Karl Johnson, Briggs and Morgan, P.A.
Jeffrey Klobucar, Bassford Remele, P.A.
Contributing Editor: Karl Johnson, Briggs and Morgan, P.A.
In Fulmer v. Fifth Third Equip. Fin. Co. et al. (In re Veg Liquidation, Inc.), No. 18-1786 (8th Cir. Jul. 26, 2019), The Eighth Circuit affirmed the dismissal of an adversary proceeding (“AP”) on the basis that it was an impermissible collateral attack on a prior 363 sale order and the denial of the trustee’s motion to amend the complaint on the basis of futility.
Two years after the bankruptcy court approved the sale of the debtor’s assets and converted the case from chapter 11 to 7, the trustee commenced an AP against parties including the purchaser of the debtor’s assets and creditors who allegedly supported the purchaser’s bid in exchange for an agreement not to pursue preference claims that were included among the sale assets. The trustee claimed that the 363 sale was a sham and a fraud on the court and that the parties had conspired to manipulate the value of assets in the sale. The bankruptcy court dismissed the trustee’s claims as either impermissible collateral attacks on a sale order or without merit. The trustee appealed and the BAP affirmed.
Before the Eighth Circuit, the trustee again argued, among other things, that res judicata should not apply because most of the defendants were not parties to the sale order and that the AP was not a collateral attack on the sale because of a lack of privity and because the trustee’s claims were not “integral” to the sale. Reviewing de novo, the Eighth Circuit rejected the trustee’s argument that res judicata should not apply because a § 363 sale is an in rem proceeding that transfers property rights “good against the world, not just against parties to a judgment or persons with notice of the proceeding.” For the same reason, the Eighth Circuit rejected the trustee’s argument that lack of privity meant the AP was not a collateral attack.
Without determining whether a collateral attack is limited to “integral” provisions of a sale order, the Eighth Circuit rejected the proposition that the trustee’s claims were not “integral” because “[u]ndermining the sale order’s finding that [the purchaser’s] consideration was the highest and otherwise best offer for the Acquired Assets would adversely alter the parties’ bargained-for exchange.”
The trustee also argued that the sale order is unenforceable because the required elements for a sale were not adequately proven. The Eighth Circuit rejected this argument as an issue that may be raised only on direct appeal, not through a separate AP.
The trustee also argued that the sale order should be set aside because it was allegedly obtained through fraud on the court. The Eighth Circuit rejected this argument because fraud on the court applies only to “the most egregious misconduct directed to the court itself, such as bribery of a judge or jury or fabrication of evidence by counsel” and the facts alleged did not involve conduct directed to the court.
Finally, the Eighth Circuit rejected the trustee’s argument that the recently-decided Supreme Court case of Czyzewski v. Jevic Holding Corp., ___ U.S. ___, 137 S. Ct. 973 (2017) barred the bankruptcy court from approving a sale that would violate the absolute priority rule because Jevic on its face does not apply to anything other than structured dismissals. Furthermore, the Eighth Circuit noted that even if Jevic did apply to a sale order, the Supreme Court in United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 273-76 (2010), stated that a final order is not “void” simply because it violates the requirements of the Bankruptcy Code.
Fulmer stands for the proposition that a court ordinarily cannot undo a 363 sale once it becomes final. Objections must be made to the sale; not in an adversary proceeding filed after the time to appeal the sale has passed.