Pennsylvania Bankruptcy Court Finds That Consent and Release Do Not Protect Against Wrongful Foreclosure Claim – JD Supra

On September 19, 2022, the U.S. Bankruptcy Court for the Western District of Pennsylvania found that secured lenders could not hide behind a consent and a release to avoid the review of the commercial reasonableness of a pre-bankruptcy foreclosure sale. Prepetition, the debtor was a manufacturer of nutrition bars, protein bars and other baked good for various brands. KIND Operations was one of the debtors major customers. While the debtor, at various times, had substantial operations, at the time of its bankruptcy filing it was a non-operating shell company with no employees or assets. It did however have almost $30 million in debt.

Within a year prior to the bankruptcy filing, the debtors prepetition secured lenders, Cadence Bank, N.A. and Bank Hapoalim B.M., and others allegedly manufactured a private foreclosure sale of substantially all of the debtors assets at a below market price. After the chapter 11 case was converted to chapter 7 and the trustee assigned various claims to KIND, KIND commenced various adversary proceedings against the secured lenders, asserting claims for civil conspiracy, aiding and abetting breach of fiduciary duty, violation of Article 9 of the UCC because the foreclosure sale was not commercially reasonable, and avoidance of the pre-petition foreclosure sale as a fraudulent transfer. The lenders moved to dismiss on the ground that a consent and a release executed by the debtor in connection with the prepetition foreclosure sale barred the claims.

The bankruptcy court, finding that KIND stood in the shoes of the prepetition debtor and had no greater rights than the debtor, stated that a majority of the claims could potentially be dismissed. While there remained an issue as to whether the consent and the release could be avoided, and while the court believed that claims sounding in civil conspiracy and aiding and abetting a breach of fiduciary could be barred by the general releases (if not avoided), the court found that the advance blanket waivers and releases were unenforceable as to the Article 9 sale because a banks duty to conduct a commercially reasonable sale is not waivable by [certain] contract terms and that an agreement provision attempting to expunge a commercial reasonableness requirement is per se manifestly unreasonable. While the lenders argued there was no advance waiver in this case, the court disagreed because the consent and the release were drafted and executed before the foreclosure sale. Thus, the court concluded that the lenders could not hide behind the consent and the release to avoid a review of the commercial reasonableness of the pre-bankruptcy foreclosure sale.

With respect to the other state law claims (civil conspiracy and aiding and abetting a breach of fiduciary duty), the court declined to dismiss them, finding they could be avoided as fraudulent transfers. While KIND did not specifically seek to avoid the consent and release in its pleadings, the court found that KIND did seek to avoid the pre-petition foreclosure sale, and the consent and release were integral to that transaction. The court found, if appropriate, it could collapse multiple transactions into one integrated transaction. If the prepetition foreclosure sale was ultimately avoided, the consent and release would also be avoided. Accordingly, the court denied the lenders motion to dismiss as it related to the Article 9 violation claim, and deferred ruling on the appropriateness of dismissing the other state law claims. The court did state that, if the lenders ultimately prevailed in their defense to the fraudulent transfer claim, the civil conspiracy and aiding and abetting a breach of fiduciary duty claim would be dismissed.

The case is KIND Operations, Inc. v. Cadence Bank, N.A. (In re PA Co-Man, Inc.), No. 21-ap-2061 (Bankr. W.D. Pa. Sept. 19, 2022). KIND is represented by Bernstein-Burkley, P.C. Cadence Bank, N.A. is represented by Riemer & Braunstein LLP and Buchanan Ingersoll & Rooney PC. Bank Hapoalim B.M. is represented by Herrick Feinstein LLP and Dentons Cohen & Grigsby, P.C. The order is available here.

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Pennsylvania Bankruptcy Court Finds That Consent and Release Do Not Protect Against Wrongful Foreclosure Claim - JD Supra