Court Opinion

ID: 9940957
Source: CourtListenerOpinion
Date Created: 2024-02-15 18:02:36.196424+00
Date Added: 2024-06-11T13:46:04.767402
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NOT FOR PUBLICATION

 UNITED STATES BANKRUPTCY APPELLATE PANEL
            FOR THE FIRST CIRCUIT
                           ______________________________

                                 BAP No. MB 99-056
                           ______________________________

             IN RE: TOWN & COUNTRY FINE JEWELRY GROUP, INC.
                    GL, INC. and LGB, INC.,
                                    Debtors.
                         ______________________________

                       MICHAEL ANTHONY JEWELERS, INC.
                                  Appellant,

                                            v.

               TOWN AND COUNTRY FINE JEWELRY GROUP, INC.,
                               Appellee.

                           ______________________________

                    Appeal from the United States Bankruptcy Court
                   for the District of Massachusetts (Eastern Division)
                   (Hon. William C. Hillman, U.S. Bankruptcy Judge)

                           ______________________________

                                  Before
              GOODMAN, HAINES and CARLO, U.S. Bankruptcy Judges.
                      ______________________________

John A. Gleason and Benesch, Friedlander, Coplan & Aronoff, LLP on brief for Appellant.

Charles R. Dougherty, Anne L. Showalter, and Hill & Barlow on brief for Appellee.
                          ______________________________

                                   February 9, 2000
                           ______________________________
Per Curiam.

     Michael Anthony Jewelers, Inc. appeals the June 28, 1999, order

of the United States Bankruptcy Court denying its motion to require

the debtor, Town and Country Fine Jewelry Group, Inc., to pay it a

break-up   fee   as   a    consequence   of   an   unconsummated    sale   of

substantially all of Town and Country’s assets.          Its asks that we

reverse the bankruptcy court and remand the matter with instructions

that the court order payment of the $300,000 break-up fee as an

administrative claim.       Alternatively, it asks that we remand for an

evidentiary hearing.        We take the latter track.

The Dispute

     A. Procedural History

      On February 3, 1999, Town and Country, a Chapter 11 debtor,

filed an emergency motion to sell substantially all its assets

pursuant to § 363(b) and (f).      On the same day it filed an emergency

motion for an order "Establishing Bidding Procedures and Approving

a Break-up Fee in Connection with the Sale of Substantially all the

Debtor's Assets."         The court granted the debtor's motion for an

expedited hearing on the motions.

     On February 16, 1999, the court signed an order "Establishing

Bidding Procedures and Approving a Break-Up Fee in Connection with

the Sale of Substantially all the Debtor's Assets."                The order

included a paragraph, now pivotal, stating:
          A break-up fee is approved in the amount of
     $300,000, payable to Michael Anthony Jewelers, Inc., as
     liquidated damages for Michael Anthony's time, expenses,
     financing efforts and lost opportunities, in the event
     that the transactions contemplated by the Asset Purchase
     Agreement are not consummated in accordance with the
     terms thereof, other than as a result of the breach by
     Michael Anthony (including termination pursuant to
     Section 8.1(e) of the Asset Purchase Agreement, based on
     a minimum purchase requirement) upon (a) the sale of all
     or a substantial portion of the Purchased Assets to any
     one or more person or entity other than the Purchaser
     (including, but not limited to, pursuant to the Auction
     or through a liquidation), or (b) the failure of the
     Debtor to use reasonable efforts to obtain an order
     authorizing the sale within the time frame specified in
     the Asset Purchase Agreement.2

Appended to the order is the February 6, 1999, "Asset Purchase

Agreement” (APA) between the Town and Country and Michael Anthony.

     Paragraph 8.1(e) of the APA provided that the seller/debtor may

terminate the agreement prior to the closing date if "the Purchase

Price is not at least equal to the Minimum Amount."       Section 3.4(h)

set the minimum:

     The Purchase Price shall be at least Thirty Million
     Dollars($30,000,000); provided; [sic] however, that (i)
     such amount shall be reduced on a dollar-for-dollar basis
     for each Qualified Account Receivable collected by the
     Seller after the date of this Agreement and prior to the
     Closing Date, and (ii) if the composition of the
     inventory as represented by Seller in connection with the
     Filing is materially different than the actual inventory
     existing on the Closing Date, then such amount shall be
     appropriately adjusted (the "Minimum Amount").

The order also set the auction sale for hearing on February 22,

1999.

     When the February 22, 1999, hearing convened, the debtor's

attorney   represented   that   Michael   Anthony   was   ready   to   pay

                                   2
$24,500,000;1 stated that the minimum purchase price was, in the

debtor's view, $25,900,000 ($30,000,000 less collections); and

explained that there was a qualifying counter-bid by a third party.

After wading through a few third-party objections, the debtor

requested that the court entertain two sealed bids, "subject to the

debtor's   reservation   with   respect   to   the   floor   price,"   and

recommended that "the higher of those two bids be accepted as the

purchaser under the agreement."

     When the court inquired whether any party wanted to be heard

on the preliminaries, Michael Anthony's counsel stated,

     Your Honor, I just want to add that regarding counsel's
     earlier statements, we do reserve the right to disagree
     with the debtor as to their characterization of the
     minimum price. We believe that the minimum is different
     than theirs.    We also believe that the balance sheet
     price is different; however, in order to save the Court
     time, in order to save all the parties' time we have come
     to the figure of twenty-four five. However, should it
     subsequently be determined later that the debtor does not
     go forward, we do reserve the right to challenge the
     debtor's characterization of its minimum price. (Emphasis
     supplied.)

To this the court responded, "Your rights will be preserved."

     Shortly thereafter, the court reviewed the sealed bids and

announced that Michael Anthony was the high bidder.           Following a

brief recess, Town and Country’s attorney disclosed          "the debtor's

view ... that the minimum purchase price under the agreement

     1
          The transcript states the amount of Michael Anthony’s bid
variously as $24,500,000; $25,000,400; and $25,400,000.         The
briefs, however, agree that it was in fact $25,400,000.

                                   3
adjusted for collections is ... 25.9 million dollars, which is

$500,000 more than the high bid."2   Reckoning that the debtor could

realize more than $26,000,000 in a piece-meal liquidation (a process

for which the debtor had already laid the ground work) he stated:

     [E]ven though we would much have preferred to bring this
     thing to a much quicker and cleaner closing by simply
     going forward with this agreement, we don't think it's
     the right thing to do, and as a result, we would not be
     prepared under, as provided for in the agreement, to
     close at a purchase price of 25.4 million dollars, which
     in any event would be subject to at least a half a
     million dollars in potential adjustments under the
     agreement as stated. So that's where the debtor stands
     as of today.

     The following discourse between the court and Michael Anthony's

counsel then took place:

     Attorney for Michael Anthony: Your Honor, we are
     obviously very disappointed. We believe that our offer
     was frankly substantially in excess of even what the
     balance sheet had shown. Nonetheless, I would point out,
     Your Honor, we believe that under the Court's earlier
     order issued related to bidding procedures and break-up
     fee that even under a liquidation scenario, because of
     the work and the diligence that we have done in order to
     bring the parties to this point, that we are still
     entitled to the break-up fee that we had bargained for in
     the agreement, but we are disappointed that the purchase
     did not go through.

     The Court: I don't believe I agree with you on the break-
     up fee. I believe that would have been payable if you
     were overbid as it was that the debtor reserve the right
     not to sell to anyone [sic], and that is the option the
     debtor has accepted, and so I don't believe that Michael
     Anthony is entitled to the break-up fee under the present

     2
           This statement is consistent with the parties’ briefs,
each of which indicates Michael Anthony’s bid was $25,400,000. See
supra n.1.

                                 4
     scenario.
          Now the question is do I allow this just to go along
     and let the debtors do their thing now?

The court continued the hearing "with all options left open,

including dismissal, conversion, Trustees or whatever nature," with

the debtor to return to prosecute its self-propelled liquidation

proposal. All pending matters were continued until March 1, 1999.

No order entered.

     On March 1, 1999, no hearing was held.     After a conference in

chambers the court entered an order that, among other things,

stated:

     The Bidding Procedures Motion is denied without prejudice
     and all objections thereto ... have been withdrawn or are
     disallowed as moot;3 and

     The Sale Motion is denied without prejudice and all
     objections ... have been withdrawn or are disallowed as
     moot.

     On May 17, 1999, Michael Anthony filed a motion for an order

requiring the debtor to pay the break-up fee.    This motion asserted

that Michael Anthony had been the highest bidder and that its bid

satisfied the APA’s minimum purchase price requirement.     Thus, it

argued, under the terms of the February 16, 1999, order it was

entitled to the break-up fee.   The court held an initial hearing on

this motion on June 28, 1999. Michael Anthony argued that it was

entitled to the fee because a substantial portion of the debtor's

     3
          This provision of the order may be a clerical error. The
bidding procedures motion had been granted on February 16, 1999.
The docket bears both, dichotomous entries.

                                  5
assets were sold to other parties through the liquidation rather

than to Michael Anthony and, since it had met the minimum bid

requirements, the debtor had not exerted reasonable efforts to

secure court approval of a sale under the APA.

     Town   and   Country   countered   that   Michael   Anthony   was   not

entitled to the break-up fee because its bid did not meet the

minimum purchase price.4 It maintained, "the February 16[] order of

the Court, which is cited by Michael Anthony, is clear that in the

case of a breach, including termination pursuant to Section 8.1(e)

of the asset purchase agreement, based on the minimum purchase

requirement – based on the failure to meet the minimum purchase

requirement, Michael Anthony is not entitled to its break-up fee."5

 The Creditor's Committee also chimed in.6

     4
          In error, the debtor also contended that at the February
22, 1999, hearing Michael Anthony requested the break-up fee but
had not argued that it had met the minimum bid. The quoted sections
of that hearing, see supra, demonstrate that Michael Anthony twice
asserted that its bid met the floor.       Indeed, Michael Anthony
expressly asked the court to preserve its rights on that score, and
the court stated that it would.
     5
          The debtor also argued that Michael Anthony had not made
a timely motion for reconsideration or filed an appeal of the
February 22, 1999, "decision." Michael Anthony argued, correctly,
that the court's oral statements –    that it did not agree with
Michael Anthony assertion that it was entitled to the fee – was
not an appealable order. See infra note 6.
     6
          It argued that even if Michael Anthony met the minimum
bid requirement it was not entitled to the break-up fee because the
assets were not sold at auction to a higher bidder.        For the
proposition that the intent of the parties vis-a-vis payment of the
break-up fee was limited to this scenario, the committee quotes
language from the February 3, 1999, emergency motion to establish

                                    6
    The court gave the following oral disposition:

         I can think of several reasons for denying the
    motion and none for granting it.       The first is the
    wording of the agreement itself, as detailed by [the
    attorney for the debtor] in her presentation, which I
    believe is the correct reading of the contract, would
    sustain in itself a denial of the motion.7
         The second is the other issue, and that is we don't
    know yet what the liquidation sale is going to bring, so
    we don't know whether it's going to bring more or less;
    and even if you read the contract the way Michael Anthony
    would have me read it, that would be a relevant
    consideration that would determine whether or not the
    break-up fee were payable.
         I do not believe that the transaction contemplated
    by the agreement which created the break-up fee was the
    kind of transaction which, in fact, occurred. I believe

the bidding procedures and approve the break-up fee. In requesting
a steeper $500,000 fee the motion represented:

     Further, the break-up fee is payable only if the Debtor
     consummates an alternative transaction, which must be at
     least $1 million more than the Purchase Price called for
     under the Letter of Intent. Thus, the break-up fee will
     only be payable under circumstances where the bidding on
     the Assets has generated an even greater purchase price
     – and corresponding benefit – to the estates.

     The committee’s position overlooks the language of the order
issued on February 16, discussed infra, that appears to provide for
payment of the break-up fee under several scenarios other than a
sale closed under the APA’s terms, so long as Michael Anthony’s bid
met or exceeded the “Minimum Amount.”

In essence the committee argued that the court ought not dwell on
the "legal niceties of the contract" as urged by Michael Anthony,
but ought to approach the dispute from the vantage point of the
emergency motion and "what everybody saw" was to be the operation
of the fee.
     7
          Here the court seems to be referring to the debtor's
assertion that Michael Anthony was not insisting that it had met
the minimum purchase price and that, since it had not met that
price, under the order and the agreement it was not entitled to the
break-up fee.

                                7
       that all of the parties are operating on the premise that
       there would be an auction and that at that auction the —
       Michael Anthony would have to outbid before the fee was
       payable.
            Now the problem that we have is that in this unusual
       addendum to these customary sale procedures, the debtor
       retained the right to – as [the attorney for the
       creditor's committee] said, pull the plug and not have
       the sale at all. I believe that under those circumstance
       no break-up fee is payable.
            Now considering this motion as whatever you want to
       consider it,8 this is my determination, and a final
       determination that no break-up fee is payable.        The
       motion of Michael Anthony Jewelers, Inc. for an order
       requiring the debtor to pay a break-up fee is denied.

This time a written order issued.               From it Michael Anthony now

appeals.

       B. Arguments on Appeal

       Michael Anthony argues that the bankruptcy court erred when it

concluded that the break-up fee was to be paid only if Michael

Anthony was out-bid at auction. It also argues that the court erred

in not holding an evidentiary hearing on the "factual assumptions"

underlying the court's ruling. On this score, if reversal is not

forthcoming, it seeks a remand for an evidentiary hearing.

       The debtor maintains that the inquiry on appeal should focus

only   on   the   terms   of   the   February    16,   1999,   order,   read   in

conjunction with § 8.1(e) of the agreement.              Skirting around the

       8
          The appellee has not argued that Michael Anthony’s appeal
was filed untimely and, although substantial time did pass before
the court’s February pronouncement about what it intended to do and
its June order, we do not see how the appeal could be considered
untimely. No order entered at the close of the February 22, 1999,
hearing and the court expressly continued then-pending matters
without prejudice to Michael Anthony’s rights.

                                        8
issues raised by the court's alternative holding,9 the debtor's core

contention is that Michael Anthony failed to meet the minimum

purchase price, the debtor responsibly terminated the agreement as

a result, and the court correctly upheld its right to do so under

the APA.   It also argues that § 503 of the Code operates to limit

break-up fees to transactions that benefit the estate, that the

break-up fee provision could have served this end by generating a

competing bid that exceeded Michael Anthony's by more than $300,000,

but that no such benefit redounded to the estate given the way that

the bids played-out at the auction.     Thus, it asserts that the

result below is dictated by law.

Disposition

     Neither party has argued that the terms governing Michael

Anthony’s entitlement to a break-up fee are ambiguous.       In its

present posture, the case has not yet provided them with the

opportunity to do so.   Without foreclosing that possibility, the

order outlining break-up fee entitlement appears straightforward.

Michael Anthony is entitled to the fee if (1) its bid (proffered on

February 22, 1999) equaled or exceeded the “Minimum Amount,” and (2)

the debtor (a) either sold all or substantially all of its assets

to one or more parties (via the auction sale or a liquidation) at

     9
          The debtor's argument is not sharp with respect to the
court's alternate reasons. It seems to shy away from the position
of the Creditor's Committee, echoed by the court, that the break-up
fee provision was intended to operate only in the context of an
auction in which Michael Anthony was out-bid.

                                   9
a sufficient price or (b) having received a sufficiently high offer,

failed to use reasonable efforts to obtain an order authorizing the

sale.

     Michael Anthony has steadfastly contended that its February 22,

1999, bid met the “Minimum Amount.” The debtor contends that it was

entitled to terminate its agreement with Michael Anthony (and

thereby eliminate Anthony’s entitlement to the break-up fee) because

its bid was too low.

        Somehow, the court’s June 28, 1999, order resolved that factual

dispute in the debtor’s favor without taking evidence.                          It is no

answer to say, as the debtor does here, that Michael Anthony made

no offer of proof.            It repeatedly requested, and preserved its

rights to, an evidentiary hearing where it could demonstrate that

its bid met the “Minimum Amount” term under the agreement’s formula.

Neither the court nor the debtor demanded a proffer.                        If Michael

Anthony      is   able   to     show   that        it   met   the    “Minimum    Amount”

requirement, thereby precluding the debtor’s unilateral termination

of its rights, the court may go on to consider whether the other

contractual conditions for payment of the fee have been satisfied.

        Of   course,     even    if    the    agreement       were    not   effectively

terminated, the court may determine, on evidence, that the debtor’s

assets ultimately were sold at a price, or in a fashion, that

disqualified Michael Anthony from receiving its fee.

        There is no more to be said.              On the record before us we cannot

                                             10
sustain the lower court’s determination that Michael Anthony is not

entitled to its fee.   Neither can we conclude that Michael Anthony

has demonstrated that it is, as a matter of law, entitled to it.

     We therefore VACATE the lower court’s order denying Michael

Anthony its break-up fee and REMAND the matter to the lower court

for further proceedings consistent with our decision.

                                11