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In re Mercury Cos., Inc.

United States District Court, D. Colorado

March 19, 2015


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[Copyrighted Material Omitted]

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For Mercury Companies Inc, Cross Appellant, Plaintiff: Joshua Mark Hantman, Lisa A. Hogan, LEAD ATTORNEYS, Brownstein Hyatt Farber Schreck, LLP-Denver, Denver, CO.

For FNF Security Acquisition Inc, Cross Appellee, Fidelity National Title Company, Cross Appellee, formerly known as Security Title Guardanty Co., USA Digital Solutions Inc, American Heritage Title Agency Inc, Cross Appellee, Mercury Settlment Services of Utah Inc, Cross Appellee, United Title Company, Inc., Cross Appellee, Defendants: James T. Markus, Jennifer May Salisbury, Steven R. Rider, LEAD ATTORNEYS, Markus Williams Young & Zimmermann LLC, Denver, CO.

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William J. Martí nez, United States District Judge.

FNF Security Acquisition, Inc., Fidelity National Title Company, USA Digital Solutions, Inc., American Heritage Title Agency, Inc., Mercury Settlement Services of Utah, Inc., and United Title Company, Inc. (collectively, " Defendants" or " Fidelity" unless otherwise specified) appeal the bankruptcy court's judgment against them. (ECF No. 2.) The bankruptcy court ruled that FNF Security Acquisition breached a stock purchase agreement when it refused to make a final installment payment under that agreement. The bankruptcy court also ruled that Defendants must return funds they received through what the court determined was a constructive fraudulent transfer. Mercury Companies, Inc. (" Mercury" ) cross-appeals the bankruptcy court's ruling that the stock purchase transaction mentioned above was not subject to avoidance. (ECF No. 6.) For the reasons set forth below, the Court vacates the bankruptcy court's judgment and remands for further proceedings consistent with this opinion.


In reviewing a bankruptcy court's decision, the district court normally functions as an appellate court, reviewing the bankruptcy court's legal conclusions de novo and its factual findings for clear error. 28 U.S.C. § 158(a); In re Warren, 512 F.3d 1241, 1248 (10th Cir. 2008). Fidelity, however, argues that the bankruptcy court lacked jurisdiction to enter judgment

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in light of Stern v. Marshall, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), Langenkamp v. Culp, 498 U.S. 42, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990), and Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). (ECF No. 23 at 17--20.) Thus, says Fidelity, the Court must treat the bankruptcy court's ruling and judgment as findings and recommendations only, subject to complete de novo review. ( Id.)

The Court previously rejected this jurisdictional argument from these very Defendants. See generally Mercury Cos., Inc. v. FNF Sec. Acquisition, Inc., 460 B.R. 778 (D. Colo. 2011). This Court held that Stern, Langenkamp, and Granfinanciera changed nothing with respect to parties that consent to the bankruptcy court's plenary jurisdiction, and that Defendants had so consented. See id. at 780--84. Nothing has changed in the interim. The Court recognizes that the United States Courts of Appeals for the Fifth and Sixth Circuits have since ruled that consent might not be enough. See In re BP RE, L.P., 735 F.3d 279, 286--88 (5th Cir. 2013); Waldman v. Stone, 698 F.3d 910, 919 (6th Cir. 2012). Those cases do not control in this circuit and the Court finds them unpersuasive.

The Court will therefore apply the traditional appellate standard, reviewing legal questions de novo and fact questions for clear error. Warren, 512 F.3d at 1248. On mixed questions of law and fact, the Court reviews de novo any question that primarily involves the consideration of legal principles, and applies the clearly erroneous standard if the mixed question is primarily a factual inquiry. In re Wes Dor, Inc., 996 F.2d 237, 241 (10th Cir. 1993).


The following facts suffice for a general overview of this matter. The Court will discuss additional facts as they become relevant to the legal issues presented below.

A. The Comerica Sweep

Mercury and its subsidiaries were in the settlement services industry, including title and escrow services, mortgage document preparation, and similar services related to real estate transactions. (Stipulated Facts ¶ 3.)[1] In April 2008, Mercury obtained a $45 million loan from Comerica Bank (" Comerica" ) secured by most of Mercury's and its subsidiaries' assets. (Bankruptcy Court's Mar. 31, 2014 Order (" Order" ) (ECF No. 23-1) at 2.)

On July 25, 2008, Comerica called a default and swept about $40 million from Mercury's operating accounts. ( Id.) The record does not say why Comerica called this default, but all of this came in the midst of the real estate decline that formed a major part of the recent recession. The parties' briefs imply that this bleak economic situation at least partly prompted Comerica's actions. In any event, Mercury soon began shutting down offices and subsidiaries outside of Colorado. ( Id.)

B. The Stock Purchase Agreement (SPA)

Although Mercury's Colorado subsidiaries remained open and operating to some extent, Mercury CEO Jerrold Hauptman (" Hauptman" ) nonetheless decided to sell them, and quickly. ( Id. at 2--3, 16--18.) Hauptman called First American Title

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(" First American" ) on July 31, 2008, with an offer to sell all subsidiaries for $1 million. ( Id. at 3; Stipulated Facts ¶ 10.) First American declined. (Order at 3.) Hauptman then turned to Fidelity with an offer of $5 million. ( Id.) Fidelity wanted time for due diligence but Hauptman refused, stating that there was no time for " haggling." ( Id. at 17.)

On August 5, 2008, Fidelity's and Mercury's representatives met and, within the course of that day, collectively drafted a Stock Purchase Agreement (" SPA" ) (ECF No. 23-2). ( See Order at 3; Stipulated Facts ¶ 15.) The SPA transferred ownership of Mercury's Colorado subsidiaries to Defendant FNF Security Acquisition, Inc. (" FNF" ), for $5 million " in immediately available funds." (SPA § 1.) The SPA directed Fidelity to pay this sum in two installments: $1 million " upon execution of [the SPA]," and " the balance . . . as set forth in Section 3." ( Id.)

Section 3 set up a post-execution procedure for Mercury to disclose additional information relevant to the sale. Specifically, Section 3 gave Mercury two weeks to deliver several " Schedules" to Fidelity. (SPA § 3.) Among them was " a schedule of all liabilities of the Purchased Companies in excess of $50,000." ( Id. § 3.4.) When Fidelity received that and the other Schedules, it and Mercury had two weeks to " work together in good faith to revise the Schedules to the extent appropriate based on [Fidelity's] review." ( Id. § 3.8.)[2] Finally, " [u]pon [Fidelity's] indication of satisfaction with the Schedules, which indication will not be unreasonably withheld, and the accuracy of [Mercury's] representations and warranties contained herein, [Fidelity] will pay the balance of the Purchase Price to [Mercury]." ( Id.)

The " representations and warranties contained herein" included Mercury's representation that certain financial statements attached to the SPA " fairly present the financial condition and results of operations of the Purchased Companies as of the date thereof." ( Id. § 4.8.) The " date thereof " ( i.e., of the attached financial statements) was June 30, 2008. ( Id., Schedule 4.8.)[3]

C. Payment and Non-Payment of the Purchase Price

The parties executed the SPA effective August 5, 2008--the same day it was negotiated. (Order at 3.) Fidelity wired $1 million directly to Mercury that same day. ( Id.) The next day, Fidelity wired almost $1.5 million to Comerica, thus paying off Mercury's outstanding obligations there. ( Id.) The parties treated this $1.5 million to Comerica as part of the purchase price, meaning that Fidelity had to this point paid about $2.5 million of the agreed-upon $5 million. ( Id.)

Sometime in the next two weeks, Fidelity learned that the purchased subsidiaries carried about $8.6 million in liabilities not previously disclosed. (ECF No. 23 at 15.) Fidelity claims that about $5.1 million of these liabilities existed as of June 30, 2008 (the date of the financial statement represented to be accurate " as of the date thereof" ). (ECF No. 27 at 10--17.) Supposedly because of this disappointing information, Fidelity refused to pay the remaining $2.5 million. (ECF No. 23 at 15.)

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D. The $1.6 Million Transfer from Mercury to the Subsidiaries

Between execution of the SPA and Fidelity's refusal to pay the remaining $2.5 million, Mercury employees concluded that about $1.6 million in Mercury's bank account actually belonged to five of the subsidiaries that it had just sold to Fidelity. (Stipulated Facts ¶ ¶ 53, 55.) Thus, on August 8, 2008, Mercury transferred that money to the affected subsidiaries. ( Id. P 55.)

E. Bankruptcy Proceedings

Mercury filed for Chapter 11 protection in late August 2008. ( Id. ¶ 25.) Eventually, it filed an adversary proceeding against Fidelity (specifically, against FNF) to recover the value of the Colorado subsidiaries, alleging that the sale to Fidelity had been a constructive fraudulent transfer. (Record (" R." ), Vol. 1, part 1 (ECF No. 15-1) at 61--69.) Mercury also alleged breach of contract in light of Fidelity's refusal to pay the remaining $2.5 million of the purchase price. ( Id.) Finally, Mercury asserted an avoidance claim against the five Colorado subsidiaries that received the $1.6 million transferred on August 8, 2008 ( i.e., the five Defendants here other than FNF). ( Id.) Mercury claimed that the $1.6 million had not, in fact, belonged to those subsidiaries, and therefore was a constructive fraudulent transfer, or alternatively, a preference. ( Id.)

After a three-week trial, the bankruptcy court issued its Order holding: (a) the $5 million sale of the Colorado subsidiaries was not a constructive fraudulent transfer; (b) Fidelity breached the SPA, and its implied covenant of good faith and fair dealing, by refusing the pay the $2.5 million balance of the purchase price; and (c) the $1.6 million was a constructive fraudulent transfer. The bankruptcy court entered judgment against FNF for $2.5 million, plus prejudgment interest running from August 5, 2008 (the ...

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