Mooney Aircraft, Inc., Matter of, 83-1036

• Citation: 730 F.2d 367
• Decision Date: 23 April 1984
• Docket Number: No. 83-1036,83-1036
• Parties: Bankr. L. Rep. P 69,858 In the Matter of MOONEY AIRCRAFT, INC. and Mooney Corporation, Bankrupts. MOONEY AIRCRAFT CORP., Plaintiff-Appellant, v. Joyce L. FOSTER, et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 367

730 F.2d 367

Bankr. L. Rep. P 69,858

In the Matter of MOONEY AIRCRAFT, INC. and Mooney

Corporation, Bankrupts.

MOONEY AIRCRAFT CORP., Plaintiff-Appellant, v. Joyce L. FOSTER, et al., Defendants-Appellees.

No. 83-1036.

United States Court of Appeals, Fifth Circuit.

April 23, 1984.

Matthews & Branscomb, Charles J. Muller, III, Shelley Ann Bennack, San Antonio, Tex., Richard Chernick, Los Angeles, Cal., Hall Barton Clark, Jr., San Antonio, Tex., for plaintiff-appellant.

William J. Howard, Santa Ana, Cal., for Margaret Bradshaw, et al.

Plunkett, Gibson & Allen, San Antonio, Tex., Ronald Hornberger, Karl Seuthe, Los Angeles, Cal., for Joyce L. Foster, et al.

Appeal from the United States District Court for the Western District of Texas.

Before REAVLEY, RANDALL and HIGGINBOTHAM, Circuit Judges.

RANDALL, Circuit Judge:

Plaintiff-appellant, Mooney Aircraft Corporation, appeals a final judgment rendered by the United States District Court for the Western District of Texas, reversing an order of the Bankruptcy Court for the Western District of Texas, which had permanently enjoined defendants-appellees from pursuing tort claims in California state court against Mooney Aircraft Corporation. Finding that the bankruptcy court lacked jurisdiction to enter the injunction, we remand the case to be dismissed for lack of jurisdiction.

I. FACTUAL AND PROCEDURAL BACKGROUND.

On February 17, 1969, Mooney Aircraft, Inc. and Mooney Corporation, Inc. (collectively "Mooney-Texas") filed applications for bankruptcy in the Bankruptcy Court for the Western District of Texas, pursuant to Chapter VII of the Bankruptcy Act of 1898. Bankruptcy Act of July 1, 1898, ch. 541, 30 Stat. 544, as amended, repealed by Bankruptcy Reform Act of Nov. 6, 1978, ch. 1, 92 Stat. 2549. ¹ The bankruptcy schedules filed by Mooney-Texas reflect that the estate consisted of fixed assets, including machinery and equipment, having a book value of $1,643,363.83 and raw materials and inventory with a value of $3,322,637.00. All real property in the estate was shown as fully encumbered by deeds of trust and outstanding tax claims. The estate also included an FAA Type Certificate of undetermined value. Against these assets there were priority claims consisting of wages and taxes in the total amount of $1,215,581.00 and creditors holding secured claims in the total amount of $4,857,498.66.

In addition to the priority and secured claims, there were eleven wrongful death or personal injury claims arising out of airplane accidents involving Mooney-Texas aircraft, totalling $3,300,000.00. There were also another 330 trade creditors with total claims of $465,000.00.

The following day, February 18, American Electronics Laboratories, Inc. ("AEL") offered to purchase, for $650,000.00, all of the business assets of Mooney-Texas, under and subject to the full amount of all valid liens, as defined in the offer, but free and clear of all other claims, liabilities, liens, encumbrances, mortgages and security interests. Notice of AEL's purchase offer was communicated to some 7,000 persons holding possible claims against the bankruptcy estate. The defendants-appellees were not among those notified.

The first meeting of creditors was held on March 13, 1969, and continued to March 14, 1969. This meeting culminated in an order by the bankruptcy court that the purchase offer of AEL for Mooney-Texas be accepted by the Receiver. The court increased the required consideration to $850,000.00 and made the following findings:

The Court finds that the only definite offer being made at the first meeting of creditors is from AEL, ... that the corporations have been operating at a loss under the Receivership and prior to that time for many months, and the value of the bankrupt estate as a going business is accordingly decreasing, and will continue to decrease, that the assets of the corporation have been duly appraised in accordance with competent and available means of appraisal and that such appraisal shows that the assets of the bankrupt estates are of a value less than the secured debts against the estates as sold at auction and other than as a going business, that the aircraft industry and all persons who would be reasonably expected to be interested in purchasing the bankrupt estates as a going business have had a reasonable opportunity to investigate the value of the bankrupt estates, that AEL can withdraw its offer if not accepted at this time, and has indicated that it would consider doing so, that the sale to AEL appears to make it possible for the bankrupt estates to pay all priority claims, expenses, and have some assets available for dividends to unsecured creditors, and further is the only assurance before the Court that the business which employs some 700 people will continue, and that such offer appears from all available evidence to the Court to be reasonable in amount, ...

Accordingly, the court ordered the sale of the estate in accordance with the terms of the purchase offer.

The purchase offer provided that AEL would take the assets "under and subject only to Valid Liens, but free and clear of all other claims, liabilities, liens, encumbrances, mortgages and security interests of [Mooney-Texas], or of the Receiver or Trustee." ² The purchase offer also provided that the bankruptcy court was to retain jurisdiction in order to adjudicate the validity and amounts of all liens and secured claims asserted in the bankruptcy proceeding. In October 1969, the trustee submitted an objection to the allowance of the eleven tort claims. Concerning those claims, the trustee reported:

(b) There will be a very small amount of money, compared with the number of claims, available for unsecured creditors, and accordingly the extensive litigation which must be involved would substantially eliminate any amount available due to the expense of attorneys, etc. required for trial by the bankrupt estates. In fact, considering the other contingent and unliquidated suits against the bankrupt estates, it would appear almost certain that the attorneys' fees for services, etc. which would be required in a proper defense of the claims above and other claims which are contingent and unliquidated which are also objected to by the Trustee, would be in excess of the total amount expected to be available for distribution to unsecured creditors.

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(c) Further, it is remote that any recovery made by any of the claims above, considering the expense of litigation and the amount of money available for unsecured creditors, would be substantial in any respect, and accordingly if the Trustee is directed to defend the bankrupt estates against the above claims, in any type of proceeding, he would show to the Court that after the payment of all expenses, a decision in favor of the claimants would be an empty victory, which would have the practical result of denying the trade creditors any recovery at all.

The bankruptcy court subsequently disallowed the eleven negligence claims. ³ The bankruptcy estate was closed on March 13, 1972.

AEL held the assets of Mooney-Texas for only nine months. On December 1, 1969, AEL sold those assets to Butler Aviation International, Inc. ("Butler"). Those assets were later purchased from a subsidiary of Butler by Republic Steel Corporation ("Republic") on September 24, 1973. Republic formed a subsidiary New Jersey corporation, Mooney Aircraft Corporation ("Mooney-New Jersey"), which continues to hold the former assets and operate the former business of the bankrupt Mooney-Texas.

In late 1971 or early 1972, Leo Foster acquired from an unknown source an aircraft which had been manufactured by Mooney-Texas. On November 24, 1973, Foster and his passenger, William Bradshaw, were killed when the aircraft lost a wing in flight and crashed in California.

In November 1974, the families of Foster and Bradshaw, defendants-appellees herein, filed wrongful death actions in the Superior Court of the State of California, County of Los Angeles, against Mooney-New Jersey and others based upon two causes of action, one for negligence and the other based on strict liability in tort. Mooney-New Jersey entered a special appearance in the two California actions and moved to quash the service in the Foster case; the Bradshaw complaint was held in abeyance pending the outcome of the Foster motions. On January 6, 1976, the Superior Court quashed the service in the Foster case and an appeal was taken. The California Court of Appeals, in Foster v. Mooney Aircraft Corp., 68 Cal.App.3d 887, 137 Cal.Rptr. 694 (1977), reversed the trial court. On remand, the Foster and Bradshaw actions were consolidated and set for trial. Thereafter, Mooney-New Jersey filed a motion for summary judgment. The Superior Court granted the motion as to the negligence counts, but denied the motion as to the strict liability counts. Subsequently, all other defendants except Mooney-New Jersey were voluntarily dismissed from the suits.

The theory under which the Fosters and Bradshaws attempt to hold Mooney-New Jersey strictly liable is a recent development in products liability law adopted in a small minority of states, including California. The traditional corporate law rule, still followed in a majority of jurisdictions, is that the purchase of manufacturing assets does not subject the purchaser to any of the liabilities of the seller. See, e.g., Bernard v. Kee Mfg. Co., 409 So.2d 1047 (Fla.1982); Travis v. Harris Corp., 565 F.2d 443 (7th Cir.1977). This rule of non-liability includes product liability claims arising from defective products manufactured and marketed by the selling enterprise prior to the asset purchase. 15 W. Fletcher, Cyclopedia of the Law of Private Corporations Sec. 7123 (rev. perm. ed. 1980). However, in recent years, a minority of jurisdictions have deviated from this general rule. Where one corporation acquires all or substantially all the manufacturing assets of another...