755 F.2d 1223 (6th Cir. 1985), 83-1802, In re DeLorean Motor Co.

Docket Nº:John Z. DeLOREAN (83-1802); Cristina, a Nevada corporation;
Citation:755 F.2d 1223
Party Name:In re DeLOREAN MOTOR COMPANY, a Michigan corporation, Debtor. The UNSECURED CREDITORS' COMMITTEE OF DeLOREAN MOTOR COMPANY, Plaintiff- Appellee, v.
Case Date:February 27, 1985
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

Page 1223

755 F.2d 1223 (6th Cir. 1985)

In re DeLOREAN MOTOR COMPANY, a Michigan corporation, Debtor.

The UNSECURED CREDITORS' COMMITTEE OF DeLOREAN MOTOR

COMPANY, Plaintiff- Appellee,

v.

John Z. DeLOREAN (83-1802); Cristina, a Nevada corporation;

DeLorean Manufacturing Company; Logan

Manufacturing Company; Thomas W.

Kimmerly, (83- 1803),

Defendants-Appellants,

and

DeLorean Motor Company, Inc. and Office of the United States

Attorney for the Central District of California, Defendants.

Nos. 83-1802, 83-1803.

United States Court of Appeals, Sixth Circuit

February 27, 1985

Argued Dec. 4, 1984.

Page 1224

Howard L. Weitzman, Richard S. Berger (argued), Gendel, Raskoff, Shapiro, Quittner, Jeffrey Lerman, Los Angeles, Cal., for defendants-appellants.

Page 1225

Sheldon S. Toll, Honigman, Miller, Schwartz & Cohn, John Sklar, Robert Weiss (argued), Detroit, Mich., Alan Rubin, Asst. U.S. Atty., Los Angeles, Cal., for plaintiff-appellee.

Before KEITH and KENNEDY, Circuit Judges, and PHILLIPS, Senior Circuit Judge.

CORNELIA G. KENNEDY, Circuit Judge.

John Z. DeLorean, Thomas W. Kimmerly, and several DeLorean-related corporations appeal the District Court order affirming a Bankruptcy Court order requiring any proceeds from any sale of the assets or stock of Logan Manufacturing Company to be deposited in an escrow account under the Bankruptcy Court's control.

I. FACTS

DeLorean Motor Company ("DMC") filed a petition for reorganization under chapter 11 of the Bankruptcy Code on October 21, 1982. In June 1982 the unsecured creditors' committee brought an adversary complaint seeking to have the assets of Logan Manufacturing Company made part of the bankruptcy estate of DMC. Logan and DMC are both controlled by DeLorean Manufacturing Company, which is owned by Cristina (a Nevada corporation), which is owned by John Z. DeLorean.

The creditors' committee's theory was that Logan had been acquired by DeLorean Manufacturing Company with assets that could ultimately be traced back to DMC and its subsidiaries. The committee made the following allegations in support of its theory: DMC had given GPD Services, Inc. (a Panamanian corporation operating through a Swiss post office box) about $12.5 million out of funds that DeLorean Research Limited Partnership ("DRLP") (a limited partnership of which DMC was general partner) had raised for DMC's use. DeLorean Motor Cars Limited ("DMCL") (a Northern Ireland subsidiary of DMC) had given GPD a further $5.1 million. In return for these payments, GPD was purportedly to pay Lotus Cars Ltd. for research and development work. DMCL paid Lotus for this work directly, however, and Lotus never received any payments from GPD. Thereafter, John Z. DeLorean obtained a "super-balloon" Swiss loan of about $9 million, of a type normally secured by an offsetting bank account. The proceeds of this loan were used to pay off a loan from a Chicago bank, the proceeds of which had been used to purchase Logan. The committee alleged that there was circumstantial evidence that John Z. DeLorean had used the money paid to GPD to acquire Logan through DeLorean Manufacturing Company.

After receiving an affidavit stating that the sale of Logan was impending, the Bankruptcy Court issued an order to show cause why the proceeds of any sale of Logan or its assets should not be "attached." A hearing was held on June 30, 1983, at which the committee offered evidence in support of its allegations. The Court received portions of the testimony of Christopher Hughes, an English accountant who had investigated transactions involving DMCL, given in a earlier proceeding in the Bankruptcy Court. Hughes testified concerning the transactions among DMC, DMCL, GPD, and Lotus, and said that the $17.6 million paid to GPD remained unaccounted for. The Court then received portions of the deposition of Eric Javits, an attorney, who said that John Z. DeLorean had used the services of a Swiss corporate lawyer recommended by Javits, and that DeLorean had asked him whether DeLorean would have to disclose to the SEC the identity of the partner involved in the research and development contract. Finally, the Bankruptcy Court heard the live testimony of Yale Levin, the court-appointed examiner who had been investigating the allegations. Levin testified that he had been unable to account for the $17.6 million paid to GPD, that the Swiss bank loan must have been secured by some unidentified collateral, and that the proceeds of the Swiss bank loan to John Z. DeLorean had been used to acquire Logan. Levin concluded that there was a reasonable possibility

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that Logan's assets represented property of the DMC estate and that he believed it worthwhile to continue his investigation.

The Bankruptcy Court then entered an order enjoining John Z. DeLorean, Cristina, DeLorean Manufacturing Company, Logan, and Thomas Kimmerly (DMC's general counsel) from disposing of any proceeds of the sale of Logan's assets or stock, and directing that any such proceeds be placed with an escrow agent. This order was affirmed by the District Court, and the defendants appeal.

II. STANDING

Defendants claim that the unsecured creditors' committee had no standing to pursue this complaint without first asking DMC as debtor-in-possession to sue and then asking the Bankruptcy Court for permission to sue if DMC refused. On December 21, 1983, however, DMC's petition was amended to seek relief under chapter 7 of the Bankruptcy Code, rather than the chapter 11 reorganization originally sought. On January 4, 1984 the trustee was substituted for the creditors' committee as plaintiff in this adversary proceeding in the Bankruptcy Court. There is no question as to the trustee's standing. The defendants' objection to standing has therefore become moot.

III. MOOTNESS

The committee claims that the entire appeal became moot when the parties stipulated to entry of an order regarding the sale of Logan, which was entered by the Bankruptcy Court first as a temporary restraining order on January 17, 1984 and then as a preliminary injunction on January 27, 1984. That injunction (1) restrained the proposed sale of Logan or its assets to Pacific International Equipment, Inc.; and (2) provided that at least twenty days before any other proposed sale of Logan all counsel would be notified and served with all sale documents and certain information about the buyer.

The January 27 preliminary injunction did not direct the proceeds of a sale of Logan to be placed in escrow. The transcript of proceedings regarding the January injunction reveals that the parties and the Bankruptcy Court were operating from the premise that if a sale was consummated the proceeds would be placed in escrow in accordance with the earlier injunction. The trustee was concerned with preventing in any form the sale of Logan to Pacific, which was allegedly controlled by a close associate of John Z. DeLorean. The injunction was designed to give the trustee time to object to any sale that might not be in the best interest of the state.

If this Court were to vacate the preliminary injunction under review, the defendants would not be obligated to place proceeds from a sale of Logan in escrow. The January 27 injunction does require the defendants to give notice before any proposed sale, giving the trustee time to object, but does not duplicate the escrow provisions of the earlier injunction. This Court is thus in a position to grant effectual relief to the defendants, and the appeal is therefore not moot. See International Brotherhood of Teamsters v. Zantop Air Transport Corp., 394 F.2d 36 (6th Cir.1968); Mills v. Green, 159 U.S. 651, 16 S.Ct. 132, 40 L.Ed. 293 (1895).

IV. VALIDITY OF BANKRUPTCY COURT'S ORDER

The Bankruptcy Court's order was issued under 11 U.S.C. Sec. 105(a), which states: "The bankruptcy court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." Defendants attack the validity of the order on several grounds. First, they contend that the order must be considered an attachment under Fed.R.Civ.P. 64 and governed by Michigan law. Defendants argue that the Michigan attachment procedures were not followed in this case and are unconstitutional if they were followed. In the alternative, defendants contend that if the order is a preliminary injunction governed by Fed.R.Civ.P. 65 it is nonetheless invalid, because

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(1) the procedures required by Rule 65 were not complied with; and (2) the evidence before the Bankruptcy Court was insufficient to support the injunction.

  1. Applicability of Michigan Attachment Statute

    Defendants contend that the Bankruptcy Court's order must be construed as an attachment under Rule 64. Rule 64 provides that:

    [A]ll remedies providing for seizure of person or property for the purpose of securing satisfaction of the judgment ultimately to be entered in the action are available under the circumstances and in the manner provided by the law of the state in which the district court is held.... The remedies thus available include ... attachment ... however designated....

    Defendants' argument assumes that this provision dictates that state law is the exclusive means through which to effectuate an attachment. At least one commentator has suggested that Rule 64 does not require that an injunction otherwise proper under Rule 65 must also conform to state law merely because it is a provisional remedy. See 7 Moore's Federal Practice p 64.04 at 64-19 to 64-21 (2d ed.). We need not decide this question, however, because under precedent in this Circuit it is clear that Rule 64 does not apply to this case.

    In USACO Coal Co. v. Carbomin Energy, Inc., 689 F.2d 94 (6th Cir.1982), this Court...

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