Martin Bros. Toolmakers, Inc., In re

• Decision Date: 18 August 1986
• Docket Number: No. 85-7165,85-7165
• Parties: , Bankr. L. Rep. P 71,410 In re MARTIN BROTHERS TOOLMAKERS, INC., Debtor. MARTIN BROTHERS TOOLMAKERS, INC., Plaintiff-Appellant, v. INDUSTRIAL DEVELOPMENT BOARD OF the CITY OF HUNTSVILLE and Central Bank of the South, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1435

796 F.2d 1435

14 Bankr.Ct.Dec. 1403, Bankr. L. Rep. P 71,410

In re MARTIN BROTHERS TOOLMAKERS, INC., Debtor.

MARTIN BROTHERS TOOLMAKERS, INC., Plaintiff-Appellant, v. INDUSTRIAL DEVELOPMENT BOARD OF the CITY OF HUNTSVILLE and Central Bank of the South, Defendants-Appellees.

No. 85-7165.

United States Court of Appeals, Eleventh Circuit.

Aug. 18, 1986.

Philip A. Geddes, Decatur, Ala., for plaintiff-appellant.

John M. Heacock, Jr., Huntsville, Ala., for defendants-appellees.

Appeal from the United States District Court for the Northern District of Alabama.

Before RONEY and CLARK, Circuit Judges, and FAIRCHILD ^*, Senior Circuit Judge.

CLARK, Circuit Judge:

Appellant-debtor Martin Brothers Toolmakers, Inc. (Martin Bros.) brings this appeal from an adversary proceeding in bankruptcy. Martin Bros. sought a judgment declaring its lease agreement for manufacturing facilities to be a mortgage rather than a true lease. Appellee-lessor, the Industrial Development Board of Huntsville, Alabama (IDB), opposed the action on grounds that the bankruptcy court had already determined the agreement to be a true lease and had ordered appellant to accept or reject the lease under 11 U.S.C. Sec. 365(a). ¹ IDB was joined in this action by appellee Central Bank of the South, trustee of the IDB bond issue which had financed construction of the building occupied by Martin Bros. The bankruptcy court entered summary judgment in favor of IDB and Central Bank, finding the agreement to be a true lease. The district court reviewed the matter de novo and affirmed the judgment on different grounds. Martin Bros. claims error by the district court, asserting that the court was mistaken in finding that the parties intended to create a lease rather than a mortgage.

The parties' contentions on appeal raise two issues. The first is whether the lease characterization is res judicata by virtue of the bankruptcy court's initial order to the debtor, requiring it to affirm or reject the lease within 90 days of order. The second issue is whether the district court erred in its selection of controlling law and consequently erred in its conclusion that the parties intended a lease. We raise sua sponte an issue preliminary to our review of the district court's opinion, namely whether this court has jurisdiction to hear an appeal from a district court order declaring an agreement to be a true lease.

I. Appellate Jurisdiction

This court has jurisdiction over final district courts orders and other interlocutory orders not here at issue. See 28 U.S.C. Secs. 1291-92. Before reviewing the orders below, we must find the district court order final in itself or find some exception to that requirement. "Finality" has traditionally been defined as a decision adjudicating all rights, "leaving nothing for the court to do but execute judgment." See Catlin v. United States, 324 U.S. 229, 65 S.Ct. 631, 89 L.Ed. 911 (1945). The traditional rule narrows the concept of finality to avoid waste of judicial resources and the delay inherent in piecemeal litigation. See id., 65 S.Ct. at 634. Nonetheless, certain doctrines have refined the concept, rendering appellate jurisdiction flexible enough to handle the practicalities of complex litigation.

The collateral order doctrine is, for example, just such a refinement. It provides that an order resolving issues independent and easily separable from the other claims in the action may be reviewed if delay would prejudice important interests of the parties and if practical rather than technical factors also favor immediate review. See Cohen v. Beneficial Industrial Loan, 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949). The Forgay-Conrad rule is another qualification of the traditional rule, allowing review whenever an order directs "immediate delivery of physical property and subjects the losing party to irreparable harm" if appellate review is delayed until conclusion of the case. See Forgay v. Conrad, 6 How. 201, 47 U.S. 201, 12 L.Ed. 404 (1847). Perhaps the most extreme refinement of the finality concept is found in Gillespie v. United States Steel Corp., 379 U.S. 148, 157, 85 S.Ct. 308, 312, 13 L.Ed.2d 199 (1964), which holds that even an order of marginal finality should be reviewed if the question presented is fundamental to further conduct of the case. All of these doctrinal exceptions to the strict rule of finality ultimately rest on a single theory: the scope of appellate jurisdiction must be defined by balancing "the costs and inconvenience of piecemeal review on the one hand and the danger of denying justice on the other." Id., 85 S.Ct. at 311 (quoting Dickinson v. Petroleum Conversion Corp., 338 U.S. 507, 511, 70 S.Ct. 322, 324, 94 L.Ed. 299 (1950)). Consequently, the statutory requirement of finality is a flexible concept, grounded in the practicalities of the situation.

This accommodative approach is vital in the context of bankruptcy. Viewed realistically, a bankruptcy case is simply an aggregation of controversies, many of which would constitute individual lawsuits had a bankruptcy petition never been filed. While the goal of the bankruptcy process is to bring all present and potential contestants together and decide all the claims at the same time, a truly simultaneous resolution is impossible. Each claim represents a variable which must be quantified before a dividend is fixed or a workable reorganization plan adopted. Delayed review of any particular claim, especially claims involving key assets of the debtor's estate, would render any distribution or plan purely contingent until completion of appeals after conclusion of the case. Such an approach would be especially devastating in reorganizations, which proceed most smoothly when at least some variables become fixed and operate as the basis for further negotiation.

In recognition of these factors, finality of bankruptcy orders cannot be limited to the last order concluding the bankruptcy case as a whole. This circuit and others reviewing bankruptcy decisions have freely applied the collateral order doctrine and the Forgay-Conrad rule to escape such results. See In re Regency Woods Apartments, 686 F.2d 899 (11th Cir.1982); In re Olson, 730 F.2d 1109 (8th Cir.1984); In re Saco Local Development Corp., 711 F.2d 441 (1st Cir.1983); In re Mason, 709 F.2d 1313 (9th Cir.1983). Some courts, including our own, have also concluded that any order within a bankruptcy case which concludes a particular adversary proceeding should be deemed final and reviewable. See In re Charter Co., 778 F.2d 617 (11th Cir.1985); In re Saco Local Development, supra. This approach is particularly suitable in the case at hand, since the order below affirmatively characterizes the transaction as a lease and leaves in full force the prior order to affirm or reject. No action remains for the court below with respect to the status of the lease. This result is completely consistent with the fact that this declaratory judgment action would have been final and reviewable had it occurred outside bankruptcy proceedings. Thus, our court has jurisdiction and we proceed to the merits of the case.

II. Lease or Mortgage?

Appellant contends that the district court erred in finding the agreement to be a true lease. Proper consideration of this issue requires a detailed review of the facts. In 1976, appellant-debtor decided to locate manufacturing facilities in the City of Huntsville, Alabama. Appellant entered into a lease agreement with appellee IDB for occupancy of an industrial facility built to appellant's specifications. IDB funded construction by issuing $500,000 in industrial development bonds. Central Bank serves as trustee for the issue and presently holds 100 percent of the bonds. The bond issue is secured by a mortgage on the building and related property, and a security agreement which includes an assignment to the trustee of IDB's rights under the lease agreement. Only IDB and Central Bank are parties to the mortgage, security agreement and bond indenture.

The lease agreement between IDB and Martin Bros. provides for rent payable semi-annually, in an amount equal to the "principal and interest due" on the bonds issued by IDB. The rental obligation abates if the bonds are fully pre-paid ² during the lease term. Martin Bros. bears the responsibility for insuring the property, paying tax assessments and covering operating expenses of the property. The lease term runs through July 31, 1986, the same day the underlying bond issue is to be completely repaid. Nonetheless, Martin Bros. has two options exercisable at that date: to renew the lease at $15,000 annual rent or to purchase the property for $5,000. ³

Martin Bros. performed under the lease agreement until it defaulted in February, 1982. In December, 1982, it filed a bankruptcy petition as debtor-in-possession. Three months later, Central Bank filed a complaint in the bankruptcy court, seeking a Sec. 365 order to compel Martin Bros. to either affirm or reject the lease. ⁴ A hearing was held, and on March 28, 1983 the court ordered the debtor to act within ninety days. Before the order expired, but after the time for appeal had lapsed, Martin Bros. brought this action to declare the agreement a mortgage outside the scope of Sec. 365. Central Bank and IDB filed for summary judgment, as did the debtor. The bankruptcy court looked to the U.C.C. for guidance in construing the documents and found the agreement to be a lease despite the presence of a purchase option. ⁵

Martin Bros. appealed and the district court affirmed. The district court did not discuss the U.C.C. and found other factors supporting a lease characterization. Considering Alabama law, the court found that the parties lacked the intent to create a mortgage because such an arrangement was foreclosed by Alabama's tax-exempt industrial development finance statute. The parties had to denominate and intend the agreement to be a lease since Martin Bros. could not...