In re Primel, Case No. 20-70172-JAD

629 B.R. 790

IN RE: Ray M. PRIMEL and Esther D. Gay-Primel, Debtors.

Case No. 20-70172-JAD

United States Bankruptcy Court, W.D. Pennsylvania.

Signed July 19, 2021

Kenneth P. Seitz, Esq. Law Offices of Kenny P. Seitz Ligonier, PA Attorney for the Debtors.

Josh May, Esq. Richard Cooper, Esq. Coventry First, LLC Fort Washington, PA Attorneys for Coventry First LLC.

David Lampl, Esq. Matthew J. Burne, Esq. Leech Tishman Fuscaldo & Lampl, LLC Pittsburgh, PA Attorneys for Wall Garage 203, LLC and FairMarket Life Settlements Corp.

Owen W. Katz, Esq. Office of the Chapter 13 Trustee Pittsburgh, PA Attorney for Ronda Winnecour.

Eric A. Schaffer, Esq. Jeanne Lofgren, Esq. Stonecipher Law Firm Pittsburgh, PA Attorneys for Coventry First LLC.

David J. Novak, Esq. Law Offices of David J. Novak Johnstown, PA Attorney for Somerset Trust Company.

Related to Dkt. No. 91

MEMORANDUM OPINION

GREGORY L. TADDONIO, UNITED STATES BANKRUPTCY JUDGE

What should have been a routine asset sale under section 363(b)(1) of the Bankruptcy Code¹ has devolved into an investigation of the conduct of the prevailing bidder, Coventry First, LLC ("Coventry"). During the sale hearing, a representative of Coventry contacted the principal of the other bidder, FairMarket Life Settlements Corp. ("FairMarket"), and advised it of a state fraud investigation allegedly involving the asset. FairMarket and its bidding partner, Wall Garage 203, LLC ("Wall Garage"), now accuse Coventry of trying to chill competitive bidding, while Coventry argues "no harm, no foul" given that all parties agree that the ultimate sale price was not impacted. Under the circumstances, the parties have very divergent views on whether Coventry acted in bad faith and, if so, whether In re Abbotts Dairies of Pennsylvania² mandates disqualification in favor of FairMarket's last highest bid. For the reasons set forth below, the Court will approve the sale to Coventry with a finding under section 363(m) that it did not proceed in good faith.

I. BACKGROUND

Ray M. Primel (the "Debtor") holds a term life insurance policy (the "Policy") with a death benefit of $400,000.³ The Policy is fully encumbered by a collateral assignment to Somerset Trust Company, the holder of the mortgage on the Debtor's primary residence.⁴ On April 7, 2021, the Debtor moved to sell the Policy to Coventry for $175,000, free and clear of all liens under section 363(b).⁵

Shortly before the sale hearing, Coventry withdrew its purchase offer after learning that an auction would occur because another party, Wall Garage, expressed an interest in purchasing the Policy.⁶ Wall Garage was the sole bidder at the sale hearing and made the prevailing bid of $175,000.⁷ The Court entered an order approving the sale the next day.⁸

1 Less than a week later, Coventry filed a letter⁹ addressed to Debtor's counsel asserting that Wall Garage's acquisition of the Policy violated Pennsylvania's Viatical Settlement Act (the "Act").¹⁰ In support, Coventry explained that only a licensed viatical settlement provider or broker may legally enter into a viatical settlement contract and that Wall Garage is not publicly listed as having such a license with the Commonwealth of Pennsylvania.¹¹ In an apparent change of heart, Coventry also expressed its willingness to purchase the Policy as a licensed entity in place of Wall Garage, suggesting that it only withdrew its prior offer because the "standard" stalking horse protections were not provided.¹² Considering the alleged impropriety of the sale order, the Court scheduled the matter for a status conference.¹³

Both the Debtor and Wall Garage filed responses denying Coventry's assertion that only a licensed viatical settlement provider or broker could complete the transaction.¹⁴ They contended that Wall Garage, as a "viatical settlement purchaser," was exempt from the licensure requirement.¹⁵ In reply, Coventry disputed Wall Garage's qualification as a "viatical settlement purchaser," positing that the exemption only applies to resale transactions through a licensed viatical settlement provider.¹⁶ Coventry also reiterated its desire to acquire the Policy and, "as a gesture of good faith," increased its offer to $185,000.¹⁷

At the status conference, the Debtor argued that Coventry's negotiation of the sale contract, though unconsummated, was enough to render Wall Garage a "viatical settlement purchaser" under the Act. The Court disagreed, but granted Wall Garage a brief opportunity to supplement its defense of the sale.¹⁸ The Court also noted its frustration with Coventry's decision to "take its ball and go home," only to return and object to the sale after the hearing. Because Wall Garage subsequently filed nothing to establish its eligibility as a purchaser, the Court ultimately vacated the sale order and scheduled a new sale hearing for June 30, 2021.¹⁹ The Debtor re-noticed the sale, specifically serving the twenty licensed viatical settlement providers in Pennsylvania.²⁰

From the outset, the sale hearing was somewhat chaotic due to a lack of preparedness. Despite having multiple bidders, the Debtor did not obtain good-faith deposits or pre-qualify the bidders.²¹ Wall Garage revealed that it had entered into a policy funding agreement with FairMarket, a licensed viatical settlement provider, to enable it to consummate the original sale.²² After the Court declined to reinstate the vacated sale,²³ Coventry announced that Wall Garage was allegedly under investigation by the Pennsylvania Insurance Department for "potential violations" of the Act,²⁴ and insinuated that Wall Garage's actions had "tainted" the Policy.²⁵ The Debtor then raised concerns, echoed by Coventry, about FairMarket's bidding eligibility, observing that publicly-available information showed that its license had expired on June 10, 2021.²⁶ Given these issues, the Court took a 50-minute recess so that the bidders could tender deposits and FairMarket could produce evidence that its license was current.²⁷

When the hearing reconvened, the parties represented that the wire transfers had been initiated and evidence of FairMarket's renewed license had been provided.²⁸ FairMarket and Wall Garage then dropped a bombshell, accusing Coventry of attempting to chill the bidding. They reported that, during the recess, Coventry's principal contacted FairMarket's principal to inform him that the Policy was under investigation for potential fraud.²⁹ Coventry's counsel admitted that the call took place, but suggested its purpose was merely to inform FairMarket of the background of the case, possibly due to a reporting obligation under the Act.³⁰ The Court reserved the issue for further inquiry pending the outcome of the auction.³¹

Ultimately, Coventry prevailed with the highest and best bid of $200,000, and the Court registered FairMarket's last bid of $190,000 as the backup bid.³² To assess Coventry's good faith under section 363(m), the Court scheduled an evidentiary hearing for July 6, 2021 on the discrete issue of Coventry's recess communication with FairMarket. Before the hearing, Wall Garage served subpoenas on Coventry's chief legal officer and assistant general counsel, which Coventry sought to quash for a variety of reasons.³³

At the start of the evidentiary hearing, the Court stressed its view that the issue before it was a narrow one. To the extent that the subpoenas involved matters beyond the recess phone call, the Court deferred consideration of the motion to quash. The Court clarified that it was Coventry's burden to establish a basis for section 363(m) protection, subject to rebuttal by FairMarket.³⁴ Only two witnesses testified: Alan Buerger of Coventry and Kenneth Klein, FairMarket's Chief Executive Officer. Based on their testimony, there is really no dispute about the content of Mr. Buerger's call to Mr. Klein.

Mr. Buerger testified that although he is no longer involved with Coventry's daily operations,³⁵ he just happened to stop into the office of Reid Buerger, his son and Coventry's Chief Executive Officer, during the sale hearing.³⁶ Reid informed him that FairMarket appeared as an interested party at a hearing to facilitate a purchase for Wall Garage,³⁷ prompting Mr. Buerger to immediately call Mr. Klein at FairMarket.³⁸ Although both men knew each other through their work in the viatical settlement industry,³⁹ they had not spoken in years.⁴⁰

The call lasted only a couple of minutes.⁴¹ Mr. Buerger told Mr. Klein that he had "just learned that ... FairMarket was bidding on a policy and that [Mr. Buerger] thought he should know that [Coventry] had reported the transaction to the State of Pennsylvania as a possible fraudulent viatical settlement act."⁴² After highlighting Coventry's statutory obligation to report any alleged fraud to state authorities, Mr. Buerger stated that it was his "understanding that the Pennsylvania State Insurance Department was investigating this transaction."⁴³ During his testimony, Mr. Buerger could not recall how Mr. Klein responded other than to ask if Coventry intended to bid on the Policy, which Mr. Buerger confirmed.⁴⁴ For his part, Mr. Klein testified that he told Mr. Buerger that he was unaware of any fraud investigation, thanked him for the courtesy, and said that he would pass the information on to those at FairMarket directly involved.⁴⁵

On cross-examination, Mr. Buerger testified that his objective in contacting Mr. Klein was to make him aware that FairMarket may be participating in fraud or aiding the fraud of Wall Garage.⁴⁶ He admitted that Coventry was under no obligation to notify a competitor of an alleged fraud, but asserted that it is common practice in the industry.⁴⁷ Mr. Klein seemingly disputed that point, explaining that he found the call "odd."⁴⁸ Even so, Mr. Klein testified that Mr. Buerger did not elaborate on the nature of the alleged fraud,⁴⁹ nor that it was reported by Coventry.⁵⁰ The Court recognizes that Mr. Buerger did not describe the alleged fraud in his summary of the call...