Liang Xiang Xu v. Messer

MEMORANDUM & ORDER

PAMELA K. CHEN, UNITED STATES DISTRICT JUDGE.

Appellant Liang Xiang Xu appeals an order of the United States Bankruptcy Court for the Eastern District of New York, the Honorable Nancy Hershey Lord presiding. Over Appellant Xu's objection, the Bankruptcy Court granted the motion of Appellee Gregory Messer-Chapter 11 Trustee of the Debtor 41-23 Haight Street Realty, Inc.'s estate-to retain deposits paid in connection with a contemplated sale of certain real properties of the Debtor. For the reasons below, the Bankruptcy Court's order with respect to Appellant Xu is affirmed.^[1]

BACKGROUND

On June 4, 2019, several creditors filed an involuntary petition under Chapter 11 of the Bankruptcy Code against the Debtor in the Bankruptcy Court. (R. 3.)^[2] By order of the Bankruptcy Court on August 12, 2019, Appellee was appointed the Chapter 11 Trustee of the Debtor's estate (“Appellee-Trustee”). (R. 6.) On December 12, 2019, the Bankruptcy Court approved the

2

retention of Maltz Auctions, Inc., d/b/a Maltz Auctions, and Rosewood Realty Group as co-brokers to sell the Debtor's real properties in Queens County (the “Real Property”). (R. 16.) The Bankruptcy Court subsequently entered an order on March 30, 2020 (the “Sale Procedure Order”), that, among other things, authorized Appellee-Trustee to proceed with a virtual public auction sale of the Real Property, and approved the terms and conditions of sale (“Sale Terms”) and the notice of sale. (R. 20, 48-70.) Notably, under the Sale Terms, any purchaser is generally required to make an initial deposit (“Deposit”), pay a 4% buyer's premium “within 48 hours after conclusion of the Sale” (“Buyer's Premium”), and “close title to the Real Property at a date that is no more than thirty (30) days after the Sale Date (the ‘Closing Date'), ” although such Closing Date may, at the “sole discretion” of Appellee-Trustee, be extended by 30 days. (See R. 56-57 (formatting in original).) The Sale Terms also state-in bold, underlined font-that

TIME IS OF THE ESSENCE against [any purchaser] and the failure of [any purchaser] to close for any reason whatsoever (except as otherwise provided herein) including its failure to pay the balance of the Purchase Price on the Closing Date will result in an immediate forfeiture of the Deposit and Buyer's Premium and the termination of such [purchaser's] right to acquire each Real Property under these [Sale Terms] and the Memorandum of Sale

(R. 58 (formatting in original).)

On April 9, 2020, the Bankruptcy Court approved an agreement that Appellee-Trustee had entered into with Tu Kang, business partner of Wing Fung Chau a/k/a Andy Chau, and Selena Chau, daughter of Andy Chau (collectively, the “Initial Offerors”), for purchase of the Real Property at a price of $31, 000, 000. (R. 21, 121-22.) After the Bankruptcy Court approved the agreement, however, the Initial Offerors defaulted. (R. 122.)

Following the default of the Initial Offerors, Appellee-Trustee received an offer from Mei Yang Ko and Appellant Xu for purchase of the Real Property at a price of $27, 300, 000. (See R. 71-74.) This offer was reduced to a signed written agreement dated April 20, 2020 (the “Stalking

3

Horse Agreement”), which incorporated the previously approved Sale Terms and provided that a Deposit of $2, 780, 000 would be paid to Appellee-Trustee. (R. 84-85; see also R. 86-92 (Sale Terms annexed to the Stalking Horse Agreement and signed by Ko and Appellant).) Between April 23 and April 28, 2020, Appellee-Trustee received a series of cashier's checks amounting to the full Deposit of $2, 780, 000. (R. 285-86, 290-92.) All of the checks were deposited into the Trustee's account at Mechanics Bank. (See R. 290.) One of these checks-in an amount of $1, 319, 000-was remitted from an account at East West Bank in the name of JCBD Investment Inc., a company belonging to Appellant Xu. (See R. 189, 291.) Appellant Xu thus avers: “I, through my company [JCBD] Investment Inc., paid [Appellee-Trustee] $1, 319, 000.00 by cashier's check on April 28, 2020[.]” (R. 189; see also Brief of Appellant Liang Xiang Xu in Support of Appeal (“Appellant Br.”), Dkt. 4, at 8.)

On April 29, 2020, with the Deposit of $2, 780, 000 in hand, Appellee-Trustee moved the Bankruptcy Court for an order approving the Stalking Horse Agreement. (R. 23, 71-83.) On the same day, the Bankruptcy Court issued an order scheduling a telephone hearing for May 5, 2020. (R. 23.) At the May 5 hearing, counsel for Ko, Andy Choi, confirmed to the Bankruptcy Court that Appellant Xu had “pulled out” and Ko was prepared to proceed without Xu. (See R. 300-01.) The Bankruptcy Court also considered and overruled an objection by the Initial Offerors to approval of the Stalking Horse Agreement. (See R. 306-24.) Accordingly, on May 8, 2020, the Bankruptcy Court entered an order (the “Stalking Horse Order”) approving the Stalking Horse Agreement only as to Ko and naming Ko as the “Stalking Horse Bidder.” (R. 24, 93-96.) Attached to the Stalking Horse Order was a copy of the Stalking Horse Agreement with Appellant Xu's name and signature crossed out. (See R. 98-106.) Even though the Stalking Horse Order with the revised Stalking Horse Agreement was entered publicly, Appellant Xu avers that he was unaware

4

at the time that his name had been removed from the Stalking Horse Agreement. (See R. 190; see also Appellant Br., Dkt. 4, at 9.) Indeed, Appellant Xu claims ignorance even though he, Ko, and the Initial Offerors at the time shared the same real estate attorney, Xiangan Gong, Esq. (See R. 21-22 (noting Gong's appearance on behalf of the Initial Offerors at a telephone conference before the Bankruptcy Court on 4/21/2020), R. 189 (Appellant affirming that he and Ko “were represented by the same counsel, Xiangan Gong, Esq., ” when the Stalking Horse Agreement was being negotiated in April 2020); see also Response Brief of Appellee Gregory M. Messer (“Appellee Br.”), Dkt. 6, at 9 (“In fact, the counsel representing the Appellant at that time was Xiangan Gong, Esq., the same counsel, who represented the Initial Offerors.”).)^[3]

On May 12, 2020, at 11:00 a.m., the co-brokers held a virtual public auction, and “the Stalking Horse Bidder [i.e., Ko] was the successful bidder of the Real Property with a bid of $27, 300, 000 plus the Buyer's Premium and the transfer tax (the ‘Purchase Price').” (R. 110 (formatting in original).) Appellee-Trustee filed an affirmation the next day confirming the public auction sale of the real Property “to the Stalking Horse Bidder, Mei Yang Ko.” (R. 24, 107.)

On May 14, 2020, the Bankruptcy Court held a hearing shortly after 11:00 a.m. to confirm the results of the sale. (See R. 25, 713.) During the hearing, counsel for Appellee-Trustee verified that the 4% Buyer's Premium had not yet been paid, despite the 48-hour deadline under the Sale Terms. (R. 726.) Ko's counsel, Choi, however, represented that his client was “in the process of” completing a wire transfer of the funds, noting that the funds were “coming from several wires”

5

that were being gathered into “one single wire, ” and it was agreed that Ko would have until the end of the day to wire the funds to cover the Buyer's Premium. (See R. 726-28.) The Bankruptcy Court explicitly warned Choi: “The terms have to be-as you know, the terms have to be complied with. And if they're not complied with, there'll be a default declared. They'll have to come before me. And the deposit will end up [] with the estate.” (R. 727-28.) Choi replied, “Okay, ” and “Yes, Your Honor.” (Id.)

Appellant Xu avers-and the record confirms-that he wired $800, 000 on May 14, 2020, from the JCBD Investment Inc. account at East West Bank to an account at Rabobank, N.A.^[4] (See R. 189, 206; see also Appellant Br., Dkt. 4, at 8-9.) Ultimately, the Buyer's Premium was remitted to Appellee-Trustee in a timely manner, and Appellee-Trustee accordingly “was holding Funds in the amount of $3, 822, 000 in connection with the sale of the Real Property to [Ko]”-of which $2, 119, 000 came from Appellant Xu's company JCBD Investment Inc. (R. 124-25; see also Appellant Br., Dkt. 4, at 8-9 (“Appellant, through his company JCBD Investment Inc., paid [Appellee-Trustee] $1, 319, 000.00 by cashier's check on April 28, 2020 and $800, 000.00 by wire transfer on May 14, 2020 for a total of $2, 119, 000.00 in partial payment of the required deposit.”).^[5])

6

On May 19, 2020, after the Buyer's Premium was timely remitted to Appellee-Trustee, the Bankruptcy Court entered an order (the “Sale Confirmation Order”) confirming the sale of the Real Property to “the Stalking Horse Bidder, ” i.e., Ko. (R. 25, 143-53.) Among other things, the Sale Confirmation Order found that Ko was “purchasing the Real Property in good faith” and was “a good faith buyer.” (R. 146.) The Sale Confirmation Order-consistent with the Sale Terms-also ordered:

The Stalking Horse Bidder shall close title to the Real Property no later than June 11, 2020 (which is no more than thirty (30) days after the date of the Public Auction) (the “Closing Date”), TIME BEING OF THE ESSENCE, although such Closing Date may be extended by the Trustee [i.e., Appellee], in his sole discretion and after consultation with the Lender, but such extension of the Closing Date shall not be later than thirty (30) days from the original Closing Date-July 11 2020, TIME BEING OF THE ESSENCE

To the extent that the Trustee, in his sole discretion, grants any such extension of the Closing Date, the Purchaser shall provide to the Trustee an additional, non-refundable deposit equal to ten (10%) percent of the Purchase Price in the amount of $2, 730, 000 (the “