges to these lien-validity findings. Those deadlines passed with neither Mission nor any other party lodging any objection.

C.

The debtor also sought to reject the Agreement with Mission under the terms of the Bankruptcy Code. The bankruptcy court granted the request "subject to [Mission's] election to preserve its rights under [ ] § 365(n)" of the Bankruptcy Code. Clarifying the extent of these section 365(n) rights, the bankruptcy court stated that Mission's non-exclusive intellectual property license survived the rejection but that Mission's exclusive distribution rights and trademark license did not. In re Tempnology, LLC, 541 B.R. 1, 6–7 (Bankr. D.N.H. 2015). We affirmed. Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re Tempnology, LLC ), 879 F.3d 389, 405 (1st Cir. 2018).

On June 11, 2018 (the same day that S & S filed the currently-at-issue motion for relief from the automatic stay), Mission petitioned the Supreme Court for a writ of certiorari seeking review of our affirmance. The Supreme Court granted the petition in part on October 26, 2018 (a month after the bankruptcy court granted the sought-after stay relief but before the relief order took effect), to answer the following question: "Whether, under § 365 of the Bankruptcy Code, a debtor-licensor's ‘rejection’ of a license agreement -— which ‘constitutes a breach of such contract,’ 11 U.S.C. § 365(g) -— terminates rights of the licensee that would survive the licensor's breach under applicable non-bankruptcy law." See Petition for a Writ of Certiorari at i, Mission Prod. Holdings, Inc. v. Tempnology, LLC, ––– U.S. ––––, 139 S. Ct. 397, 202 L.Ed.2d 309 (2018) (No. 17-1657) (mem.). On May 20, 2019, the Supreme Court reversed our ruling, holding that

under Section 365, a debtor's rejection of an executory contract in bankruptcy has the same effect as a breach outside bankruptcy. Such an act cannot rescind rights that the contract previously granted. Here, that construction of Section 365 means that the debtor-licensor's rejection cannot revoke the trademark license.

Mission Prod. Holdings, Inc. v. Tempnology, LLC, ––– U.S. ––––, 139 S. Ct. 1652, 1666, 203 L.Ed.2d 876 (2019).

D.

While Mission and S & S did battle, the debtor moved to sell all its assets at auction pursuant to 11 U.S.C. § 363. The bankruptcy court appointed an examiner and approved the sale motion in September and October 2015, respectively. S & S agreed to be a stalking horse bidder, and the bankruptcy court authorized S & S to credit bid "up to and including the post-petition amounts loaned to" the debtor and "an additional $5,650,000" as listed on the debtor's Schedule D.

The auction took place on November 5, 2015. In its first bid, Mission included $200,000 of debtor cash as some sort of supposed consideration for the sale, stating that the bid would "leave $200,000 worth of cash in the debtor" and that "[Mission is] leaving $[200,000] of the cash [it was] otherwise ... going to buy in the debtor." In an effort to bid similarly to Mission, S & S also began to demand fewer than all of the debtor's assets, with the debtor's counsel describing S & S's bid as "strik[ing] the provisions of the ... acquired assets, similar to those struck by Mission" and thereby "leav[ing] back" or "leav[ing] behind" various estate assets. As a result, both parties' final bids left behind in the estate an identical subset of debtor assets, worth approximately $800,000 (the debtor's inventory, its accounts receivable, and $600,000 of cash). Perhaps seeking to clarify each other's view regarding the precise treatment of these debtor assets post-auction, the following exchange took place between the debtor's counsel (Desiderio) and Mission's counsel (Keach):

MR. KEACH: So [S & S is] leaving $800,000 of assets in the estate. The estate gets to liquidate those and keep the money?

MR. DESIDERIO: It's more than that. They're leaving—

MR. KEACH: Well, if it was 800 for us, it's going to be 800 for them.

MR. DESIDERIO: ... Yes. That's right. Which means we value [S & S]’s last bid at $2,257,000.

Eventually, S & S incrementally increased its credit bid beyond an amount Mission was willing to contribute in cash and won the auction.

Mission objected to the sale procedures and final determination that S & S had fairly won. It argued that the debtor miscalculated S & S's bid; that the auction was conducted in bad faith; and that S & S should not have been able to credit bid as much as it did because much of that credit was in fact equity. After the Examiner entered a report determining that the valuation was fair and the transaction arms-length, the bankruptcy court, after a two-day evidentiary hearing, entered a sale order approving the sale of the debtor's assets to S & S pursuant to an Asset Purchase Agreement between the two parties (APA). In re Tempnology, LLC, 542 B.R. 50 (Bankr. D.N.H. 2015). The bankruptcy court rejected Mission's arguments, concluding that S & S was entitled to credit bid in the amount that it did because the secured claim listed on the debtor's schedule D was not subject to a bona fide dispute, as Mission had never previously disputed the secured claim. Id. at 68–70. The court similarly refused either to treat these claims as equity or find that S & S was not a good faith purchaser. The court also found no collusion between the debtor and S & S, and that the auction was otherwise fair. Id. at 70–72.

The APA memorializing the sale distinguishes between two sets of debtor assets resulting from the sale: the Acquired Assets and the Excluded Assets. The former included, free and clear of all encumbrances, all of the debtor's assets save the Excluded Assets, which were specifically identified as such in the APA. As is customary in a transaction liquidating a debtor's assets, the sale proceeds received by the debtor on the sale became subject to all encumbrances that had been attached to the Acquired Assets. We found a challenge to the entry of the sale order moot. Mission Prod. Holdings, Inc. v. Tempnology, LLC (In re Old Cold LLC ), 879 F.3d 376, 389 (1st Cir. 2018).

As to the left-behind Excluded Assets, neither the APA nor the sale order purported to change in any way the status or treatment of those assets, all of which had long been subject to S & S's lien. The APA simply omitted the Excluded Assets from the valuation of the bid, instead calculating only the dollar value given for the Acquired Assets, presumably on the assumption that, because both S & S's and Mission's final bids included exactly the same list of Excluded Assets, the precise...