Abbotts Dairies of Pennsylvania, Inc., In re

• Decision Date: 14 April 1986
• Docket Number: 85-1544,No. 85-1544,No. 85-1543,Nos. 85-1543,85-1543,s. 85-1543
• Citation: 788 F.2d 143,14 Bankr.Ct.Dec. 606
• Parties: 14 Collier Bankr.Cas.2d 811, 14 Bankr.Ct.Dec. 606, Bankr. L. Rep. P 71,136 In re ABBOTTS DAIRIES OF PENNSYLVANIA, INC., Pennbrook Foods Company, Inc., the Pennbrook Corp., Abbotts Realty, Inc., Abbotts Holding Co., Inc. Appeal of CUMBERLAND FARMS DAIRY, INC., AppellantAppeal of NATIONAL FARMERS' ORGANIZATION, INC., Appellant
• Court: U.S. Court of Appeals — Third Circuit

Page 143

788 F.2d 143

14 Collier Bankr.Cas.2d 811, 14 Bankr.Ct.Dec. 606,

Bankr. L. Rep. P 71,136

In re ABBOTTS DAIRIES OF PENNSYLVANIA, INC., Pennbrook Foods Company, Inc., the Pennbrook Corp., Abbotts Realty, Inc., Abbotts Holding Co., Inc Appeal of CUMBERLAND FARMS DAIRY, INC., Appellant No. 85-1543 Appeal of NATIONAL FARMERS' ORGANIZATION, INC., Appellant No. 85-1544

Nos. 85-1543, 85-1544.

United States Court of Appeals Third Circuit.

Argued March 7, 1986.

Decided April 14, 1986.

Melvin Lashner (argued), Melvin Lashner Associates, Philadelphia, Pa., for appellant Cumberland Farms Dairy, Inc.

Marvin Beshore (argued), Milspaw & Beshore, Harrisburg, Pa., for appellant Nat. Farmers' Organization, Inc.

Marvin Krasny, Barry D. Kleban (argued), Adelman Lavine Krasny Gold and Levin, Philadelphia, Pa., for appellees Abbotts Dairies of Pennsylvania, et al.

J. Gregg Miller, M. Duncan Grant (argued), Mark S. Haltzman, Richard J. Squadron, Pepper, Hamilton & Scheetz, Philadelphia, Pa., for appellee ADC, Inc.

Alexander N. Rubin, Jr., Robert Lapowsky, Eric M. Hocky, Rubin, Quinn & Moss, Philadelphia, Pa., for intervenor-appellee Official Creditors' Committee of Pennbrook Foods Co., Inc.

Irv Ackelsberg, Community Legal Services, Inc., Philadelphia, Pa., for amicus curiae Consumer Educ. and Protective Assn.

Before ALDISERT, Chief Judge, SEITZ, and ADAMS, Circuit Judges.

OPINION OF THE COURT

SEITZ, Circuit Judge.

The National Farmers' Organization, Inc. ("NFO") and Cumberland Farms Dairy, Inc. ("Cumberland") appeal from a final order of the district court, which dismissed as moot their appeals from an order of the bankruptcy court. This court has jurisdiction over their appeals by virtue of 28 U.S.C. Secs. 158(d) and 1291.

I.

On August 10, 1984, Abbotts Dairies of Pennsylvania, Inc., Pennbrook Foods Company, Inc., The Pennbrook Corporation, Abbotts Realty Inc., and Abbotts Holding Company, Inc. (hereinafter referred to collectively as "Abbotts"), filed petitions for relief under Chapter 11 of the Bankruptcy Code (the "Code"), 11 U.S.C. Secs. 1101-1174. On the same day, Abbotts filed motions for approval of two agreements it had entered into with ADC, Inc. ("ADC"): an "Interim Agreement Concerning Sale of Inventory and Lease of Certain Assets" (the "Interim Agreement"); and an "Asset Purchase and Lease Agreement" (the "Purchase Agreement").

The bankruptcy court held an emergency hearing that afternoon to consider Abbotts' motion for approval of the Interim Agreement, whereby ADC would effectively take over Abbotts' business. ¹ Notice of the hearing had been given only to the Philadelphia National Bank ("PNB") and Fairmont Pennsylvania Holdings, Inc. ("Fairmont"), Abbotts' two secured creditors, both of whom were represented at the hearing. Also present, almost by chance, was an attorney representing three of Abbotts' unsecured creditors, and Cream-O-Land Dairies, a prospective purchaser of the business.

In support of its motion, Abbotts' Chairman and Chief Executive Officer, Richard H. Gwinn, testified that PNB notified Abbotts in February of 1984 that it had defaulted on its loans, and that if Abbotts did not obtain financing from another lender, PNB would reduce Abbotts' line of credit at a rate of $100,000 per week. ² He also stated that unless the bankruptcy court approved the Interim Agreement, the company would have to cease operations when its current inventory was exhausted on August 11 (the next day), because it had no excess working capital with which to purchase any more milk. Finally, Mr. Gwinn opined that if Abbotts ceased operations, its trademarks and customer list would lose substantially all of their value, resulting in a loss of $3 to $4 million dollars to the estate.

On cross-examination by counsel representing one secured creditor, a prospective bidder, and three unsecured creditors, Mr. Gwinn testified that he had reached an informal agreement to act as a consultant to ADC during the pendency of the bankruptcy proceedings, at his current salary of $150,000 per year--provided that the bankruptcy court approved the Interim Agreement. He also testified that he had been offered a senior executive position with ADC for five years, once again at his current salary, and that he hoped that ADC would relieve him from personal liability on several of Abbotts' obligations--provided, once again, that the bankruptcy court approved ADC's purchase of Abbotts' assets.

At the conclusion of the hearing, the bankruptcy court entered an order approving the Interim Agreement. This order was supplemented by an order entered on August 17, 1984, which required ADC and its employees to hold themselves out as Abbotts' representative; to maintain, where possible and economically feasible, Abbotts' existing distribution system; to continue to distribute products under the Abbotts' trademarks and not act affirmatively to switch its customers to products sold under other trademarks; and to act reasonably so as not to prejudice the rights of Abbotts' creditors or diminish the value of its trademarks. These provisions represented concessions that Fairmont had extracted from Abbotts and ADC during the course of the hearing, which Fairmont hoped would preserve Abbotts' value as a going concern until the bankruptcy court could consider the Purchase Agreement and any other competing bids for Abbotts' assets.

Notice of the motion for approval of the Purchase Agreement was then sent to all interested parties. The notice summarized the Purchase Agreement, and set a deadline for objections to it, as well as for "higher or better" bids for Abbotts' assets. The notice did not, however, reveal that Mr. Gwinn was presently employed by ADC as a "consultant," nor did it indicate that he had been offered a permanent position with ADC, conditioned upon closing pursuant to the Purchase Agreement. Likewise, the notice did not indicate that an emergency hearing had been held on August 10, nor did it summarize the terms of the Interim Agreement that had been approved at that hearing; rather, the notice simply stated that "[ADC] previously purchased the inventories and has been in possession of certain operating equipment and facilities of [Abbotts] and have continued certain operations of Abbotts ... under an Interim Agreement pending approval by the Bankruptcy Court of the [Purchase] Agreement."

Three parties filed objections to the sale, only one of which--that filed by Fairmont--is at all pertinent to the present appeals. Fairmont asserted, inter alia, that the sale of Abbotts' assets should not be approved until a disclosure statement had been approved by the court and a plan of reorganization confirmed by Abbotts' creditors, because of a number of factors (including the Interim Agreement) that might chill the bidding for Abbotts' assets. Fairmont also objected to the lack of any appraisals of Abbott's assets, and argued that the "value" to be paid by ADC was insufficient.

Three parties submitted bids: ADC, Cumberland, and Atlantic Processing, Inc. ("API"). ADC's bid (the Purchase Agreement) contemplated, inter alia, the purchase of Abbotts' trademarks and customer list for a guaranteed minimum payment of $1 million. API sought to purchase Abbotts' trademark only for a cash payment of $1,250,000. Finally, Cumberland submitted two alternative bids. The first contemplated a guaranteed minimum payment for Abbotts' trademarks and customer list of $1,100,000; the second a guaranteed minimum payment of $1,500,000.

Cumberland's bids, however, were subject to certain conditions. For example, both required the bankruptcy court to rescind Section 7.2(d) of the Interim Agreement, which it had expressly approved in a prior order. ³ Similarly, both bids delayed the closing for approximately ten days, during which time ADC would still be required to operate Abbotts. Finally, the second bid required the court to restrain ADC from competing with Cumberland for any of Abbotts' customers for 90 days.

The bankruptcy court held a hearing on the Purchase Agreement on September 12. At its conclusion, the bankruptcy court refused to impose the conditions Cumberland sought, ⁴ after which Cumberland and API withdrew their bids. Fairmont then sought to support its objections to the Purchase Agreement through the testimony of approximately ten witnesses who were present at the hearing. The bankruptcy court refused to hear this evidence; instead, it brought the auction to a close, and signed an order confirming the sale to ADC. In the order, the court found that "it appear[s] that the prices for the sale of the assets ... are fair and reasonable, that the sale and lease are in the best interest of the estate[ ] of [Abbotts] and [its] creditors, [and] that the assets will substantially diminish in value if not immediately sold." In re Abbotts Dairies, et al., No. 84-02623G, slip op. at 1 (Bankr.E.D.Pa. Sept. 12, 1984).

Fairmont, Cumberland, and NFO filed timely notices of appeal to the district court; Fairmont alone, however, sought a stay pending appeal. When the bankruptcy court initially enjoined the sale pending determination of Fairmont's motion for a stay, Fairmont, Abbotts, and ADC met and entered into a stipulation under which Fairmont withdrew its appeal and motion for a stay. The bankruptcy court then vacated its order enjoining the sale. With no stay in effect, ADC and Abbotts closed the sale pursuant to the terms of the Purchase Agreement; notice thereof was filed on September 14, 1984.

After it had closed the sale to ADC, Abbotts filed a motion to dismiss the Cumberland and NFO appeals as moot pursuant to 11 U.S.C. Sec. 363(m). The district court, by order dated July 30, 1985, granted the motion. After reviewing the record in the bankruptcy court, the district court concluded that "[a]ppellants have not shown a lack of good faith on the part of ADC so as to justify their failure to seek a stay, and so the appeal is dismissed." In re...