In re JB Winchells, Inc.
| Decision Date | 13 October 1989 |
| Docket Number | Bankruptcy No. 87-00575F. |
| Citation | 106 BR 384 |
| Parties | In re J.B. WINCHELLS, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
COPYRIGHT MATERIAL OMITTED
Robert K. Coulter, Trial Atty., Tax Div., Dept. of Justice, Washington, D.C., Virginia Powel, Asst. U.S. Atty., Local Counsel, Philadelphia, Pa., for the I.R.S.
Douglas H. Weiss, Pincus, Dubroff, Ganz, Lightman & Weiss, Philadelphia, Pa., for debtor, J.B. Winchell's, Inc.
Gary A. Friedberg, Goldstein, Friedberg, Kelly & DiVito, P.C., Philadelphia, Pa., for Rich Aaron's Gallery, Ltd.
David A. Pollack, Rosenwald, Pollack & Grumfeld, Philadelphia, Pa., for Rouse-Philadelphia, Inc.
James J. O'Connell, Asst. U.S. Trustee, Philadelphia, Pa.
The federal government has brought what it denominates a "Renewed Motion Pursuant to Rule 9024," which seeks to vacate an "Order Approving Modified Stipulation," which was entered by this court on April 28, 1988. The parties to that original stipulation — J.B. Winchells, Inc. (the debtor), Rich Aaron's Gallery, Ltd. ("Aaron's") and Rouse-Philadelphia, Inc. — then agreed, in pertinent part, to the debtor's transfer of its interest in a liquor license to Aaron's. The modified stipulation allowed Aaron's to take the license free and clear of any liens, including that of the federal government.
The government filed its instant motion on November 7, 1988.1 It presents two grounds for the vacation of the April 28, 1988 order: that the stipulation was in actuality a contested matter, and the government was not afforded proper notice of this matter; and that the court was misled into believing that Aaron's possessed a secured interest in the license which in fact, according to the government, it did not.
The parties now before me have collectively submitted a number of exhibits and have stipulated to the following facts for purposes of resolving this motion.2
On or about July 29, 1985, Aaron's made a loan to the debtor in the principal amount of $275,000.00. The loan was secured by a Security Agreement between the parties on that date, and by three financing statements. The loan was specifically secured, inter alia, by the debtor's restaurant liquor license. The financing statements were recorded in Philadelphia County in the Recorder of Deeds Office and the Prothonotary's Office on August 14, 1985, and in Harrisburg with the Secretary of the Commonwealth on August 16, 1985. These financing statements were submitted by the parties as Exhibit 1.
The Internal Revenue Service filed notices of a federal tax lien against the debtor on January 6, 1987 and April 1, 1988 in Philadelphia, Pa. Exhibit 2.
The debtor filed a voluntary petition in chapter 11 bankruptcy on February 4, 1987. The debtor's petition (with attachments) and bankruptcy schedules and statement of financial affairs comprise Exhibits 3 and 4. The IRS filed a proof of claim (Ex. 5) on June 22, 1987, alleging a secured claim of $24,730.52, unsecured priority claims of $4,919.92, and an unsecured general claim of $394.01.
On September 18, 1987, the debtor moved for the court's approval of a stipulation by and among three parties: the debtor, Aaron's, and Rouse-Philadelphia, Inc., which provided: that the debtor would withdraw its then pending motion to assume its lease on the restaurant premises;3 Rouse would be granted relief from the stay and be allowed to take possession of these premises; and Aaron's would be allowed to take possession of the debtor's furniture, fixtures, equipment and liquor license, in which "Aaron's has a perfected security interest." Ex. 6. A notice of this motion for approval of the stipulation was filed in the bankruptcy clerk's office on or about September 23, 1987, stating that the notice was served "upon all creditors and parties having filed requests to receive notices in this matter pursuant to Bankruptcy Rule 2002. . . ." Ex. 7. The debtor certified to the court on October 20, 1987 that it had not received any objections to its motion. My order approving the stipulation as unopposed was entered October 22, 1987 (Ex. 9); shortly thereafter, on October 28, the debtor's bankruptcy case was dismissed under 11 U.S.C. § 1112(b) for failure to propose a plan and for failure to either prosecute the case or to file required documents in a timely fashion. Ex. 10.
Approximately five months later, on March 29, 1988, the debtor filed a motion with this court seeking an order approving a modification of the approved stipulation pursuant to Bankruptcy Rule 9024 or, in the alternative, to reopen the case. The basis for the proposed modification was the debtor's representation that the agreement reached by the three parties included Aaron's right to take the debtor's furniture, fixtures, equipment and liquor license free and clear of liens and encumbrances. It was alleged that before the stipulation was reduced to writing, the debtor's attorney primarily responsible for these negotiations became incapacitated and was unable to finalize the matter, and that final negotiations and the actual drafting of the stipulation was handled thereafter by another attorney in that firm, one less familiar with the agreement. Because of these circumstances, the motion stated, the approved stipulation failed to include the fact that Aaron's was to take back the debtor's assets free and clear of all liens and encumbrances. Ex. 11.
On March 29, 1988 I entered an Order Requiring Answer in connection with this motion. A hearing on this motion was scheduled for April 15, 1988; a Certificate of Service filed with the court on March 31, 1988 shows that the motion was mailed to, inter alia, the Internal Revenue Service's Special Procedures Staff in Philadelphia. See Exs. 12, 13, 14. The address to which the notice was sent is the one the IRS used on its proof of claim against the debtor. Ex. 5.
On April 13, 1988 the parties to the stipulation filed an amended Motion for an order approving their stipulation. Ex. 15. The only difference in language between the March and April modified stipulations involves Aaron's authorization to take possession of, inter alia, the debtor's liquor license. The March, 1988 motion reads that Aaron's is to take the "license free and clear of liens and encumbrances;" the April, 1988 motion states that Aaron's takes the "license free and clear of all liens, claims (including claims of any taxing authority, suits, demands and encumbrances . . . )." See Exs. 14, 15. A certificate of service of the April 13 motion was filed April 15, Ex. 17, and a certificate of no objection was thereafter filed on April 22, 1988. Ex. 18.
On April 28, 1988 I issued an Order approving the modified stipulation, as amended on April 13, as unopposed. Ex. 19. Aaron's then assigned its interest in the liquor license to a third party named Nick's American Cafe of 9th Street, Inc. The assignment was filed with the Pennsylvania Liquor Control Board, Ex. 20, which apparently approved transfer of the liquor license to that third party on August 12, 1987. Stip. of Facts, No. 23. No evidence has been provided regarding the price Nick's paid for the liquor license, to whom it was paid, the value of the liquor license, or what connection, if any, existed between Nick's, the debtor, and Aaron's.
The government argues that the April 28, 1988 order should be vacated under Rule 9024 (incorporating Fed.R.Civ.P. 60) on the grounds that the parties to the settlement misled this court by wrongfully asserting that Aaron's held a first priority security interest and, as a result, no party would be prejudiced by the settlement; it also contends that the government was not given proper notice of the motion to approve the amended settlement. As will be discussed below, the government complains only about that portion of the April 28 order which permitted the transfer of the liquor license free and clear of its liens. The government's motion is based specifically upon Rule 60(b)(1), (b)(3), and (b)(6).4 A brief discussion of the boundaries of this rule will frame the government's request for relief.
First, I note that the provisions of Rule 60(b)(6) may be utilized only in exceptional or extraordinary circumstances, and can be used only as a "residual clause" in cases which are not covered under the first five subsections of Rule 60(b). If the government's argument is addressed by subsections (b)(1) or (b)(3), then it is not cognizable under 60(b)(6). Wesco Products Co. v. Alloy Automotive Co., 880 F.2d 981, 983 (7th Cir.1989); In re Salem Mortg. Co., 791 F.2d 456, 459 (6th Cir.1986); Pierce v. U.M.W. Welfare & Retirement Fund, 770 F.2d 449, 451 (6th Cir.1985), cert. denied, 474 U.S. 1104, 106 S.Ct. 890, 88 L.Ed.2d 925 (1986); In re Watkins, 90 B.R. 848 (Bankr. E.D.Mich.1988).
It also is well established that the burden rests upon the party seeking relief under Rule 9024 to show justification for its oversight, error or omission pursuant to Rule 60(b)(1), see generally 11 Wright & Miller, Federal Practice and Procedure: Civil § 2858 (1973 & Supp.1989). Similarly, a motion to vacate an order for fraud in its procurement under Rule 60(b)(3) must be proved by clear and convincing evidence. Brown v. Pennsylvania R. Co., 282 F.2d 522 (3d Cir.1960), cert. denied, 365 U.S. 818, 81 S.Ct. 690, 5 L.Ed.2d 696 (1961). In fact, the requirements for pleading fraud under 9024 are stricter than those required for most other claims. In re Met-L-Wood Corp., 80 B.R. 912 (N.D.Ill.1987), aff'd, 861 F.2d 1012 (7th Cir.1988), cert. denied, ___ U.S. ___, 109 S.Ct. 1642, 104 L.Ed.2d 157 (1989); In re F.A. Potts & Co., 86 B.R. 853 (Bankr.E.D.Pa.1988), aff'd, 93 B.R. 62 (E.D. Pa.1988); In re Chipwich, Inc., 64 B.R. 670 (Bankr.S.D.N.Y.1986). A party seeking relief under subsection (b) of this rule must also prove the...
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