If there’s anything the history of mediation tells us, it’s this:
–We’ve gotta trust the process.
Here’s an example, that’s happening right now [in June 2018], of how a failure to trust the mediation process creates issues:
In re Las Cruces Country Club, Inc., Case Nos. 16-12947 & 16-12947-j7 (Bankry., D. New Mexico) (the debtor is a non-profit corporation in a voluntary Chapter 7 case).
[October 2018 update: It also created a $1.1 million loss for the bankruptcy estate, as noted below.]
I’ll try to explain.
A History of Financial Troubles—Then Bankruptcy
The Las Cruces Country Club began in 1928 with 248 acres of land.
It dedicated a clubhouse in November 1929, “within days of the Stock Market crash” that began the Great Depression. The Club would suffer financial difficulties from then on and would sell parts of its real estate, from time to time, to pay debts.
In 2014, the Club decided to swap its golf course for another one:
It sold all its property to Park Ridge Properties for $7.1 million—$2.2 million cash and a $4.9 million promissory note; and
It purchased the Sonoma Ranch Golf Course.
The Club couldn’t make a go of the new course, spending all its available cash, and returned ownership of the newly-purchased course to the prior owner. The prior owner then sued the Club.
The Club’s Chapter 7 voluntary bankruptcy ensued on November 29, 2016.
The Bankruptcy Filing—A Curiosity
The Club’s voluntary Chapter 7 bankruptcy filing is a curiosity. Here’s why:
Debtor is a corporation (it has no exemptions and gets no discharge) and is a non-profit (equity after payment of debts must go to another non-profit); and
Debtor’s Schedules say it is solvent ($4.88 million of assets against a half-million dollars of debt—all unsecured), with no co-debtors and no insider exposure.
So . . . why is this case in a voluntary Chapter 7? A newspaper article cites this reason: litigation costs “exceeded the funds available to fight.” This reason makes good sense here:
–since no one has an ownership interest to protect and since Club leaders have no personal exposure for Debtor’s liabilities, why should Club leaders manage the disputed winding up—a Chapter 7 Trustee is in a better position to do so.
The Bankruptcy Disputes
After bankruptcy filing, a number of disputes arise.
–Claim Objection and Conversion/Trustee Motion
The proof of claim amounts filed in the case total $1.28 million, instead of the half-million dollars scheduled amounts. The Trustee objects to a $191,943.23 claim (Doc. 22), and the creditor responds by filing a motion to convert the case to Chapter 11 and to appoint one of its own insiders as trustee (Doc. 59).
One of the concerns raised in the conversion motion is this:
–“Over six months ago,” the Trustee received a $2.1 million offer to purchase estate assets that would have promptly paid all creditors in full, but the Trustee rejected the offer and “decided instead to gamble Estate funds” by filing the Complaint discussed below.
–Promissory Note Obligation
The only significant asset on Debtor’s Schedules is the promissory note obligation payable to Debtor from the 2014 asset sale to Park Ridge Properties. The Chapter 7 Trustee wants to get this promissory note obligation paid—but Park Ridge isn’t entirely forthcoming.
–Fraudulent Transfer Complaint
So, the Trustee files a “Complaint” against Park Ridge Properties to avoid the entire asset sale as a fraudulent transfer. The primary problem with the transfer, alleged in the Complaint, is this:
–Park Ridge’s promissory note obligation has no maturity date—Park Ridge “can hold the Subject Property in perpetuity without ever paying to Debtor any money at all.”
Park Ridge moves to dismiss the Complaint.
The Bankruptcy Court encourages the parties to mediate, and the parties agree.
The Bankruptcy Court enters various mediation-related orders in 2018, including:
In the Complaint lawsuit, (i) a February 13 “Mediation Order” for fraudulent transfer parties to mediate, and (ii) a February 22 “Order Regarding Mediation” adding two non-party entities who expressed interest in buying assets; and
In the Chapter 7 case, a February 22 Order incorporates the Mediation Order and emphasizes the Chapter 7 Trustee’s duty to “maximize any surplus for the benefit of” the non-profit Debtor.
The two competing bidders participate, along with the parties, in a mediation session. The Mediator conducts an informal auction between them. The result is a $3.3 million purchase offer for all assets of the bankruptcy estate, along with a settlement of related issues.
The Approval Motion & Responses
The Trustee asks for Court approval (Docs. 69 & 72) of the purchase offer and other settlement terms (“Approval Motion”), representing that the offer “is supported by escrowed funds” of $3.3 million and that the amount is “a fair price.”
The unsuccessful bidder chimes in with an “Objection” (Doc. 74):
Saying it is now willing to pay “at least $3.5 million” for estate assets [note: this is not an actual offer]; and
Asking the Court to establish procedures for a formal auction, rather than approving the mediated auction result.
The Debtor weighs-in (Doc. 77) with both support and opposition, saying:
Support—Debtor’s board of directors voted that any equity available, after payment of claims, would be distributed “to New Mexico State University Foundation as a donation”; but
Opposition—A “further auction process would be beneficial to the Debtor” by maximizing the surplus.
Things Start Going South
If the Trustee had stuck with the mediated deal, the mediated deal might have been approved. But that’s not what happened.
–Trustee Waffles and Punts
The Trustee waffles and punts on the deal in a “Reply” (Doc. 84), asking the Court to determine whether, (i) the Approval Motion should be granted, or (ii) a formal auction of estate assets should be held.
In response, the Court enters two orders:
“Order” (Doc. 92) denying the Trustee’s Approval Motion; and
“Order” (Doc. 93) directing the Trustee to file a motion for formal auction procedures.
–Losing Bidder Waffles and Is Gone
While bidding procedures are in the works, worries arise on whether the losing bidder’s “at least $3.5 million” suggestion is legit. Here are some April 2018 developments:
April 19—Court establishes (Doc. 113) an April 23 deadline for written confirmation that the losing bidder’s $3.5 million suggestion is a legitimate offer;
April 23—Trustee files a “Notice” (Doc. 114) that the losing bidder has NOT committed to any $3.5 million bid—the competing bidder who created the fuss is gone; and
April 27—Trustee and successful mediation bidder file a “Joint Motion” for a reconsideration and grant of the Approval Motion (Doc. 115).
–Successful Bidder Backtracks
On April 30, the successful mediation bidder backtracks from the April 27 Joint Motion and files a “Response” (Doc. 116) saying:
“Trustee is asking the Court to enforce an agreement that does not exist”; and
Trustee “repudiated” the highest purchase offer from the mediation session and cannot now “unilaterally resurrect” it.
Later that same day, the largest creditor weighs-in with a “Response” (Doc. 118), in which it grouses about what’s happened but supports the formal auction process now that things are falling apart.
Where Things Stand Now
On May 25, 2018, the Court dismisses the fraudulent transfer lawsuit “with prejudice” (Doc. 25) because the parties agreed, during oral arguments, that :
The promissory note obligation “has an outside maturity date of October 27, 2019”; and
The obligor’s failure to pay in full by that date will entitle the Trustee to foreclose the supporting mortgage and obtain title to the previously-transferred property.
On May 29 the Court holds a Status Conference in the bankruptcy case and determines that the formal auction process will go forward.
The bidders are gone, and it’s uncertain whether they will reappear. Presumably, the Trustee is working toward getting them back—and getting other bidders involved as well.
The promissory note comes due in another year and a half—but it’s uncertain whether the debtor will be good for it.
The security interest for the promissory still exists—but it’s uncertain whether the collateral will have sufficient value to satisfy the promissory note.
Things might, yet, work out for the best—but they might not.
[October 2018 Update — A $1.1 Million Loss:
On October 3, 2018, the Chapter 7 Trustee reported (Doc. 160) that he sold “all assets of the bankruptcy estate” for a “gross sale price” of $2,200,000 — that’s $1.1 million less than the mediated amount.]
It’s easy to second-guess decisions taken in a series of disputes. But second-guessing can be instructive. So . . . in that vein, here are some lessons from the foregoing:
Kudos to the Bankruptcy Judge for getting parties into mediation in the first place and getting the two bidders included as well—that’s an impressive approach to be emulated!
The parties and the mediator achieved a legitimate, and bidding-enhanced, offer during the mediation, with the winner putting the entire purchase price into escrow—this is a significant achievement!
When the losing bidder expressed, after mediation, a willingness to pay more, the Trustee and Court could/should have demanded an immediate put-up or shut-up—either make a real commitment supported by payment assurances, or forget it!
The Court’s insistence on maximizing value is sound, but rejecting the mediation results, and requiring formal bidding procedures instead, appear unwise in current retrospect—especially since the mediated offer would have paid all creditors in full and also left a large excess.
When a mediated resolution is achieved, with all interested parties participating, any opposition arguments should be looked upon with disfavor and subjected to heavy burdens of persuasion.
As this In re Las Cruces Country Club case demonstrates, a mediated deal-in-hand is better than some potential result that might (or might not) be achieved.
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