(Bankruptcy No. 08-22224-JAD) ) (Adversary No. 09-02127-JAD)
The opinion of the court was delivered by: David Stewart Cercone United States District Judge
Victoria Howard ("appellant"), an unsecured creditor in her ex-husband's bankruptcy proceeding at No. 08-22224, and a defendant in an adversary proceeding commenced by the trustee of the estate created upon the filing of the petition in bankruptcy, appeals the entire series of orders underlying and effectuating the bankruptcy court's determination that as a matter of law the estate of the debtor, John Howard, and not Victoria Howard, owned the mineral rights to certain property situated in Whitley Township, Greene County, Pennsylvania, at the time the debtor filed his petition in bankruptcy. Appellant also challenges the series of orders underlying and effectuating the bankruptcy court's determination that the trustee was entitled to recover all proceeds from an advance received by appellant pursuant to an oil and gas lease, with interest, as property of the estate. Appellant further challenges the court's award of compensatory damages in the form of attorneys fees, costs and punitive damages as a consequence of appellant's "willful" violation of the automatic stay. For the reasons set forth below, the orders of the bankruptcy court will be affirmed.
The trustee commenced an adversary proceeding by filing a complaint on March 9, 2009, seeking to recover a fraudulent transfer. Among other things, the adversary complaint alleged that pursuant to the "strong arm" powers found at 11 U.S.C. § 544, the trustee obtained the rights to the minerals underlying a tract of land in Whitley Township, Greene County, Pennsylvania, including coal and gas and oil rights ("the mineral rights"), upon the debtor filing a petition in bankruptcy. The trustee averred that the acquired rights were superior to any competing rights asserted by appellant. It was further alleged that appellant improperly effectuated a transfer of the mineral rights in violation of the automatic stay by recording a quit claim deed and entering into a prepaid lease for exploration of the mineral rights post-petition without obtaining authorization from the bankruptcy court prior to doing so.
Appellant answered the complaint and disputed the trustee's position, asserting the transfer of the mineral rights between the debtor and appellant occurred years before the filing of the petition pursuant to an unrecorded 1990 handwritten agreement. Appellant had entered into a lease with J&J Oil on August 12, 2008, by executing a "Paid Up Oil & Gas Lease" and received an advance of $600,000.00 in royalties. A quit claim deed was recorded on August 25, 2008, wherein the debtor relinquished all rights to the mineral rights in favor of appellant. Appellant recorded the lease in the chain of title on October 2, 2008.
Appellant filed a motion for summary judgment on September 28, 2009, asserting she was entitled to the mineral rights as a result of the 1990 handwritten agreement. The trustee filed a response to the motion and a cross-motion for summary judgment on October 26, 2009. Appellant was ordered to provide an accounting of the proceeds received pursuant to the lease.
After review and argument, the bankruptcy court issued an order from the bench on December 1, 2009, granting the trustee's motion in part and ruling that the trustee had acquired a superior claim to the mineral rights on the date the debtor filed his petition and therefore owned all of the mineral rights. As a consequence, appellant was ordered to turn over to the trustee all remaining proceeds she had received under the lease with J&J Oil. She also was determined to be liable for any portion of the proceeds that had been dissipated. The bankruptcy court issued a written memorandum opinion in support of these rulings on December 10, 2009. See Memorandum Opinion of December 10, 2009 (Doc. No. 1-7). The court also determined that further proceedings were necessary in order to ascertain the amount of damages the trustee incurred or that were otherwise appropriate as a result of appellant's "willful" violation of the automatic stay. Id. at 24-25.
Appellant immediately attempted to appeal the bankruptcy court's rulings and filed a motion with the bankruptcy court on January 6, 2010, seeking to stay the court's summary judgment orders. The trustee sought to have the appeal dismissed as interlocutory and objected to the motion for stay. On January 15, 2010, the bankruptcy court denied the motion to stay and granted the trustee's motion to compel enforcement of the previous orders directing appellant to turn over the funds from the lease that had not yet been dissipated. In so ruling the bankruptcy court noted: "once the Mineral Rights proceeds are returned to the Trustee, the Trustee is precluded from distributing the same to creditors absent an order of this Court. In this regard, a mechanism is in place to protect the status quo during the pendency of the appeal." See Memorandum and Order of January 15, 2010, (Doc. No. 1-21) at 18. Appellant thereafter turned over approximately $472,000.00 to the trustee.
A hearing was held on the trustee's claimed damages on April 9, 2010. Appellant subsequently filed a motion for reconsideration on the issue of whether the trustee could be awarded damages for violation of the automatic stay. The bankruptcy court denied the motion and affirmed its initial ruling pursuant to a Memorandum and Order issued on May 14, 2010. See Memorandum and Order of May 15, 2010 (Doc. No. 1-29). On May 17, 2010, the bankruptcy court entered judgment in favor of the trustee awarding $128,000 in damages for the dissipated funds from the oil and gas lease, $493.20 in interest, $76,068.90 in actual damages (reflecting attorneys fees incurred by the trustee) and $5,000.00 in punitive damages. See Memorandum and Order of May 17, 2010, (Doc. 1-31) at 11.
The trustee also requested additional fees that would be incurred after the submissions outlining the fees and costs incurred through the date of the hearing. Id. at 3 and n. 3. The court directed the trustee to submit a supplemental affidavit outlining such fees and costs. Id. at 10-11. On June 14, 2010, the bankruptcy court entered an order awarding the trustee an additional $15,035.50 in fees and $699.35 in costs. See Order of June 14, 2010 (Doc. No. 1-37).
Appellant then filed an "Election to Appeal" with the bankruptcy court and a notice of appeal in this court, appealing the final order of June 14, 2010 (or any subsequent "final judgment on a separate document as required by Rule 58, F.R.C.P., [or] in the event that the Bankruptcy Court does not issue judgment on a separate document under Rule 58, then th[e] appeal is from the last order and judgment entered by the Bankruptcy Court, which occurred on June 14, 2010, but the appellant expressly challenges the orders and judgments entered by the Bankruptcy Court on December 1, 2009 (bench order), December 10, 2009, January 15, 2010, April 9, 2010, May 14, 2010 and May 17, 2010." Exhibit -- "Notice of Appeal" (Doc. No. 1-40) attached as Exhibit A to "Election to Appeal" (Doc. No. 1-39).
On June 10, 2010, the trustee filed a "Motion to Sell Property of the Estate Free and Clear of All liens and Encumbrances." The motion was made pursuant to 11 U.S.C. § 363(b). See Motion to Sell Property of the Estate Free and Clear of All liens and Encumbrances (Doc. No. 649 in Bankruptcy No. 08-22224-JAD) at ¶ 12. Appellant filed a "response" to the motion wherein she recounted her competing claim to the mineral rights, the ongoing litigation in the adversary proceeding regarding the same, and her appeal of the judgments entered in the adversary proceeding that had awarded ownership of the mineral rights to the trustee. She requested that any order granting the trustee's motion to sell acknowledge appellant's "continuing competing claim to ownership of the property, and must also require United Bank, Inc., to hold the said mineral rights and proceeds in trust or in escrow, and otherwise must restrict United Bank from selling, transferring, distributing, bargaining or encumbering the said mineral rights and/or any proceeds relating thereto, particularly funds in the amount of $472,000 that this [Bankruptcy] Court heretofore required [appellant] to turn over to the Trustee." Response Regarding the Hearing on 07/10/2010 (Doc. No. 672 in Bankruptcy No. 08-22224-JAD) at 3.
A hearing on the trustee's motion was held on July 20, 2010, as scheduled. See Proceeding Memo (Doc. No. 689 in Bankruptcy No. 08-22224-JAD). Appellant failed to appear at the hearing. Id. An order was entered on that date granting the trustee's motion, finding United Bank to be a good faith purchaser pursuant to U.S.C. § 363 and In re Abbots Dairies of Pennsylvania, Inc., 788 F.2d 143 (3d Cir. 1986), and "overruling" the objections of appellant and also deeming them to be waived "for failure to appear and prosecute." Order of July 20, 2010 (Doc. No. 690 in Bankruptcy No. 08-22224-JAD) at ¶ 13. Appellant did not seek further relief from the bankruptcy court. See generally the docket in Bankruptcy No. 08-22224-JAD. The sale was consummated and thereafter reported as complete on July 29, 2010. See Report of Sale (Doc. No. 700 in Bankruptcy No. 08-22224-JAD).
On August 3, 2010, United Bank filed a motion seeking to substitute itself as the appellee. Appellant did not contest the proposed substitution and an order was entered on August 11, 2010, granting United Bank's motion.
Appellant raises a plethora of challenges to the substantive and procedural aspects of the bankruptcy court's rulings. She asserts that the court erred in concluding the trustee acquired a superior claim of ownership to the mineral rights and thus erred in rendering all of the concomitant orders that followed from that determination. In addition, the court erred (1) in reaching issues that purportedly were beyond the matters raised by the parties' cross-motions for summary judgment and/or (2) by deciding various issues without adequate evidence to do so. It also erred in concluding that (1) the trustee was an individual who could recover damages for violation of the automatic stay and (2) punitive damages were recoverable and appropriately imposed.
Appellee contends that appellant's failure to seek and obtain a stay of the order authorizing the trustee's sale of the assets of the estate precludes the review of the orders awarding ownership of the mineral rights to the trustee pursuant to equitable mootness and/or statutory mootness under 11 U.S.C. § 363(m). In the alternative, the court correctly determined that the trustee had a superior claim to the mineral rights under the "strong arm" powers set forth at 11 U.S.C. § 544 and properly reached and resolved all related issues presented by the parties' filings.
Notwithstanding appellant's vitriol as to the propriety of the bankruptcy court's rulings in the adversarial proceeding, section 363(m) of the United States Bankruptcy Code bars further review of the central issues raised in this appeal regarding the ownership of the mineral rights. That section provides:
The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.
11 U.S.C. § 363(m). This provision reflects a congressional mandate directing that as a general matter orders authorizing the sale of "property" of a bankruptcy estate be deemed final unless a stay of the order authorizing the sale is obtained. See Pittsburgh Food & Beverage, Inc. v. Ranallo, 112 F.3d 645, 647, 651 (3d Cir. 1997) (the appellant's inability to obtain a stay of the bankruptcy court's order approving the sale of the debtor's assets and the district court's inability to grant relief without affecting the validity of the sale rendered appeal moot). In so providing, "section 363(m) fosters the 'policy of not only affording finality to the judgment of the bankruptcy court, but particularly [the policy of giving] finality to those orders and judgments upon which third parties rely.'" Id. at 647-8 (quoting In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 147 (3d Cir. 1986) (internal quotation marks and citation omitted)).
Assuming that an authorization of sale was obtained under either §§ 363(b) or (c), § 363(m) will create "statutory mootness" where two other prerequisites are satisfied: "(1) the underlying sale or lease was not stayed pending the appeal, and (2) the court, if reversing or modifying the authorization to sell or lease, would be affecting the validity of such a sale or lease." Krebs Chrysler-Plymouth, Inc. v. Valley Motors, Inc., 141 F.3d 490, 499 (3d Cir. 1998); accord In re Rickel Home Centers, Inc., 209 F.3d 291, 298 (3d Cir. 2000) (same). The proponent of the protections afforded by § 363 bears the burden of proving the statutory and prudential prerequisites have been satisfied. In re Abbotts Dairies of Pa., Inc., 788 F.2d 143, 149-50 (3d Cir. 1986); In re Summit Global Logistics, Inc., 2008 WL 819934, * 9 (Bankr. D. N.J. 2008). In contrast, a party objecting to an order of authorization under § 363(b) has the burden of advancing sufficient grounds to support its position. In re Lionel Corp., 722 F.2d 1063, 1071 (3d Cir. 1983) ("While a debtor ...