Chapter 7 Trustee of the Estate of the Robert Plan
Corporation, Appellee.
11 CV 0795(SJF)
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK
2011 U.S. Dist. LEXIS 64929
June 16, 2011, Decided \
June 16, 2011, Filed
COUNSEL: For Weinberg, Gross & Pergament LLP, Movant: Marc A. Pergament,Weinberg, Gross & Pergament, LLP, Garden City, NY.
Michelle Wallach, Appellant, Pro se, Mill Neck, NY.
For Kenneth Kirschenbaum, Chapter 7 Trustee of the Estate of the Robert PlanCorporation, Appellee: Steven B. Sheinwald, Kirschenbaum & Kirschenbaum, P.C.,Garden City, NY.
JUDGES: SANDRA J. FEUERSTEIN, United States District Judge.
OPINION BY: SANDRA J. FEUERSTEIN
OPINION
ORDER
FEUERSTEIN, J.,
I. Introduction
On December 28, 2010, pro se appellant Michelle Wallach ("appellant")1 fileda notice of appeal from an order of the United States Bankruptcy Court for theEastern District of New York (Grossman, U.S.B.J.) ("the bankruptcy court"),entered December 17, 2010, inter alia, approving the application of KennethKirschenbaum ("the Trustee"), the Chapter 7 Trustee of the Estate of the RobertPlan Corporation, to withdraw his motion filed in a consolidated bankruptcyproceeding commenced by The Robert Plan Corporation and The Robert Plan of NewYork Corporation (collectively, "the RP Corporations") for authorization to sellto appellant the interest, if any, of the estate of the RP Corporations in aproof of claim filed by the Trustee in a Chapter 11 bankruptcy proceedingcommenced by Robert Wallach ("the Wallach Chapter 11 proceeding"), a shareholderof the RP Corporations and appellant's spouse. The Trustee moves to dismiss theappeal on the basis that appellant lacks standing to appeal the December 17,2010 order of the bankruptcy court. For the reasons set forth below, theTrustee's motion is granted and the appeal is dismissed.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1 Althoughappellant is proceeding pro se on this appeal, she is an attorney admitted topractice before the courts of the State of New York.- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
II. Background
On or about August 25, 2008, Robert Wallach ("Wallach") filed in thebankruptcy court a voluntary petition under Chapter 11 of the United StatesBankruptcy Code which was assigned case number 08-74601-reg ("the WallachChapter 11 proceeding"). On that same date, the RP Corporations also filed inthe bankruptcy court voluntary petitions under Chapter 11 of the United StatesBankruptcy Code ("the Bankruptcy Code"), which were consolidated to proceedunder case number 8-08-74573-reg ("The RP Corporations bankruptcy proceeding").
On or about January 19, 2010, the RP Corporations bankruptcy proceeding wasconverted from Chapter 11 to Chapter 7 under the Bankruptcy Code and the Trusteewas appointed the Chapter 7 Trustee of the estate of the RP Corporations.
On or about February 25, 2010, the Trustee filed a proof of claim ("Claim No.28"), in the sum of six million three hundred ninety-eight thousand dollars($6,398,000.00), plus interest, in the Wallach Chapter 11 proceeding.
By letter dated August 18, 2010, appellant offered to purchase and receive anassignment of the interest, if any, of the estate of the RP Corporations inClaim No. 28 against Wallach for the sum of five thousand dollars ($5,000.00),subject to higher or better bids and the approval of the bankruptcy court.
On or about September 20, 2010, the Trustee received a check in the sum offive thousand dollars ($5,000.00) from appellant, which was deposited in theaccount of the estate of the RP Corporations pending the entry of an orderapproving the sale of Claim No. 28 by the bankruptcy court and the actual saleof Claim No. 28 by the Trustee to appellant.
On or about September 21, 2010, the Trustee filed in the RP Corporationsbankruptcy proceeding a motion pursuant to 11 U.S.C. § 363(b) ("the SaleMotion"), seeking authorization to sell to appellant the interest, if any, ofthe estate of the RP Corporations in Claim No. 28 against Wallach for the sum offive thousand dollars ($5,000.00), subject to, inter alia, "higher or betteroffers."
On or about October 27, 2010, after the deadline for objections to the SaleMotion to be served and filed had expired, the bankruptcy court held a hearingon the Sale Motion, during which the Trustee indicated, inter alia: (1) that asale of Claim No. 28 to appellant for the sum of five thousand dollars($5,000.00) was in the best interest of the estate of the RP Corporationsbecause Claim No. 28 was "uncertain" and subject to litigation risks and costs;(2) that he, with the assistance of Wallach, had negotiated a settlement of aclaim asserted by Wallach against American International Group, Inc. ("AIG"),one of the largest creditors of the RP Corporations, which provided for apayment by AIG to (a) the estate of the RP Corporations in the sum of ninehundred thousand dollars ($900,000.00), and (b) the Wallach estate in the sum offorty thousand dollars ($40,000.00) ("the AIG Settlement"); and (3) that the AIGSettlement was made possible because Wallach understood (a) that appellant waspurchasing Claim No. 28 from the Trustee for the sum of five thousand dollars($5,000.00) and (b) that upon the purchase, appellant would be reducing theamount of Claim No. 28 from six million three hundred ninety-eight thousanddollars ($6,398,000.00), plus interest, to five thousand dollars ($5,000.00).However, the Trustee expressly indicated that disapproval of the Sale Motionwould have no effect on the AIG Settlement. The bankruptcy court adjourned thehearing on the Trustee's Sale Motion until the date scheduled to hear theTrustee's motion to approve the AIG Settlement in the RP Corporations bankruptcyproceeding.
During a hearing on December 8, 2010, counsel for Wallach reiterated thatalthough the sale of Claim No. 28 to appellant may have impacted thenegotiations regarding the AIG Settlement, a denial of the sale would not affectthe AIG Settlement. The bankruptcy court, inter alia, expressed "a good bit oftrepidation" regarding the sale of Claim No. 28 but indicated that it would not"second guess the [T]rustee." The bankruptcy judge further stated, in relevantpart:
"I think [the Trustee] met barely a minimum standard here. So the Court will approve [the sale], but again, that's with a good bit of trepidation * * *, and based on the facts in front of [the bankruptcy court]. If the facts end up changing, if [the bankruptcy court] learn[s] facts differently down the road it's not going to change this order, but it could have effects on other things, but [the bankruptcy court] [wi]ll approve [the sale]. So the Court will grant the motion."
(Transcript of Proceedings on December 8, 2010 ["T."], p. 23).
On December 13, 2010, appellant submitted to the bankruptcy court a proposedorder, inter alia, granting the Trustee's Sale Motion. On that same date,counsel for the Trustee filed a letter with the bankruptcy court indicating thathe was withdrawing the Sale Motion based upon the bankruptcy court's expressed"trepidation" in granting the Sale Motion and the Trustee's reservations, uponfurther reflection, about whether proceeding with the sale of Claim No. 28 toappellant was in the best interests of the estate of the RP Corporations.
On December 15, 2010, the Trustee submitted to the bankruptcy court aproposed order approving the withdrawal of the Sale Motion. On December 17,2010, the bankruptcy court signed the Trustee's proposed order withdrawing theSale Motion and authorizing the return of the five thousand dollars ($5,000.00)deposited in escrow to appellant and declined to sign appellant's proposed ordergranting the Sale Motion. Upon entry of the December 17, 2010 order, the Trusteeissued a check to appellant in the sum of five thousand dollars ($5,000.00) andmailed it to her.
Appellant subsequently filed a notice of appeal to this Court of thebankruptcy court's December 17, 2010 order, which was transmitted to this Courton February 17, 2011.
On March 3, 2011, the Trustee filed a letter, in accordance with myindividual rules, advising the Court that he had served a motion to dismiss theappeal. Thereafter, the Court entered a bankruptcy scheduling order. Appellantfiled her brief on March 8, 2011. In accordance with my individual rules, theTrustee filed his fully-briefed motion to dismiss the appeal on March 30, 2011.In accordance with the Court's bankruptcy scheduling order, the Trustee filedhis responsive brief on the appeal on April 4, 2011 and appellant filed herreply brief on April 18, 2011.
III. Discussion
The Trustee seeks dismissal of the appeal on the basis that appellant, as aprospective purchaser of an asset of the estate of the RP Corporations, is notan "aggrieved person" and, therefore, lacks standing to appeal the December 17,2010 order of the bankruptcy court.
"Whether a claimant has standing is 'the threshold question in every federalcase, determining the power of the court to entertain the suit.'" Licensing byPaolo, Inc. v. Sinatra (In re Paolo Gucci), 126 F.3d 380, 387-88 (2d Cir. 1997)(quoting Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343(1975)). "[c]ourts have consistently applied a standard* * * permitt[ing] only a'person aggrieved' to appeal an order of the bankruptcy court." Kabro Associatesof West Islip, LLC v. Colony Hill Associates (In re Colony Hill Associates), 111F.3d 269, 273 (2d Cir. 1997); see also DISH Network Corp. v. DBSD North America,Inc. (In re DBSD North America, Inc.), 634 F.3d 79, 89 (2d Cir. 2011); Kane v.Johns-Manville Corp., 843 F.2d 636, 641-42 (2d Cir. 1988). "[A]n 'aggrievedperson' is one who is 'directly and adversely affected pecuniarily' by thechallenged ruling of the bankruptcy court." Colony Hill, 111 F.3d at 273(quoting Kane, 843 F.2d at 641); see also Gucci, 126 F.3d at 388 ("To havestanding to appeal from a bankruptcy court ruling in this Circuit, an appellantmust be an 'aggrieved person,' a person 'directly and adversely affectedpecuniarily' by the challenged order of the bankruptcy court.") The "aggrievedperson" standard "is stricter than Article III's 'injury in fact' test forstanding," Gucci, 126 F.3d at 388; see also DBSD North America, 634 F.3d at 89("A[] [bankruptcy] appellant * * * must show not only 'injury in fact' underArticle 111 but also that the injury is 'direct[]' and 'financial'"), and"'reflect(s) the understandable concern that if appellate standing is notlimited, bankruptcy litigation will become mired in endless appeals brought bythe myriad of parties who are indirectly affected by every bankruptcy courtorder.'" Colony Hill, 111 F.3d at 273 (quoting Kane, 843 F.2d at 642); see alsoGucci, 126 F.3d at 388 ("The stringency of [the 'aggrieved person' standard] isrooted in a concern that freely granting open-ended appeals to those personsaffected by bankruptcy court orders will sound the death knell of the orderlydisposition of bankruptcy matters.")
Under the "aggrieved person" standard, "an unsuccessful bidder- whose onlypecuniary loss is the speculative profit it might have made had it succeeded inpurchasing property at an auction- usually lacks standing to challenge abankruptcy court's approval of a sale transaction." Colony Hill, 111 F.3d at 273; see also Gucci, 126 F.3d at 388 ("[U]nsuccessful bidders usually lack standingto challenge a bankruptcy court's approval of a sale.") A prospective purchaseralso lacks standing to challenge a bankruptcy court's disallowance of a proposedsale of an asset of the bankruptcy estate. See, e.g. Austin Associates v.William H. Howison (In re Murphy), 288 B.R. 1, 4 (D. Me. 2002) ("As a generalrule, a prospective purchaser of assets from a bankruptcy estate is not withinthe zone of interests intended to be protected by the Bankruptcy Code and,therefore, does not typically have standing to challenge a sale of the assets toanother party."); Calpine Corp. v. O'Brien Environmental Energy, Inc. (In reO'Brien Environmental Energy, Inc.), 181 F.3d 527, 531 (3d Cir. 1999) (holdingthat generally, creditors have standing to appeal, but disappointed prospectivepurchasers do not); Davis v. Seidler (In re HST Gathering Co.), 125 B.R. 466,468 (W.D. Tex. 1991) ("[T]he statutes governing the sale of assets of bankruptcyestates are intended to protect the creditors of such estates and notprospective purchasers. Thus, [the appellant] * * * lacks standing to appealbecause, as a prospective purchaser, he is not within the 'zone of interestsintended to be protected' under the bankruptcy statutes and regulations,")
However, "the rule denying standing to unsuccessful bidders is not absolute,"Colony Hill, 111 F.3d at 273; see also Gucci, 126 F.3d at 388 ("[T]he rule thatpurports to deny standing to unsuccessful bidders is not unvarying * * * but isaffected by those concerns the Bankruptcy Code was enacted to protect.") Anunsuccessful bidder has standing to challenge the "intrinsic fairness" of abankruptcy sale, i.e., that the sale was tainted by fraud, bad faith, collusion,deceit, mistake or unfairness. Gucci, 126 F.3d at 388; Colony Hill, 111 F.3d at274.
It is undisputed that appellant is not a creditor of the estate of the RPCorporations. Nor was an order approving the sale ever entered by the bankruptcycourt. Contrary to appellant's contention, even assuming, arguendo, that thebankruptcy court's statement that it "will grant" the Sale Motion effectivelygranted the Sale Motion absent entry of any such order, the sale to appellantwas not consummated at that time. Rather, the Sale Motion only soughtauthorization to sell Claim No. 28 to appellant "subject to higher or betteroffers," thus contemplating that a sale would be held at a later date, afterauthorization was granted therefor and third parties were given an opportunityto submit "higher or better offers." No bankruptcy sale of Claim No. 28 was everscheduled and no deadline for the submission of any "higher or better offers" byother prospective purchasers of Claim No. 28 was ever designated following thebankruptcy court's purported approval of the sale. Contrary to appellant'scontention, the notice of the Sale Motion seeking authorization for the salethat had been served upon all creditors and parties in interest did notconstitute a notice of sale of Claim No. 28 to appellant. There is no evidencein the record that a notice of sale of Claim No. 28 to appellant was ever servedupon any creditor or party in interest. Moreover, any order granting the Trusteeauthorization to sell Claim No. 28 to appellant "subject to higher or betteroffers" would not require the Trustee to, in fact, sell that asset to appellant.Accordingly, appellant was never a successful purchaser of any property of theestate of the RP Corporations, but was merely an unsuccessful prospectivepurchaser of such property.
Moreover, appellant's deposit was returned to her upon withdrawal of the SaleMotion and the loss of any profit she hoped to gain from acquiring Claim No. 28"is too speculative a harm to constitute injury to property for purposes of thestanding test." O'Brien Environmental Energy, 181 F.3d at 531. Accordingly,appellant does not have standing as a prospective purchaser of Claim No. 28 toappeal the December 17, 2010 order of the bankruptcy court. See, e.g. O'BrienEnvironmental Energy. 181 F.3d at 531 (finding that the appellant did not havestanding to appeal the bankruptcy court's decision to deny approval of acontract for appellant's purchase of the assets of the bankruptcy estate).
Appellant contends, however, that she has standing to appeal the December 17,2010 order of the bankruptcy court based upon her prenuptial agreement withWallach. According to appellant, "if [Wallach] successfully reorganizes and payshis unsecured creditors 100% of their allowed claims under a confirmed plan ofreorganization, [she] stands to gain fifty cents for every dollar of unsecureddebt that is eliminated. * * * Accordingly, if Appellant purchased the Claim[No. 28] and had it reduced from $6,398,000 to the $5,000 purchase price, [she]could gain up to $3,199,000." (Appellant's Memorandum of Law in Opposition toMotion to Dismiss Appeal [App. Opp.], p. 5).
Although the prenuptial agreement is not part of the record on appeal, theissue of appellant's standing, the purpose for which the prenuptial agreement issubmitted, was not before the bankruptcy court and the prenuptial agreementpresumably is part of the record in the related, albeit separate, WallachChapter 11 proceeding. Accordingly, I have considered the prenuptial agreementon the Trustee's motion to dismiss the appeal. See In re Bear Stearns High-GradeStructured Credit Strategies Master Fund, Ltd., 389 B.R. 325, 339 (S.D.N.Y.2008) ("The touchstone for the designation of matter as part of the record [onappeal] is whether the matter was before the lower court (or at least consideredby that court) in entering the order of judgment appealed from. * * *. Subjectto a narrow exception * * *, if an item was not considered by the [bankruptcy]court, it should be stricken from the record on appeal." (Internal quotations,citations and alterations omitted)); see also Food Distribution Center v. FoodFair, Inc., 15 B.R. 569, 572 (Bankr. S.D.N.Y. 1981) ("The record on appealshould contain all documents and evidence bearing on the proceedings below andconsidered by the bankruptcy judge in reaching his decision." * * * However, therecord on appeal of one matter may be supplemented with materials from otheradversary proceedings arising from the same bankruptcy case and, both [sic]materials from cases closely related to the appeal." (Internal quotations andcitations omitted)).
Nonetheless, appellant's contention, unsupported by any law, that theprenuptial agreement confers standing upon her to maintain this appeal iswithout merit. Appellant is merely a nondebtor spouse of a debtor in a separatebut related bankruptcy proceeding and, in any event, there is no evidence of anypending divorce proceedings or even that appellant contemplates divorcing herhusband. Similarly without merit is appellant's unsupported contention that shehas standing based upon her status as "one of the largest creditors in[Wallach's Chapter 11] bankruptcy case, having filed a proof of claim for $17.5million bifurcated into both a priority claim and an unsecured claim. * * * Asan unsecured creditor, Appellant would have a significant interest in reducingthe overall pool of unsecured claims in which [she] would have to share anydistribution to such class of creditors." (App. Opp., p. 6). The loss of anypecuniary benefit appellant hoped to gain from acquiring Claim No. 28 andeliminating that debt of her husband in the event (a) she ever divorces him or(b) there is a distribution in the Wallach Chapter 11 proceeding to unsecuredcreditors "is too speculative a harm to constitute injury to property forpurposes of the standing test." O'Brien Environmental Energy, 181 F.3d at 531.Both of appellant's contentions would open a floodgate of bankruptcy litigationby individuals only indirectly affected by a bankruptcy proceeding, againstwhich the "aggrieved person" test for standing was designed to protect.
In addition, appellant contends that she is challenging the intrinsicfairness of the process, pursuant to which the bankruptcy court allowed theTrustee to withdraw the Sale Motion "without any due process of law" after ithad orally approved the motion. (App. Opp., p. 9). According to appellant, theTrustee "acted in bad faith and fraudulently in deceiving the Bankruptcy Courtthat a notice of sale had not been served upon creditors and interested partiesand thus, causing the court to believe that the sale had not been complete uponthe court's approval thereof." (App. Opp., p. 10). Appellant's contention thatthe Trustee acted in bad faith and fraudulently is without merit since, interalia, there is no evidence that a notice of sale had ever been served uponcreditors and interested parties in the RP Corporations proceeding and the saleto appellant of Claim No. 28 had not, in fact, been completed upon thebankruptcy court's oral approval of the Sale Motion authorizing the sale subjectto "higher or better offers." Absent any evidence that the Trustee's withdrawalof the Sale Motion had been tainted by fraud, bad faith, collusion, deceit,mistake or unfairness, see, e.g. Gucci, 126 F.3d at 388; Colony Hill, 111 F.3dat 274, appellant's challenge to the "intrinsic unfairness" of the process isinsufficient to confer standing upon her to appeal the December 17, 2010 orderof the bankruptcy court. See In re REA Holding Corp., 447 F.Supp. 167, 169(S.D.N.Y. 1978) ("[U]nless it can be shown that there is some evidence of fraud,deceit, mistake of fact or other inequitable overreaching * * * an unsuccessfulbidder[] has no standing to * * * appeal.")
In any event, "where, as here, a trustee proposes to sell assets of theestate, the trustee's business judgment is subject to great judicial deference."O'Brien Environmental Energy, 288 B.R. at 5 (citing In re Bakalis, 220 B.R. 525,532 (Bankr. E.D.N.Y. 1998). "The decision of the trustee will not be disturbed'unless it is shown that the trustee acted in an irrational, arbitrary, orcapricious manner, clearly contrary to reason and not justified by theevidence.'" Id. (quoting In re Fas Mart Convenience Stores, Inc., 265 B.R. 427,431 (Bankr. E.D. Va. 2001) (internal quotations and citation omitted)). Therecord demonstrates that the Trustee decided to withdraw his Sale Motion oncethe bankruptcy court expressed trepidation about the sale and he reflected uponthose concerns. Accordingly, the Trustee acted in a rational and justifiablemanner in seeking to withdraw his Sale Motion in light of the bankruptcy court'sexpress reservations about the sale.
IV. CONCLUSION
For the reasons stated above, the Trustee's motion to dismiss the appeal isgranted and the appeal is dismissed based upon appellant's lack of standing toappeal the December 17, 2010 order of the bankruptcy court.
SO ORDERED.
/s/ Sandra J. Feuerstein
SANDRA J. FEUERSTEIN
United States District Judge
Dated: June 16, 2011
Central Islip, New York