The Huntington National Bank v. Saint Catharine College, Inc.

          MEMORANDUM OPINION AND ORDER

          David J. Hale, Judge United States District Court.

         Plaintiff Huntington National Bank filed this action as trustee to recover debts owed on bonds issued by Defendant Saint Catharine College, Inc. (Docket No. 1) Upon Huntington's unopposed motion, the Court appointed LS Associates, LLC as receiver to manage, maintain, preserve, and repair Saint Catharine's remaining assets. (D.N. 12) The Court also instituted a receivership stay on litigation against Saint Catharine. (Id., PageID # 289) Nonparties Becky Lee Meadows, Scott Scheerhorn, Robert Akin, and Robert Hutchins have moved to lift the receivership stay so that they may file a putative class action against Saint Catharine. (D.N. 78) Nonparty Ellis Towing, LLC also asks the Court to lift the stay to allow it to initiate litigation against Saint Catharine. (D.N. 80) Additionally, Receiver LS Associates has moved to reduce funds held in a Student Refund Account for the purpose of paying receivership expenses. (D.N. 97) LS Associates has also filed an expedited motion for an order approving procedures in connection with the proposed sale of Saint Catharine's remaining assets. (D.N. 101) Intervening party Farmers National Bank opposes LS Associates' motions on a number of grounds. (See D.N. 98; D.N. 107)

         For the reasons set forth below, the Court will partially grant the motion by Meadows, Scheerhorn, Akin, and Hutchins to lift the receivership stay. These nonparties may proceed with their putative class action, but only after the proposed sale of Saint Catharine's remaining assets is complete. Additionally, the Court will grant Ellis Towing's motion to lift the receivership stay, LS Associates' motion to reduce funds held in the Student Refund Account, and LS Associates' motion for an order approving the proposed sale procedures.

         I. Background

         Between 2004 and 2014, Saint Catharine issued a series of notes and other financial documents to collateralize its repayment obligations under its previously issued bonds. (D.N. 1, PageID # 3-4) In connection with the loan documents, Huntington, as trustee, was granted a mortgage and perfected security interest in Saint Catharine's real estate and the fixtures associated with the real estate. (Id., PageID # 5) With financial difficulties mounting, Saint Catharine announced in June 2016 that it intended to discontinue its business operations effective July 31, 2016. (Id., PageID # 6) Huntington then brought the present action, alleging that, by announcing its intent to discontinue its business, Saint Catharine had defaulted on its obligations under the loan documents. (Id., PageID # 6-8)

         Pursuant to the loan documents, Huntington was entitled to have a receiver appointed upon the filing of any action for money due under the bonds. (D.N. 4-1, PageID # 196) Accordingly, the Court appointed LS Associates as receiver to manage, maintain, preserve, and repair Saint Catharine's remaining assets. (D.N. 12) The Court also instituted a receivership stay, mandating that “[n]o individual or entity may sue [Saint Catharine] without first obtaining the permission of this Court.” (Id., PageID # 289) The Court thereafter granted LS Associates' unopposed motion to establish a Student Refund Account to handle student refund claims filed against Saint Catharine. (D.N. 17; D.N. 19)

         In the meantime, Farmers National Bank sought to intervene in the dispute in light of an outstanding $1.5 million promissory note executed by Saint Catharine and delivered to FNB. (See D.N. 8, PageID # 235-36) Pursuant to a stipulation by the parties, the Court granted FNB's motion to intervene. (See D.N. 20; D.N. 21) Around the same time, LS Associates and Huntington filed a number of joint motions requesting approval to sell certain personal property of Saint Catharine's at auction. (D.N. 26; D.N. 27; D.N. 32) The Court granted these motions. (D.N. 45; D.N. 68) Consequently, Saint Catharine's only remaining significant asset is its former campus. (See D.N. 104)

         On March 28, 2017, nonparties Meadows, Scheerhorn, Akin, and Hutchins moved for an order lifting the receivership stay to allow them to proceed with a putative class action against Saint Catharine. (D.N. 78) Huntington and LS Associates have filed a joint response opposing this motion. (D.N. 88) On April 7, 2017, nonparty Ellis Towing, LLC likewise moved for an order granting it permission to proceed with litigation against Saint Catharine in a Kentucky state-court action. (D.N. 80) Saint Catharine initially opposed this motion (D.N. 84), but the parties have since stipulated that Ellis may proceed in the state-court action for apportionment purposes only. (D.N. 86)

         On September 28, 2017, LS Associates moved for an order authorizing it to reduce the funds held in the Student Refund Account to $50, 000. (D.N. 97) In response, FNB stated a general objection “to the continued use of unencumbered funds for receivership activities solely or substantially for the benefit of [Huntington] and its bond holders, to the detriment of all other creditors.” (D.N. 98, PageID # 1375) On November 2, 2017, LS Associates also moved for an order approving certain procedures to be employed in connection with a proposed sale of Saint Catharine's real estate and other remaining assets. (D.N. 101) FNB opposes this motion on a number of grounds. (D.N. 107) The United States, as an intervening interested party, initially opposed the motion, citing an interest it allegedly has in a building within Saint Catharine's campus. (D.N. 106) LS Associates has since filed a revised proposed sale-procedures order, in which it addresses some of the issues raised by FNB and the United States. (D.N. 110-1) Indeed, LS Associates alleges that the United States now agrees with the proposed order. (See D.N. 110)

         II. Discussion

         A. LS Associates' Motion to Reduce Funds Held in the Student Refund Account

         LS Associates moves for permission to reduce the funds held in the Student Refund Account to $50, 000 and use the remaining balance of approximately $223, 000 for receivership expenses. (D.N. 97) In support of its motion, LS Associates notes that since the Court's August 20, 2016 Order establishing the Student Refund Account, only $47, 456.41 has been paid out to student refund claims. (Id., PageID # 1368) The last such student refund claim was filed in November 2016. (Id.) Given the figures cited by LS Associates, the Court finds LS Associates' request and proposed resolution reasonable. FNB's general objection to the contrary is misplaced. FNB is correct that the vast majority of receivership expenses to date have been related to the preservation and attempted liquidation of Saint Catharine's campus. (See D.N. 99-1, PageID # 1388) FNB is also correct that preservation of the campus will largely benefit Huntington and Saint Catharine's bondholders alone, as the value of the property is likely less than the $24 million owed to bondholders. (See D.N. 98, PageID # 1376) At the hearing on this matter, however, FNB did not present a reasonable alternative approach that LS Associates could take that might result in a better return on Saint Catharine's remaining assets-one of the primary purposes of the receivership itself. (See D.N. 109)

         Furthermore, even if FNB could present a reasonable alternative approach, prior orders from this Court grant LS Associates the power to reduce the Student Refund Account even without Court approval. The Court's Order establishing the Student Refund Account grants LS Associates the right “to withdraw funds in excess of the Reserve for purposes of paying expenses of this Receivership pursuant to the terms of the Receivership Order” upon receipt of approval by the Kentucky Council on Postsecondary Education. (D.N. 19, PageID # 375) LS Associates has received such approval. (D.N. 97, PageID # 1367) In addition, the Court's Order establishing the receivership states that “[t]he Receiver's compensation and receivership expenses and professional fees . . . shall be paid first from available cash and/or revenue.”^[1](D.N. 12, PageID # 288 (emphasis added)) Accordingly, the Court will grant LS Associates' motion to reduce funds held in the Student Refund Account.

         B. LS Associates' Proposed Sale-Procedures Order

         LS Associates also moves for approval of a sale-procedures order in connection with a proposed sale of Saint Catharine's real estate and other remaining assets. Specifically, LS Associates seeks an order (i) approving sale procedures and bidding protections to be employed in connection with the proposed sale; (ii) scheduling an auction and a hearing to consider approval of the sale; (iii) approving the proposed notice of the dates, times, and places for the auction and the sale hearing; (iv) approving the proposed asset purchase agreement with the stalking-horse purchaser; (v) authorizing the sale of additional assets; (vi) authorizing the assumption and assignment of certain executor contracts and unexpired leases in connection with the sale; and (vii) authorizing LS Associates to consummate all transactions related to the above-listed procedures. (D.N. 101, PageID # 1404-05) The following facts are relevant to resolution of this pending motion.

         Since its appointment as receiver, LS Associates has taken a number of steps to liquidate Saint Catharine's remaining assets. (D.N. 101, PageID # 1406-07) At this time, Saint Catharine's only significant remaining non-cash assets are its real estate and potential causes of action. (Id., PageID # 1407) In order to maximize the value achieved on the real estate, LS Associates retained CBRE, Inc. as an exclusive agent to list and market the campus portion of Saint Catharine's real estate. (Id.) “After extensive marketing by CBRE, communication with numerous potential interested parties, numerous site visits and negotiations, ” LS Associates executed a letter of intent with a potential purchaser for the purchase of substantially all of Saint Catharine's remaining assets. (Id.) The negotiations resulted in an Agreement for Purchase and Sale of Assets (the “APA”). (See D.N. 101-3) The APA essentially treats the potential purchaser as a stalking-horse bidder. The APA is thus subject to the bidding period, auction, and sale hearing outlined in LS Associates' proposed order. (D.N. 101, PageID # 1407-08) If the stalking-horse purchaser is not overbid and the APA is otherwise approved by this Court, however, the purchaser is contractually committed to purchasing the assets at issue for $4.7 million. (Id., PageID # 1407)

         The proposed order therefore establishes a nuanced sale procedure for the remainder of Saint Catharine's assets. It would establish rules for the submission and consideration of competing bids; schedule an auction, if needed; and schedule a sale hearing in this Court, at which LS Associates would ask the Court to enter an order authorizing LS Associates to close the transaction with the highest bidder. (See id.)

         FNB objects to the proposed sale-procedures order on several grounds. (D.N. 107) Specifically, FNB argues: (i) the proposed sale is not a “public sale” under 28 U.S.C. §§ 2001 and 2004, nor does it comply with the statutory requirements of a “private sale”; (ii) the proposed timeframe for qualifying bids following entry of the proposed order is unreasonably narrow; and (iii) the proposed sale does not allocate the purchase price among Saint Catharine's remaining unencumbered assets. (Id.) The United States also filed an objection to the sale-procedures order, citing an interest it has in a building within Saint Catharine's real estate. (D.N. 106)

         LS Associates has addressed most of these objections in its revised sale-procedures order. (See D.N. 110-1) It has extended the timeframe for submitting competing bids from 21 days to 45 days after the entry of the proposed order. (Id., PageID # 1583) LS Associates also changed the proposed order's language to require publication of an abbreviated version of the Sale Notice in the Courier-Journal and Springfield Sun once ...