Hower v. Molding Systems Engineering Corp.

• Decision Date: 19 April 2006
• Docket Number: No. 05-1889.,05-1889.
• Citation: 445 F.3d 935
• Parties: John HOWER, Plaintiff-Appellant, v. MOLDING SYSTEMS ENGINEERING CORP., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

445 F.3d 935

John HOWER, Plaintiff-Appellant, v. MOLDING SYSTEMS ENGINEERING CORP., Defendant-Appellee.

No. 05-1889.

United States Court of Appeals, Seventh Circuit.

Argued December 9, 2005.

Decided April 19, 2006.

Jason M. Crowder (argued), Heller, Holmes & Associates, Mattoon, IL, for Plaintiff-Appellant.

Joel A. Kunin, East St. Louis, IL, Steven M. Wallace (argued), Kunin Law Offices, East St. Louis, IL, for Defendant-Appellee.

Before FLAUM, Chief Judge, RIPPLE and WILLIAMS, Circuit Judges.

WILLIAMS, Circuit Judge.

Creditor-appellant John Hower moved to stay the sale of the debtor's assets in this bankruptcy proceeding. The bankruptcy court denied the motion on its merits and Hower appealed to the district court. That court dismissed the appeal as moot because the sale had already taken place, and because we agree with that decision, we affirm the ruling of the district court.

I. BACKGROUND

In September of 2003, creditor-appellant John Hower won an Illinois state court judgment in excess of $500,000 against debtor-appellee Molding Systems Engineering Corporation ("Molding"). A few weeks later, Molding filed a voluntary petition for Chapter 11 bankruptcy protection. Molding filed a motion in the bankruptcy court to sell certain of its assets free and clear of liens and claims, including Hower's judgment creditor claim. This motion requested that Molding's assets be sold to Molding Services of Illinois ("MSI"), a new corporation owned and led by the same pair of individuals who owned and ran the now-bankrupt Molding. Put simply, Molding and MSI share the same president and the same majority shareholder. Hower objected to the motion on several grounds, including the argument that it was not filed in good faith, but rather was an attempt to continue in business under a different name while avoiding Hower's claim. At the hearing on that motion, the bankruptcy judge gave Hower the opportunity to try to locate competing bidders for the assets within 30 days. Unable to locate any other bidder within the 30-day period, Hower filed his own bid for the assets, offering to assume Molding's debts.

At the next hearing, MSI and Molding's secured creditors presented numerous arguments supporting MSI's bid as the superior bid. The bankruptcy trustee stated that he did not share Hower's objection to the MSI bid. MSI's lawyer explained that while Molding and MSI shared the same president and same major shareholder, the corporations were meaningfully distinct entities because MSI had obtained $250,000 in operating funds which it could use to keep the business functioning, whereas Molding had assets of five dollars. Two secured creditors (banks) who were owed several hundred thousand dollars by Molding noted that they strongly supported the MSI sale because they believed that MSI's infusion of cash would keep the business operating, while there was no indication that Hower had enough funds to meet the payroll. Additionally, Hower's offer to assume Molding's debts carried no weight with these creditors because he had not contacted them or given them any assurance that he could actually bear those debts.¹ Following the presentation of these arguments, the bankruptcy judge orally granted the motion for sale to MSI and denied Hower's motion to buy.

On June 7, 2004, the bankruptcy court entered a written sale order authorizing the MSI sale, explicitly finding that MSI was a good-faith purchaser and stating that, notwithstanding Federal Rules of Bankruptcy Procedure 6004(g) and 6006(d), the order would take effect immediately and "shall not be stayed." On June 15, Hower filed a motion to stay the sale. On June 16, the judge denied this motion on the merits, explaining that a rapid sale was in the best interests of the creditors. On June 17, Hower appealed that denial to the district court. On June 24, Molding filed a Report of Sale stating that the sale of assets to MSI had closed on June 8, the day after the sale order was entered. In light of the completed sale, the district court denied Hower's appeal as moot. This appeal followed.

II. ANALYSIS

A. Hower's appeal from the sale order to the district court was moot.

Whether an appeal was properly dismissed as moot is a legal question; thus, our review of the district court's ruling is de novo. Higgason v. Farley, 83 F.3d 807 (7th Cir.1996). The district court ruled that Hower's appeal was moot because the disputed sale had already taken place. This is correct. The Bankruptcy Code provides that absent a stay of sale, appeals of orders authorizing asset sales do not affect the validity of sales to entities that purchased the assets in good faith. 11 U.S.C. § 363(m). In the absence of a stay pending appeal, the good-faith sale of a debtor's assets is final. The Code strongly favors finality because the protection of good-faith purchasers maximizes the value of the assets for sale, which benefits both debtors and creditors. In re CGI Indus., Inc., 27 F.3d 296, 299 (7th Cir.1994). Here, there is no question that no stay was entered, that the bankruptcy court made an explicit finding of good faith, and that the sale took place. Therefore, the appeal is moot, because the sale is final and this court is powerless to provide Hower the remedy he seeks. Id.

B. The bankruptcy court's refusal to stay the sale was not an abuse of discretion.

Although we have found that the appeal is moot, we will address Hower's argument that this court may evaluate the correctness of the underlying sale order because of the bankruptcy court's alleged errors regarding the issuance of a stay and the finding of good faith. In other words, he complains that improper circumstances and wrongful actions by the bankruptcy court led to the improper sale that mooted his claim. These underlying arguments fail on the merits.

Federal Rule of Bankruptcy Procedure 6004(g) provides that orders authorizing the sale of debtors' assets are automatically subject to a ten-day stay unless the court orders otherwise. We review a bankruptcy court's decision to lift an automatic stay for abuse of discretion. In re Meyer Med. Physicians Group, Ltd., 385 F.3d 1039, 1041 (7th Cir.2004). Here, the court explicitly ordered otherwise and declined to reconsider its decision eight days later when Hower moved for a stay. "[B]ankruptcy courts face a difficult task in weighing the competing interests implicated by upset bids ... [T]hey must be accorded maximum discretion in striking an appropriate balance." Corporate Assets, Inc. v. Paloian, 368 F.3d 761, 770 (7th Cir.2004). Given the unusually exigent circumstances of this case — the debtor had five dollars in its coffers, it had dozens of full-time employees and a payroll to meet, and the purchaser offered to make $250,000 available to keep operations going — the judge acted within his discretion in expediting the purchase, particularly in light of the trustee's and the secured creditors' approval of the sale and Hower' slim chance of prevailing on appeal. Hower's equitable point that the lack of a stay effectively denied him the opportunity to appeal the court's decision carries some force, but this circumstance is contemplated by the Code's preference for finality in sale orders and the broad discretion it provides judges to deny stays pending appeal. Therefore, it was not an abuse of discretion for the bankruptcy judge to prioritize the debtor's ability to operate over Hower's right to pursue an appeal.

C. The bankruptcy court's determination of good...