Fraud on Court Case Filed by Losing Bidder Dismissal Upheld

by San Antonio Attorney

In a landmark case, a three judge panel has allowed the petition of four individuals to uphold the dismissal of a losing bidder’s suit. The four individuals are defunct farmer’s cooperative trustee and two other executives together with the purchaser of the assets of the cooperative. The case stemmed from the bankruptcy sale in 2004 where the losing bidder filed suit to question the sale.

The 8th US Circuit Court of Appeals decided, upon review of the factual circumstances of the case, that the complainant GAF Holding LLC lacked the prerequisite standing to question the sale and file suit.

The owner of the questioned assets, Farmland Industries Inc filed for Chapter 11 insolvency in May of 2002. In order to pay off its obligations, the company was allowed by the bankruptcy court to sell its refinery and fertilizer plant complex located at Coffeyville, Kansas. GAF had offered to purchase the assets prior to the bankruptcy proceedings also submitted a bid at the bankruptcy hearing. Then Farmland CEO Robert Terry decided that GAF was unqualified as a bidder as it failed to submit required information in its bid documents and did not deposit the requisite ten (10) percent deposit for the bid. GAF did not oppose its disqualification then.

The winner of the bidding was Coffeyville Resources, which were namely the hedge fund companies, Pegasus Partners II, Pegasus Investors II LP and Pegasus Capital Partners LP. Their bid was accepted and the bankruptcy court approved the sale on November 2003. The court found that Coffeyville Resources was qualified to bid and upon review by the bankruptcy court, all sales procedures were conducted in good faith. The insolvency court also found the purchase price as fair, reasonable and at par value. After such sale pushed through, the bankruptcy court approved the liquidation plan for Farmland Industries where the remaining assets were placed in a trust under the control of JP Morgan Trust Co. At this point, GAF still did not object or appeal to the said sale or liquidation order.

GAF belatedly though sought to set aside the sale of the assets alleging that Coffeyville Resources had offered a position to then Farmland Executive Vice President Stanley Riemann should the sale push through. Said deal was said to have been brokered prior to the sale making the sale defective as there was collusion between Farmland’s management and the Pegasus hedge fund managers.

After thorough review, the insolvency court denied the motion to set aside the sale as it found no proof that Riemann had influenced the bidding nor put GAF’s bid in the backburner. Again, GAF did not file an appeal to this order and instead opted to file an adversary complaint against Farmland’s CEO and EVP, the Pegasus funds and its executive Philip Rinaldi in March 2007. The bankruptcy court dismissed the adversary complaint stating that GAF was undertaking a disallowed collateral attack on the court’s sale order together with the finding that GAF did not have the legal standing to file such adversary complaint, as it had no interest in the case.

The appellate panel upheld the decision of the insolvency court as to the finding that GAF lacked the legal standing to file suit. It found that the adversary complaint lacked a cause of action and also GAF had been barred by estoppel since it had the opportunity to question the decisions beforehand. This estoppel prevents relitigation of claims that could have been questioned at the first instance. On this GAF appealed and the 8th Circuit again upheld GAF’s lack of standing because of the lack of damage or injury resulting from the actions of Farmland executives and the Pegasus fund management.

GAF presented the argument on appeal that because of the fraud there need not be proof adduced to allege standing to sue. This was rejected by the appellate panel since GAF was only seeking payment of monetary damages and not the setting aside of the fraudulent court judgment. In order for the argument of GAF to hold water, the appellate court stated that instead of compensatory damages, GAF should have sought to rescind the sale and recant the sale order.

San Antonio Attorney has more news topics under its Bankruptcy blog section

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