In re Brookfield Clothes, Inc.
| Decision Date | 21 June 1983 |
| Docket Number | No. 82 CIV 0022 (LBS).,82 CIV 0022 (LBS). |
| Citation | 31 BR 978 |
| Parties | In re BROOKFIELD CLOTHES, INC., Debtor. Appeal of KREDIETBANK N.V. |
| Court | U.S. District Court — Southern District of New York |
Angel & Frankel, P.C., Joshua J. Angel, Eric S. Brown, New York City, for appellee Brookfield Clothes, Inc.
Cleary, Gottlieb, Steen & Hamilton, George Weisz, Scott Horton, Wanda Olson, New York City, for appellant Kredietbank N.V.
Sherman & Citron, P.C., Cecil A. Citron, Robert Kolodney, New York City, for amicus curiae Official Creditors' Committee of Brookfield Clothes, Inc.
This proceeding is an appeal from the Order of Bankruptcy Judge Prudence B. Abram, dated November 15, 1982, authorizing and approving the sale of substantially all of the assets of the debtor Brookfield Clothes, Inc. ("Brookfield" or appellee) to the Abraham Zion Corporation ("Zion"). The standard of review employed herein is that set forth in Emergency Bankruptcy Rule 1, which provides that the district court may hold a hearing, receive evidence, accept, reject or modify the order of the bankruptcy court and need give no deference to the findings below. Upon a review of the record and consideration of the memoranda submitted on this appeal, and having heard counsel at oral argument, we conclude that the order of the bankruptcy court should be affirmed.
The facts are as follows: on August 30, 1982, an involuntary petition for relief under Chapter 11 of Title 11, United States Code ("Bankruptcy Code" or "Code"), was filed against Brookfield, a manufacturer of men's clothing, by three of its trade creditors.1 Brookfield filed a consent and order for relief dated September 1, 1982, and after entry of an Order for Relief by the Bankruptcy Court the following day, Brookfield remained in possession of its property and assets and in operation of its business as a debtor-in-possession pursuant to Code §§ 1107 and 1108. Appellant Kredietbank, N.V. (hereinafter "Kredietbank") holds a senior lien on certain equipment leased by HMH Associates to Brookfield.
It appears that from the commencement of the bankruptcy proceedings, Brookfield needed to either obtain permanent financing from an outside party or negotiate some form of sale of its business or assets. The company's only means of meeting its day-to-day expenses such as payroll were various interim financing agreements entered into between Brookfield and Chase Manhattan Bank, N.A. On September 21, 1982, Brookfield's unionized employees walked off the job because of the company's failure to meet certain health and welfare benefit obligations. The company ceased operations at that point.
Negotiations were immediately commenced with Zion, an entity that had expressed interest in acquiring Brookfield prior to the petition filing. The bankruptcy court scheduled a hearing for September 22, 1982, to consider Brookfield's application for approval of a sales purchase agreement between itself and Zion. Unable, however, to resolve certain objections raised by third parties—including Kredietbank—the application was withdrawn and the hearing cancelled.
In early November 1982, Zion once again expressed interest in purchasing Brookfield's assets. Renewed negotiations resulted in a second application by Brookfield for approval of an assets purchase agreement and the scheduling of a hearing on November 15 to consider the application.
Notice of the hearing was served on, among others, attorneys to the duly appointed Creditors' Committee; Brookfield's largest twenty creditors; and Kredietbank. In addition, notice of the proposed sale and hearing was published in The Daily News Record of November 12, 1982.
Briefly stated, the terms of the proposed sale, as set forth in the hearing notice and elaborated upon at the November 15 hearing, provided for Zion's purchase of Brookfield's assets; its right, title and interest, if any, in machinery and equipment subject to all existing and valid liens as may exist against Brookfield; all inventory; all accounts receivable subject to those loan advances made on or after August 30, 1982; certain specified leases; all sale orders; and all other tangible and intangible assets such as insurance policies, trade secrets, trademarks, names, and goodwill. The purchase price was $1.2 million. Among the conditions precedent to closing was the entry by the bankruptcy court of a final, non-appealable order authorizing the sale. Assets Purchase Agreement, ¶¶ 6.01(b), 6.02(b) ().
At the hearing, Judge Abram fruitlessly inquired whether anyone present wished to make a higher or better offer. The court then proceeded to consider the Brookfield-Zion application and objections thereto.
Among Kredietbank's objections, and the basis of this appeal, was the contention that Bankruptcy Code § 363(b) did not empower the debtor in possession to undertake a sale of substantially all of its assets. Kredietbank maintained that such sales can be accomplished only pursuant to a duly adopted reorganization plan or in the course of a liquidation proceeding under Code Chapter 7, 11 U.S.C. §§ 701 et seq. The bankruptcy judge expressed her familiarity with certain authorities in agreement with Kredietbank's position, but stated her view that where the formulation and filing of a plan cannot, as a practical matter, precede an all-asset sale, the sale is nevertheless permitted under the Code.
Brookfield's counsel, being in agreement with the judge's characterization of the law, represented to the court its preparedness to file subsequent to the immediate sale a reorganization plan providing for the distribution of all of its assets, including the sale proceeds, to its creditors in accordance with the Code. Because one of the parties had raised the question whether Brookfield's principal was receiving any undisclosed consideration in the form of a continuing employment contract from Zion, counsel for both Brookfield and Zion represented to the court that no consideration whatsoever had been promised to any of Brookfield's principals.
The court then requested Brookfield's counsel to address itself to the issue of the reasonableness of the purchase price. Brookfield's counsel referred the court to the debtor's continuous yet otherwise unsuccessful efforts to sell the assets, offering to recite a "litany of prospective purchasers, none of whom we were able to bring to the Bench this morning." Transcript of November 15, 1982, 11:00 A.M. (hereinafter "AM Tr."), at 44. With regard to the need to dispose of the business on a global basis, Brookfield's counsel pointed out the large portion of unfinished goods in inventory and the company's accounts receivable, the value of both of which would be substantially less were the company liquidated rather than sold as an ongoing entity.
Pursuant to the court's request, counsel for the Creditors' Committee expressed the view of the Committee, as follows:
"Under the circumstances, the committee which is well aware of the amount that is involved, and has followed the situation very, very closely, has authorized us to indicate its approval of the transaction contemplated."2
AM Tr. at 45. The Committee's counsel also set forth on the record the lack of interest of other prospective buyers with whom the debtor made contact; the absence of any higher offerer; the unfeasibility of a liquidation, rather than a sale; and finally, the reasonableness of the sales price. Id. at 44-45.
Despite the fact that counsel for Brookfield considered sufficient the representations on the record—which Kredietbank's counsel stated he had no reason to doubt— the bankruptcy judge ordered a hearing that afternoon on the necessity of an immediate sale.
Herman Soifer, chief operating officer of Brookfield, testified at the afternoon hearing. Soifer estimated the amount owed to his employees' union at $225,000 and stated that no funds were available to Brookfield to meet that liability and thereby resume operations. Transcript of November 15, 1982, 3:00 P.M. (hereinafter "PM Tr."), at 7. Brookfield's 1,000 employees were characterized as "holding still" in anticipation of a sale and prompt resumption of business. Soifer set the book value of the work-in-progress portion of the inventory at approximately $300,000 and its market value at virtually zero. Id. at 8-9. Soifer also testified that three other people who had expressed interest in acquiring Brookfield, have "disappeared from the scene" and that no better offers were obtained. Id. at 9-10. Finally, Soifer disclaimed the existence of any understanding or agreement between himself and Zion by which Soifer would receive any money or consideration if the proposed sale were approved. Id. at 10-12.
At the conclusion of the afternoon hearing, the court approved the sale and entered the order to that effect.
Kredietbank grounds this appeal on the contention that the sale of substantially all of the assets of a Chapter 11 debtor cannot be effected pursuant to Code § 363(b), but must instead either await the confirmation of a reorganization plan or a conversion of the reorganization to a liquidation proceeding under Code Chapter 7. Alternatively, Kredietbank argues that resort to § 363(b) for an all-asset sale is restricted to "emergency" situations, of which the instant case is not one.
For the reasons stated herein, we are of the view that an "emergency" all-asset sale is permitted under § 363(b) and that the circumstances confronting Brookfield were sufficiently exigent to warrant authorization of the sale pursuant to § 363(b).
As a preliminary matter, we address debtor's claim that this appeal should be dismissed as moot. Section 363(m) provides:
(m) The reversal and modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such...
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