Century Glove, Inc. v. First American Bank of New York

• Decision Date: 25 October 1988
• Docket Number: 88-3078,Nos. 88-3077,s. 88-3077
• Citation: 860 F.2d 94,18 B.C.D. 747
• Parties: , 57 USLW 2282, 20 Collier Bankr.Cas.2d 742, 18 Bankr.Ct.Dec. 747, Bankr. L. Rep. P 72,492 CENTURY GLOVE, INC., Appellant, v. FIRST AMERICAN BANK OF NEW YORK.
• Court: U.S. Court of Appeals — Third Circuit

Page 94

860 F.2d 94

100 A.L.R.Fed. 207, 57 USLW 2282, 20

Collier Bankr.Cas.2d 742,

18 Bankr.Ct.Dec. 747, Bankr. L. Rep. P 72,492

CENTURY GLOVE, INC., Appellant, v. FIRST AMERICAN BANK OF NEW YORK.

Nos. 88-3077, 88-3078.

United States Court of Appeals Third Circuit.

Argued June 21, 1988.

Decided Oct. 25, 1988.

Peter J. Walsh (argued), Bayard, Handelman and Murdoch, P.A., Wilmington, Del., for appellee First American Bank of New York.

Lawrence C. Ashby, Ashby, McKelvie and Geddes, Wilmington, Del., for appellee SWG Acquisition Corp.

Edward F. Von Wettberg, III (argued), P. Clarkson Collins, Jr., Morris, James, Hitchens and Williams, Wilmington, Del., for appellant.

Before GIBBONS, Chief Judge, and HIGGINBOTHAM and HUNTER, III, Circuit Judges.

OPINION OF THE COURT

JAMES HUNTER, III, Circuit Judge:

Century Glove, Inc. ("Century Glove"), a debtor seeking reorganization under the federal bankruptcy laws, seeks review of a district court order dismissing sanctions imposed on its creditors. Century Glove claims that one of its creditors, First American Bank ("FAB"), unlawfully solicited the votes of other creditors, in violation of 11 U.S.C. Sec. 1125. The bankruptcy court agreed, imposing sanctions against FAB and invalidating another creditor's rejection of Century Glove's plan. On appeal, the district court reversed, holding FAB's action lawful. Century Glove now appeals to this court. We will affirm the order of the district court.

I.

Century Glove filed its petition seeking reorganization in bankruptcy on November 14, 1985. On August 1, 1986, Century Glove filed its reorganization plan, along with a draft of the disclosure statement to be presented along with the plan. Arguing that Century Glove's largest claimed assets are speculative lawsuits (including one against FAB), FAB presented a copy of an alternative plan to the unsecured creditors' committee. FAB advised that it would seek court approval to present its plan as soon as possible. The committee ultimately rejected the plan in favor of that of the debtor. On December 2, 1986, the bankruptcy court approved Century Glove's disclosure statement. A copy of the plan, the statement, and a sample ballot were then sent to Century Glove's creditors entitled to vote on the plan's acceptance.

Between December 12 and December 17, 1986, an attorney for FAB, John M. Bloxom, telephoned attorneys representing several of Century Glove's creditors. Among these creditors were Latham Four Partnerships ("Latham Four") and Bankers Trust New York Corporation ("BTNY"). ¹ Bloxom sought to find out what these creditors thought of the proposed reorganization, and to convince them to vote against the plan. He said that, while there was no other plan approved for presentation, and thus no other plan "on the table," FAB had drafted a plan and had tried to file it. The creditors' attorneys then asked for a copy of the plan, which FAB provided. The copies were marked "draft" and covering letters stated that they were submitted to the creditors for their comments. The draft did not contain certain information necessary for a proper disclosure statement, such as who would manage Century Glove after reorganization.

With a copy of its draft plan, FAB also sent to Latham Four a copy of a letter written to the unsecured creditors' committee by its counsel. In the letter, dated August 26, 1986, counsel questioned the committee's endorsement of the Century Glove plan, arguing that the lawsuits which Century Glove claims as assets are too speculative. As stated, the committee endorsed the plan anyway. Upset with this decision, one of its members sent a copy of the letter to a former officer of Century Glove. The officer then sent a copy, unsolicited, to FAB. Uncertain whether the letter was protected by an attorney-client privilege, FAB asked the committee member whether he had disclosed the letter voluntarily. He said that he had, and furnished a second copy directly to FAB. FAB attached this letter to a motion before the bankruptcy court seeking to have the committee replaced. The bankruptcy court later held the letter a privileged communication.

BTNY had made a preliminary decision on September 12, 1986, to reject Century Glove's plan. It reaffirmed this decision on December 15, when it received a copy of the plan and disclosure. Counsel for BTNY spoke with Bloxom the next day, December 16, 1986, and Bloxom mailed a letter confirming the call, but by mistake Bloxom did not send a draft of the alternate plan until December 17. On that day, counsel for BTNY prepared its ballot rejecting Century Glove's plan, and informed Bloxom of its vote.

After receiving the several rejections, Century Glove petitioned the bankruptcy court to designate, or invalidate, the votes of FAB, Latham Four and BTNY. Century Glove argued that FAB had acted in bad faith in procuring these rejections.

II.

The bankruptcy court held that FAB had violated 11 U.S.C. Sec. 1125(b), which allows solicitation of acceptance or rejections only after an approved disclosure statement has been provided the creditor. Though a statement had been filed and provided, the bankruptcy court stated that:

solicitations ... must be limited by the contents of the plan, the disclosure statement, and any other court-approved solicitation material. The solicitee may not be given information outside of these approved documents.

The bankruptcy court found that FAB violated the section by providing additional materials such as copies of its draft plan. 74 B.R. 952.

The bankruptcy court also concluded that FAB had violated "the spirit of Sec. 1121(b), since FAB was apparently seeking approval of a plan which was not yet filed and which it could not file...." ² This "impropriety" was "heightened" by the absence from the FAB plan of such information as "who will manage the debtor." The bankruptcy court also found "improper" the disclosure by FAB of the August 26, 1986 letter to the creditors' committee. The court found that FAB's "machinations" in procuring a second copy of the letter showed that it was "obviously wary" that the letter might be privileged.

The bankruptcy court held invalid Latham Four's vote. It allowed the vote of BTNY, however, finding that the creditor had proved it had not relied on FAB's statements in deciding to reject Century Glove's plan. The court declined to bar FAB from participating further in the reorganization, finding such a sanction "too harsh," but instead, ordered FAB to pay for "all costs incurred by [Century Glove] in prosecuting" its motions. The amount of these damages was not specified. Both parties appealed the decision to the district court.

In a decision dated January 5, 1988, the district court affirmed the bankruptcy court rulings allowing BTNY's vote, but reversed the designation of Latham Four and the imposition of money sanctions against FAB. 81 B.R. 274. The district court disagreed that Sec. 1125(b) requires approval for all materials accompanying a solicitation, and found such a reading in conflict with the bankruptcy code's policy of fostering free negotiation among creditors. The district court held that merely supplying additional information does not constitute "bad faith" or a violation of the bankruptcy rules. Therefore, the court concluded, the bankruptcy court had erred in finding that FAB had improperly solicited rejections of the Century Glove plan.

The district court next considered whether FAB had improperly sought acceptance of its own plan. The court found that, in order to facilitate negotiations, communications between creditors should not easily be read as solicitations. Because Bloxom did not make a "specific request for an official vote," In re Synder, 51 B.R. 432, 437 (Bankr.D.Utah 1985), FAB's action "may only be fairly characterized as part of FAB's negotiations." Because FAB did not unlawfully solicit rejections, and did not solicit acceptances, the designation and sanction orders of the bankruptcy court were reversed. Century Glove appeals to this court.

III.

Though a district court may review both final and interlocutory orders of the bankruptcy court, 28 U.S.C. Sec. 157(a) & (b), this court has jurisdiction to review only the final orders of the district courts, 28 U.S.C. Sec. 158(d). FAB argues that, until the votes are counted, a designation order cannot be final. We find that this court has jurisdiction to review the bankruptcy court's order imposing costs, but agree with FAB that we lack jurisdiction to review at this time the decisions regarding the designation of certain votes.

A.

The bankruptcy court held that FAB had "clearly violated" 11 U.S.C. Sec. 1125(b), which bars the solicitation of acceptances or rejections until a creditor has received "adequate information" approved by the court. Ultimately, the bankruptcy court ordered FAB to pay the debtor's costs as a sanction for that violation. The bankruptcy court also considered whether certain votes should be designated under 11 U.S.C. Sec. 1126(e). That section allows the bankruptcy court to hold invalid any vote that was not made or solicited "in good faith or in accordance with the provisions of this title." Although the bankruptcy court relied on its finding of liability under Sec. 1125(b) in deciding whether to designate votes, we find the costs and designation decisions separate.

Section 1125(b) bars certain solicitation activities, regardless of the intent of the actor. Whether that provision is violated is not a matter left to the discretion of the bankruptcy court, but is a matter of fact and law. Section 1126(e), on the other hand, is not simply a remedy for Sec. 1125(b) violations. It grants the bankruptcy court discretion to sanction any conduct that taints the voting process, whether it violates a specific provision or is in "bad faith." Thus, the bankruptcy court also considered several "improprieties" unrelated to the Sec. 1125(b) decision in deciding whether the designate...