Western Supply v. Savage Arms, Inc. ( 1994 )

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 93-2244
IN RE SAVAGE INDUSTRIES, INC.,
Debtor,
WESTERN AUTO SUPPLY COMPANY,
Defendant, Appellee,
v.
SAVAGE ARMS, INC.,
Plaintiff, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Frank H. Freedman, Senior U.S. District Judge]
Before
Torruella, Cyr and Boudin,
Circuit Judges.
Paul H. Rothschild, with whom Michael B. Katz, Susan Luttrell
Burns and Bacon & Wilson, P.C. were on brief for appellant.
Mark G. DeGiacomo, with whom James P. Rooney, Edward J. Rozmiarek
and Roche, Carens & DeGiacomo were on brief for appellee.
December 14, 1994
CYR, Circuit Judge. The question presented on appeal
CYR, Circuit Judge.
is whether the bankruptcy court properly enjoined a state-law
based "successor product-line liability" action in an Alaska
court against an entity which had acquired a corporate chapter 11
debtor's assets by purchase and subject to an explicit disclaimer
of liability on all unfiled claims relating to products
manufactured by the chapter 11 debtor. On intermediate appeal,
the district court vacated the injunction. As we conclude that
injunctive relief was improvidently granted, we affirm the
district court order.
I
I
BACKGROUND
BACKGROUND
A. The "Successor Liability" Claim
A. The "Successor Liability" Claim
In February 1988, Savage Industries, Inc. ("Debtor
Industries"), a Massachusetts firearms manufacturer, commenced
voluntary chapter 11 proceedings in the United States Bankruptcy
Court for the District of Massachusetts and obtained
authorization to operate its business as a debtor in possession.
One month later, appellant Savage Arms, Inc. ("Arms") was incor-
porated. In May 1989, Debtor Industries submitted a proposal to
sell substantially all its corporate assets to Arms.1 The
bankruptcy court approved the proposed sale in July 1989.
1The assets included all Debtor Industries' real estate,
manufacturing equipment, leases, contracts, corporate records,
patents, trademarks, cash, accounts receivable, and inventory.
The assets were sold subject to all liens.
2
Although the court order prescribed safeguards for interests held
by objecting creditors, it neither required court approval of the
asset-transfer terms subsequently negotiated between Debtor
Industries and Arms, nor made provision for the interests of
holders of contingent product liability claims against Debtor
Industries.2
On November 1, 1989, Debtor Industries and Arms closed
their asset transfer agreement, wherein Arms assumed liability
for certain pending product liability claims against Debtor
Industries, but explicitly disclaimed all liability for any other
product liability claims relating to firearms manufactured by
Debtor Industries prior to the closing date.3 Debtor Industries
2The order approving the sale provided as follows:
ORDERED, that [DEBTOR] INDUSTRIES . . . is
hereby authorized to enter into and conclude
within sixty (60) days of this Order becoming
final and non-appealable a Definitive
Agreement (the "Agreement") with SAVAGE ARMS,
INC. ("Purchaser") providing for the sale and
transfer of its real property and certain of
its tangible and intangible assets to
Purchaser and the assumption by Purchaser of
certain secured and priority liabilities as
set forth in this Order . . . .
3Section 2(b) of the Asset Transfer Agreement states, in
pertinent part:
Arms does not assume, and [Debtor Industries] shall
pay, perform and discharge:
. . . .
(iv) any liability or obligation resulting from or
arising out of claims for personal injury or property
damage based on the malfunction or failure of any
product manufactured or distributed, in whole or in
part, by [Debtor Industries], arising out of any act,
omission, event, occurrence or circumstance that
existed on or before Closing, except to the extent
3
ceased to operate immediately after the asset transfer was
consummated. Thereupon, without interruption, Arms took up the
manufacture of the identical lines of firearms previously
produced by Debtor Industries.
Meanwhile, in May 1989, shortly before Debtor
Industries submitted its proposal to transfer its assets to Arms,
Kevin Taylor had been injured by a "Stevens" .22 caliber firearm
manufactured by Debtor Industries. One year after the chapter 11
asset transfer was consummated, Taylor brought a products
liability action against Debtor Industries in an Alaska state
court. Later, Western Auto Supply Company ("Western Auto"), the
retail distributor which sold Taylor the allegedly defective
firearm, was added as a party defendant. Although Taylor did not
name Arms as a defendant, in due course Western Auto filed a
third-party complaint alleging that Arms had incurred "successor
product-line liability" under Alaska law by continuing to
manufacture the identical firearms theretofore manufactured by
Debtor Industries. Western Auto demanded either indemnification
or an apportionment of damages from Arms as successor to Debtor
expressly set forth in Schedule 2 or Section 4(f)
hereof . . . .
Debtor Industries warranted, in Section 6(e), that only 44
product liability claims were pending at the time of the asset
transfer. In Section 4(f), Arms conditioned its purchase
agreement on the bankruptcy court's estimate that 24 pending
prepetition product liability claims against Debtor Industries
did not exceed $400,000 in aggregate value.
4
Industries.4
In June 1991, the bankruptcy court confirmed the
chapter 11 liquidation plan, which made no provision for
contingent product liability claims disclaimed by Arms under its
November 1989 asset transfer agreement with Debtor Industries.
The asset-transfer proceeds began to be disbursed under the
confirmed chapter 11 plan in February 1992.
Thereafter, Arms commenced this adversary proceeding
against Western Auto in the United States Bankruptcy Court for
the District of Massachusetts, requesting declaratory and
injunctive relief against further prosecution of Western Auto's
4As a general rule, a corporation which acquires another
corporate entity's assets does not assume the seller's
liabilities unless (1) the buyer expressly assumes those
liabilities; (2) the transaction constitutes a merger or
consolidation; (3) the buyer is a mere extension of the seller;
or (4) the transaction amounts to a fraudulent or collusive
attempt to avoid the seller's liabilities. See Conway v. White
Trucks, 885 F.2d 90, 93 (3d Cir. 1989); Ray v. Alad Corp., 560
P.2d 3, 7 (Cal. 1977). Several states, including California and
New Jersey, have adopted a "hybrid" exception to the general rule
precluding implied successor liability, known as "product-line"
liability. Its elements commonly include: (1) the total or
virtual extinguishment of tort remedies against the seller as a
consequence of an all-asset sale; (2) the buyer's continued
manufacture of the same product lines under the same product
names; (3) the buyer's continued use of the seller's corporate
name or identity, and trading on the seller's good will; and (4)
the buyer's representation (e.g., advertising) to the public that
it is an ongoing enterprise. See, e.g., Conway, 885 F.2d at 93;
Ray, 560 P.2d at 11.
A three-part policy underlies the "product-line" liability
doctrine: (1) such all-asset acquisitions virtually eliminate
the tort plaintiff's remedies against the seller, which usually
dissolves after the sale; (2) the buyer becomes the most
efficient conduit for effecting the cost-spreading policy at the
root of strict tort liability; and (3) fairness demands that the
buyer the party enjoying the economic benefits of its
predecessor's good will bear the initial financial burden of
its predecessor's contingent product liability. Id. at 8-9.
5
third-party complaint in Alaska state court. Arms asserted that
it acquired Debtor Industries' assets "free and clear" of all
product liability claims against Debtor Industries, except those
disclosed to Arms by Debtor Industries prior to the chapter 11
asset transfer. See supra notes 2 & 3.
B. The Injunction
B. The Injunction
Notwithstanding the contention that it lacked jurisdic-
tion once the asset transfer had been consummated, the bankruptcy
court enjoined further prosecution of Western Auto's third-party
action against Arms in Alaska state court. The bankruptcy court
concluded that it retained the requisite jurisdiction to enjoin
any hostile "claim" which contravened the terms of the asset
transfer agreement approved by the bankruptcy court in the
pending chapter 11 proceeding. Savage Arms, Inc. v. Taylor (In
re Savage Arms, Inc.), No. 88-40046-JFQ, slip op. at 4-5 (Bankr.
D. Mass. Oct. 5, 1992). But cf. Mooney Aircraft v. Foster (In re
Mooney Aircraft), 730 F.2d 367 (5th Cir. 1984) (bankruptcy court
lacks jurisdiction to enjoin successor liability claims arising
one year after close of bankruptcy proceedings).
The bankruptcy court reasoned that even assuming
Alaska were to adopt a common law "successor product-line
liability" doctrine, see, e.g., Dawejko v. Jorgensen Steel Co.,
434 A.2d 106 (Pa. Super. Ct. 1981); supra note 4 the Western
Auto claim against Arms would be preempted by the Bankruptcy Code
insofar as it constituted a tort "claim" against Debtor
Industries which arose before either the chapter 11 asset
6
transfer or the order confirming the chapter 11 plan. Savage
Arms, Inc., slip op. at 2-3 (citing Volvo White Truck Corp. v.
Chambersburg Beverage, Inc. (In re White Motor Truck Corp.), 75
B.R. 944, 950 (Bankr. N.D. Ohio 1987); American Living Systs. v.
Bonapfel (In re All American of Ashburn, Inc.), 56 B.R. 186, 190
(Bankr. N.D. Ga. 1986)). Since the confirmed chapter 11 plan
restricted claimants to their pro rata share of the net proceeds
realized from the all-assets transfer, the bankruptcy court
considered injunctive relief essential to prevent Western Auto
from circumventing the Bankruptcy Code priority scheme by
obtaining full recovery from Arms, the chapter 11 debtor's
successor. Because Taylor and Western Auto held "claims" against
Debtor Industries that could be dealt with under the confirmed
chapter 11 plan, and since asset transfers under Bankruptcy Code
363(f) are effected "free and clear of any interest" in the
transferred assets,5 the bankruptcy court ruled that the
5Section 363(f) provides:
(f) The trustee may sell property under subsection (b)
or (c) of this section free and clear of any interest
in such property of an entity other than the estate,
only if
(1) applicable nonbankruptcy law permits sale of
such property free and clear of such
interest;
(2) such entity consents;
(3) such interest is a lien and the price at
which such property is to be sold is greater
than the aggregate value of all liens on such
property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or
equitable proceeding, to accept a money
satisfaction of such interest.
7
explicit disclaimer in the asset transfer agreement must be given
full effect, at least in the absence of collusion. Savage Arms,
Inc., slip op. at 3. Finally, the court expressed concern that
such successor liability actions might "chill" all-asset sales
under chapter 11 by prompting potential purchasers to hedge their
bids against unquantifiable future product liability costs. Id.
at 5. See also Paris Mfg. Corp v. Ace Hardware Corp. (In re
Paris Indus. Corp.), 132 B.R. 504, 508 n.7 (D. Me. 1991).
Western Auto took an intermediate appeal to the
district court, which concluded that the bankruptcy court lacked
jurisdiction to enjoin prosecution of the Alaska state court
action. This appeal followed.6
II
II
DISCUSSION
DISCUSSION
Bankruptcy Code 363(f), 11 U.S.C. 363(f).
6After the district court decision, but prior to oral
argument in this appeal, the Alaska court severed the Taylor
claim against Western Auto from the third-party "successor
liability" claim against Arms, allowing the former to proceed to
trial. Judgment eventually entered for Western Auto. Although
it is not known whether Taylor appealed the adverse state court
judgment, failure to do so would not moot the present appeal
since Western Auto represents that it will seek indemnification
for its litigation costs from Arms, based on its "successor
liability" theory. See, e.g., Anderson v. United States Dep't of
Health and Human Servs., 3 F.3d 1383, 1384-85 (10th Cir. 1993)
(noting that although "'a claim of entitlement to attorney's fees
does not preserve a moot cause of action, the expiration of the
underlying cause of action does not moot a controversy over
attorney's fees already incurred'") (citation omitted) (emphasis
added); Heritage v. Pioneer Brokerage & Sales, 604 P.2d 1059,
1065-67 (Alaska 1979) (once retailer establishes an implied-at-
law right to indemnification from product manufacturer, it may
recover its litigation costs and attorney fees in successfully
defending against customer's tort action).
8
The bankruptcy court reasoned that the requisite
jurisdiction to enjoin further prosecution of the state court
"successor liability" action summoned from its power to enforce
its own order approving the all-assets transfer,7 in furtherance
of two fundamental Bankruptcy Code themes: the Code priority
scheme and maximization of creditor recoveries. For the reasons
hereinafter discussed, we believe the rationale undergirding the
bankruptcy court decision is flawed.8
7Even though the bankruptcy court did not do so, Arms has
devoted considerable attention to the precise statutory source of
the bankruptcy court's "jurisdiction" to enjoin prosecution of
the Alaska state court action. See, e.g., 28 U.S.C. 157(a),
1334; Bankruptcy Code 105(a), 11 U.S.C. 105(a). Further,
Arms suggests that it may opt to rescind the chapter 11 asset
transfer if found liable as Debtor Industries' "successor." But
see Zerand-Bernal Group v. Cox, 23 F.3d 159, 164 (7th Cir. 1994)
(rescission of all-asset sale which formed "core and premise" of
chapter 11 plan is precluded 180 days after confirmation of
plan). Western Auto responds that the bankruptcy court lacked
jurisdiction because by the time Savage sought injunctive relief
the reorganization plan had been confirmed and substantially all
chapter 11 estate assets had been distributed to creditors.
Therefore, the Alaska state court action could have had no
conceivable effect on the administration of the chapter 11 case.
See, e.g., In re G.S.F. Corp., 938 F.2d 1467, 1475 (1st Cir.
1991). We need not address these jurisdictional questions, as we
conclude that the bankruptcy court misapprehended the effect of
its July 1989 order approving the asset transfer to Arms. See
infra Section II.B.
8"[We] undertake[] an independent review of the bankruptcy
court order, utilizing the same appellate standards governing the
district court review." Laroche v. Amoskeag Bank (In re Laroche),
969 F.2d 1299, 1301 (1st Cir. 1992). Rulings on permanent
injunctive relief are reviewed for "abuse of discretion." See
Caroline T. v. Hudson Sch. Dist., 915 F.2d 752, 754-55 (1st Cir.
1990); Sturge v. Smouha (In re Petition of Smouha), 136 B.R. 921,
925 (S.D.N.Y. 1992). Four principal factors govern the
appropriateness of permanent injunctive relief: (1) whether the
plaintiff has prevailed on the merits; (2) whether the plaintiff
will suffer irreparable injury absent injunctive relief; (3)
whether the harm to the plaintiff outweighs any harm threatened
by the injunction; and (4) whether the public interest will be
9
A. The Code Priority Scheme
A. The Code Priority Scheme
The bankruptcy court expressed concern that unless such
successor liability actions are enjoined, claimants will be
encouraged to forego their chapter 11 remedies in favor of the
more lucrative state-court recoveries conceivably available
against the chapter 11 debtor's successor.
We believe this concern to be unwarranted. For one
thing, it is more illusory than real, given the nature of the
successor product-line liability doctrine itself. See supra note
4. As a general rule, a successor to the chapter 11 debtor would
be absolved of strict tort liability if the claimant failed to
pursue any available chapter 11 remedy. See, e.g., Conway v.
White Trucks, 885 F.2d 90, 95 (3d Cir. 1989) (applying
Pennsylvania law). Yet more conclusively, the "circumvention"
concern relied upon by the bankruptcy court is inapposite to the
present context since there is no record indication that any
attempt was made to afford notice to Taylor or Western Auto as
holders of contingent postpetition product liability claims, see
Bankruptcy Code 502(c), 11 U.S.C. 502(c). We enlarge upon
the latter point.
Notice is the cornerstone underpinning Bankruptcy Code
procedure. Under the Bankruptcy Reform Act of 1978 in a
adversely affected by the injunction. Caroline T., 915 F.2d at
754-55. Although its conclusions of law are subject to plenary
review, the bankruptcy court's findings of fact, "whether based
on oral or documentary evidence," are not to be set aside unless
"clearly erroneous." Fed. R. Bankr. P. 8013.
10
deliberate departure from its forerunners virtually all
administrative responsibilities were removed from the bankruptcy
judge. See, e.g., In re Sullivan Ford Sales, 2 B.R. 350, 353-54
& n.10 (Bankr. D. Me. 1980) (citing Report of the Comm. on the
Judiciary, House of Representatives, To Accompany H.R. 8200, H.R.
Rep. No. 95-595, 95th Cong., 1st Sess. 4, 89-91, 99, 107 (1977)).
Under the Code, therefore, the debtor in possession or trustee
must ensure "parties in interest" adequate notice and opportunity
to be heard before their interests may be adversely affected.
See, e.g., Bankruptcy Code 363(b) ("The Trustee, after notice
and a hearing, may use, sell, or lease, other than in the
ordinary course of business, property of the estate.") (emphasis
added); Fed. R. Bankr. P. 6004(a) (mandating notice of proposed
sale); 2002(a)(2) (20 days' notice by mail to "parties in
interest"); see also, e.g., Bankruptcy Code 1109(b), 11 U.S.C.
1109(b) ("parties in interest" have "right to be heard" in
chapter 11 case). The term "parties in interest" encompasses
not only entities holding "claims" against the debtor, but any
entity whose pecuniary interests might be directly and adversely
affected by the proposed action. See, e.g., Yadkin Valley Bank &
Trust Co. v. McGee (In re Hutchinson), 5 F.3d 750, 756 (4th Cir.
1994); In re Athos Steel & Aluminum, Inc., 69 B.R. 515, 519
(Bankr. E.D. Pa. 1987). "[N]otice . . . means . . . such notice
as is appropriate in the particular circumstances . . . ."
Bankruptcy Code 102(1), 11 U.S.C. 102(1) (emphasis added);
Fed. R. Bankr. P 2002(k) (empowering court to order publication
11
of notice to "parties in interest" where "desirable" or notice by
mail is "impracticable"). Thus, in the first instance the Code
consigns to the proponents, rather than to the bankruptcy court,
the preliminary determination whether a proposed disposition of
estate assets adversely affects "parties in interest." See In re
Sullivan Ford, 2 B.R. at 353-54 ("appropriate" notice to "parties
in interest" is indispensable); cf., e.g., In re Northern Star
Indus., Inc., 38 B.R. 1019, 1021 (E.D.N.Y. 1984) (hearing
dispensable if parties in interest are afforded proper notice and
interpose no timely objection); In re Robert L. Hallamore Corp.,
40 B.R. 181, 183 (Bankr. Mass. 1984) (same); Fed. R. Bankr. P.
6004, advisory committee note, subsection (e).9
Bankruptcy Code 102(1) is founded in fundamental
notions of procedural due process. See In re Center Wholesale
9The Code "notice" requirements have even greater force in a
case like the present, where the order approving the proposed
sale authorized a transfer of substantially all chapter 11 estate
assets for present purposes, the functional equivalent of an
order confirming a conventional chapter 11 reorganization plan.
As such, the order confirming a chapter 11 liquidation sale
warrants especial bankruptcy court scrutiny. See In re Abbotts
Dairies, 788 F.2d 143, 150 (3d Cir. 1986) (noting that "[
363(b)(1)] mirrors the requirement of section 1129 that the
bankruptcy court independently scrutinize the debtor's
reorganization plan"); In re Wilde Horses Enters., 136 B.R. 830,
841 (Bankr. C.D. Cal. 1991) ("'The key to the reorganization
Chapter . . . is disclosure. . . .'") (citation omitted)
(emphasis added); In re George Walsh Chevrolet, Inc., 118 B.R.
99, 101 (Bankr. E.D. Mo. 1990); In re Channel One Communications,
Inc., 117 B.R. 493, 496 (Bankr. E.D. Mo. 1990); In re Industrial
Valley Refrigeration and Air Conditioning Supplies, Inc., 77 B.R.
15, 17 (Bankr. E.D. Pa. 1987); see generally David A. Skeel, The
Nature and Effect of Corporate Voting in Chapter 11 Re-
organization Cases, 78 Va. L. Rev. 461, 496 (1992) (collecting
cases advocating "enhanced scrutiny" of liquidation sales
preceding chapter 11 plan confirmation).
12
Inc., 759 F.2d 1440, 1449 (9th Cir. 1985); In re Garland Corp., 6
B.R. 456, 459 (Bankr. 1st Cir. 1980) ("The right to be heard 'has
little reality or worth unless one is informed that the matter is
pending and can choose for himself whether to appear or default,
acquiesce or contest.'") (quoting Mullane v. Central Hanover Bank
and Trust Co., 339 U.S. 306, 314 (1950)). Since Taylor and
Western Auto, as "parties in interest," were never afforded
"appropriate" notice of the chapter 11 proceeding, the chapter 11
plan, or the privately negotiated terms of the asset transfer
agreement, not only do their state-law based successor liability
claims against Arms survive the chapter 11 proceeding but their
claims against Debtor Industries as well. See, e.g., Dalton Dev.
Project v. Unsecured Creditors Comm. (In re Unioil), 948 F.2d
678, 683 (10th Cir. 1991) (Bankruptcy Code) (chapter 11 claim
whose holder was afforded no notice is not subject to discharge);
2 Lawrence P. King, Collier on Bankruptcy, 363.13, at 363-43
(15th ed. 1992) (noting that the Code concern for finality in
bankruptcy sales "will not, however, protect a party buying from
the trustee in a sale free and clear of liens where no notice is
given to the lienholder [and] [s]uch a purchaser will be held to
have purchased subject to the lien"); Bankruptcy Code
727(a)(1), 1141(a), (d)(3), 11 U.S.C 727(a)(1), 1141(a),
(d)(3); see also City of New York v. New York, New Haven &
Hartford R.R., 344 U.S. 293, 296-97 (1953) (Bankruptcy Act).
Thus, even assuming that the Western Auto successor
liability claim constituted an "interest" in the Debtor
13
Industries chapter 11 assets transferred to Arms and that it
would be extinguishable under section 363(f) "after notice and a
hearing," Bankruptcy Code 102(1), 11 U.S.C. 102(1); but cf.
Zerand-Bernal Group v. Cox, 23 F.3d 159, 164 (7th Cir. 1994)
(Posner, C.J.) (suggesting that 363(f) cannot be employed to
extinguish successor product-line liability claims), there can be
no question that its claim could not be extinguished absent a
showing that Western Auto was afforded appropriate notice in the
particular circumstances. See Bankruptcy Code 1109(a), 11
U.S.C. 1109(a); Fed. R. Bankr. 2002(a)(2), 2002(k), 6004(a);
see also Hoffman v. Hoffman, 157 B.R. 580, 584 (E.D.N.C. 1992)
(burden rests with trustee or debtor in possession to establish
appropriate notice). Arms concedes that Debtor
Industries never attempted notice to retailers or wholesalers of
firearms manufactured by Debtor Industries. Arms now argues that
direct notification would have entailed exorbitant financial and
logistical burdens unwarranted in the circumstances. There is no
suggestion, however, that either the identity or the whereabouts
of large-volume firearms distributors like Western Auto did not
appear in Debtor Industries' business records as wholesalers or
retailers of its firearms. Furthermore, the asset transfer
agreement itself disclosed that forty-four product liability
claims were pending in the chapter 11 proceedings against Debtor
Industries by the time the asset transfer was consummated, see
supra note 3, which strongly suggests that Debtor Industries may
have been on notice that certain types of firearms (hence,
14
particular distributors) may have been prominent candidates for
future indemnification claims. These unresolved factual
determinations were for the bankruptcy court, had the parties to
the all-asset transfer alerted the court to their intention to
negotiate the "free and clear" transfer term at issue here. Even
assuming direct notice were proven impracticable, however, Debtor
Industries concededly made no attempt to provide notice by
publication, see Fed. R. Bankr. P. 2002(k); Novak v. Callahan (In
re GAC Corp.), 681 F.2d 1295, 1300 (11th Cir. 1982) (direct mail
unnecessary if class large); Trump Taj Mahal Assocs. v. Alibraham
(In re Trump Taj Mahal Assocs.) 156 B.R. 928, 938-41 (Bankr. D.
N.J. 1993) (notice by publication may be adequate for "unknown"
creditors).
As it was never determined "appropriate in the
particular circumstances" for Debtor Industries and Arms to
dispense with all notice and opportunity to be heard on the part
of potential claimants like Taylor and Western Auto, it would
border on the bizarre to conclude that the third-party complaint
Western Auto filed against Arms in Alaska state court threatened
disruption to any legitimate function served by the Bankruptcy
Code priority scheme which Debtor Industries and Arms subverted
in their private negotiation of the asset transfer agreement.
Furthermore, it cannot seriously be questioned that the central
"notice and hearing" requirement prescribed by the Bankruptcy
Code would be eviscerated were we to presume, as Arms belatedly
suggests, that an entire class of future product liability
15
claimants was beyond the purview of "such notice . . . and such
opportunity for a hearing as [was] appropriate in the particular
circumstances . . . ," Bankruptcy Code 102(1)(A), 11 U.S.C.
102(1)(A).
B. "Chilling" Future Chapter 11 Liquidation Sales
B. "Chilling" Future Chapter 11 Liquidation Sales
As an additional basis for injunctive relief, the
bankruptcy court expressed the concern that permitting state-
court successor liability actions to proceed would "chill"
chapter 11 asset bidding because all-asset transfers "free and
clear" would be seen as unenforceable against similarly situated
product liability claimants. Once again we must disagree.
We are satisfied that this largely illusory concern is
entirely of the parties' own making, brought on by their mutual
arrangement for effecting an all-asset transfer without regard to
basic Bankruptcy Code notice requirements. Thus, even assuming
that state-law based successor product-line liability claims may
be barred through recourse to Bankruptcy Code 363(f), but see
Zerand-Bernal Group, 23 F.3d at 164, the all-asset transfer to
Arms could effect no settlement or discharge of the Western Auto
claim against Debtor Industries let alone the state-law based
successor liability claim against Arms absent both appropriate
notice and court approval. See supra note 9.10
10The procedures utilized below differed markedly from those
employed in the cases cited by the bankruptcy court. See, e.g.,
Paris, 132 B.R. at 506 n.2 (order approving sale incorporates
extant counteroffer by reference); In re White Motor, 75 B.R. at
947 (approval order confirms extant sale agreement "in all re-
spects"); see also Zerand-Bernal Group, 23 F.3d at 161(bankruptcy court approval order "reserv[ed] jurisdiction to
16
The failure to afford appropriate notice pursuant to
Bankruptcy Code 102(1) and to obtain bankruptcy court approval
of the asset transfer agreement terms privately negotiated
between Debtor Industries and Arms precluded a legitimate basis
for enjoining the Alaska state court action. See In re Federal
Shopping Way, 717 F.2d 1264, 1270 (9th Cir. 1983) (noting that a
bankruptcy court has no jurisdiction to issue "an injunction to
enforce an order [it] did not make"); In re Wilde Horses, 136
B.R. 830, 841 (Bankr. C.D. Cal. 1991) ("The essential purpose
served by disclosure [in an all-asset sale] is to ensure that
parties in interest are not left entirely at the mercy of the
debtor and others having special influence over the debtor.");
see also supra notes 2 & 8. Participants in chapter 11 all-asset
sales parties and bidders alike can avoid this
jurisdictional "no man's land" by ensuring compliance with Code
notice requirements to "parties in interest," see Bankruptcy Code
enforce" extant agreement containing a provision which
extinguished product liability claims). The order purportedly
approving the asset transfer to Arms preceded the private
agreement between the parties to transfer Debtor Industries'
assets "free and clear" of future product liability claims.
Compare, e.g., In re G.S.F., 938 F.2d at 1478 (indicating that
the pertinent inquiry is what the court order said, not what the
court may have intended to say). After prescribing protective
provisions for the benefit of objecting creditors who had been
afforded appropriate notice of the proposed asset transfer, the
bankruptcy court order pre-authorized the asset transfer absent
either notice or substantive protections for holders of contin-
gent product liability claims in the confirmed chapter 11 plan or
the order approving the asset transfer agreement. Indeed, there
is no indication in the appellate record that the bankruptcy
court itself learned about the terms on which the parties to the
asset transfer agreement proposed to deal with such contingent
product liability claims until after Arms commenced the present
adversary proceeding to enjoin the Alaska state court action.
17
102, 11 U.S.C. 102, and, in problematic circumstances, by
securing a timely bankruptcy court determination as to the notice
and opportunity for hearing appropriate in the particular
circumstances. See In re Blehm Land & Cattle Co., 71 B.R. 818,
822-23 (D. Colo.) (noting that the bankruptcy court serves as no
mere "rubber stamp" under Bankruptcy Code 362(d), 363(b),
364(b); and "refus[ing] to assume that the unapproved contractual
Agreement would have been approved by [the court]"), rev'd on
other grounds, 859 F.2d 137 (10th Cir. 1988).
III
III
CONCLUSION
CONCLUSION
We express no view as to whether Bankruptcy Code
363(f) enables the extinguishment of state-law based successor
"product-line" liability claims. But see Zerand-Bernal Group, 23
F.3d at 164. We hold only that the parties to an all-asset
transfer conducted under the auspices of chapter 11 are not
entitled to rely on the protective jurisdiction of the bankruptcy
court to enjoin the prosecution of a state-law based successor
product-line liability action against an all-asset transferee
when the state court plaintiff was neither afforded appropriate
notice of the material terms of the all-asset transfer, nor of
the chapter 11 plan. Moreover, even assuming appropriate notice
under Bankruptcy Code 102(1), prior to dispensing injunctive
relief the bankruptcy court must ascertain, at the threshold,
that the particular successor liability action poses a genuine
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threat to the legitimate operation of the provisions of the
Bankruptcy Code, and not merely to the private enforcement of a
closet term in an agreement negotiated between the chapter 11
debtor and its successor. As there was no threshold showing in
the present case, we need not consider the other prerequisites to
permanent injunctive relief. See supra notes 7 & 8. The
district court order must be affirmed. The district
The district
court order vacating the bankruptcy court injunction is affirmed;
court order vacating the bankruptcy court injunction is affirmed;
costs to defendant-appellee.
costs to defendant-appellee
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