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In re Veg Liquidation, Inc.

United States Bankruptcy Appellate Panel of the Eighth Circuit

March 26, 2018

In re: Veg Liquidation, Inc., formerly known as Aliens, Inc.; All Veg, LLC Debtors
Fifth Third Equipment Finance Company; Ryder Integrated Logistics, Inc.; International Paper Company; URS Real Estate, LP; Ball Metal Food Container, LLC; Syngenta Seeds, Inc.; Teneo Securities, LLC; Andrew Torgrove; Lazard Middle Market, LLC; Lazard Freres & Co., LLC; Alvarez & Marsal, North America, LLC; Alvarez & Marsal Private Equity Performance Improvement, LLC; Jonathan Hickman; Sager Creek Vegetable Company, formerly known as Sager Creek Acquisition Corp.; 1903 Onshore Funding, LLC; Cortland Capital Market Services, LLC; Sankaty Credit Opportunities, IV, L.P.; Sankaty Credit Opportunities, IV, L.P. (Caymanian); Sankaty Middle Market Opportunities Fund, L.P.; Sankaty Middle Market Opportunities Fund, L.P. (Caymanian); Does 1-100; Alvarez & Marsal Holdings, LLC; 412, Inc., formerly known as Sager Creek Vegetable Company, formerly known as Sager Creek Acquisition Corp.; Sankaty Credit Opportunities, (Offshore Master) IV; Sankaty Middle Market Opportunities Fund, (Offshore Master), L.P. Defendants-Appellees R. Ray Fulmer, II Plaintiff-Appellant

          Submitted: February 23, 2018

          Appeal from United States Bankruptcy Court for the Western District of Arkansas - Fayetteville

          Before SALADINO, Chief Judge, SHODEEN and SANBERG, Bankruptcy Judges.

          SALADINO, Chief Judge.

         The Appellant, R. Ray Fulmer, II, Chapter 7 Trustee, appeals the May 2, 2017, and September 26, 2016, orders of the bankruptcy court[1] dismissing his complaint and denying leave to file a further amended complaint. We have jurisdiction over this appeal from the final orders of the bankruptcy court. See 28 U.S.C. § 158(b).

         For the reasons stated below, we affirm.


         This court reviews the bankruptcy court's grant of a motion to dismiss de novo. See GAF Holding, LLC v. Rinaldi (In re Farmland Indus., Inc.), 408 B.R. 497, 503 (B.A.P. 8th Cir. 2009), aff'd, 639 F.3d 402 (8th Cir. 2011). Although a court must accept the factual allegations in a complaint as true, a complaint must contain sufficient factual matter to state a claim that is plausible on its face to survive a motion to dismiss. Id. The applicability of collateral estoppel is a question of law which we also review de novo. United States v. Brekke, 97 F.3d 1043, 1046-47 (8th Cir.1996); Osborne v. Stage (In re Stage), 321 B.R. 486, 491 (B.A.P. 8th Cir. 2005). The denial of a motion for leave to amend a complaint is reviewed for abuse of discretion, although when a motion for leave to amend is denied on the basis of futility, the underlying legal conclusions are reviewed de novo. See Zutz v. Nelson, 601 F.3d 842, 850 (8th Cir. 2010).


         The Debtors, Veg Liquidation, Inc., f/k/a Allen's, Inc., and All Veg, LLC, filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code on October 28, 2013. On November 22, 2013, the Debtors filed a motion for an order authorizing, inter alia, bidding procedures for the sale of substantially all of the assets of Allens, Inc., free and clear of liens pursuant to § 363(f) of the Bankruptcy Code. On December 23, 2013, the Debtors followed up their bidding procedures motion with a motion to sell in accordance with the bidding procedures and identifying a "Stalking Horse" bidder. After a contested hearing, the bankruptcy court issued an order on January 7, 2014, which granted the bidding procedures motion, authorized the designation of Seneca Foods Corporation as the Stalking Horse purchaser, established an auction procedure, and set a hearing date to approve the results of the auction.

         On January 9, 2014, the Debtors filed a Notice of Bid Procedures, Sale Hearing and Objection Deadlines in Connection With the Sale of Substantially All of the Debtors' Assets. On January 10, 2014, that notice and the bidding procedures order were served by Epiq Systems (the noticing agent for the Debtors) by United States mail on more than 5, 000 creditors and parties in interest.

         The auction commenced on February 3, 2014, and concluded on February 6, 2014, with Seneca's Stalking Horse agreement as the opening bid. Qualifying bids were also submitted by Sager Creek Acquisition Corporation (an entity formed by a group of second lienholders) and a third party, McCall Farms. Seneca did not submit any further bids, but Sager Creek and McCall Farms both increased and modified their bids during the auction. Ultimately, Sager Creek was declared the successful bidder with McCall Farms as the backup bidder. The day after the sale, the Debtors filed a notice identifying the successful bidder along with a draft purchase agreement. On February 10, 2014, written transcripts of the auction were filed with the bankruptcy court.

         The sale hearing took place as scheduled on February 11, 2014. Various objections were filed, but prior to or during the hearing all objections were either settled, withdrawn, or continued. On February 12, 2014, the bankruptcy court issued its detailed order ("Sale Order") approving the sale to Sager Creek. No appeals were filed. The closing took place on February 28, 2014.

         On June 6, 2014, the motion of the Debtors to convert the cases to Chapter 7 was granted. The Appellant was subsequently appointed the Chapter 7 trustee. On February 26, 2016, the Trustee filed his initial complaint against the Appellees (the Defendants in the adversary proceeding from which this appeal arose), and filed his first amended complaint on April 28, 2016. The amended complaint names at least 25 separate defendants that the Trustee places into three categories - the "Committee Defendants, " who were members of the unsecured creditor's committee appointed in the Chapter 11 bankruptcy proceeding of the Debtors; the "Fiduciary Defendants, " who are various financial advisors and restructuring officers retained by the Debtors during the bankruptcy case; and the "Sager Creek" and/or "Second Lien Holders, " Defendants who held junior lienholder interests secured by assets of the bankruptcy estate.

         The amended complaint includes 14 claims for relief entitled: Breach of Fiduciary Duty, Fraudulent Transfer, Conspiracy to Commit Fraud on the Court, Aiding and Abetting Conversion and Fraud on the Court, Conversion, Inducing Breach of Contract, Intentional Interference With Contractual Relations, Intentional Interference With Prospective Economic Relations, Negligent Interference With Prospective Economic Relations, Deceptive Trade Practices, Rescission/Reformation, Unjust Enrichment, Equitable Subordination and Claim Bar, and Declaratory Relief. All of the causes of action arise from the sale of substantially all of the assets of the Debtors to Sager Creek that took place during the Chapter 11 case.

         The Defendants filed an initial motion to dismiss on July 1, 2016. On September 29, 2016, the bankruptcy court dismissed two causes of action: the cause of action for fraud on the court under Federal Rule of Civil Procedure 60(d) and collusion under 11 U.S.C. § 363(n). The court denied the motion to dismiss all other causes of action but held in abeyance the Defendants' argument that the action was a collateral attack on the Sale Order. On November 2, 2016, the Defendants filed a second stage motion to dismiss. On May 2, 2017, asserting the doctrine of res judicata and the finality of the Sale Order, the bankruptcy court granted the second stage motion to dismiss, thereby dismissing all remaining causes of action. This appeal followed.


         The Trustee describes his complaint as seeking damages against the Defendants for their conduct before and during the Debtors' Chapter 11 proceeding. He believes the Defendants concealed agreements and manipulated auction bids in order to take more than $107 million of assets from the estate for no value. The Defendants' view it quite different. They consider the Trustee's action as an improper collateral attack on a final sale order.

         The Trustee's briefing asserts a wide range of factual and legal issues. However, we believe the ultimate issue presented is whether the finality of the Sale Order, together with statutory provisions and procedural rules, effectively defeats the Trustee's claims. We believe it does and the bankruptcy court properly dismissed the adversary proceeding.

         1. Dismissal.

         Federal Rule of Civil Procedure 8(a)(2), made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7008, requires pleadings to contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2); Fed.R.Bankr.P. 7008. A complaint which fails to state a claim to relief that is plausible on its face may be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6):

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to "state a claim to relief that is plausible on its face." A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a "probability requirement, " but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are "merely consistent with" a defendant's ...

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