SE Prop. Holdings, LLC v. Seaside Eng'g & Surveying, Inc. (In re Seaside Eng'g & Surveying, Inc.)

• Decision Date: 12 March 2015
• Docket Number: No. 14–11590.,14–11590.
• Parties: In re SEASIDE ENGINEERING & SURVEYING, INC., Debtor. SE Property Holdings, LLC, Claimant–Appellant, v. Seaside Engineering & Surveying, Inc., Defendant–Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

780 F.3d 1070

In re SEASIDE ENGINEERING & SURVEYING, INC., Debtor.SE Property Holdings, LLC, Claimant–Appellant

v.Seaside Engineering & Surveying, Inc., Defendant–Appellee.

No. 14–11590.

United States Court of Appeals, Eleventh Circuit.

March 12, 2015.

Richard M. Gaal, McDowell Knight Roedder & Sledge, LLC, Mobile, AL, Theodore R. Howell, Barron & Redding, PA, Panama City, FL, for Claimant–Appellant.

Natasha Revell, Teresa Marie Dorr, Kenneth W. Revell, Zalkin Revell, PLLC, Santa Rosa Beach, FL, for Defendant–Appellee.

Appeal from the United States District Court for the Northern District of Florida. D.C. Docket Nos. 3:12–cv–00511–MW–EMT; 11–bkc–31637–WSS.

Before MARTIN and ANDERSON, Circuit Judges, and COTE,^* District Judge.

Opinion

ANDERSON, Circuit Judge:

SE Property Holdings, LLC, and affiliated entity Vision–Park Properties, LLC, (collectively “Vision”) appeal the district court's order upholding decisions in the bankruptcy restructuring proceedings of Seaside Engineering and Surveying, LLC (“Seaside” or “Debtor”). After careful review of the record, and with the benefit of oral argument, we affirm. In doing so, we provide guidance to the Circuit's bankruptcy courts with respect to a significant issue: i.e., the authority of bankruptcy courts to issue non-consensual, non-debtor releases or bar orders, and the circumstances under which such bar orders might be appropriate.

I. BACKGROUND

Seaside is a civil engineering and surveying firm that conducts forms of technical mapping. Seaside provided services to, among other clients, the U.S. Army Corps of Engineers. Seaside's principal shareholders prior to all bankruptcy litigation were John Gustin, James Mainor, Ross Binkley, James Barton, and Timothy Spears. The principals branched out from their work as engineers and entered the real estate development business, forming Inlet Heights, LLC, and Costa Carina, LLC. These wholly separate entities borrowed money from Vision with personal guaranties from the principals. Inlet Heights and Costa Carina defaulted on the loans, and Vision filed suit to recover amounts under the guaranties.

Gustin filed for Chapter 7 bankruptcy protection for himself. Mainor and Binkley followed suit. All were appointed Chapter 7 trustees. Gustin, Mainor, and Binkley listed their Seaside stock as non-exempt personal property in their required filings. In April 2011, the Chapter 7 trustee in the Gustin case conducted an action to sell Gustin's shares of Seaside stock. Gustin bid $95,500.00, and Vision defeated the bid with a purchase price of $100,000.00. Seaside attempted to block sale of Gustin's stock to Vision, but the bankruptcy court confirmed the sale. Following the sale of Gustin's stock, Seaside filed for Chapter 11 bankruptcy protection on October 7, 2011.¹

Seaside proposed to reorganize and continue operations as the entity Gulf Atlantic, LLC (“Gulf”), an entity managed by Gustin, Mainor, Binkley, and Bowden, and owned by four members, the respective irrevocable family trust of each manager. The outside equity holders would receive promissory notes with interest accruing at a rate of 4.25% in exchange for their interest in Seaside and thus be excluded from ownership in Gulf. The bankruptcy court approved the Second Amended Plan of Reorganization (“Second Amended Plan” or “Reorganization Plan”), over objection of Vision, valuing Seaside at $200,000.00. The district court affirmed the bankruptcy court.

II. DISCUSSION

Vision raises myriad issues on appeal. The arguments all essentially reduce to Vision's objections to the bankruptcy court's valuation and to the composition of the reorganized entity under the Second Amended Plan of Reorganization. We address each argument in turn.

A. Valuation of Seaside

Vision argues that the bankruptcy court improperly valued Seaside under a forced-sale analysis as opposed to a going-concern analysis. Vision continues that even under a forced-sale analysis, the bankruptcy court selected an inadequate discount rate by considering impermissible factors—particularly the risk of critical employees leaving the firm—and inadmissible expert testimony. The valuation of Seaside is a mixed question of law and fact. In re Ebbler Furniture & Appliances, Inc., 804 F.2d 87, 89 (7th Cir.1986). Selection of a valuation method is a legal matter subject to de novo review, and findings made under that standard are facts subject to clear error review. Id.

We disagree with Vision that the bankruptcy court valued Seaside using a forced-sale method. To begin, the bankruptcy court explicitly stated that “the correct method of valuation of the [D]ebtor is that as a going concern.” The bankruptcy court also considered future losses, which are necessary to a discounted cash flow analysis, the core of a going-concern valuation. Most telling, the bankruptcy court discussed and selected a discount rate, the critical input to calculate the present value of a business based on a cash flow.

Having established use of the proper valuation method, the bankruptcy court committed no error in considering the risk of losing key employees in selecting a discount rate. “[A]ll relevant factors to property value must be considered to arrive at a just valuation of a property.” In re Webb MTN, LLC, 420 B.R. 418, 435 (Bankr.E.D.Tenn.2009). Seaside's civil engineering and mapping operations rely upon human expertise, and its client base relies upon established relationships. The loss of key employees could equate to a complete deterioration of Seaside's value. Employee retention is certainly a relevant risk if not the key risk in calculating the discount rate in a case like this. The bankruptcy court also has discretion to weigh expert testimony and select portions to accept or reject. Id. Vision's argument is that the bankruptcy court did just this, and therefore the argument is unavailing. To reiterate, the bankruptcy court committed no error in valuing Seaside.

B. The Non-debtor Release or Bar Order ²

As part of the Reorganization Plan, the bankruptcy court approved releases of claims against non-debtors:

[N]one of the Debtor, ... Reorganized Debtor, Gulf Atlantic ... (and any officer or directors or members of the aforementioned [entities] ) and any of their respective Representatives (the “Releasees”) shall have or incur any liability to any Holder of a Claim against or Interest in Debtor, or any other party-in-interest ... for any act, omission, transaction or other occurrence in connection with, relating to, or arising out of the Chapter 11 Case, the pursuit of confirmation of the Amended Plan as modified by the Technical Amendment, or the consummation of the Amended Plan as modified by this Technical Amendment, except and solely to the extent such liability is based on fraud, gross negligence or willful misconduct.

Reorganization Plan Art. IX.C. The district court upheld the propriety of these non-debtor releases. Although this Circuit has considered the propriety of such a release by a bankruptcy court, it has not done so recently. The issue warrants significant discussion.

1. History of Non–Debtor Releases in the Eleventh Circuit

This Circuit has spoken at least once on the validity of non-debtor releases in bankruptcy restructuring plans. We approved a release of claims against a non-debtor in In re Munford, 97 F.3d 449 (11th Cir.1996). There, the debtor sued several defendants alleging breach of fiduciary duties related to a leveraged buy out. Id. at 452. One defendant offered to settle the claims but denied liability and conditioned its offer of settlement on issuance by the bankruptcy court of a protective order enjoining the non-settling defendants from pursuing contribution or indemnity claims against the settling defendant. Id. In order to make the settlement possible and to fund the bankruptcy estate, the bankruptcy court issued a protective order barring the non-settling defendants from seeking contribution or indemnification from the settling defendant. Id. We held that 11 U.S.C. § 105(a)³ gives bankruptcy courts authority to issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of the Bankruptcy Code, including the bar order in that case. We upheld the non-debtor release because the settling defendant “would not have entered into the settlement agreement” without the bar order and because the bar order was “integral to settlement in an adversary proceeding.” Munford, 97 F.3d at 455.

Munford is the controlling case here, indicating that this Circuit permits non- debtor releases at least under some circumstances.⁴ However, the facts of this case differ from those considered in Munford. Instead of the settlement context in Munford, here the releases prevent claims against non-debtors that would undermine the operations of, and doom the possibility of success for, the reorganized entity, Gulf. Other Circuits have addressed substantively similar releases, which we now consider.

2. Non-debtor Releases in Sister Circuits

Other circuits are split as to whether a bankruptcy court has the authority to issue a non-debtor release and enjoin a non-consenting party who has participated fully in the bankruptcy proceedings but who has objected to the non-debtor release barring it from making claims against the non-debtor that would undermine the operations of the reorganized entity. Collier Bankruptcy Practice Guide ⁵ reports the circuit split as follows. The authors indicate, as the minority view, that the Ninth and Tenth Circuits prohibit such bar orders.⁶ Our research reveals that the Fifth Circuit is also in the minority with respect to this issue. In In re Vitro S.A.B. DE C.V., 701 F.3d 1031, 1061 (2012), the Fifth Circuit interpreted its prior precedent, saying that it “seem[s] broadly to foreclose non-consensual non-debtor releases in permanent injunctions.” The opinions for these minority circuits base their conclusion on 11 U.S.C. § 524(e), which provides in relevant part: “[D]ischarge of a debt of...