Rsch squirrels. Creditor Labs is not entitled to aftermarket discovery

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In In re Squirrels Rsch. Laboratories, LLC, no. 21-61491, 2022 WL 1310173, at *1 (Bankr. ND Ohio April 29, 2022) the United States Bankruptcy Court for the Northern District of Ohio recently considered whether after the sale of the assets of the debtors, a creditor could conduct a discovery to investigate the extent of a secured creditor’s privileges in order to alter the distribution of sale proceeds. On the facts of this case, the bankruptcy court dismissed the creditor’s claim.

In squirrels, creditor Carl Forsell (“Forsell”) had a prior claim against debtors in the amount of $744,373.60 for unfulfilled purchase orders. The debtors have included Forsell in their matrix of creditors and in their schedules as a creditor with a contingent, unliquidated and disputed claim. In their schedules, the debtors also claimed that their primary secured lender held a “general lien” on “all physical assets” of the debtors.

Under a prepackaged plan, the debtors filed a motion to sell the same day they filed their cases, seeking to sell substantially all of their assets to a horse bidder for $3,010,000. Under the terms of the proposed sale, the primary secured lender has agreed to fix its secured claim at $3,000,000. The debtors served Forsell with the motion to sell and a motion to expedite the motion to sell. Forsell did not oppose the sell motion. When the bankruptcy court approved the sale petition, the debtors served Forsell with the order approving the sale petition, which contained time limits for opposing the completion of the sale transaction. Ultimately, the debtors received no competing offers for their assets, and the sale to the bidder was approved, with the primary secured lender entitled to $3,000,000 of the sale proceeds of $3,010,000. Again, Forsell did not object to the completion of the sale transaction. However, a month after the bankruptcy court approved the sale, Forsell filed a motion to waive the sale order, claiming that the principal secured lender’s lien was a security interest in the purchase price, not a general lien, and demanded to know whether the primary secured lender had an interest in the property being sold.

Initially, the bankruptcy court noted that prior to entering the sell order, Forsell had broad rights of discovery under Federal Bankruptcy Rule 7026 and could have obtained any information it sought by through normal pre-trial discovery. However, the right to post-judgment discovery is much more vague, but Forsell argued that he was entitled to post-judgment discovery under Rule 60(b) of the Federal Rules of Civil Procedure, which provides that a party may be exempt from a final judgment or Order. However, the bankruptcy court determined that Forsell was not entitled to relief under Rule 60.

First, the bankruptcy court ruled that Forsell had not been diligent in obtaining information about the nature of the principal secured lender’s lien because he had made no effort to obtain information prior to the sale, n had filed no objections to the sale and because the primary secured lender’s CCU was publicly available to Forsell prior to the sale. Further, the debtors did not commit fraud by calling the lien a “general lien” rather than a “purchase price security interest” because there is no unified definition of what constitutes a “general lien” and, therefore, the parties must exercise their own due diligence. to determine which assets serve as security for the lien.

Ultimately, the bankruptcy court ruled that there was no clear right to postjudgment discovery, but if available, the plaintiff must establish a prima facie case that there is a basis for enable post-judgment discovery to overcome the important need for finality in Chapter 11 sales. Without finality, bidders and acquirers will not be inclined to offer maximum value for the assets.

As a guide, this case reiterates that in a bankruptcy sale process, the parties must be diligent and “speak now, or shut up forever.”

Copyright ©2022 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XII, Number 129

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