In an appeal raising different issues after the Supreme Court’s Tempnology decision, the First Circuit made pronouncements about appellate jurisdiction and the interpretation of bids made at a bankruptcy auction. In sum, the appeals court ruled in its October 1 opinion that:
- Foreclosing on cash does not moot an appeal from the order permitting foreclosure.
- A pending appeal does not divest the bankruptcy court of jurisdiction over different issues when the outcome of the appeal would not take away the benefit from winning the appeal; and
- Courts are loath to read unwritten and unspoken terms into a bid made at auction.
Mission Product v. Tempnology and Its Progeny
Mission, the petitioner in the Supreme Court, was the appellant in the new appeal in the First Circuit. Before bankruptcy, Mission had obtained licenses from the debtor for intellectual property. Affirmed by the First Circuit but reversed in the Supreme Court, the bankruptcy court had ruled that rejection of the trademark license as an executory contract worked like rescission and barred Mission from continuing to use the mark.
Reversing the First Circuit in Tempnology, the Supreme Court held that rejection of a contract under Section 365 is just a breach giving rise to a prepetition claim, not rescission of the contract. Mission Product Holdings Inc. v. Tempnology LLC, 139 S. Ct. 1652 (May 20, 2019). To read ABI’s report, click here.
During the appeals all the way to the Supreme Court, Mission argued that it would have a claim for its inability to use the mark were it to prevail, which it ultimately did. In bankruptcy court during the appeals, Mission objected to the sale and disposition of the debtor’s property, claiming nothing would remain to pay its claim for deprivation of the trademarks.
Indeed, that’s what happened. By the time the Supreme Court ruled in its favor, nothing was left in the debtor’s estate. The procedural history was highly complex, but here is the gist.
Mission and the debtor’s primary secured creditor bid for the debtor’s assets at auction. The secured lender was the stalking horse. The lender had a valid lien on all of the debtor’s assets and was making a credit bid.
In its first bid topping the lender’s opening offer, Mission said it would leave $200,000 of cash in the debtor. Eventually, the lender won the auction, incorporating the same terms as Mission but leaving behind $800,000. As Circuit Judge William J. Kayatta, Jr. said in the new opinion for the First Circuit, neither the asset purchase agreement nor the sale-approval order said the lender was waiving or releasing its lien on the $800,000 in cash that it was not purchasing.
After sales, nothing was left in the estate aside from about $500,000 in cash. The secured lender filed a motion to modify the automatic stay, saying it had a valid $5 million lien, leaving the debtor with no equity in the $500,000 in cash remaining in the debtor’s possession.
Over Mission’s objection, the bankruptcy court modified the stay. The debtor turned the $500,000 over to the lender when requested after stay modification.
Mission unsuccessfully appealed the lift-stay order in district court and appealed a second time to the circuit. Mission and the lender raised several issues in the Court of Appeals.
The Stay-Relief Appeal Wasn’t Moot
Because it had already taken possession of the $500,000, the lender argued in the circuit court that the appeal from the lift-stay order was moot. Judge Kayatta disagreed.
Unlike tangible property taken in foreclosure after the stay is modified, Judge Kayatta said that cash is fungible. For an appeal to be moot, there must be no means for giving meaningful appellate relief if the lower court is reversed.
Providing relief would be possible in the event of reversal, Judge Kayatta said. “In contrast to a case where we are unable to return title to the estate because it has been transferred to a good faith purchaser, we simply cannot say that ordering a party on appeal to disgorge mere cash is impracticable and does not afford meaningful appellate relief.”
Judge Kayatta added that there was no “judicial sale order,” nor an actual purchaser relying on a sale order. As a result, there was no risk of undermining the integrity of a judicial sale.
At least when the collateral being foreclosed is cash, Judge Kayatta held that an appeal from a lift-stay order was neither equitably moot, moot under Article III of the Constitution, nor moot under the Bankruptcy Code or Rules.
A Pending Appeal Didn’t Divest Jurisdiction
Mission argued that its appeal to the Supreme Court divested the bankruptcy court of jurisdiction to lift the stay, because allowing foreclosure would take away the last estate property that could be used to satisfy its claim for deprivation of the trademarks.
Judge Kayatta wasn’t buying. He had just held that the circuit court could order disgorgement if the lender was not entitled to the $500,000.
The priority of claims was also pivotal. The bankruptcy court had ruled in substance that a claim by Mission would be subordinate to the lender’s secured claim. Therefore, he said, the appeal to the Supreme Court did not divest the bankruptcy court of jurisdiction because allowing foreclosure would “not take away any benefit” that might flow from an appeal to the Supreme Court.
Foreclosure Was Ok on the Merits
On the merits of modifying the stay, Mission conceded there was no equity in the $500,000 if the lien was valid and enforceable. Instead, Mission contended that the lender “implicitly surrendered its lien” by omitting the $800,000 from the assets being purchased.
Again, Judge Kayatta wasn’t buying.
Judge Kayatta said that Mission was saying that “we should assume” that the lender was releasing its lien. He noted, however, that neither the purchase contract nor the sale approval order “contained any reference to such a waiver or release.”
It “makes no sense,” Judge Kayatta said, that “merely . . . agreeing to leave assets in the estate” results in releasing the lien. “Were that premise correct,” he said, “many Section 363(f) sales would turn into lien laundries.” There was, he added “no caselaw to justify such alchemy.”
“It would be strange,” Judge Kayatta said, if a lien were waived because an asset was not sold at auction.
Judge Kayatta upheld the order modifying the stay. Mission’s argument about waiver made no sense, “for a slew of reasons,” he said. “Waiver of a first secured lien on cash is no small matter — hardly something that would be offered only on an implication so tenuous as that claimed by Mission.”
In an appeal raising different issues after the Supreme Court’s Tempnology decision, the First Circuit made pronouncements about appellate jurisdiction and the interpretation of bids made at a bankruptcy auction. In sum, the appeals court ruled in its October 1 opinion that:
- Foreclosing on cash does not moot an appeal from the order permitting foreclosure.
- A pending appeal does not divest the bankruptcy court of jurisdiction over different issues when the outcome of the appeal would not take away the benefit from winning the appeal; and
- Courts are loath to read unwritten and unspoken terms into a bid made at auction.
Mission Product v. Tempnology and Its Progeny
Mission, the petitioner in the Supreme Court, was the appellant in the new appeal in the First Circuit. Before bankruptcy, Mission had obtained licenses from the debtor for intellectual property. Affirmed by the First Circuit but reversed in the Supreme Court, the bankruptcy court had ruled that rejection of the trademark license as an executory contract worked like rescission and barred Mission from continuing to use the mark.
Reversing the First Circuit in Tempnology, the Supreme Court held that rejection of a contract under Section 365 is just a breach giving rise to a prepetition claim, not rescission of the contract. Mission Product Holdings Inc. v. Tempnology LLC, 139 S. Ct. 1652 (May 20, 2019).