Court Opinion

ID: 9649515
Source: CourtListenerOpinion
Date Created: 2023-08-23 14:57:32.307433+00
Date Added: 2024-06-11T18:12:11.490931
License: Public Domain

SOMERS, Bankruptcy Judge,
dissenting.
I respectfully dissent from the majority’s decision on the merits of the appeal from both orders. In my view, the bankruptcy court erred when ruling on the motions and remanding the adversary complaint, with the exception of the dismissed derivative claims, without addressing the effect, if any, of the Sale Order on the state law claims which were not sold to TAR. I would reverse and remand the case to the bankruptcy court with instructions to undertake that analysis.
It is necessary to recite additional facts in order to understand the basis of my position. The Debtor was formed in 1991 to acquire, develop, and sell Ballard House. Several dozen limited partners invested approximately $1.6 million in the project. After completing the South Building and while developing the North Building, Debtor ran out of funds. In October 1999, when faced with foreclosure, Debtor agreed to transfer several remaining unsold units in the South Building and the entirety of the uncompleted North Building to Western Slope, LLC. The sale agreement was called Contract For Sale and Equity Participation Agreement (“EPA”). Under the EPA, as consider*402ation for the transfer of property, Western Slope agreed to pay Debtor’s existing debts on the property (at the time, over $6.4 million), to finance and complete construction of the North Building, and to deliver a Purchase Money Deed of Trust (“PMDOT”) granting Debtor 80% of the net profits and Western Slope 20% of the net profits, if build-out and sale of the Ballard House occurred. Net profits were defined in Schedule C of the EPA as total project revenues less: (1) repayment of all project expenses and existing and future debt related to the obligations under the agreement; and (2) repayment of the amount of the Debtor’s investors’ outstanding original investment in an amount not to exceed $1.6 million, plus interest from the date of investment forward at the rate of 8%. The EPA required the PMDOT to include specific language limiting the remedies available in the event of breach of the EPA to recourse against the real property subject to the deed of trust; i.e., the Ballard House property. Debtor and Western Slope are the only named parties to both the EPA and the PMDOT.
Western Slope made no significant construction progress, and by early 2002, the primary lender, Pueblo Bank, commenced foreclosure against Western Slope. On February 15, 2002, E-Global Development Limited (“E-Global”) bought the Pueblo loan for the full amount owed. Western Slope then gave E-Global a deed in lieu of foreclosure. E-Global then quit-claimed its interest to Appellant TGD. The transfer was subject to the EPA.
On October 11, 2002, twenty-five of Debtor’s Limited Partners commenced the State Court Litigation in San Miguel County, Colorado, styled Dennis Bullock, et al. v. Telluride Income/Growth Limited Partnership, Ltd., et al, case number 02-CV78. There were twenty-seven defendants, including E-Global, Bauhinia 1 TGD, Debtor, Western Slope, the Debtor’s general partners, the Debtor’s management and related entities, various lenders, and third-party purchasers of Ballard House condominium units. The complaint alleged six causes of action: (1) breach of fiduciary duty and mismanagement of partnership assets; (2) accounting by, and dissolution of, the Debtor; (3) damages for breach of the partnership agreement; (4) misappropriation and fraudulent conveyance of partnership assets; (5) self-dealing; and (6) foreclosure of an equitable lien against the undeveloped North Building and unsold units in the South Building. Although not filed as a derivative action, the complaint asserted causes of action that were in fact Debtor’s claims.
Some defendants, including E-Global and TGD, sought dismissal of the foreclosure claim for failure to state a claim. The Limited Partners defended the motion by asserting that they were proper parties to foreclose a lien on Ballard House because they were third party beneficiaries of the EPA, which was secured by the PMDOT. The motion to dismiss was denied. The state court found the allegations of third party beneficiary status and entitlement to an equitable lien sufficient to withstand the motion to dismiss. The state court, upon Limited Partners’ motion, granted a preliminary injunction enjoining the defendants from selling the Ballard House property and ordered the Limited Partners to deposit $25,000 or post a bond in that amount.
On October 29, 2003, E-Global, TGD, and a third party filed an involuntary *403Chapter 7 petition against Debtor. The order for relief was entered on June 4, 2004. On September 1, 2004, the Chapter 7 Trustee filed a Notice of Removal of the State Court Litigation, which became the adversary proceeding that is the subject of this appeal.
During the course of the bankruptcy, Appellant TAR entered into an agreement (“Agreement”) with the Trustee to purchase substantially all of the Debtor’s assets.2 The assets included were the estate’s claims asserted in the State Court Litigation, including the claims asserted by the Limited Partners as derivative claims, and the Debtor’s rights under the EPA. The Agreement also provided that the Trustee would release the PMDOT and any and all claims of the estate against TAR, TGD, E-Global, and Bauhinia. Under the Agreement reached with the Trustee, the estate would receive $250,000 cash and release of claims in the amount of $10,519,079.
On March 22, 2005, the Chapter 7 Trustee filed a motion pursuant to 11 U.S.C. § 105(a) and § 363 for approval of the sale. The Limited Partners objected. After four days of evidentiary hearings, the bankruptcy court on August 2, 2005, granted the motion and approved the Agreement. Findings of fact and conclusions of law were read into the record and incorporated by reference into the court’s Sale Order, formally entitled Order Under 11 U.S.C. § 363, And Fed. R. Bankr.P.2002, 6004, 9014 And 9019(a), (A) Approving Agreement To Acquire Assets And Release Claims; And (B) Authorizing (I) Transfer Of Certain Of Debtor’s Assets Free And Clear Of Liens, Claims, Interests And Encumbrances, And (II) Mutual Release Of Claims. The Sale Order defined Assets to mean “the Debtor’s Litigation Claims, the Equity Participation Agreement, and the Purchase Money Deed of Trust release.”3 The findings in the Sale Order included the following: “The Trustee may transfer the Assets free and clear of all claims of any kind or nature whatsoever because, in each case, one or more of the standards set forth in 11 U.S.C. § 363(f)(l)-(5) has been satisfied.”4 As to the transfer of the Assets, the Sale Order provided in part:
Pursuant to 11 U.S.C. §§ 363(b) and (f), the Assets shall be transferred to Purchaser, provided however, that the Trustee is empowered to transfer only property of the Debtor’s estate, as defined in section 541 of the Bankruptcy Code. As of the Closing Date, the Assets shall be transferred to Purchaser, pursuant to section 363(f) of the Bankruptcy Code, free and clear of all interests (including claims (as defined in section 101(5) of the Bankruptcy Code) and liens (as defined in section 101(37) of the Bankruptcy Code)).... 5
No appeal was taken from the Sale' Order. TAR’s motion to be substituted for the Debtor in the adversary case was granted.
On October 2, 2005, TAR filed a motion to dismiss the adversary case without prejudice, release the bond, and dissolve the preliminary injunction. The Limited Partners responded by objecting to the motion and filing a motion to remand the adversary case to state court. TAR opposed remand, arguing, inter alia, that as a result of the Sale Order, it owned all claims, that the Sale Order “ ‘closed the book’ on the *404[Limited Partners’] investment in the Debtor,” and that the Limited Partners were no longer parties or real parties in interest to the adversary case.6 The Limited Partners opposed dismissal in part because they asserted they had litigation rights that survived the sale. Oral argument was held on the two motions, which the court identified as the “flip-side to the same coin.”7 The bankruptcy court did not expressly in its oral findings or written order consider the impact of the sale on the pending claims, other than the transfer of the derivative litigation claims to TAR. Before making its rulings, the bankruptcy court made the following observations concerning the § 363 sale:
This Court has previously ruled in connection with the trustee’s contested sale and settlement motion that all claims of the debtor TIGLP, including all derivative claims in [the removed action], which were moved on the filing of this case or which moved by operation of law in the filing of this case to the trustee and were sold by the trustee to Telluride Asset Resolution, LLC .... the purchaser of these claims, has now moved to dismiss them without prejudice.
I am not ruling today on — nor have I previously addressed the viability of any limited partnership nonderivative claims. This Court has not addressed direct claims of limited partners in the [removed action] or otherwise.8
The bankruptcy court granted TAR’s motion to the extent it sought dismissal without prejudice of all claims it held as successor to the Debtor, and granted the Limited Partners’ motion to remand, to the extent of all claims not sold to TAR. TAR and TGD appealed both orders, which the majority identifies as the Abstention Order and the Remand Order. The issue on appeal as stated by Appellants is: “Whether the Bankruptcy Court Erred in Remanding Part of the Adversary Proceeding to the State Court because Doing So Was Contrary to the Court’s Sale Order.”9 This statement is equally applicable to the Abstention Order and the Remand Order, and therefore the two orders should be considered as a unit.10 The parties disagree as to the meaning of the Sale Order in two closely related respects: (1) the extent of the property sold — whether all of the State Court Litigation claims, including the equitable lien claim, were sold to TAR; and (2) the operation of § 363(f) — whether the sale of the Assets free and clear of interests transferred any of the Limited Partners’ claims to the proceeds of the sale.
For the reasons stated below, I would remand this case to the bankruptcy court for interpretation of the Sale Order, particularly to address whether the sale of the Assets free and clear extinguished any of the claims that, absent the sale, the Limited Partners could pursue against parties other than the Debtor. Without bankruptcy court interpretation of its own Sale Order, there is likelihood of state court findings which conflict with the actions *405taken in the bankruptcy court while the complaint was pending in federal court.
The claims asserted in the adversary case and remanded by the bankruptcy court orders to the state court excluded only the derivative claims sold to TAR. Before remanding, the bankruptcy court did not rule on whether any claims not sold to TAR were affected by the sale. This resulted in remand of all claims, with the exception of the transferred claims, even though, as a matter of law, because of the nature of the interests sold and because the sale was pursuant to § 363(f), some of the nonderivative claims asserted by the Limited Partners may have been transferred to the proceeds of the sale or otherwise impacted by the sale.
In addition to posing the question of construction of the definition of “Assets” in the Sale Order to answer the question of what was sold, this appeal involves the closely related question of how to apply § 363(f) to the sale transaction. The Sale Order transferred the Assets, which were comprised of the Debtor’s litigation claims, the EPA, and the PMDOT release, free and clear of all interests pursuant to § 363(f). Section 363(f) provides:
The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if—
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
The Code does not define “interest in property,” and the “courts have been unable to formulate a precise definition.”11 Research has not revealed any Tenth Circuit authority that addresses the question. The Code makes it clear that a lien is an interest by providing in § 363(f)(3) conditions for a sale free and clear “if such interest is a lien.” Similarly, rights of dower and curtesy are identified as interests by § 363(g). Although some courts have narrowly construed interest in property to mean in rem interests only, such as liens, the trend seems to be toward a more expansive reading of interest in property as encompassing other obligations that may flow from ownership of the property.12 Some courts have held that the term “any interest” is intended to refer to obligations that are connected to, or arise from, the property being sold. Under this rationale, the Court of Appeals of the Fourth Circuit held that the sale of a coal mining company’s assets under § 363(f) was free and clear of successor liability that would have otherwise arisen under the Coal Act,13 and the Third Circuit held that the sale of an airline’s assets was free and clear of any successor liability claim, stemming from either the airline’s employees’ pending employment discrimination claims or the settlement of a class action suit by flight *406attendants.14 However, using this definition, the affirmative defense of recoupment to collection of an account purchased in a sale under § 363(f) was held not to be an interest in property and therefore not cut off by the sale.15 The sale of an estate’s interest in real property has been held to be free of a lessee’s possessory interest.16
The issue of the possible impact of the free and clear sale is most apparent with respect to the sale of the Debtor’s interest in the EPA and PMDOT release. The EPA is a contract between Debtor and Western Slope, whereby, in consideration for the transfer by Debtor to Western Slope of the Ballard House property, Western Slope will develop the property and Debtor will have the right to 80% of the net profits. Western Slope’s performance is secured by the PMDOT, conveying in trust the Ballard House to Debtor. Debtor’s interest in the EPA therefore includes a secured right to payment. Although none of the Limited Partners are parties to either the EPA or the PMDOT, in the State Court Litigation they alleged third party beneficiary status and a right to enforce the EPA based upon the definition of net profits as being total project revenues, less costs, and repayment of Debtor’s original investors in an amount not to exceed $1.8 million, plus interest. They further contend, based upon the PMDOT, that this right to enforce the payment obligation of Western Slope is secured by the Ballard House property, thereby entitling them to pursue a foreclosure claim. The Sale Order authorized the transfer of the PMDOT release to TAR free and clear. TAR asserts that remand of the third party beneficiary and equitable lien claims was contrary to the sale of the EPA free and clear of interests, that after the sale the third party beneficiary rights of the Limited Partners, if any existed under state law, were extinguished and that only TAR has the right to enforce the EPA. Appellants assert that because of the sale of Assets, including the EPA and release of the PMDOT, the “limited partners’ sole claim is as equity holders to the proceeds of the sale.”17 The Limited Partners contend that all the Debtor owned, and therefore all that the Trustee could sell, was a third tier right under the EPA, which was junior to the Limited Partners’ second tier rights. They assert that their claims, including rights under the EPA and to an equitable lien, were not altered by the sale.
This dispute as to the claims remaining for remand involves interpretation of the Sale Order and consideration of the implications of the free and clear sale of the litigation claims, the EPA, and the release of the PMDOT. By not addressing whether, and if so, how, the sale, and § 363(f) in particular, affected the Limited Partners’ third party beneficiary, equitable lien, and other claims, the bankruptcy court may have remanded claims which were extinguished by the sale. The bankruptcy court left to the state court the interpretation of the Code and construction of the bankruptcy court’s own order approving the § 363 sale. This fact dependent, complex issue of bankruptcy law18 should have *407been decided by the bankruptcy court. After such consideration, the bankruptcy court may again remand all claims except the derivative claims transferred to TAR or may find that some claims are barred. In either event, remand following such analysis of federal law would foreclose the parties’ continued litigation over the implications of the § 363 sale in state court.
For the foregoing reasons, I would reverse the Abstention Order and the Remand Order and return this case to the bankruptcy court with directions to address before remand any claims not transferred to TAR and the impact of the § 363 sale on the claims asserted by the Limited Partners in the adversary case.

. Bauhinia, Ltd., a Hong Kong corporation, was a preconstruction purchaser of interests in the North Building.

. Parties to the Agreement also included TGD, E-Global, and Bauhinia.

. Sale Order at 1, in Appellants’ Appendix, Vol. 5, at 1682.

. Id. at 3, ¶ K, in Appellants’ Appendix, Vol. 5, at 1690.

. Id. at 4, ¶ 6, in Appellants' Appendix, Vol. 5, at 1691.

. Appellants' Opposition to Motion to Remand Proceeding to Colorado State Court 4, ¶ 13-14, in Appellants' Appendix, Vol. 5, at 1514.

. Transcript at 2, ll. 12-13, in Appellants' Appendix, Vol. 5, at 1621.

. Id. at 24, ll. 6-22, in Appellants' Appendix, Vol. 5, at 1643.

. Appellants' Brief at 1.

. I would find jurisdiction to review both the Abstention Order, for the reasons stated by the majority, and the Remand Order, under the substantive law exception recognized by the majority.

. Precision Indus., Inc. v. Qualitech Steel SBQ, LLC, 327 F.3d 537, 545 (7th Cir.2003).

. 3 Collier on Bankruptcy ¶ 363.06[1], (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev.2006).

. United Mine Workers of Am.1992 Benefit Plan v. Leckie Smokeless Coal Co. (In re Leckie Smokeless Coal Co.), 99 F.3d 573 (4th Cir.1996).

. In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir.2003).

. Folger Adam Sec., Inc. v. DeMatteis/MacGregor, JV, 209 F.3d 252, 261 (3d Cir.2000).

. Precision Indus., 327 F.3d at 545.

. Reply Brief of Appellants at 15. *407tion of whether the sale free and clear of a partnership's derivative claims affects the right of partners to assert the same claim.

. No case law or commentary addressing whether third party beneficiary rights under a contract of the Debtor constitute an "interest in property” has been identified by the parties or found by the Court. Likewise, research has not located any authorities on the ques-