Vetter Corp., In re

• Decision Date: 20 December 1983
• Docket Number: No. 83-1371,83-1371
• Citation: 11 B.C.D. 539,724 F.2d 52
• Parties: , Bankr. L. Rep. P 69,544 In re VETTER CORPORATION, Debtor. HOESE CORPORATION, Appellant, v. VETTER CORPORATION, Vetter Products, Inc., and Continental Illinois National Bank and Trust Company of Chicago, Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 52

724 F.2d 52

11 Bankr.Ct.Dec. 539, Bankr. L. Rep. P 69,544

In re VETTER CORPORATION, Debtor HOESE CORPORATION, Appellant, v. VETTER CORPORATION, Vetter Products, Inc., and Continental Illinois National Bank and Trust Company of Chicago, Appellees.

No. 83-1371.

United States Court of Appeals Seventh Circuit.

Argued Sept. 22, 1983.

Decided Dec. 20, 1983.

John F. Martin, Dukes, O'Rourke, Stewart, Martin & Helm, Ltd., Danville, Ill., for appellant.

Ronald W. Hanson, Sidley & Austin, Chicago, Ill., for appellee.

Before PELL, COFFEY, and FLAUM, Circuit Judges.

COFFEY, Circuit Judge.

Appellant, Hoese Corporation, appeals a final order of the United States Bankruptcy Court for the Central District of Illinois, authorizing and confirming the sale of Vetter Corporation's assets to Vetter Products, Inc. We affirm.

I.

In fiscal year 1982, debtor-appellee, Vetter Corporation ("Vetter Corp."), an Illinois corporation involved in the manufacture and sale of motorcycle parts and accessories in Rantoul, Illinois, experienced a seventy percent reduction in sales and a "cash flow" loss of $4.9 million. On January 31, 1983, the company filed a petition for reorganization under Chapter 11 of the Bankruptcy Act, 11 U.S.C. Sec. 1101 et seq. (1982), in the United States Bankruptcy Court for the Central District of Illinois. On that same day, Vetter Corp., as a debtor in possession, also filed with the court an "Application of Debtor to Sell Assets" which was accompanied by a "Purchase Agreement" entered into between Vetter Corp. and Vetter Products, Inc. ("Vetter Products"), a newly formed California corporation. ¹ The "Purchase Agreement" provided that Vetter Corp. would sell "substantially all of its assets" to Vetter Products, who, in return, would assume $12 million worth of Vetter Corp.'s indebtedness to Continental Illinois National Bank and Trust Company of Chicago.

On the morning of February 14, 1983, Vetter Corp. conducted a meeting of creditors to explain "the financial position of the company, what went wrong ... and the prospects for the future," ² and that afternoon a hearing was held in bankruptcy court on the "Application of Debtor to Sell Assets." At this sale hearing, appellant, Hoese Corporation ("Hoese") filed a formal "Objection to a Limited Portion of the 'Application of Debtor to Sell Assets,' " namely the sale of Vetter Corp.'s motorcycle radio housings and the molds used in their manufacture. The attached pleading revealed that on January 23, 1980, Hoese had sued Vetter Corp. in the United States District Court for the Western District of Texas, "alleging infringement of numerous rights of Hoese Corporation and unfair competition" with regard to the motorcycle radio housings. Vetter Corp. counter-sued on similar grounds in the United States District Court for the Central District of Illinois. The cases were consolidated in the Central District of Illinois and set for trial on February 16, 1983. See Vetter Corporation v. Cycle Sound Systems, No. 81-2091 (C.D.Ill. filed March 26, 1981). Pursuant to 11 U.S.C. Sec. 362(a)(1) (1982), the trial was automatically stayed upon Vetter Corp.'s filing of a petition for reorganization in bankruptcy court. The pleading further revealed that on February 1, 1983, Hoese had filed a motion for "Relief From Automatic Stay" which the bankruptcy judge denied but which he allowed Hoese to re-urge at the February 14, sale hearing.

At the conclusion of the sale hearing on February 14, 1983, the bankruptcy judge issued an order denying Hoese's motion to lift the automatic stay and, after considering Hoese's objection to the sale of the motorcycle radio housings, the judge issued an order approving the sale of Vetter Corp.'s assets to Vetter Products. In so ruling, the judge stated:

"It seems to me that what they [Hoese] are seeking, though they don't use those terms, is to cut out a piece of this sale, go ahead and sell it except for this little piece, and that sounds good in theory, but I don't think it will work in this particular case. There is no indication with all this testimony that Vetter Products, Inc., is prepared to go forward if we cut a little piece out.

I think in this particular case, it is appropriate to approve the sale of the assets, pursuant to the purchase agreement with Vetter Products, Inc."

The bankruptcy judge certified the order, authorizing and confirming the sale of Vetter Corp.'s assets to Vetter Products, to the district court and the order was approved by the court on February 15, 1983. Claiming that the bankruptcy court erred by refusing to withhold that portion of the sale which included the transfer of Vetter Corp.'s motorcycle radio housings, and the molds used in their manufacture, to Vetter Products, Hoese appealed the order to this court on February 24, 1983. ³ That same day, Hoese appealed the bankruptcy judge's denial of the motion to lift the automatic stay, to the United States District Court for the Central District of Illinois. Thus, the sole issue before this court is whether the bankruptcy court erred in authorizing and confirming the sale of Vetter Corp.'s assets, including the motorcycle radio housings and the molds used in their manufacture, to Vetter Products.

II.

In reviewing appellant's claim that the bankruptcy judge erred in authorizing and confirming the sale of Vetter Corp.'s assets to Vetter Products, we initially note that appellant failed to stay the bankruptcy court's order pending this appeal. The sale has been consummated and "substantially all" of Vetter Corp.'s assets have been transferred to Vetter Products. In effect, appellant asks this court to retract a portion of that January, 1983, sale, namely, the transfer of Vetter Corp.'s motorcycle radio housings, and the mold used in their manufacture, to Vetter Products. According to the express language of section 363(m) of the Bankruptcy Act of 1978, 11 U.S.C. Sec. 363(m) (1982):

"The reversal or modification on appeal of ... a sale ... of property does not affect the validity of a sale ... under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale ... [was] stayed pending appeal." (emphasis added).

Similarly, former Fed.R.Bank.P. 805 ⁴ provided:

"Unless an order approving a sale of property ... is stayed pending appeal, the sale to a good faith purchaser .... shall not be affected by the reversal or modification of such order on appeal, whether or not the purchaser ... knows of the pendency of the appeal." (emphasis added).

See also, In re Rock Industries Machinery Corp., 572 F.2d 1195 (7th Cir.1978). This court interpreted former Fed.R.Bank.P. 805 to mean that a failure to stay a bankruptcy judge's order which authorizes and confirms a sale of property to a good faith purchaser renders an appeal of that sale moot. Id. at 1197; Country Fairways, Inc. v. Mottaz, 539 F.2d 637, 641 (7th Cir.1976). Accord, In re Charlton, 708 F.2d 1449, 1454 (9th Cir.1983); In re Bel Air Associates, Ltd., 706 F.2d 301, 304-05 (10th Cir.1983); In re Cada Investments, Inc., 664 F.2d 1158, 1160 (9th Cir.1981); Greylock Glen Corp. v. Community Savings Bank, 656 F.2d 1, 4 (1st Cir.1981); In re Bleaufontaine, Inc., 634 F.2d 1383, 1390 (5th Cir.1981); In re National Homeowners Sales Service Corp., 554 F.2d 636, 637 (4th Cir.1977). We reached this conclusion based upon our reasoning in Fink v. Continental Foundry & Machine Co., 240 F.2d 369, 374 (7th Cir.1957), that "if pending an appeal an event occurs which renders it impossible for the appellate court to grant any relief or renders a decision unnecessary the appeal will be dismissed [as moot]." See Country Fairways, Inc. v. Mottaz, 539 F.2d at 641. In the case of a bankruptcy sale, the failure to obtain a stay of the sale, pending appeal, allows the sale to be completed, thus preventing an appellate court from granting relief and thereby rendering the appeal moot. ⁵ This rule "is in furtherance of the policy of not only affording finality to the judgment of the bankruptcy court, but particularly to give finality to those orders and judgments upon which third parties rely." 14 Collier on Bankruptcy 11-62.03 at 11-62-11 (14th ed. 1977). Accordingly, we hold that pursuant to 11 U.S.C. Sec. 363(m) (1982), if a party appeals a bankruptcy judge's order, authorizing and confirming a sale to a good faith purchaser, the order must be stayed pending appeal, otherwise the issue becomes moot on appeal. See, e.g., In re Jewel Terrace Corp., 10 B.R. 1008, 4 CBC 847, 852 (Bkrtcy.E.D.N.Y.1981).

In this instance, appellant failed to stay the bankruptcy court's order authorizing and confirming the sale of Vetter Corp.'s assets to Vetter Products. In an attempt to overcome its failure to stay the order, appellant contends that Vetter Products was not a good faith purchaser as that term is used in 11 U.S.C. Sec. 363(m) (1982) and, therefore, 11 U.S.C. Sec. 363(m) is inapplicable. To support this "lack of good faith" claim, the appellant asserts that Vetter Corp. infringed upon Hoese's motorcycle radio housing patent, that Vetter Products knew of Vetter Corp.'s patent infringement and yet, Vetter Products still chose to complete the purchase of Vetter Corp.'s assets. Appellant claims that Vetter Products' actions constitute the recognized, though somewhat limited, tort of contributory infringement and thus evidence a lack of good faith. See, e.g., Honeywell, Inc. v. Metz Apparatewerke, 509 F.2d 1137, 1142 (7th Cir.1975).

"No definition of good faith is attempted in the [Bankruptcy] Code." 2 Collier on Bankruptcy 363.14 at 363-34 (15th ed. 1983). This court, however, has set forth the misconduct which would destroy a purchaser's good faith status when attempting to purchase the assets of a bankrupt debtor. In In re Rock Industries Machinery Corp., 572 F.2d at 1198, we determined that "fraud, collusion...