Briar Capital Working Fund Capital, L.L.C. v. Remmert (In re S. Coast Supply Co.)

91 F.4th 376

In the MATTER OF SOUTH COAST SUPPLY COMPANY, Debtor,

Briar Capital Working Fund Capital, L.L.C., as assignee of South Coast Supply Company, Appellant, v. Robert W. Remmert, Appellee.

No. 22-20536

United States Court of Appeals, Fifth Circuit

FILED January 22, 2024

Appeal from the United States District Court for the Southern District of Texas, USDC No. 4:18-CV-2867, George C. Hanks, Jr., U.S. District Judge

Broocks McClure Wilson, Michelle Valadares Friery, Esq., Kean Miller, L.L.P., Houston, TX, for Appellant.

George William Vie, III, George W. Vie, III, P.C., Houston, TX, Robin Marie Ziek, Houston, TX, for Appellee.

Before Stewart, Dennis, and Wilson, Circuit Judges.

James L. Dennis, Circuit Judge:

This appeal arises out of a Chapter 11 Bankruptcy petition and raises a res nova issue for our circuit. Because we find that preference claims arising under 11 U.S.C. § 547 may be sold, we REVERSE the district court's dismissal for lack of subject matter jurisdiction and REMAND for further proceedings.

I. BACKGROUND

South Coast Supply Company ("South Coast"), an industrial products distributor founded in 1972, began experiencing financial issues in 2016, which it later attributed to mismanagement. South Coast was forced to borrow $800,000 from Robert Remmert, its then-CFO, pursuant to a loan agreement. South Coast issued forty-seven checks pursuant to the terms of the loan agreement, totaling over $320,628.04, until Remmert resigned from South Coast. After his resignation, on October 17, 2017, Remmert sent a demand letter requesting $405,261.87 to satisfy the loan, less than the actual $578,199.04 left on the original loan. On October 20, 2017, South Coast filed a voluntary Chapter 11 petition for bankruptcy in the Southern District of Texas.

South Coast continued to operate its business as a debtor-in-possession, and the bankruptcy court appointed J. Patrick Magill as South Coast's Chief Restructuring Officer ("CRO"). At the time the CRO was appointed, Briar Capital Working Fund Capital, L.L.C. ("Briar Capital") was South Coast's sole secured lender and had filed proof of claim in the bankruptcy proceeding, thereby asserting a claim for $2,563,191.07. Briar Capital's proof of claim stated that it had a lien on property valued at $3,926,263.88.

Five months into the bankruptcy case, South Coast was not generating enough cash flow to remain liquid and cash-flow-positive. South Coast sought post-petition debtor-in-possession ("DIP") financing. It requested and received an order from the bankruptcy court authorizing it to obtain DIP financing from Solstice Capital, LLC ("Solstice"). The order specified that Briar Capital would have lien priority over Solstice as to property obtained by South Coast prior to the date on which Solstice advanced DIP financing to South Coast. Solstice, by contrast, would have lien priority over Briar Capital as to property obtained after that date. By doing so, the bankruptcy court found that Briar Capital's interests in its collateral were sufficiently protected. Additionally, Briar Capital received junior liens on all Solstice collateral. Around this time, South Coast also filed the instant lawsuit against Remmert attempting to "avoid" more than $300,000 of allegedly preferential transfers made to Remmert right before the bankruptcy proceedings were initiated under 11 U.S.C. § 547, and to recover, i.e., claw back, the value of the avoided transfers under 11 U.S.C. § 550.

After obtaining DIP financing, South Coast filed its first proposed Chapter 11 plan. The first plan proposed to sell all South Coast's "intangible assets," including intellectual property, to Solstice for $500,000. Solstice also agreed to pay up to $200,000 to satisfy claims entitled to administrative treatment under the Bankruptcy Code. Additionally, the first plan provided for the transfer of some of South Coast's property to Briar Capital to satisfy Briar Capital's claim but did not provide for any payment of Briar Capital's administrative expenses incurred in participating in the bankruptcy proceeding, which are traditionally prioritized and paid in full. The first plan also provided that unsecured creditors would receive $500,000 in cash.

Briar Capital objected to the first plan, asserting the plan did not offer it fair compensation. South Coast and Briar Capital settled their issues and agreed to a second, modified plan. The second plan provided that Briar Capital would abandon its security interest in $700,000 of sale proceeds that South Coast planned to distribute to other creditors and would also waive its claim to recover administrative expenses incurred in participating in the bankruptcy proceedings. In exchange, Briar Capital received South Coast's interest in this pending preference action against Remmert, which was seeking to avoid more than $300,000 of allegedly preferential transfers.

At the confirmation hearing of the second plan, the CRO testified about the value of the assets to be transferred to Briar Capital, stating that "it was very difficult to give a concrete valuation of any kind of inventory," that the estimate of the inventory transferred was "our best guess," and that he was uncertain and concerned about the real value of the collateral. The CRO also testified that the value of the accounts receivable transferred to Briar Capital was $400,000, but it was possible they could be worth less. The CRO specifically testified that because of South Coast's settlement with Briar Capital, the second proposed plan allowed the $700,000 of proceeds from the sale of South Coast's assets to be distributed to unsecured creditors and administrative claimants, rather than to Briar Capital, the secured creditor. Remmert objected on a limited basis, arguing that the plan should explicitly provide that only this one existing preference lawsuit would be assigned to Briar Capital. The bankruptcy court approved the plan over Remmert's objection, finding that the plan complied with the Bankruptcy Code, was proposed in good faith, and was not forbidden by law.

The order confirming the plan contained a paragraph titled "Assignment of Claims," which provided that "[a]s of the Effective Date of the Plan, [South Coast] and the bankruptcy estate assign and convey to Briar Capital and/or authorize to prosecute on their behalf" the preference action against Remmert attempting to avoid payments made prior to the filing of the bankruptcy petition. The plan itself specifically states that "[a]s of the Effective Date of the Plan, [South Coast] and the estate assign and convey to Briar Capital and/or authorizes Briar Capital to prosecute on their behalf all of [sic] their potential claims against Robert W. Remmert," including the currently pending preference lawsuit. The plan also provided that Briar Capital was permitted to keep any amount it recovered from Remmert, even if the recovery exceeded the amount it was owed to satisfy its debt, stating that "[a]ny and all recoveries and proceeds of such recoveries shall be solely the property of Briar Capital."

As a result of the plan's approval, Briar Capital was substituted as assignee of South Coast in this preference action against Remmert, leading to this instant suit. The parties litigated the case from January 2019 until August 2022. Eleven days before trial, Remmert filed a motion to dismiss under Rule 12(b)(1) of the Federal Rules of Civil Procedure, arguing that Briar Capital lacked standing to prosecute the preference action. The district court agreed, holding that since a successful recovery would not benefit South Coast's estate or its unsecured creditors, Briar Capital lacked standing to bring the preference claim against Remmert as a representative of the estate under 11 U.S.C. § 1123(b)(3)(B) of the Bankruptcy Code. Acknowledging the absence of caselaw from our circuit, the district court followed cases from bankruptcy courts ruling that outright sales of preference actions under 11 U.S.C. § 547 are impermissible. Therefore, the district court dismissed the suit for lack of subject matter jurisdiction. This timely appeal followed.

II. STANDARD OF REVIEW

We review a dismissal for lack of subject matter jurisdiction de novo, applying the same standards as the district court. In re S. Recycling, LLC, 982 F.3d 374, 379 (5th Cir. 2020); Griener v. United States, 900 F.3d 700, 703 (5th Cir. 2018). "The burden of proving subject matter jurisdiction lies with the party asserting jurisdiction, and it must be proved by a preponderance of the evidence." In re S. Recycling, LLC, 982 F.3d at 379 (citing Ballew v. Cont'l Airlines, Inc., 668 F.3d 777, 781 (5th Cir. 2012) ("The plaintiff must prove by a preponderance of the evidence that the court has jurisdiction based on the complaint and evidence.")).

III. ANALYSIS

While Briar Capital raises several issues on appeal, this appeal turns on whether preference claims—a type of avoidance action—may validly be sold.¹

A. Preference Claims Arising Under 11 U.S.C. § 547 May Be Sold

Briar Capital argues the district court erred in finding that preference claims cannot be sold, and thus, that it did not have standing to bring this claim. The district court, relying on various bankruptcy court opinions in light of the "absence of explicit authorization from the Fifth Circuit for sales of 11 U.S.C. § 547 avoidance actions," found that Briar Capital did not have standing, and dismissed its claims for lack of subject matter jurisdiction. "Avoidance actions are claims to avoid a transfer of property by the debtor that was made voidable by the Bankruptcy Code. Avoidance actions include claims to recover fraudulent transfers and certain preferential transfers made too close in time to the filing of bankruptcy." In re Simply Essentials, LLC, 78 F.4th 1006, 1008 (8th Cir. 2023). At issue is whether a preference action, a specific type of avoidance action, may be sold. This question of whether preference claims may be sold is indeed a novel...