Krebs Chrysler-Plymouth, Inc. v. Valley Motors, Inc.

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit
4-10-1998
Krebs Chrysler v. Valley Mtr Inc
Precedential or Non-Precedential:
Docket 96-3702
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1998
Recommended Citation
"Krebs Chrysler v. Valley Mtr Inc" (1998). 1998 Decisions. Paper 76.
http://digitalcommons.law.villanova.edu/thirdcircuit_1998/76
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 1998 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
Filed April 10, 1998
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 96-3702 and 96-3757
KREBS CHRYSLER-PLYMOUTH, INC.
Appellant in 96-3702
v.
VALLEY MOTORS, INC., d/b/a REA MOTORS; OFFICE
OF THE U.S. TRUSTEE; RONALD J. CHARAPP;
AMERICAN AUTO SALES INC., t/d/b/a Wilkinsburg
Rambler, Inc.; CHRYSLER CORPORATION; GENERAL
MOTORS ACCEPTANCE CORPORATION; BENKE
MOTORS, INC.; VERONA MOTOR SALES, INC.,
STEPHEN I. GOLDRING
KREBS CHRYSLER-PLYMOUTH, INC.
v.
VALLEY MOTORS, INC., d/b/a REA MOTORS; OFFICE
OF THE U.S. TRUSTEE; RONALD J. CHARAPP;
AMERICAN AUTO SALES INC., t/d/b/a Wilkinsburg
Rambler, Inc.; CHRYSLER CORPORATION; GENERAL
MOTORS ACCEPTANCE CORPORATION; BENKE
MOTORS, INC.; VERONA MOTOR SALES, INC.,
STEPHEN I. GOLDRING
CHRYSLER
CORPORATION,
Appellant in 96-3757
ON APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
D.C. Civ. No. 95-01860
Argued Thursday, December 11, 1997
Before: NYGAARD and ALITO, Circuit Judges, and
DEBEVOISE, District Judge*
(Opinion Filed April 10, 1998)
Thomas E. Reilly
Davis & Reilly
437 Grant Street
1124 Frick Building
Pittsburgh, PA 15219
Attorney for Krebs Chrysler-
Plymouth, Inc.
James F.B. Daniels
(argued)
1102 Grand Avenue
Suite 1500
Kansas City, MO 64106
Attorney for Chrysler Corporation
and Krebs Chrysler-Plymouth, Inc.
David E. Tungate (argued)
Eckert, Seamans, Cherin & Mellott
600 Grant Street
42nd Floor
Pittsburgh, PA 15219
Attorney for General Motors
Acceptance Corporation
_________________________________________________________________________
* The Honorable Dickinson R. Debevoise, Senior District Judge for the
District of New Jersey, sitting by designation.
2
OPINION OF THE COURT
NYGAARD, Circuit Judge.
Appellants, Krebs Chrysler-Plymouth, Inc. and Chrysler
Corporation, challenge a bankruptcy court's order denying
their motions to reconsider, alter, or amend its prior
decisions. Those decisions approved the rejection of a buy-
sell agreement between debtor Valley Motors, Inc. and
Krebs and the subsequent assumption and auction sale of
the underlying franchises. In response to Chrysler's appeal,
General Motors Acceptance Corporation has filed a motion
to dismiss for lack of standing. We will grant GMAC's
motion and also dismiss Krebs's appeal as moot pursuant
to 11 U.S.C. S 363(m) for failing to obtain a stay pending
appeal.
I.
Valley Motors, Inc. operates an automobile dealership in
the Pittsburgh, Pennsylvania area and is a party to three
sales and service franchise agreements. In one of these,
Chrysler allows Valley to sell and service Jeep and Eagle
automobiles. Valley executed a buy-sell agreement to sell
its interest in the Jeep-Eagle franchise to Krebs for
$295,000. Half of that amount was paid upon the execution
of the buy-sell agreement, and the second half was due
upon the occurrence of two events: Chrysler's approval of
the transfer as Jeep-Eagle franchisor and the favorable
resolution of any protests filed under state law by Krebs's
competitors. Although Chrysler approved the transfer to
Krebs, several competing auto dealerships protested it.
When Valley filed its Chapter 11 petition, those protests
became subject to the automatic stay and remain
unresolved.
Valley moved to assume the buy-sell agreement with
Krebs under section 365 of the Bankruptcy Code, which
authorizes a trustee to assume or reject executory
contracts. 11 U.S.C. S 365. The protesting dealerships
objected to the motion. Valley then amended its motion to
3
further assert that assumption was in the best interest of
the bankruptcy estate and satisfied the requirements of the
business judgment rule. Chrysler "conditionally objected" to
the assumption, alleging that Valley had previously
defaulted under the Jeep-Eagle franchise, and it should pay
over two million dollars in lost-volume sales and damages
to Chrysler's intangible assets and provide adequate
assurances of Krebs's future performance under the
franchise. Another auto dealer, Ronald Charapp, also
objected, because he had made an offer to purchase all of
Valley's franchises, inventory and lease obligations for
$425,000. Charapp suggested the bankruptcy court
conduct a hearing to entertain other offers on the sale of
Valley's assets.
On the same day as the hearing on the amended motion
to assume the buy-sell agreement, but before a decision,
Valley moved to withdraw its amended motion, arguing that
Charapp's, not Krebs's, offer would be in the best interest
of the estate. The next day, the bankruptcy court granted
Valley's motion to withdraw its amended motion. The day
after that, Valley moved to reject the buy-sell agreement
pursuant to section 365. Valley then filed a second motion
to sell all its franchises (including the Jeep-Eagle
franchise), parts, shop materials, and fixed and
miscellaneous assets to Charapp for $425,000. The motion
stated that the sale was conditioned upon Chrysler's and
the other franchisors' approval. Valley then filed a third
motion to assume the three franchise agreements. Chrysler
and Krebs objected to all three motions. Charapp also
expressed his reservations about the suggested sale
because he had learned that Valley's Dodge franchise was
soon to expire, and that Dodge was unwilling to extend the
term.
The bankruptcy court granted Valley's motions to reject
the buy-sell agreement and to assume and sell the three
sales and service franchises. During the hearing on Valley's
motion to sell, however, the court allowed Charapp to
withdraw his offer and then held an auction on the three
franchises "as is, where is." Krebs won the bidding on all
three and paid ten percent of the purchase price to Valley
on the day of the hearing. The price for the Jeep-Eagle
4
franchise was $230,000. The bankruptcy court entered an
order affirming the sale. Krebs has not paid the balance of
the bid and has refused to close on the sale.
Krebs instead moved for reconsideration of the orders
granting Valley's three motions. Chrysler moved for
reconsideration of the order to assume and the order to sell
the franchises, but not the order to reject the buy-sell
agreement. In response, Valley moved to compel Krebs to
close on the ordered sale. The bankruptcy court denied
Krebs's motions. It found that the buy-sell agreement was
executory, that the business judgment test was applicable,
and that Valley satisfied it. Accordingly, it upheld its order
permitting Valley to reject the agreement under section 365.
The bankruptcy court also found that Krebs did not have
an equitable interest in the first $147,500 payment as
either a set-off or recoupment against the amount due from
the auction sale. The bankruptcy court ruled that, at most,
Krebs had an unsecured claim because Valley's rejection
operated as a prepetition breach of the buy-sell agreement.
Chrysler's arguments largely paralleled Krebs's, except
Chrysler also wanted the bankruptcy court to require Valley
to comply with section 365(b)(1)(A)-(C) and (f)(2), which
require debtors who have defaulted on executory contracts
to cure the breaches or provide adequate assurance of
future performance before assuming them. Valley opposed
this motion, claiming that its breaches under the franchises
were nonmonetary obligations excusing the statutory
obligation to cure or assure performance. The bankruptcy
court deferred its decision on Chrysler's motion because it
did not have an adequate record and has yet to schedule an
evidentiary hearing on Chrysler's motion.
Finally, the bankruptcy court granted Valley's motion to
compel Krebs to close on the ordered sale. It rejected
Krebs's argument that the closings were conditioned on
approval from the respective franchisors. The court held
that the sale was not conditional; it was "as is, where is."
Only Krebs appealed the bankruptcy court's order to the
district court, although Chrysler filed a brief and argued in
support of Krebs's position. The district court affirmed the
bankruptcy court's decision and adopted its opinion. Now,
5
however, both Krebs and Chrysler have filed notices of
appeal.
The bankruptcy court had jurisdiction by virtue of 28
U.S.C. S 157, and the district court had jurisdiction over
Krebs's appeal under 28 U.S.C. S 158(a). We exercise
jurisdiction under 28 U.S.C. S 158(d) over final decisions of
district courts entered under section 158(a).
II. Chrysler's Appeal
GMAC, a secured creditor, moved to dismiss Chrysler's
appeal for lack of standing. GMAC argues that Chrysler is
not a "person aggrieved" and therefore does not have
standing to appeal the bankruptcy court's orders. To
support its argument, GMAC points out that,
notwithstanding the outcome on the merits, Krebs will be
the owner of the Jeep-Eagle franchise; Chrysler will not be
directly and pecuniarily affected. Chrysler argues that it is
a person aggrieved and has standing despite its failure to
comply with the Federal Rules of Bankruptcy Procedure.
A. Jurisdiction
Chrysler is in an unusual procedural position because it
appeals from the district court's affirmance of a bankruptcy
court order it never appealed from. A party may "appeal
from a final judgment, order, or decree of a bankruptcy
judge to a district court" as of right "by filing a notice of
appeal with the [bankruptcy court] clerk within the time
allowed by Rule 8002." Fed. R. Bankr. P. 8001. Moreover,
the "[f]ailure of an appellant to take any step other than the
timely filing of a notice of appeal does not affect the validity
of the appeal, but is ground only for such action as the
district court . . . deems appropriate." Id. By implication,
Chrysler's failure to file a notice of appeal to the district
court from the bankruptcy court does affect the validity of
its appeal to the Court of Appeals. See Shareholders v.
Sound Radio, Inc., 109 F.3d 873, 879 (3d Cir. 1997) ("The
failure to file a timely notice of appeal [from the bankruptcy
court] creates a jurisdictional defect barring appellate
review."); In re Colon, 941 F.2d 242, 245-46 (3d Cir. 1991)
6
("a late filing is insufficient to vest the district court with
jurisdiction of the appeal").
Rule 8002 gives persons aggrieved by a bankruptcy order
ten days to file a notice of appeal. Fed. R. Bankr. P.
8002(a). However, that rule also provides for an extension
in certain circumstances:
"Effect of Motion on Time for Appeal. If any party makes
a timely motion of a type specified immediately below,
the time for appeal for all parties runs from the entry
of the order disposing of the last such motion
outstanding. This provision applies to a timely motion:
(1) to amend or make additional findings of fact under
Rule 7052, whether or not granting the motion would
alter the judgment; [or] (2) to alter or amend the
judgment under Rule 9023 . . . . A notice of appeal
filed after announcement or entry of the judgment,
order, or decree but before disposition of any of the
above motions is ineffective to appeal from the
judgment, order, or decree, or part thereof, specified in
the notice of appeal, until the entry of the order
disposing of the last such motion outstanding.
Appellate review of an order disposing of any of the
above motions requires the party, in compliance with
Rule 8001, to amend a previously filed notice of
appeal."
Fed. R. Bankr. P. 8002(b). Because the bankruptcy court
hasn't ruled on Chrysler's motion to alter or amend, neither
Krebs nor Chrysler can appeal the underlying orders at this
time. Also, the bankruptcy court has not ruled on
Chrysler's motion to reconsider, so Chrysler may not found
its appeal here on that motion. Finally, while Krebs has
appealed the denial of its motion to reconsider, Chrysler did
not appeal that decision, either. Hence, the district court
did not have jurisdiction to hear an appeal from Chrysler.
It follows that we lack jurisdiction over Chrysler's appeal
from the district court order emanating from Krebs's
appeal.
In the cases cited by Chrysler and GMAC, the parties had
first appealed a bankruptcy court order to the district
court. See Travelers Ins. Co. v. H.K. Porter Co., 45 F.3d 737,
7
740-41 (3d Cir. 1995) (order granting motion to vacate
withdrawals and defaults of claims); In re Dykes, 10 F.3d
184, 186 (3d Cir. 1993) (order confirming Chapter 13 plan);
In re El San Juan Hotel, 809 F.2d 151, 152-53 (1st Cir.
1987) (order granting U.S. leave to sue a former trustee); In
re Fondiller, 707 F.2d 441, 441 (9th Cir. 1983) (order
authorizing employment of special counsel for bankruptcy
trustee). Chrysler cites only one case that even arguably
supports its position regarding our jurisdiction over its
appeal. In In re Colonial Broad. Corp., 758 F.2d 794 (1st
Cir. 1985), the bankruptcy court issued an order accepting
Joaquin Villamil's offer to buy the debtor's assets. The
debtor, the committee of debtor's equity security holders,
and Charles Woods (a potential buyer who submitted a
higher, but belated bid) all filed motions for
reconsideration. After the bankruptcy court denied these
motions, all three appealed the underlying order accepting
the Villamil bid to the U.S. District Court for the District of
Puerto Rico. The district court dismissed the debtor's
appeal for failure to prosecute. Although the equity security
holders and Woods filed separate appeals, the equity
security holders "appeared in Woods' appeal by both filing
a statement of intent to join and fully support Woods'
position and then filing their own brief." Id. at 798. The
district court dismissed the remaining two appeals because
it held that the bankruptcy court's order accepting the
Villamil bid was interlocutory, and not appealable.
Considering the notices of appeal as motions for leave to
appeal an interlocutory order, the district court denied
leave to appeal because a subsequent bankruptcy court
order confirming the sale on different terms mooted the
order accepting the bid. All three previous appellants
appealed to the Court of Appeals for the First Circuit,
including the debtor whose appeal had been dismissed.
The Court of Appeals first addressed the debtor's
untimely appeal from the district court's dismissal:
"We begin by noting that we have no jurisdiction over
the appeal of the debtor, ACBC. ACBC's appeal . . . was
dismissed by the district court for failure to prosecute.
No notice of appeal was filed within the thirty-day
period allowed for appeals. Fed. R. App. P. 4(a). The
8
requirements of Rule 4(a) are "mandatory and
jurisdictional," and ACBC's failure to comply with these
requirements leave this court without jurisdiction."
Id. at 799 (citation omitted). The Court continued, "Nor can
we consider ACBC a proper party to appeal the district
court's denial of the Woods appeal since, unlike the Equity
Security Holders, ACBC did not either file an appearance or
join in that action." Id. Chrysler now cites this statement
for the proposition that it can appeal to this Court without
first appealing from the bankruptcy court because it
submitted a brief to the district court.
We reject this argument. First, the sentence in Colonial
Broadcasting upon which Chrysler relies is dicta, in light of
the Court's previous determination that the debtor's appeal
should be dismissed as untimely. Here, although Chrysler
has timely appealed from the district court's decision, it
failed to appeal from the bankruptcy court. Second, to allow
a party like Chrysler to appear before a court of appeals
without first appealing to the district court, even if that
party somehow participated in the district court
proceedings, would nullify bankruptcy rules 8001 and
8002. Following Chrysler's logic, if a party at the
bankruptcy court level could convince an appellant at the
district court level to name it as an appellee, it would be
able to bypass district court review--hardly a desirable or
contemplated result. This, however, does not mean that a
non-party can never appeal a bankruptcy court order. The
"person aggrieved" rule covers that situation. If an
aggrieved party files a timely appeal from both the
bankruptcy court and the district court, the court of
appeals will have jurisdiction over its claim.
B. Standing as a Person Aggrieved
The "person aggrieved" rule states that only those whose
pecuniary interests are directly and adversely affected by a
bankruptcy court order that "diminishes their property,
increases their burdens, or impairs their rights," may
appeal. Travelers, 45 F.3d at 741-42 (quoting Dykes, 10
F.3d at 187). "[W]hether someone is a ``person aggrieved' is
normally a question of fact to be determined by the district
9
court." Travelers, 45 F.3d at 742; see also Dykes, 10 F.3d
at 188. Because the facts were undisputed in Travelers and
Dykes, we could reach the standing issues. Here, however,
the parties dispute whether Valley's obligations to Chrysler
are recoverable under the cure provisions of section 365(b)
or are excusable nonmonetary obligations. This precise
dispute prompted the bankruptcy court to delay ruling on
Chrysler's motion to reconsider, and it has not ruled or
even scheduled an evidentiary hearing on that motion.
Hence, for now there is simply no record support for
Chrysler's argument that it is a person aggrieved.
Moreover, we doubt that Chrysler is a "person aggrieved,"
even under its version of the facts. In its response to
GMAC's motion to dismiss its appeal, Chrysler alleged that
it suffered damages because Valley had breached its
franchises (although it was going to waive its remedies if
Krebs acquired the franchises through the buy-sell
agreement). Admittedly then, Chrysler's only pecuniary
interest is whether it will receive a cure for those defaults
under section 365. Although the bankruptcy court has yet
to rule on that issue, Chrysler has not shown how its
interest will be affected whether the franchises are
transferred to Krebs under the buy-sell agreement or via
the auction sale. Even if the franchises were assigned
pursuant to the buy-sell agreement, no one disputes that
the underlying franchises were executory contracts, and
there is nothing to relieve Valley from assuming them
before it could perform under the buy-sell agreement.
Furthermore, the bankruptcy court has yet to decide
whether Chrysler is entitled to cure or assurances under
section 365 because it has not ruled on Chrysler's motion
to reconsider or amend. Hence, Chrysler is simply not a
person aggrieved and does not have standing to pursue this
appeal.
C.
We acknowledge that we have occasionally allowed non-
parties to appeal district court decisions in nonbankruptcy
contexts, but those cases are either inapposite or
distinguishable. In Delaware Valley Citizens Council for
Clean Air v. Davis, 932 F.2d 256 (3d Cir. 1991), citizens
10
groups appealed the dismissal of one of the four counts in
their complaint. We allowed the EPA to join them, stating
"we believe that the EPA has a sufficient stake in the
outcome of this case to join the Citizens' appeal as a party-
appellant because Pennsylvania could use the judgment to
collaterally estop the EPA in [a related] administrative
appeal." Id. at 263 n.6. Here, Chrysler does not argue that
our decision in this case will have any preclusive effect
upon it in any other proceeding.
In Caplan v. Fellheimer Eichen Braverman & Kaskey, 68
F.3d 828 (3d Cir. 1995), involving a sexual harassment suit
by a female attorney against her former law firm, we
allowed the firm's insurance carrier, Vigilant, standing. In
doing so, we established the following rule:
"Generally, it is true that those who were not parties
before the district court may not appeal an order of the
district court. We have, however, recognized that a
non-party may bring an appeal in a situation where
three conditions are met: 1) the equities favor the
appeal; 2) the non-party has participated in some way
in the proceedings before the district court; and 3) the
non-party has a stake in the outcome of the district
court proceedings, which is discernable from the
record."
Id. at 836.
Here, Chrysler participated in the district court by filing
a brief and arguing in support of Krebs's position, albeit
over GMAC's objection. Thus, the second requirement is
satisfied. Regarding the first, we see no equities favoring
Chrysler. Certainly, Chrysler has an interest in who owns
their franchises. This interest is embodied in the"veto"
power it has over a proposed transfer of the Jeep-Eagle
franchise. However, the transfer under the buy-sell
agreement and the auction sale ordered by the bankruptcy
court were both to Krebs--a Chrysler approved assignee.
Therefore, the interest in approving subsequent owners of
Chrysler-product franchises has been satisfied. Chrysler's
equity argument fails. The third element is similar to the
person aggrieved test, analyzed above.
11
Thus, even under these nonbankruptcy cases, Chrysler
cannot appeal. In sum, not only has Chrysler attempted to
circumvent proper procedure, but the bankruptcy court's
order has had no direct bearing on its pecuniary interests.
The order has not diminished its property, increased its
burdens or impaired its rights. Those alleged effects have
already occurred by virtue of Valley's past breaches of the
sales and service franchises, and the bankruptcy court has
yet to decide whether it will order Valley to cure those
defaults under section 365. Therefore, we will dismiss
Chrysler's appeal.
III. Mootness
GMAC argues that Krebs's appeal is moot under 11
U.S.C. S 363(m) because Krebs is attacking the validity of
the Jeep-Eagle franchise sale without first procuring a stay.
We agree and will dismiss Krebs's appeal as well.
A.
Before we begin our analysis of section 363(m) and its
application here, we must examine whether section 363(m)
applies to the sale of the franchises. Krebs argues that the
franchises were assumed and assigned under section 365,
which exclusively governs the rejection, assumption, and
assignment of executory contracts. We disagree.
Section 363(b) provides that "[t]he 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.) Section 365(f)(1) provides that "the
trustee may assign . . . [executory] contract[s] or
[unexpired] lease[s] under paragraph (2) of this subsection."
Section 363 includes a statutory mootness provision, while
section 365 does not. The issue is whether section 365 is
the exclusive provision governing the sale of the franchises
or whether the mootness provision in section 363 also
covers this situation. In other words, our inquiry is whether
assignments of the franchises under section 365 are also
sales of estate property subject to section 363(m). We
conclude that they are.
12
In describing the scope of the bankruptcy estate, section
541 casts a wide net:
(a) The commencement of a case under section 301,
302, or 303 of this title creates an estate. Such estate
is comprised of all the following property, wherever
located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of
this section, all legal or equitable interests of the
debtor in property as of the commencement of the
case.
11 U.S.C. S 541(a)(1) (emphasis added). To determine if the
franchises are property under section 541, we look to state
law. See Butner v. United States, 440 U.S. 48, 54, 99 S. Ct.
914, 917 (1979) ("Congress has generally left the
determination of property rights in the assets of a
bankrupt's estate to state law."); accord In re Modular
Structures, Inc., 27 F.3d 72, 77 (3d Cir. 1994) (collecting
cases). Here, the franchises allowed Valley to sell vehicles in
Pennsylvania. The Pennsylvania Board of Vehicles Act, Pa.
Stat. Ann. tit. 63, S 818.1 et seq. defines a franchise as:
"The written agreement between any new vehicle
manufacturer or distributor and any new vehicle dealer
or between any new vehicle manufacturer and
distributor which purports to fix the legal rights and
liabilities of the parties to such agreement, and
pursuant to which the dealer or distributor purchases
and resells the franchise product or leases or rents the
dealership or distributorship premises."
Pa. Stat. Ann. tit. 63, S 818.2. Before the enactment of this
definition, the Pennsylvania Supreme Court had opined
that:
"[i]n its simplest terms, a franchise is a license from
the owner of a trademark or trade name permitting
another to sell a product or service under the name or
mark. More broadly stated, the franchise has evolved
into an elaborate agreement by which the franchisee
undertakes to conduct a business or sell a product or
service in accordance with methods and procedures
prescribed by the franchisor, and the franchisor
13
undertakes to assist the franchisee through
advertising, promotion and other advisory services."
Atlantic Richfield Co. v. Razumic, 390 A.2d 736, 740 (Pa.
1978) (quoting Piercing Pagoda, Inc. v. Hoffner, 351 A.2d
207, 211 (Pa. 1976)). Furthermore, the "cornerstone of a
franchise system must be the trademark or trade name of
a product. It is this uniformity of product and control of its
quality and distribution which causes the public to turn to
franchise stores for the product." Atlantic Richfield, 390
A.2d at 740 (quoting Susser v. Carvel Corp., 206 F. Supp.
636, 640 (S.D.N.Y. 1962), aff'd, 332 F.2d 505 (2d Cir.
1964)). Under Pennsylvania law, "[t]he ownership of a
trade-mark has, in general, been considered as a right of
property." Appeal of Laughman, 18 A. 415, 416 ( Pa. 1889).
Trademarks are property, and franchises are licenses to
use such property. Thus, under Pennsylvania law, these
franchises are interests in property, and as such are
property of the estate under section 541. Cf.5 Collier on
Bankruptcy P 541.06[5] (Lawrence P. King et al. eds., 15th
ed. rev. 1997) ("The debtor's estate includes any interest
under an executory contract to purchase goods either from
or by the debtor."). They are also covered by section 363,
although the procedure for their transfer is delineated by
section 365. Therefore, section 363(m) governs the sale of
the franchises here, notwithstanding that section 365
applies to the particular mechanics of conveyance.
A case cited by Krebs for the opposite result actually
supports our conclusion. Recognizing the operation of both
section 363 and 365 in the transfer of executory contracts,
the Court of Appeals for the Ninth Circuit stated that before
a sale of an executory contract may be concluded under
section 363, it must be assumed under section 365. See In
re Qintex Entertainment, Inc., 950 F.2d 1492, 1495 (9th Cir.
1991). This was necessary because under Ninth Circuit
precedent, unassumed executory contracts are not part of
the bankruptcy estate. Id. Thus, Qintex supports our
conclusion that section 363 governs the "sales" of contracts
here. Section 365 provides some limitations and conditions
to assignments; none of which negates the applicability of
section 363 to the sale, at auction, of the franchises.
14
Nor is our decision in In re Joshua Slocum Ltd., 922 F.2d
1081 (3d Cir. 1990), to the contrary. In Slocum, the debtor,
a lessee of retail space in a shopping center, requested and
received authorization from the bankruptcy court to
assume and assign its lease to a third party. The
bankruptcy court approved the assignment but amended
the assigned lease to delete an average sales requirement
clause. The district court affirmed without opinion, and
thus denied the lessor's motion to dismiss for mootness. On
appeal, the appellee again moved to dismiss the appeal as
moot, citing section 363(m).
Although we found that the appeal was not moot, Slocum
does not control our decision here. There, the Trustee
requested and received "authorization to assume and
assign the Lease pursuant to 11 U.S.C. S 365." Id. at 1084.
However, the Trustee never attempted to sell the the Lease
under section 363, and the parties conceded that section
363(m) did not apply in cases where the Trustee merely
assigns a lease under section 365. Id. at 1085. Unlike
Slocum, the bankruptcy judge in this case authorized both
an assumption under section 365 and a subsequent sale
under section 363. The bankruptcy court also conducted
an auction for purposes of selling the franchises under the
rules implementing section 363, which state that "all sales
not in the ordinary course of business may be by private
sale or by public auction." Fed. R. Bankr. P. 6004(f)(1).
There is no parallel provision under section 365 or its
companion, Fed. R. Bankr. P. 6006. For all these reasons,
Slocum does not foreclose our conclusion that the sale of
the franchises is covered by section 363(m).
B.
Section 363 allows the sale or lease of property of the
estate, not in the ordinary course of business, but imposes
a limit on appellate review:
"The reversal or modification on appeal of an
authorization under subsection (b) or (c) of this section
of a sale or lease of property does not affect the validity
of a sale or lease under such authorization to an entity
that purchased or leased such property in good faith,
15
whether or not such entity knew of the pendency of the
appeal, unless such authorization and such sale or
lease were stayed pending appeal."
11 U.S.C. S 363(m). We earlier identified two possible
constructions of this subsection, without adopting either.
See Pittsburgh Food & Beverage, Inc. v. Ranallo, 112 F.3d
645, 648-49 (3d Cir. 1997). One construction, followed by
a majority of courts of appeals, is a per se rule, mooting
appeals absent a stay of the sale or lease at issue. See id.
at 649-51 (citing cases of the 1st, 2d, 5th, 7th, 11th, and
D.C. Circuits); see also In re Onouli-Kona Land Co., 846
F.2d 1170, 1173 (9th Cir. 1988) (following per se rule with
one exception: appeals not moot where property is sold to
a creditor who is a party to the appeal and the sale is
subject to a statutory right of redemption).
A second formulation comes from how we construed a
parallel provision in the Code, section 364(e), which governs
the validity of debts or liens granted to a good faith
creditor:
"The reversal or modification on appeal of an
authorization under this section to obtain credit or
incur debt, or of a grant under this section of a priority
or a lien, does not affect the validity of any debt so
incurred, or any priority or lien so granted, to an entity
that extended such credit in good faith, whether or not
such entity knew of the pendency of the appeal, unless
such authorization and the incurring of such debt, or
the granting of such priority or lien, were stayed
pending appeal."
11 U.S.C. S 364(e). See In re Swedeland Dev. Group, Inc., 16
F.3d 552 (3d Cir. 1994) (en banc) (discussed in Pittsburgh
Food, 112 F.3d at 648).
In construing section 364(e), we refused to adopt a per se
rule:
"[T]here is no escape from the logic that inasmuch as
section 364(e) provides for the consequences of the
reversal or modification of an order under 364(d) when
the order has not been stayed pending appeal, it is
impossible to conclude that section 364(e) in itself
16
requires that an appeal be dismissed if a stay is not
obtained. After all, neither Swedeland nor anyone else
can explain how there can be a "reversal or
modification" of an order, if the appeal from the order
has been dismissed.
Yet this exercise in logic is not dispositive of the
mootness issue for even though section 364(e) standing
alone does not require dismissal of an appeal when a
stay is not granted, it might establish circumstances
which under law other than section 364(e) require
dismissal of the appeal. Thus in our consideration of
the mootness argument we cannot limit our inquiry to
an examination of section 364(e)."
Id. at 559 (emphasis added). In Swedeland, we held that an
appeal from a section 364(d) order regarding a loan in
which a portion of the funds had not been disbursed was
not moot under general mootness principles because it was
possible to fashion some meaningful, if only partial, relief.
Id. at 560-61. Regarding a fully disbursed loan, however,
the appeal was moot because the district court could not
fashion any effective relief that would not violate section
364(e). Id. at 562-63.
We reject the per se rule. Viewing section 363(m) through
the prism of Swedeland's construction of section 364(e),
section 363(m) would not moot every appeal not
accompanied by a stay. It does, however, restrict the results
of a reversal or modification of a bankruptcy court's order
authorizing a sale or lease, if reversal or modification would
affect the validity of the sale or lease. That is precisely the
situation here. Accordingly, there are two prerequisites for
section 363(m) "statutory" mootness: (1) the underlying sale
or lease was not stayed pending the appeal, and (2) the
court, if reversing or modifying the authorization to sell or
lease, would be affecting the validity of such a sale or lease.
C.
Since the first prerequisite is present, we must see
whether a remedy can be fashioned that will not affect the
validity of the sale. In doing so, we must look to the
remedies requested by the appellants. See Pittsburgh Food
17
& Beverage, 112 F.3d at 649-50. Krebs argues that the
rejection of the buy-sell agreement was improper because
that contract was not executory, and alternatively, if it was,
it did not satisfy the business judgment test. Krebs wants
us to reverse the bankruptcy court's order allowing Valley
to reject the buy-sell agreement. Naturally, this would have
an impact on the validity of the auction sale of the Jeep-
Eagle franchise, because reversing the rejection would
necessarily require reversing the subsequent assumption
and assignment of the underlying franchises. Clearly, this
remedy is not permitted by section 363(m).
Krebs also argues that at the very least, it should get
some form of recoupment, credit or refund for the amount
it paid under the first installment of the buy-sell
agreement. Under Pittsburgh Food, however, a refund would
be an attack on the sale price, impermissibly affecting the
validity of the sale. See Pittsburgh Food, 112 F.2d at 649,
650; see also In re The Charter Co., 829 F.2d 1054, 1056
(11th Cir. 1987) ("[A] refund of a portion of the purchase
price. . . . a central element of a purchase . . . challeng[es]
the validity of the sale itself.").
Krebs argues that the relief it requests will not affect any
third parties, and were we to order a refund, it would only
come from GMAC, a creditor, not from innocent third
parties who may have already spent the proceeds. Section
363(m), however, contains no exception for sales to
creditors, or other parties to the bankruptcy proceedings, or
to deep-pocketed financing companies like GMAC.
Moreover, as we and other courts have recognized, section
363(m) was created to promote the policy of thefinality of
bankruptcy court orders, and to prevent harmful effects on
the bidding process resulting from the bidders' knowledge
that the highest bid may not end up being the final sale
price. Pittsburgh Food, 112 F.3d at 647-48.
We also reject Krebs's request for recoupment. Under
that doctrine, a debtor's demand must arise from the same,
integrated transaction as the claim against it. See In re
Flagstaff Realty Assocs., 60 F.3d 1031, 1035 (3d Cir. 1995).
Here, Valley's demand for the auction price derives from the
auction sale, while Krebs's claim arises from the buy-sell
agreement. The auction sale and the buy-sell agreement are
18
not a single integrated transaction. Rather, they are
separate transactions that merely seek to accomplish the
same result: the transfer of the franchises to Krebs.
Everything Krebs seeks affects the validity of the sale.
Thus, under section 363(m), Krebs's appeal is moot
because it did not receive a stay of the sale pending appeal,
the sale has since been closed, and the relief it seeks would
impact the validity of that sale.
IV. Conclusion
We hereby dismiss Chrysler's appeal from the district
court because it did not properly appeal from the
bankruptcy court and does not have standing as a person
aggrieved by the bankruptcy court's decision. We also
dismiss Krebs's appeal as moot for failure to stay the
franchise sale. This cause is remanded to the district court
so that it may dismiss Krebs's appeal from the bankruptcy
court's order.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
19