Whitney-Forbes, Inc., Matter of

• Decision Date: 16 August 1985
• Docket Number: WHITNEY-FORBE,No. 84-2102,INC,84-2102
• Citation: 770 F.2d 692
• Parties: , Bankr. L. Rep. P 70,703 In the Matter of, an Illinois corporation, Debtor. Appeal of David COAR, as successor to Avrum Dannen, Trustee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 692

770 F.2d 692

2 Fed.R.Serv.3d 786, Bankr. L. Rep. P 70,703

In the Matter of WHITNEY-FORBES, INC., an Illinois

corporation, Debtor.

Appeal of David COAR, as successor to Avrum Dannen, Trustee.

No. 84-2102.

United States Court of Appeals, Seventh Circuit.

Argued April 18, 1985.

Decided Aug. 16, 1985.

Leo Feldman, Teller, Levit & Silvertrust, Chicago, Ill., for plaintiff.

Brian O'Neill, Faegre & Benson, Minneapolis, Minn., for defendant.

Before CUMMINGS, Chief Judge, WOOD, Circuit Judge, and GARZA, Senior Circuit Judge. ^*

CUMMINGS, Chief Judge.

This is an appeal from the district court's reversal of a November 10, 1983, bankruptcy court decision to declare void a 1973 judicial sale of a patent in bankruptcy. The trustee argues that the bankruptcy court's November 10, 1983, decision should be reinstated because relief from the 1973 confirming order is authorized by Fed.R.Civ.P. 60(b)(4) and (6). For the reasons set forth below, we affirm the decision of the district court.

I

The proceeding to vacate the March 13, 1973, bankruptcy court order confirming the sale of the patent at issue to Albert E. Sloan was instituted in 1982 by former trustee Avrum Dannen for the bankrupt estate of Whitney-Forbes, Inc. ("Whitney-Forbes"). David Coar subsequently was substituted as the trustee. Sloan was the president of Whitney-Forbes at the time of the initial bankruptcy proceedings and in late 1972 he sought to purchase from the bankruptcy estate certain litigation and U.S. Patent No. 3,455,507 ("patent 507" or "the 507 patent"). Trustee Dannen filed an application for leave to sell five causes of action in February of 1973 and notice of their proposed sale was issued to creditors. The 507 patent was not listed in the notice. The order authorizing the sale of the causes of action, however, expressly listed the 507 patent. The order was drafted by Dannen, presented in open court on March 13, 1973, and signed by Bankruptcy Judge Toles. No discussion regarding the patent occurred at the March 13 hearing and all the assets were sold for $250. ¹

There is conflict in the testimony given by Sloan, Dannen and the bankrupt's attorney, Mr. James Nachman, in the instant bankruptcy court proceedings, regarding how the 507 patent found its way into the March 13 order. Dannen stated that Nachman requested him to include the patent in the order, while Sloan testified that he did not speak to Dannen regarding the patent but did request Nachman to procure the asset for him. Nachman testified, however that he never discussed the patent with Sloan or Dannen and had no idea how it came to be included in the March 13 order. (Tr. 8/22/83, pp. 70-72, 151-153; Tr. 9/19/83, p. 155.) On May 6, 1974, Dannen executed an assignment of the patent, transferring it to Sloan. There is testimony from Dannen, Sloan and the inventor of the patent, Frans Brouwer, that as an unlicensed patent, the 507 patent in 1973 had little or no value, worth at most $250 to $500. (Tr. 8/22/83, p. 186; Tr. 9/19/83, pp. 187, 193.) Several attempts to license the patent and market the underlying invention (a spray-paint gun) had failed (Tr. 9/19/83, pp. 177-220).

In the years following the sale, Sloan, Brouwer and others invested substantial time and money to develop and market a spray-paint gun invention, leading to a second patent and, after unsuccessful attempts, a patent licensing and marketing agreement in 1976 with Graco, Inc. Production of a spray-paint gun began two years later based in part on the 507 patent. A dispute between Graco and Sloan arose which culminated in litigation in 1981 and apparently sparked the instant proceedings. In July of 1982 Dannen succeeded in having Bankruptcy Judge Toles reopen the Whitney-Forbes bankruptcy and substituted trustee Coar then petitioned the bankruptcy court to set aside the 1973 confirmed sale of the 507 patent on the ground of fraud by a party and fraud on the court (7/30/82 Application p 13; Tr. 8/22/83, p. 36). The case was subsequently reassigned to Bankruptcy Judge Merrick.

Following a trial Bankruptcy Judge Merrick issued an Opinion and Order of November 10, 1983, which relied exclusively on Fed.R.Civ.P. 60(b)(4) to declare the March 13, 1973, order void with respect to the sale of patent 507. From the testimony presented to the court and its review of the circumstances surrounding the March 13, 1973, sale, the court made the following findings regarding the suspicious inclusion of the 507 patent:

(1) that intentionally he [Sloan] concealed the existence of patent 507 so that he would not have to bid for it competitively in the event of a liquidation, nor have to bargain with creditors on the basis of it in establishing the terms of a plan of reorganization;

(2) that Sloan negotiated with Dannen to have the patent transferred to Sloan in a manner which would avoid public participation or competition; and;

(3) that at some point Sloan and Dannen devised an explanation of events which would describe them as being innocent and unaware and would cause the moving party in the scheme of transfer to appear to have been James Nachman.

(11/10/83 Order at 32). The court explained that the case essentially involved "collusion between two persons who have fiduciary relationships to the Court and to other parties to the proceeding," but also noted the irregularities of nondisclosure of assets, lack of notice to creditors of a sale of assets and a sale of assets below market value (11/10/83 Order at 33). The court, however, specifically found in its subsequent Opinion and Order of January 6, 1984, that there was no evidence to suggest fraud in the case and clarified that the November 10, 1983, Opinion did not suggest fraud (11/6/84 Order at 16). Finally, the bankruptcy court held that there was no evidence enabling it to determine the value of the patent on March 13, 1973.

Sloan appealed the decision to the district court which then reversed the bankruptcy court on June 4, 1984, ruling that as a matter of law the March 13, 1973, sale of the 507 patent was not void within the meaning of Fed.R.Civ.P. 60(b)(4). Judge Kocoras additionally found that the equities in the case, including the extraordinary delay in challenging the sale, did not support a vacating of the sale. The trustee appeals.

II

As this Court has recently held, the decision of a court to set aside a confirmed judicial sale in bankruptcy is an extraordinary one and may be permitted only in limited circumstances. See Matter of Chung King, Inc., 753 F.2d 547, 549 (7th Cir.1985). The relevant standard governing the vacating of a judicial sale in bankruptcy is provided by Bankruptcy Rule 9024 ² entitled "Relief from Judgment or Order," which makes Rule 60, Fed.R.Civ.P., ³ applicable to bankruptcy cases, except in limited circumstances not applicable here. 4B COLLIER'S BANKRUPTCY p 70.98, p. 1183 (14th ed. 1978).

Rule 60(b), Fed.R.Civ.P., lists six reasons justifying a court in relieving a party of a judgment, order or proceeding. As noted, the bankruptcy court expressly based its decision to vacate on Rule 60(b)(4) which allows relief where "the judgment is void." The district court was entirely correct in ruling that Rule 60(b)(4) cannot provide a basis for relief under these circumstances. It is clear that relief under Rule 60(b)(4) is granted only in "exceptional circumstances," C.K.S. Engineers, Inc. v. White Mountain Gypsum Co., 726 F.2d 1202, 1205 (7th Cir.1984). The rule "is construed very narrowly and a judgment is normally void only if the rendering court lacked either subject matter jurisdiction or jurisdiction over the parties." Planet Corp. v. Sullivan, 702 F.2d 123, 125 n. 2 (7th Cir.1983). The power of the bankruptcy court in 1973 to confirm the sale of the 507 patent has not been contested. Even gross errors committed by a court in reaching a decision do not render the court's judgment or order void. See In re Texlon Corp., 596 F.2d 1092, 1099 (2d Cir.1979). But an order may be void if the issuing court acted in a manner inconsistent with due process of law, see 11 C. WRIGHT & A. MILLER, FEDERAL PRACTICE & PROCEDURE Sec. 2862, p. 200 (1973), or where the court's action involved a " 'plain usurpation of power.' " Margoles v. Johns, 660 F.2d 291, 295 (7th Cir.1981), certiorari denied, 455 U.S. 909, 102 S.Ct. 1256, 71 L.Ed.2d 447 (quoting V.T.A., Inc. v. Airco Inc., 597 F.2d 220, 224-225 (10th Cir.1979). The trustee points to no case holding that lack of notice of a bankruptcy sale violates due process nor does it appear that due process considerations are apposite in this case. The bankruptcy court's action in 1973 authorizing the sale of the 507 patent at worst amounts to benign neglect and not any intentional usurpation of power.

Our review does not end here, however, since it does not appear that the trustee specifically or exclusively requested relief in the bankruptcy court under Fed.R.Civ.P. 60(b)(4). See supra p. 695. Before this Court the trustee appears to argue (with less than remarkable clarity) that wholly apart from any Rule 60(b)(4) argument the bankruptcy court decision to vacate should be reinstated due to the existence of fraud or wrongful conduct by a party (Reply Br. 9, Br. 27) or because of fraud on the court (Br. 28-29). Much of the authority cited by the trustee relates to pre-Bankruptcy Rule 924 caselaw, which, as noted in Chung King, 753 F.2d at 550, is largely consistent with Fed.R.Civ.P. 60(b) and allows a confirmed sale to be overturned in the presence of fraud, error, or similar defect where compelling equities outweigh the interests in finality of judicial sales. See 753 F.2d at 550. In an ordinary situation the trustee would appear to have a sound argument to support the vacating of the sale here since the lack of notice present in this case is the factor most often relied upon to justify the setting aside of a confirmed sale. See id. at 551. This is not an ordinary situation, however, in view of the...