Krystal Cadillac Oldsmobile GMC Truck, Inc., In re, 97-7118

• Decision Date: 23 April 1998
• Docket Number: No. 97-7118,97-7118,Nos. 97-7117,s. 97-7117
• Parties: , Bankr. L. Rep. P 77,680 In re KRYSTAL CADILLAC OLDSMOBILE GMC TRUCK, INC., Debtor. KRYSTAL CADILLAC OLDSMOBILE GMC TRUCK, INC.; Lawrence V. Young, v. GENERAL MOTORS CORPORATION, Krystal Cadillac Oldsmobile GMC Truck, Inc., appellant in 97-7117. In re KRYSTAL CADILLAC OLDSMOBILE GMC TRUCK, INC., Debtor. KRYSTAL CADILLAC OLDSMOBILE GMC TRUCK, INC.; Lawrence V. Young, v. GENERAL MOTORS CORPORATION, Lawrence V. Young, Appellant in
• Court: U.S. Court of Appeals — Third Circuit

Page 631

142 F.3d 631

32 Bankr.Ct.Dec. 673, Bankr. L. Rep. P 77,680

In re KRYSTAL CADILLAC OLDSMOBILE GMC TRUCK, INC., Debtor.

KRYSTAL CADILLAC OLDSMOBILE GMC TRUCK, INC.; Lawrence V. Young, v. GENERAL MOTORS CORPORATION, Krystal Cadillac Oldsmobile GMC

Truck, Inc., appellant in 97-7117.

In re KRYSTAL CADILLAC OLDSMOBILE GMC TRUCK, INC., Debtor.

KRYSTAL CADILLAC OLDSMOBILE GMC TRUCK, INC.; Lawrence V. Young, v. GENERAL MOTORS CORPORATION, Lawrence V. Young, Appellant in

No. 97-7118.

Nos. 97-7117, 97-7118.

United States Court of Appeals Third Circuit.

Argued Jan. 28, 1998.

Decided April 23, 1998.

William C. Cramer, Kathleen W. Cramer, (argued), Chambersburg, PA, for Krystal Cadillac Oldsmobile GMC Truck, Inc., in No. 97-7117.

Lawrence V. Young, Sara A. Austin (argued), York, PA, for Lawrence V. Young in No. 97-7118.

James A. Mollica, Jr., Mollica & Murray, Pittsburgh, PA, of Counsel: Carol H. Lesnek-Cooper, General Motors Corp. Detroit, MI, for General Motors Corp.

Before: MANSMANN, COWEN and ALITO, Circuit Judges.

OPINION OF THE COURT

MANSMANN, Circuit Judge.

In this appeal involving bankruptcy law, we are asked to decide whether a franchise agreement involving a vehicle dealership had been terminated prior to the filing of the bankruptcy petition. Because we find that the franchise agreement was still in effect when the petition was filed, it follows a fortiori that the vehicle franchise was an asset of the bankruptcy estate. We further find that the post-petition adjudications by the state administrative board and the Pennsylvania Commonwealth Court, effectively ordering the termination of the franchise agreement, were made in violation of the automatic stay provision of 11 U.S.C. § 362(a)(3) and, thus, were not binding on the bankruptcy court. Accordingly, we will reverse the order of the district court affirming the order of the bankruptcy court.

I.

The resolution of the dispute before us turns, in large part, on certain events which occurred prior to the commencement of the bankruptcy proceeding. We reiterate the pertinent facts here.

Krystal Cadillac-Oldsmobile-GMC Truck, Inc. ("Krystal Cadillac" or the "Debtor"), a licensed vehicle dealer in the Commonwealth of Pennsylvania, owned and operated a GMC dealership in Gettysburg, Pennsylvania. ¹ General Motors Corporation is a licensed vehicle manufacturer in the Commonwealth of Pennsylvania and the appellee in this consolidated appeal. ²

Krystal Cadillac operated the GMC dealership pursuant to the General Motors Corporation (Oldsmobile Division) Dealer Sales and Service Agreement, which went into effect on November 1, 1990. This franchise agreement was to remain in effect until October 31, 1995, unless terminated earlier and, as long as the dealer fulfilled its obligations under the franchise agreement, it was assured the opportunity to enter into a new dealer agreement at the expiration date. ³

In October of 1991, General Motors Acceptance Corporation withdrew its line of credit financing. Consequently, Krystal Cadillac found itself lacking the necessary financing to purchase new GM vehicles. To no avail, it made numerous attempts to obtain alternative financing. On March 6, 1992, GM notified Krystal Cadillac that is was in breach of the franchise agreement for failing to maintain a line of credit and for failing to purchase new vehicles. Based on the continued breach, GM gave notice on May 10, 1993 that the franchise would terminate in sixty days, that is, on July 13, 1993. At Krystal Cadillac's request, GM extended the termination date to August 12, 1993. ⁴

On August 11, 1993, the day before the franchise agreement would have expired, Krystal Cadillac filed an appeal with the Pennsylvania Board of Vehicle Manufacturers, Dealers and Salespersons (the "Vehicle Board"), requesting a hearing on the merits of the termination. Approximately one year later, on August 2, 1994, the Vehicle Board conducted a hearing to review the propriety of GM's notice of termination. ⁵ Before the Vehicle Board rendered its determination, Krystal Cadillac filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 8, 1994. Thereafter, on September 27, 1994, the Vehicle Board entered an Order and Decision allowing GM to terminate the franchise agreement. Subsequently, Krystal Cadillac appealed the order of the Vehicle Board to the Pennsylvania Commonwealth Court, which affirmed the Vehicle Board's decision on November 6, 1995. The Pennsylvania Supreme Court denied Krystal Cadillac's petition for allowance of appeal. State Bd. of Vehicle Mfrs. v. Krystal Cadillac-Oldsmobile-GMC Truck, Inc., 544 Pa. 665, 676 A.2d 1203 (1996).

While this appeal was pending before the Pennsylvania Commonwealth Court, the bankruptcy court appointed Lawrence V. Young as the Chapter 11 Trustee. The Trustee, in turn, filed a motion to sell the Debtor's assets, including the GM franchise, free and clear of liens and encumbrances. GM filed an objection to the Trustee's motion to sell, contending that the franchise agreement had been lawfully terminated and was not saleable or assignable. The Debtor also objected to the Trustee's motion to sell on the basis that it intended to file a reorganization plan. On June 15, 1995, the bankruptcy court conducted a hearing on the proposed sale, at which time the court denied the Trustee's motion to sell. On that same date, the Debtor filed a Plan of Reorganization with the bankruptcy court, which provided for the sale of the GM franchise as a means to pay creditors. GM filed an objection to the Plan on July 10, 1995, arguing that since the franchise had been validly terminated in the state proceedings, the franchise was not an asset of the bankruptcy estate available for sale. The Debtor filed an amended reorganization plan on October 24, 1995, to which GM lodged the same objection.

On December 27, 1995, the bankruptcy court entered an order which required the Debtor to file, on or before February 2, 1996, a motion to assume and assign the General Motors franchise and to provide to the Trustee with certain documentation to support such motion, including an unredacted copy of the agreement of sale between the Debtor and any potential purchaser, a copy of the transfer application, evidence to support the potential purchaser's financial abilities, and proof of the Debtor's financial ability to consummate its Plan of Reorganization. ⁶ In its attempt to comply with the court's December 27th order, the Debtor filed a timely motion to assume and assign the GMC dealership franchise, with documentation of its financial position vis-a-vis the Plan of Reorganization. On March 14, 1996, the Trustee filed a certification with the bankruptcy court, indicating that the Debtor had failed to comply with the terms of the court's December 27, 1995 order, and requesting that the case be converted to a Chapter 7 proceeding.

The bankruptcy court held a hearing on April 1, 1996, regarding the Debtor's compliance with the December 27th order and to consider the merits of the Debtor's motion to assume and assign the franchise. Subsequently, on April 15, 1996, the bankruptcy court entered an order denying the Debtor's motion to assume and assign the franchise. The court reasoned that the decisions rendered in the state proceedings regarding the franchise termination precluded the bankruptcy court from authorizing a sale of the franchise. Both the Debtor and the Trustee filed motions for reconsideration of the bankruptcy court's April 15, 1996, order. In addition, the Trustee filed a motion to assume and to sell the franchise agreement to a qualified buyer for the price of Five Hundred Thousand Dollars ($500,000), which GM opposed.

On July 26, 1996, the bankruptcy court entered an order denying the motions for reconsideration and the Trustee's motion to sell the franchise agreement. The court held that the appeals to the Vehicle Board and to the Pennsylvania Commonwealth Court clearly were filed by the Debtor and hence constituted an action by the Debtor, not against the Debtor. Since the automatic stay provisions of the Bankruptcy Code applied only to actions against the Debtor, they did not apply to the state proceedings. ⁷ The court therefore concluded that the final termination of the franchise agreement occurred by operation of law as a result of the Vehicle Board's determination that GM had properly effected a termination prior to the filing of the bankruptcy petition. Based upon considerations of comity and finality, the bankruptcy court held that the findings of the Vehicle Board regarding the valid termination of the franchise agreement precluded it from ruling on the Debtor's ability to assume the franchise agreement since it is clear under section 365 of the Bankruptcy Code, 11 U.S.C. § 365, that a debtor cannot assume a validly terminated contract.

The Debtor and the Trustee appealed the bankruptcy court's July 26, 1996, order to the district court on August 5, 1996. The district court affirmed the order of the bankruptcy court on February 3, 1997, holding that the proceeding before the Vehicle Board did not fall within the scope of the automatic stay provided by 11 U.S.C. § 362 and, therefore, the Vehicle Board's order allowing GM to terminate the franchise agreement was valid and the termination was effective. Accordingly, the district court held the franchise agreement was not an asset of the bankruptcy estate. The Debtor and the Trustee filed timely but separate appeals, which we consolidated for purposes of briefing and disposition.

The bankruptcy court exercised its jurisdiction over this matter pursuant to 28 U.S.C. § 157(b). The district court had jurisdiction to review the bankruptcy court's order pursuant to 28 U.S.C. § 158(a). Our appellate jurisdiction over the district court's order rests upon 28 U.S.C. §§ 158(d) and 1291. In undertaking our review, we stand in the shoes of the district court, applying a...