In re Lady Madonna Industries, Inc.
| Decision Date | 13 August 1987 |
| Docket Number | No. 87 Civ. 2796 (RJW).,87 Civ. 2796 (RJW). |
| Parties | In re LADY MADONNA INDUSTRIES, INC., Lady Madonna Management Corp., and Lady Madonna Manufacturing Co., Debtors. The ROYAL BANK AND TRUST COMPANY, Plaintiff-Appellant, v. John S. PEREIRA, as Chapter 7 Trustee, Defendant-Appellee. |
| Court | U.S. District Court — Southern District of New York |
Labozzetta & Hass, New York City, for plaintiff-appellant; Robert L. Howard, Henry G. Levy, of counsel.
Otterbourg, Steindler, Houston & Rosen, P.C., New York City, for defendant-appellee; Richard J. Rubin, Stuart I. Gordon, of counsel.
Appellant The Royal Bank and Trust Company ("RBT") appeals from an order entered pursuant to an oral decision on March 10, 1987 by the Honorable Howard C. Buschman III, Bankruptcy Judge for the Southern District of New York, denying its motion to compel John S. Pereira, as Chapter 7 Trustee ("Trustee") of the debtor Lady Madonna Industries, Inc. ("Lady Madonna" or "the Debtor") to submit a proposed settlement to the Bankruptcy Court for approval. For the reasons hereinafter stated, the Court affirms Judge Buschman's decision.
Lady Madonna is a clothing manufacturer. Although the exact facts of the dispute are unclear, the record reflects that RBT loaned money and extended credit to Lady Madonna during 1980 and 1982. To secure these loans, RBT and Lady Madonna entered into security agreements pursuant to which RBT was given a security interest in all of Lady Madonna's assets, except inventory.1
Lady Madonna filed petitions for reorganization under Chapter 11 of the Bankruptcy Code on January 12, 1984. On August 3, 1984, RBT moved by order to show cause for relief, including an order recognizing its security interest in the Debtor's accounts receivable, trademarks and trade-names ("trademarks") and modifying the automatic stay to allow it to foreclose upon the trademarks. On August 14, 1984, the Bankruptcy Court granted the requested relief with respect to the accounts receivable, but adjourned the motion with respect to the trademarks. This motion was subsequently denied without prejudice to the filing of a complaint initiating an adversary proceeding to seek the relief concerning the trademarks.
After the cases were converted from Chapter 11 to Chapter 7, the Bankruptcy Court held a hearing on November 18, 1985 and approved the Trustee's sale of the trademarks for $325,000, free and clear of liens. On the date of the Chapter 11 filing by Debtors, Lady Madonna owed RBT $3,472,302 as a result of advances on a line of credit, term loans and account over-drafts. The collection of $4,000 in accounts receivable subsequently reduced this debt.
RBT commenced this adversary proceeding against the Trustee on May 22, 1986, seeking a judgment determining that RBT has a valid lien on the trademarks and tradenames ("trademarks") owned by Lady Madonna ("the Debtor") pursuant to the 1980 and 1982 security agreements and ordering Trustee to turn over the proceeds, plus interest earned thereon, to RBT.
Both prior to and subsequent to the commencement of this adversary proceeding, the parties, through their attorneys, discussed settlement over a period of five months. At one point, the Trustee's attorney offered to settle the adversary proceeding for $200,000 and RBT countered with an offer of $240,000. On October 7, 1986, the Trustee served a motion to dismiss the adversary proceeding. On that date, Bankruptcy Judge Buschman held a pretrial conference and the pending settlement offers were placed on the record.
On October 27, 1986, RBT and the Trustee met to discuss settlement. Neither side contests the fact that the parties agreed to an oral settlement providing for the payment of $205,000 by the Trustee to RBT, plus interest accruing from that date. At the close of the meeting, RBT offered to prepare settlement papers, but Trustee's counsel said he would promptly prepare them since RBT was entitled to interest running from that day. In several telephone conversations, Trustee's counsel informed counsel for RBT that he was preparing settlement documents. During that time, RBT agreed to several adjournments of the pretrial conference in the adversary proceeding.
On December 10, 1986, Trustee's counsel mailed the Trustee a draft of the stipulation, application and order authorizing the settlement for his review and signature. Trustee's counsel notified RBT's counsel that the Trustee was reviewing the settlement documents. On December 16, 1986, Trustee's counsel informed RBT's counsel that the Trustee had approved the settlement documents with minor changes, but was considering backing out of the settlement. On December 17, 1986, RBT's counsel advised Trustee's counsel that if the Trustee did not submit an application to the Bankruptcy Court for approval of the settlement, RBT would make a motion to compel him to do so. The Trustee did not apply for approval of the settlement and on January 28, 1987, RBT moved the Bankruptcy Court to compel the Trustee to submit the settlement to the Bankruptcy Court for approval. Judge Buschman held a hearing on March 10, 1987 and thereafter signed an order denying RBT's motion. It is this order which is presently being appealed before this Court.
This appeal presents, in the first instance, the question whether the order appealed from is a final order or an order reviewable under the collateral order doctrine. In addition, the Court must consider whether it should grant leave to appeal if the order is interlocutory. The substantive issues before the Court include the questions of whether state or federal common law should govern the validity of a settlement in a Bankruptcy case and whether an oral agreement is sufficient to satisfy the appropriate standard for compelling submission of a settlement to a bankruptcy judge. The Court heard oral argument on these issues on July 30, 1987.
28 U.S.C. § 158(a) provides that the district court "shall have jurisdiction to hear appeals from final judgments, orders, and decrees, and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges . . ." In this case, the Court must determine whether Judge Buschman's March order is a final order which the parties may appeal as of right and, if the order is not final, whether the Court within its discretion may hear the order as an interlocutory appeal.
A final order is an order which requires nothing further than the mechanical entry of judgment by the trial court. In re Ben Hyman & Co., 577 F.2d 966 (5th Cir.1978). See In re Johns-Manville Corporation, 824 F.2d 176 (2d Cir.1987) (); In re Johns-Manville Corp., 32 B.R. 728 (S.D.N.Y.1983) (). By comparison, "an interlocutory order or decree is one which does not finally determine a cause of action but only decides some intervening matter pertaining to the cause, and which requires further steps to be taken in order to enable the court to adjudicate the cause on the merits." In re Merle's, Inc., 481 F.2d 1016 (9th Cir.1973).
At the outset, the Court notes that the parties have not drawn the Court's attention to a case which squarely addresses the issue of whether a bankruptcy court's order denying a motion to compel the trustee to submit a settlement to the bankruptcy court for approval is appealable as a final order under the Bankruptcy Act.
In re Tidewater Group, Inc., 22 B.R. 500 (N.D.Ga.1982), appeal dismissed, 734 F.2d 794 (11th Cir.1984), however, presents a closely analogous situation. In that case, the District Court found that the Bankruptcy Court's order refusing to confirm a settlement was not a final order because, although it finally determined the settlement issue, "it does not end the litigation, it does not decide the merits, it does not determine the rights of the parties in the disputed contract, it settles no liability, and establishes no damages." Id. at 504. In reaching its conclusion, the District Court relied on In re Merle's Inc., supra, 481 F.2d at 1018. In that case, the Ninth Circuit held that while an order approving a compromise is final because it finally determines the rights of the parties, an order disapproving a compromise is not final because it determines no rights and settles no issues, leaving the questions open for future adjudication.
Judge Buschman's order in this case determines only the narrow issue of whether the Trustee must submit the settlement to the Bankruptcy Court. By not requiring the Trustee to submit the settlement, the order clearly does not finally determine the rights of the parties or end the litigation. However, even if the Trustee had been compelled to submit the settlement to the Bankruptcy Court, the order still would not have been final. Such an order would merely bring the settlement before the Bankruptcy Judge; the Bankruptcy Judge would still have had to evaluate and confirm the settlement before it could be considered final. Accordingly, the order denying the motion to compel the Trustee to submit the settlement to the Bankruptcy Court for approval is not a final order.
RBT asserts that even though the order may not be a final order, it is nonetheless appealable as a final order under the collateral order exception to the final judgment rule. See Cohen v. Beneficial Industrial Loan Corporation, 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949). An order is appealable under the collateral order exception if the order (1) is independent and easily separable from the substance of other claims in the action; (2) presents a need for prompt review to protect important interests of any party; and (3) depends on practical, rather than narrowly technical considerations. In re Tidewater Group, Inc., supra, 734 F.2d at 796-97....
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