Gucci, In re

Decision Date29 September 1997
Docket NumberNos. 1368,1370 and 1371,1369,D,s. 1368
Citation126 F.3d 380
Parties, Bankr. L. Rep. P 77,537 In re Paolo GUCCI, Debtor. LICENSING BY PAOLO, INC., Paolo Gucci Design Studio, Ltd. and Trackwise Sales Corporation and Orologi Paolo, Inc., Appellants, v. Frank G. SINATRA, as Trustee of the Substantively Consolidated Estates of Paolo Gucci, et al.; Guccio Gucci, S.p.A. and Gucci America, Incorporated, Appellees. ockets 96-5138, 96-5142, 96-5144, 96-5146 and 96-3133.
CourtU.S. Court of Appeals — Second Circuit

Melvin Goldstein, Washington, DC (William L. Miller, Goldstein & Claxton, P.C., Washington, DC; David C. Erdos, Erdos & Maddox, L.L.C., Stamford, CT, of counsel), for Appellants Paolo Gucci Design Studio, Ltd. and Licensing By Paolo, Inc.

Allan C. Samuels, Kenneth D. Greenwald, New York City (Lawrence J. Reina, Parker Duryee Rosoff & Haft, New York City, of counsel), for Appellant Orologi Paolo, Inc.

Michael S. Kimm, Hackensack, NJ, for Appellant Trackwise Sales Corp.

Jonathan L. Flaxer, New York City (John A. Bougiamas, Scott H. Wyner, Winick & Rich, P.C., New York City, of counsel), for Defendant-Appellee Frank G. Sinatra.

Robert F. Serio, New York City (Kevin W. Barrett, Marshall R. King, Gibson, Dunn & Crutcher LLP, New York City, of counsel), for Appellee Guccio Gucci S.p.A.; Allan A. Tuttle, George M. Borababy, Patton Boggs, LLP, Washington, DC, of counsel, for Appellee Gucci America, Inc.

Before: KEARSE and CARDAMONE, Circuit Judges, and POLLACK, * District Judge.

CARDAMONE, Circuit Judge:

This appeal represents the final chapter in the long history of Paolo Gucci's battle with appellees Guccio Gucci, S.p.A. and Gucci America, Inc. (collectively referred to as Guccio Gucci or the Gucci companies) over the use of the Gucci family name to market consumer goods--a battle that continues after Paolo Gucci's death. It began when Paolo Gucci, who was the chief designer in the family's business in Italy, left Guccio Gucci to design and market products under his own name. In 1994 he filed for Chapter 11 bankruptcy and 20 months later, he died. The bankruptcy estate's primary asset was the Paolo Gucci name, which was sold in a bankruptcy court auction pursuant to 11 U.S.C. § 363(b). During the course of the proceedings, Guccio Gucci, as well as Paolo Gucci creditors and licensees, bid for the rights associated with the Paolo Gucci name and designs. Guccio Gucci's offer of $3.65 million was determined to be the highest and best bid, and the U.S. Bankruptcy Court for the Southern District of New York (Gallet, B.J.) authorized the sale of Paolo Gucci's assets to Guccio Gucci. On appeal to the district court (Griesa, C.J.), the order authorizing the sale was affirmed.

Although appellants moved in the district court for a stay of the order authorizing the sale, they were unsuccessful in obtaining either that relief or obtaining a timely stay by this Court of the district court order. Thus, appellants in taking this appeal were in the same procedural posture as a person who shuts the barn door after the horse has been stolen. It is too late. After the sale of the bankrupt estate had been consummated, and without a stay in place, the creditors and licensees appealed. Their appeal, not surprisingly, was held to be moot. One issue does remain viable, however--the purchaser's good faith.

Appellants, Licensing by Paolo, Inc. (Licensing), Paolo Gucci Design Studio, Ltd. (Design Studio), Trackwise Sales Corporation (Trackwise) and Orologi Paolo, Inc. (Orologi), seek reversal of the sale on the ground that Guccio Gucci is not a good faith purchaser. They contend that its ongoing litigation against the Paolo Gucci marks worldwide, and particularly in South Korea during the pendency of the automatic stay, were intended to devalue the estate's assets. They assert, in addition, that Guccio Gucci acted in bad faith by using the sale to purchase assets that it knew were not part of the bankruptcy estate and by colluding with the bankruptcy trustee to effect the purchase. We conclude that although the Gucci companies' conduct was fiercely competitive, it does not constitute bad faith within the meaning of the Bankruptcy Code's § 363(m) sufficient to set aside the sale order. Hence, we affirm.

BACKGROUND

Because neither the bankruptcy court nor the district court acting in its appellate capacity set out the complicated facts of this case, we begin our analysis with a detailed account of the events leading up to this appeal.

A. Paolo Gucci's Business Ventures

For many years Paolo Gucci was the principal designer and stylist of goods for Guccio Gucci, an internationally known business started by his grandfather in Florence, Italy. The firm manufactures high-quality leather goods and other consumer products under the name and trademark "Gucci." A strained relationship with his cousin, the head of the Italian operation of the family businesses, culminated in Paolo Gucci's termination in 1983 and the subsequent sale of his stock. He then started his own business to market various products under his name.

Protracted trademark litigation followed in which the Gucci companies opposed Paolo Gucci's use of his name as a trademark or trade name because it would cause confusion and infringe the established Gucci marks. A July 1988 judgment by the United States District Court for the Southern District of New York (Conner, J.) prohibited him from using "Paolo Gucci" as a trademark, but allowed its use to identify him as the designer of products under separate trademarks that did not contain the Gucci name. Gucci v. Gucci Shops, Inc., 688 F.Supp. 916 (S.D.N.Y.1988).

Free to use the name "Paolo" with the phrase, "Designed by Paolo Gucci," he designed and collaborated in the design of handbags, jewelry, office furniture, lamps, sunglasses, bedding accessories, wall coverings, ladies' lingerie, plates and flatware, all to be marketed under his name. He also entered into a number of licensing agreements that allowed others to market these products under his name.

Licensees relevant to this appeal include Trackwise, which became the exclusive master licensee of all Paolo Gucci goods in South Korea and issued ten sublicenses there. One of the sublicensees, Crown Corporation, manufactures luggage, handbags, wallets and belts. Paolo Gucci also entered into a licensing agreement with Orologi, a large watch-distributor's subsidiary whose principal activity is to design, distribute and license watches. Orologi held an exclusive license to market watches designed by Paolo Gucci in the United States. In November 1992 Paolo Gucci entered into an agreement with Licensing, which was to administer his United States licensing business with the various sublicensees.

B. Bankruptcy Proceedings

Faced with litigation arising from his failure to fulfill obligations under these various licensing agreements, Paolo Gucci filed a voluntary petition for relief under Chapter 11 on February 8, 1994. The bankruptcy court subsequently appointed appellee Frank G. Sinatra as trustee of the estate (Trustee), whose administrative duties included an investigation of the various sublicensing businesses. From the beginning the Trustee had trouble identifying and working with all of the Paolo Gucci sublicensees, and Paolo Gucci refused to cooperate in sorting out this complex problem.

On January 24, 1995 the bankruptcy court granted, over Guccio Gucci's objection, the Trustee's motion to assume the license between Paolo Gucci and Orologi. The Gucci companies had maintained that because Paolo Gucci claimed that he no longer approved the watch designs he had previously provided, Orologi's use of the designs would violate the court order requiring that products bearing the Paolo Gucci name and marks be designed by Paolo Gucci. Upon appeal the district court affirmed the bankruptcy court's decision. See In re Gucci, 193 B.R. 411 (S.D.N.Y.1996). Under the amended license, Orologi gave up its breach of contract claims against Paolo Gucci and guaranteed minimum royalty payments to the estate from August 15, 1994 to December 31, 1995.

In May 1995 Paolo Gucci started a new company with Enzo Stancato. The venture, Design Studio, was developed to become the master licensee worldwide for the Paolo Gucci name. On October 3, 1995 the Trustee signed an agreement--the Design Studio Agreement--with Paolo Gucci, Design Studio and others, under which the estate's property--including the right to the commercial use of the name "Paolo Gucci," trademarks, business names and commercial names, licensing rights, and Paolo Gucci's designs--would be conveyed to Paolo Gucci who would in turn license to the Design Studio the worldwide right to market products using his name or marks.

Despite the Design Studio Agreement, the Trustee later entered into an agreement with Trackwise under which Trackwise would purchase the exclusive licensing rights in South Korea for $1.7 million to be paid according to an agreed-upon schedule. This sale agreement, to which Design Studio consented, was intended to settle the 1993 lawsuit that Trackwise had brought against Paolo Gucci claiming he had subverted its lawful rights. The United States District Court for the Southern District of New York, the original forum of that lawsuit, approved the settlement, the terms of which included total payment of the $1.7 million and also permitted Trackwise to settle the $349,901 judgment for royalties (owed to the estate since the bankruptcy filing) with a $200,000 payment.

On March 13, 1996 the Trustee moved to terminate its rights under the Trackwise sale agreement. He asserted Trackwise had not made any settlement payments or met any of its post-petition royalty obligations. At that time unpaid royalties in the amount of $239,027 were outstanding. As an alternative to termination, the Trustee sought rejection of the license. The Trustee was prompted by his...

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