Appellate Case: 09-2548 Page: 1 Date Filed: 08/30/2010 Entry ID: 3698643
UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
)
United States of America, ) Appeal No.: 09-2548
)
Plaintiff – Appellee, )
)
v. )
)
Asset Based Resource Group, LLC, as ) APPELLANT’S PETITION
successor servicer to Acorn Capital ) FOR HEARING EN BANC
Group, LLC, )
)
Creditor – Appellant )
)
Thomas J. Petters, et al., )
)
Defendants – Appellees )
Pursuant to Rules 35 and 40 of the Federal Rules of Appellate Procedure,
Appellant Asset Based Resource Group, LLC, as successor servicer to Acorn
Capital Group, LLC (“Acorn”), respectfully submits this Petition for hearing by the
Court of Appeals en banc. The Panel’s published opinion dismissing Acorn’s
appeal based on the “finality rule” conflicts with prior decisions of the United
States Supreme Court and this Court, where the Court can still provide some relief
sought by Acorn through its appeal. Consideration by the full Court is therefore
necessary to secure and maintain uniformity of established and important
precedent.
Appellate Case: 09-2548 Page: 2 Date Filed: 08/30/2010 Entry ID: 3698643
INTRODUCTION
The United States Supreme Court has made it clear that an appeal is not
moot, even if “a court may not be able to return the parties to the status quo ante,”
so long as “a court can fashion some form of meaningful relief.” Church of
Scientology of Cal. v. United States, 506 U.S. 9, 12 (1992). Accordingly, it has
long been held that the “finality rule” does not apply when the Court is in a
position to provide at least some of the relief sought in the appeal. See, e.g.,
Lang v. Schropp, 496 F.3d 892, 899 (8th Cir. 2007).
Acorn is one of two primary creditors of Petters Aircraft Leasing (“PAL”).
Acorn appealed an order in PAL’s receivership proceedings approving a Strict
Foreclosure Agreement that disposed of PAL’s principal assets and allowed PAL’s
other primary creditor, C.I.T. Leasing Corporation (“CIT”), to recover unlawful
pre-payment penalties of more than $9 million. The foreclosure closed while this
appeal was pending. The Court nonetheless has the authority to order the Receiver
to pursue disgorgement of the more than $9 million in unlawful prepayment
penalties from CIT without having to unwind the strict foreclosure sale.
Thus, contrary to the Court’s conclusion, Acorn’s appeal is not moot—and
Acorn did not need to obtain a stay of the sale pending appeal—because the Court
can still provide for disgorgement as a remedy in this appeal without unwinding
the underlying transactions. It is imperative that the Court consider this appeal en
2
Appellate Case: 09-2548 Page: 3 Date Filed: 08/30/2010 Entry ID: 3698643
banc to ensure that entities such as CIT are not permitted to “game the system” and
retain ill-gotten gains as a result of an unwarranted expansion of the “finality rule.”
BACKGROUND
This appeal arises out of proceedings involving a receivership established
for PAL. Acorn and CIT are PAL’s only significant creditors. Acorn financed
acquisition of two Boeing 737-800 aircraft (“Aircraft”) for PAL and is owed more
than $19 million. CIT entered into leases with PAL for the Aircraft and claimed to
be owed $57 million. Additionally, CIT claimed more than $9 million in unlawful
pre-payment penalties. The Aircraft constitute PAL’s principal assets.
Douglas A. Kelley was appointed by the District Court to serve as receiver
(“Receiver”) for PAL and charged with responsibility to “conserve, hold, and
manage all receivership assets, and perform all acts necessary or advisable to
preserve the value of those assets in order to prevent any irreparable loss, damage,
or injury to consumers or creditors.” A1671 As Receiver, Kelley was “appointed
to assist the Court in protecting and preserving, for the benefit of all parties
concerned, the properties in the Court’s custody.” Crites, Inc. v. Prudential Ins.
Co. of Am., 322 U.S. 408, 414 (1944)(emphasis added). Thus, the Receiver had the
fiduciary duty to protect both CIT’s and Acorn’s interests with respect to the
1
References to “A__” correspond with the contents of Appellant’s Appendix,
which was filed with Appellant’s Brief dated August 19, 2009.
3
Appellate Case: 09-2548 Page: 4 Date Filed: 08/30/2010 Entry ID: 3698643
disposition of the Aircraft. Id. at 414. Unfortunately, the Receiver completely
failed to protect Acorn’s interests with respect to the liquidation of the Aircraft.
To begin with, the Receiver failed to properly market the Aircraft. Rather
than engaging a broker to maximize the exposure of the Aircraft to the market, the
Receiver’s agent instead relied solely on passive word-of-mouth “efforts” to sell
the Aircraft. A82 When these efforts were unsuccessful, the Receiver entered into
the Strict Foreclosure Agreement with CIT, A27-A58, and thereafter sought
District Court approval with just one week’s notice. A1-A58
The Receiver also violated its statutory obligations in the process. Federal
law requires that “[a]ny personalty sold under any order or decree of any court of
the United States shall be sold in accordance with” the statutory obligations
imposed upon the sale of real estate. 28 U.S.C. § 2004 (2009). Accordingly, at a
bare minimum, the Aircraft should have been offered for sale either (1) at a public
sale, or (2) at a private sale following a properly noticed hearing, a finding by the
Court that the private sale was in the best interest of the estate, appraisals by three
disinterested parties, publication of the sale terms, and an opportunity for third
parties to exceed the private offer. Id. at § 2001. It is well established that this
“federal statute does express a preferential course to be followed in connection
with a court authorized sale of property and that the district court should not order
otherwise except under extraordinary circumstances.” Tanzer v. Huffines, 412
F.2d 221, 222 (3rd Cir.), cert. denied, 396 U.S. 877 (1969)(emphasis added). The
4
Appellate Case: 09-2548 Page: 5 Date Filed: 08/30/2010 Entry ID: 3698643
Receiver’s actions widely deviated from these statutory requirements by, inter alia,
failing to obtain any appraisals of the Aircraft, and failing to publish notice of the
sale to ensure that other potential purchasers could bid on the Aircraft.2
As a result of the Receiver’s actions, Acorn was deprived of a meaningful
opportunity to review the terms of the Strict Foreclosure Agreement, fully raise its
objections concerning violations of federal law, and otherwise oppose the relief
sought by CIT in connection with the Strict Foreclosure Agreement. The prejudice
to Acorn was substantial not only because, as noted, the Aircraft represented
PAL’s principal assets, but also because CIT was able to obtain improper and
unlawful prepayment penalties of more than $9 million to the direct detriment of
Acorn. In re Duralite Truck Body & Container Corp., 153 B.R. 708, 714 (Bankr.
D. Md. 1993)(improper prepayment penalty charges “operate as . . . a windfall to
the lender, at the expense of other creditors.”).
CIT obtained this windfall through deception. Specifically, the Receiver and
CIT convinced the District Court to approve more than $9 million in pre-payment
penalties by misrepresenting the nature of these payments.
The Receiver represented to the District Court that CIT’s leases have
“what’s called a make-whole provision . . . that adjusts depending on the interest
rates so that at the end of the day CIT ultimately gets the benefit of its bargain” and
2
The District Court made no findings of “extraordinary circumstances” as
would have been required by law to depart from these Congressionally mandated
procedures. A172-A181
5
Appellate Case: 09-2548 Page: 6 Date Filed: 08/30/2010 Entry ID: 3698643
expressly misrepresented that “this isn’t a penalty provision. It’s really a
commercial make-whole provision.” A123-A124 (Tr. 6:22-23 & 7:3-14)
CIT was even more blatant in mischaracterizing these improper pre-payment
provisions. While recognizing that “the Court has the power to set aside a
penalty,” A147 (Tr. 30:23-24), CIT’s counsel nonetheless mischaracterized the
provisions at issue as providing for “a make-whole payment . . . that is designed to
protect the lender and it is a formula that works in your favor or against you
depending upon where interest rates have gone.” A146-A147 (Tr. 29:22-30:10)
These representations were false. In fact, the payments at issue are improper
pre-payment penalties rather than true “make-whole” provisions. In order to
qualify as a true make-whole provision, the provision must, inter alia, treat the
parties equally and provide a discount to offset the return on the reinvestment of
the pre-paid amount. In re Kroh Bros. Dev. Co., 88 B.R. 997, 1000-1002 (Bankr.
W.D. Mo. 1988). The payments contemplated under Section 20.2(a)(ii) of the
Amended and Restated Aircraft Finance Lease Agreements did not benefit both
parties. Instead, section 20.2(a)(ii) expressly provides that it can only benefit CIT.
A10 Further, Section 20.2(a)(ii) does not provide any discount or offset for the
current market rate of return to reflect CIT’s ability to immediately reinvest the
pre-paid penalty amounts. A10 Thus, the payments under this provision constitute
a windfall to CIT by allowing it to first recover the present value of its entire
investment at the contract rate, and then also recover the additional return on the
6
Appellate Case: 09-2548 Page: 7 Date Filed: 08/30/2010 Entry ID: 3698643
reinvestment of those pre-paid funds. Recovery based on penalty provisions such
as this are disfavored “because it serves the function of preferring one creditor at a
detriment to other creditors of the estate.” In re Klefstad, 95 B.R. 622, 625 (Bankr.
W.D. Wis. 1988); see also In re Schwegmann Giant Supermarkets Partnership,
264 B.R. 823, 832 (Bankr. E.D. La. 2001). Thus, courts routinely invalidate such
pre-payment penalties. See, e.g., In re Schwegmann, 264 B.R. at 832; In re Kroh
Bros., 88 B.R. at 1002.
The Bankruptcy Code clearly and unquestionably gave the Receiver the
authority to avoid CIT’s pre-payment penalties on unreasonableness grounds under
11 U.S.C. § 506(b). Thus, if necessary, the Receiver could have—and should
have—put PAL into bankruptcy to avoid these improper penalties, and by so
doing, protect the best interests of all of PAL’s creditors, including Acorn.
Instead, the Receiver improperly favored the interests of one creditor, CIT,
over Acorn and PAL’s other creditors by collaborating with CIT to bring a Motion
to Approve the Strict Foreclosure Agreement that was heard just five business days
after notice was given to the creditors. A118-A156 The District Court overruled
Acorn’s objections and entered an order granting the Receiver’s motion in all
respects. A172-A181. Two days later, Acorn timely filed this appeal of the
District Court’s Order, including the District Court’s approval of the payment of
more than $9 million to CIT in unlawful pre-payment penalties.
7
Appellate Case: 09-2548 Page: 8 Date Filed: 08/30/2010 Entry ID: 3698643
Based on the express terms of the Strict Foreclosure Agreement, Acorn had
no reason to believe that the parties would close during Acorn’s appeal. Section 14
of the Strict Foreclosure Agreement expressly required entry of “a Final Order” as
a condition precedent of the agreement. A37 This was defined by Section 15 to
mean an order “as to which no notice of appeal shall have been filed.” A37 Thus,
Acorn had no reason to seek a stay pending appeal because Acorn filed a timely
appeal before the parties closed on the transaction, thereby preventing the
condition precedent from occurring. Nevertheless, without notice to Acorn, CIT
assumed the risk as to the outcome of the appeal (and assumed the risk that it
would be subject to disgorgement) by waiving this condition precedent and closing
during the pendency of Acorn’s appeal.
The Panel erroneously held that this matter became moot because Acorn did
not move for a stay and the transaction subsequently closed. This decision ignores
the fact that the Court retained the authority to grant Acorn’s request that the
Receiver pursue disgorgement of the more than $9 million in unlawful prepayment
penalties that CIT has received.
ARGUMENT
The Panel’s published opinion dismissing Acorn’s appeal as moot
constitutes an unfounded and dangerous expansion of the finality rule. If permitted
to stand, the opinion will moot appeals even where the Court still has the authority
to grant at least some of the relief that was sought on appeal. It will be used as a
8
Appellate Case: 09-2548 Page: 9 Date Filed: 08/30/2010 Entry ID: 3698643
shield by parties who make misrepresentations to the District Court and will enable
those parties to retain their ill-gotten gains.
The Panel erred by conflating the statutory mootness rule that applies in
bankruptcy pursuant to 11 U.S.C. § 363(m) and the common law finality rule that
applies in non-bankruptcy cases like the instant receivership proceeding. Opinion
at 4 & n.2. Under the Bankruptcy Code, section 363(m) expressly bars appellate
relief in the absence of a stay pending appeal. In contrast, the common law finality
rule has never before been intended to be applied in such an absolute manner.
Instead, at common law, an appeal will not be deemed moot so long as some of the
relief sought on appeal may still be granted by the Court, even though the
underlying transaction has been completed and cannot be undone. See Church of
Scientology of Cal., 506 U.S. at 12; Lang, 496 F.3d at 899.
All of the reported decisions of this Court that were cited and relied upon by
the Panel arose out of bankruptcy proceedings, and therefore reflect the Panel’s
erroneous application of the absolute mandate imposed by section 363(m) in this
case. Opinion at 3 & 4 n.2. Moreover, the facts here are readily distinguishable
from those in the cases cited by the Panel because the appellants in the cited cases
were trying to unwind transactions which had already been completed. See, e.g.,
Fitzgerald, 109 F.3d at 1342-1343. In contrast, in this appeal, Acorn seeks an
order requiring the Receiver to pursue disgorgement of CIT’s $9 million windfall,
9
Appellate Case: 09-2548 Page: 10 Date Filed: 08/30/2010 Entry ID: 3698643
which is relief that the Court can provide without disturbing the underlying
transaction or the subsequent leasing of the Aircraft.
The Panel’s reliance on Fitzgerald is also misplaced due to the absence of a
bona fide third-party purchaser in this case. Opinion at 3 & 4. In Fitzgerald, the
court refused to set aside an arm’s-length sale to an innocent third-party purchaser.
See Fitzgerald, 109 F.3d at 1342-1343. Here, the Aircraft was not sold to an
innocent third-party. Rather, CIT was the owner and lessor of the Aircraft prior to
the foreclosure agreement, and remains the owner and lessor of the Aircraft today.
Therefore, the primary protection established by section 363(m), and invoked by
Fitzgerald—i.e., the protection of the good-faith expectations of third-party
purchasers that all sales are final—is inapplicable here.
The Panel incorrectly stated that Acorn had failed to explain how the Court
could direct the Receiver to pursue recovery of the unlawful pre-payment
penalties. In fact, Acorn articulated the specific relief it sought and explained how
this Court can grant relief in the form of disgorgement or restitution as to the
windfall payments CIT received. Appellant’s Br. at 18-29; Appellant’s Reply at
5-10 & 19. Indeed, it is well established that monetary relief, including
disgorgement and restitution of ill-gotten gains, is a common remedy awarded by
courts where a sale or foreclosure cannot easily be unwound. “The Court need not
set aside the judgment approving the foreclosure sale to affect a disgorgement
of . . . ill-gotten gains.” Lang, 496 F.3d at 899 (ordering funds that were “credit
10
Appellate Case: 09-2548 Page: 11 Date Filed: 08/30/2010 Entry ID: 3698643
bid,” but never paid, to be placed in a constructive trust for the benefit of the estate,
which retains a property interest even following a foreclosure sale of the assets at
issue).
The Panel incorrectly assumed that CIT was entitled to protection as a good
faith purchaser, relying on the District Court’s finding that “[t]he Foreclosure
Agreement was negotiated, proposed and entered into by the Receiver, PAL and
CIT without collusion, in good faith, and after arms-length and lengthy bargaining
between the parties.” Opinion at 5. In fact, the evidence in the record established
that CIT acted in bad faith in order to secure court approval of the Strict
Foreclosure Agreement. As Acorn has pointed out, CIT was aware that the
Receiver had failed to fulfill its statutory obligations for disposing of the Aircraft
through its failure to, inter alia, market the Aircraft and conduct a public sale. In
addition, the Receiver and CIT both inaccurately represented to the District Court
that the pre-payment penalty provisions were “make-whole” provisions. In any
event, CIT decided to close during Acorn’s pending appeal, even though it was not
required to do so under the terms of the Strict Foreclosure Agreement. CIT thus
closed with actual notice and knowledge that this Court could reverse the District
Court. Accordingly, even if it had entered into the Strict Foreclosure Agreement in
good faith—which it clearly did not—CIT waived any such protections and
assumed the risk of disgorgement or restitution when it voluntarily chose to close
over Acorn’s appeal.
11
Appellate Case: 09-2548 Page: 12 Date Filed: 08/30/2010 Entry ID: 3698643
The Panel further erred in holding that it could not order disgorgement or
restitution because “CIT is not a party to this suit.” Opinion at 5. CIT is clearly
subject to the Court’s jurisdiction because CIT collaborated with the Receiver to
obtain the District Court’s approval of their Strict Foreclosure Agreement.
Specifically, CIT appeared and participated in these proceedings before the District
Court, and mischaracterized the pre-payment penalties to the District Court as
“make-whole” provisions, in order to secure District Court approval of more than
$9 million in improper and unlawful payments. Given these circumstances, there
can be no question that the Court can and should exercise its authority over CIT.
In any event, “[a] court can obtain equitable relief [even] from a non-party
against whom no wrong-doing is alleged if it is established that the non-party
possesses illegally obtained profits but has no legitimate claim to them.” SEC v.
Cherif, 933 F.2d 403, 414 n. 11 (7th Cir. 1991), cert. denied, 502 U.S. 1071
(1992)(emphasis added); see also Tcherepnin v. Franz, 485 F.2d 1251 (7th Cir.
1973), cert. denied, 415 U.S. 918 (1974). Therefore, even if CIT’s active
participation in the proceedings before the District Court, and its misleading
representations to the District Court regarding the true nature of the pre-payment
penalty in order to secure its windfall, were not sufficient to make CIT a “party” to
these proceedings, the Court nonetheless has the authority and jurisdiction to
disgorge or require restitution of CIT’s unlawful windfall of more than $9 million.
12
Appellate Case: 09-2548 Page: 13 Date Filed: 08/30/2010 Entry ID: 3698643
Finally, wholly apart from the Court’s jurisdiction over CIT, the Court has
jurisdiction over the Receiver and, as such, has the authority to order the Receiver
to pursue disgorgement of the improper and unlawful payments from CIT.
Gibson v. Vinton, 21 F.2d 168, 170-171 (8th Cir. 1927)(receiver has authority to
sue on behalf of the entities under its control); Fed. Home Loan Mortgage Corp. v.
Tsinos, 854 F. Supp. 113, 115-116 (E.D.N.Y. 1994)(receiver may sue third-parties
when given permission by the appointing court to do so); Scholes v. Stone,
McGuire & Benjamin, 821 F. Supp. 533, 536 (N.D. Ill. 1993)(“the law is clear that
receivers in general have standing to assert state law claims on behalf of entities in
receivership”); Scholes v. African Enter., Inc., 838 F. Supp. 349, 353 (N.D. Ill.
1993)(receiver has authority to bring claims against third-parties who have
misappropriated estate funds). Indeed, this would be fundamental to the Court’s
supervision and oversight of the Receiver. Therefore, the Court has the authority
and the wherewithal to grant the disgorgement relief Acorn sought in this appeal.
In sum, the Panel has improperly expanded the Supreme Court’s and this
Court’s well-established precedent regarding the “finality rule” by holding that
Acorn’s appeal is moot, even though the Court is authorized to order disgorgement
of CIT’s windfall without requiring the unwinding of either the Strict Foreclosure
Agreement or the subsequent leasing of the Aircraft. As it stands, the Panel’s
published decision rewards CIT for the misrepresentations it made to the District
Court—allowing it to retain more than $9 million of unlawful and unenforceable
13
Appellate Case: 09-2548 Page: 14 Date Filed: 08/30/2010 Entry ID: 3698643
pre-payment penalties—to the direct detriment of Acorn as the only other primary
creditor. This opinion establishes the dangerous precedent that it is permissible to
mislead the District Court so long as parties close on their transactions before the
Court of Appeals has the opportunity to take review. For these reasons, this
decision merits review by the Court en banc.
CONCLUSION
Acorn respectfully petitions this Court en banc to rectify the Panel’s
erroneous published opinion which, if left in place, dangerously expands the scope
of the finality rule to moot appeals even where the Court may still grant appellants
at least some of the relief they are seeking.
Dated: August 30, 2010 WINTHROP & WEINSTINE, P.A.
By: s/ Thomas H. Boyd
Daniel C. Beck, #192053
Thomas H. Boyd, # 0200517
Michael A. Rosow, #317998
225 South Sixth Street, Suite 3500
Minneapolis, MN 55402-4629
Telephone: (612) 604-6400
Fax: (612) 604-6800
dbeck@winthrop.com
tboyd@winthrop.com
mrosow@winthrop.com
Attorneys for Appellant Asset Based
Resource Group, LLC, as successor servicer
to Acorn Capital Group, LLC
5430088v6
14