In Re: Alabama Aircraft Industries Inc. et al
Filing
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OPINION. Signed by Judge Joseph E. Irenas on 1/17/2012. (lih)
UNITED STATES DISTRICT COURT
DISTRICT OF DELAWARE
In re:
ALABAMA AIRCRAFT INDUSTRIES,
INC.
Debtor.
THE BOEING COMPANY
Appellant,
v.
KAISER AIRCRAFT INDUSTRIES,
INC.
Appellee.
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HONORABLE JOSEPH E. IRENAS
CIVIL ACTION
NO. 11-01003 (JEI)
BANKRUPTCY NO. 11-0452(PJW)
OPINION
Appearances:
BRYAN CAVE LLP
By: Robert M.D. Mercer, Esq.
Eric P. Schroeder, Esq.
One Atlantic Center, 14th Floor
Atlanta, GA 30309-3488
Counsel for The Boeing Company
LOIZIDES, P.A.
By: Chris Loizides, Esq.
1225 King Street, Suit 800
Wilmington, DE 19801
Counsel for The Boeing Company
KLEE TUCHIN BOGDANOFF & STERN LLP
By: Thomas E. Patterson, Esq.
1999 Avenue of the Stars, Suite 3900
Los Angeles, CA 90067
Counsel for Kaiser Aircraft Industries, Inc.
PACHULSKI STANG ZIEHL & JONES LLP
1
By: Bruce Grohsgal, Esq.
919 North Market Street, 17th Floor
Wilmington, DE 19801
Counsel for Kaiser Aircraft Industries, Inc.
IRENAS, Senior District Judge1:
This matter comes before the Court on The Boeing Company’s
(“Boeing”) appeal from the bankruptcy court’s Sale Order of
September 6, 2011.
Pending before the Court is Kaiser Aircraft
Industries, Inc.’s (“Kaiser”) Motion to Dismiss the appeal as
moot.
For the reasons that follow, the Court will grant the
Motion and dismiss the appeal.
I.
Alabama Aircraft Industries, Inc., Alabama Industries, Inc.Birmingham, and Pemco Aircraft Engineering Services, Inc.,
(collectively, the “Debtors”) existed for nearly sixty years as
an aerospace and defense company servicing the U.S. Government.
An inability to replace expiring contracts led to a substantial
drop in revenue.
After several failed attempts to amend their
collective bargaining agreement and refinance their working
capital, the Debtors filed for bankruptcy.
A sale procedure, assisted by an investment bank, garnered
two unsuccessful bids.
1
The Debtors subsequently reached out to
Of the District of New Jersey, sitting by designation.
2
Kaiser and agreed to sell nearly all of their assets pursuant to
an Asset Purchase Agreement (“Agreement”).
The only material
economic term of the Agreement relevant to the instant motion is
Kaiser’s establishment of a Litigation Trust (“Trust”), pursuant
to a Litigation Trust Agreement (“Trust Agreement”), wherein
Kaiser vests certain estate causes of action against Boeing and
others.2
The Trust Agreement calls for Kaiser to fund the
litigation and retain 90% of any beneficial interest accrued
therefrom; the Debtors’ estates receive the remainder with a
maximum collection of $30 million.
An expedited bankruptcy proceeding was held on September 1,
2011 because the deadline to assume the lease of the Debtors’
operating facility was set to expire September 13, 2011.
The
bankruptcy court orally granted the Sale Motion towards the
conclusion of the hearing.
(September 1, 2011 Hearing Transcript
(“Transcript”) at 112:6-14.)
Because the Debtors then committed
to wait one week before signing the Agreement, the bankruptcy
court ordered that Fed. R. Bankr. P. 6004(h)’s automatic fourteen
day stay would not apply.
(Tr. at 113:1-13.)
Boeing’s
subsequent Oral Motion to stay the sale was denied.
(Tr. at
2
The Agreement’s two other material economic terms are: I) Kaiser pays
$500,000 of cash consideration to the Debtor’s estates at the closing of the
transaction, and II) Kaiser acquires substantially all of the operating assets
of the Debtors, while the Debtors would retain their existing accounts
receivable and proceeds of the work in process generated prior to the closing.
3
118:22-25; 119:1-16.)3
After the Agreement was executed, and
without obtaining a stay in this Court, Boeing filed its Notice
of Appeal.
Kaiser subsequently filed the instant Motion to
Dismiss.
II.
The Court has jurisdiction to hear this appeal of the
bankruptcy court’s final order pursuant to 28 U.S.C. § 158(a).
The Court reviews de novo the bankruptcy court’s legal
conclusions, In re Fairfield Exec. Assoc., 161 B.R. 595, 599
(Bankr. D.N.J. 1993), and leaves undisturbed its factual
determinations unless they are clearly erroneous.
Fed. R. Bankr.
P. 8013.
III.
Section §363(m) of the Bankruptcy Code requires parties
seeking to reverse or modify authorized sales of estate property
3
The transcript reads:
Mr. Loizides: “We obviously haven’t talked to our client about the
court’s ruling and I don’t view the results today as being – you
know, some issues essentially went out way, Your Honor, so I don’t
know that there is going to be an appeal, but what I have done in
the past in circumstances such as this is the rules obviously
require that you request a stay pending appeal from the Bankruptcy
Court first and typically in situations like this, the Bankruptcy
Court, quite understandably is disinclined to grant that stay. I
guess what I would ask is is essentially, would the Court accept
what amounts to an oral motion to stay, pending appeal?
The Court: Okay. Denied.”
Tr. at 118:22-25; 119:1-16.
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11 U.S.C. §363(m).4
to obtain a stay pending appeal.
Although a
majority of courts of appeals deem an appeal moot per se in the
absence of a stay, the Third Circuit requires finding, before
dismissal, that (1) the underlying sale was not stayed pending
appeal, and (2) reversing or modifying the Bankruptcy Court’s
authorization would affect the validity of the sale.
Krebs
Chrysler-Plymouth, Inc. v. Valley Motors, Inc., 141 F.3d 490,
498-99 (1998).
Kaiser argues that because Boeing’s appeal of the Sale Order
was not stayed, and Boeing’s requested relief of vacating the
Trust would greatly affect the validity of the sale, Boeing’s
appeal must be dismissed as moot.
Boeing, in turn, contends that
§363(m) does not apply because the statute protects only sales,
not uses, and the creation of the Trust was exclusively a use.
Consequently, the two questions that dictate whether or not this
appeal is moot are: A) was the establishment of the Trust, and
Kaiser’s acquisition of 90% of the beneficial interest therein, a
sale of property requiring §363(m) protection, and, if it was a
sale, B) would granting Boeing’s requested relief affect the
4
11 U.S.C. 363(m) provides, in full:
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, whether or not such entity knew of the
pendency of the appeal, unless such authorization and such sale or
lease were stayed pending appeal.
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validity of the sale?
Because both questions are answered in the
affirmative, the appeal is dismissed as moot.
A.
Boeing asserts that the Debtors’ creation of the Trust is
not a sale deserving of §363(m) protection because the bankruptcy
court, in its Sale Order, ruled that it was a “use of the
Debtors’ property.”5
Boeing argues that the ruling prevents this
Court from affording the creation of the Trust §363(m) protection
because only sales, and not uses, are afforded such protection.
Boeing’s argument is unconvincing.
First, it appears from the Sale Order and the Transcript
that the bankruptcy court in fact found that §363(m) protected
the creation of the Trust.
The Sale Order holds that the
Agreement and the Trust Agreement “have been entered into by the
parties in good faith within the meaning of 363(m)” and that
Kaiser is “a good faith purchaser within the meaning of Section
363(m) of the Bankruptcy Code and entitled to the protections
thereof.”6
Moreover, the court specifically ruled during the
hearing that the establishment of the Trust was protected by
5
Sale Order at Page 6, Paragraph K: “The establishment of the
Litigation Trust pursuant to the terms of the APA and the Litigation Trust
Agreement is a fair and appropriate use of the Debtors’ property.”
6
Sale Order at Page 6, Paragraph L.
6
(Tr. at 113:5-9.)7
§363(m).
Thus, Boeing is inaccurate when it
claims that the bankruptcy court ruled that the creation of the
Trust was not a sale.
Second, even if this Court held that the bankruptcy court
found the establishment of the Trust a use, it is clear that such
a conclusion would be erroneous.
The transaction’s documentation
shows that the Debtors included in their sale of all major assets
the creation of the Trust and Kaiser’s possession of 90% of the
beneficial interests therefrom.
The Trust Agreement refers to
Kaiser throughout as “Purchaser” and states that the
establishment of the Trust is “pursuant to the [Asset] Purchase
Agreement.”
Additionally, the Agreement identifies 90% of the
Trust’s beneficial interest as a “Purchased Asset” and
specifically conditions the closing of the asset sale upon the
creation of the Trust and the bankruptcy court’s corresponding
approval.
Even more convincingly, the totality of the transaction
strongly indicates that the establishment of the Trust was part
and parcel of the Debtors’ sale to Kaiser.
quickly running out of capital.
The Debtors were
They faced the option of selling
all major assets or being forced to liquidate.
81:12-22.)
(Tr. at 22:8-19;
To receive the highest possible purchase price from
7
The Transcript reads: Mr. Mercer: Your Honor, I just want to make –
ask for clarification as to the Court’s ruling. Is the Court ruling that
363(m) applies with the establishment of litigation trust? The Court: Yes.
Tr. at 113:5-9
7
Kaiser, they included in the asset sale the creation of the Trust
and a 90% stake in its beneficial interest.
Neither the
complexity of the transaction, nor the Debtors’ retention of 10%
of the Trust’s beneficial interest, dictates finding otherwise.
Lastly, even if we were to describe the Trust as a use of
estate property rather than an outright sale, there is support in
this Circuit that transactions integral to a sale deserve §363(m)
protection whether they themselves are properly referred to as
sales under §363(b).
See Cinicola v. Scharffenberger, 248 F.3d
110, 125-26 (3d Cir. 2001) (providing the assumption and
assignment of employment contracts §363(m) protection because
they were “inextricably intertwined” with the Debtor’s sale of
assets); Official Comm. of Unsecured Creditors v. Chase Manhattan
Bank (In re Charter Behavioral Health Sys., LLC), 45 Fed. Appx.
150, 151 n.2 (3d Cir. 2002) (affording §363(m) protection to the
assignment of Medicare provider agreements because they were
“inextricably intertwined” to the sales of the Debtors’
hospitals).
Boeing is correct that this precedent pertains only
to the assignment of executory contracts and unexpired leases
assigned under 11 U.S.C. §365.
See also Collier on Bankr. (16th
ed. 2010) ¶363.11 (“The protection provided by section 363(m)
applies not only to sales of property of the estate but also to
assignments of leases...”).
Nonetheless, such precedent is
persuasive for two reasons.
First, the instant case is
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overwhelmingly analogous to Cinicola.
Just as in Cinicola, where
the underlying sale of the Debtors’ assets depended upon the
successful assignment of its employment contracts, here the sale
of assets is conditioned upon the vesting of the estates’ causes
of action in the Trust and Kaiser’s beneficial ownership of 90%
therein.
The Third Circuit’s decision to afford protection in
the former case strongly indicates that such protection is
appropriate in the latter.
Second, narrowly circumscribing §363(m) protection, as
Boeing proposes, undercuts the purpose of the statute, which this
Circuit has defined as “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.”
In re Abbotts Dairies of Penn., Inc., 788 F.2d 143, 147
(3d Cir. 1986).
Another court’s attempt to limit such protection
to only instances of “changes of title”, Clear Channel Outdoor,
Inc. v. Nancy Knupfer (In re PW, LLC), 391 B.R. 25, 35 (B.A.P.
9th Cir. 2008), has been summarily rejected.
See In re Nashville
Senior Living, LLC (B.A.P. 6th Cir. 2009) (refusing to follow
Clear Channel because it “cited no case law for its conclusion
and the overwhelming weight of authority disagrees with its
holding...”).
Lastly, Boeing’s argument that parties will shield
improper conditions of sale from appellate review by claiming
that they are integral to the transaction ignores the fact that
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§363(m) provides review of authorized sales for those parties
that obtain a stay.
Consequently, the creation of the Trust is
entitled to §363(m) protection.
B.
Having concluded that the Debtors’ formation of the Trust is
deserving of §363(m) protection, and recognizing that its
execution was not stayed, we must now determine whether granting
Boeing its requested relief, vacating the Trust, would “affect
the validity of the sale.”
Krebs, 141 F.3d at 499.
Courts
undertaking this analysis focus on whether relief would impact
the transaction as executed by the parties pursuant to the
court’s authorization.
See id. (holding that allowing the debtor
to reject buy-sell agreement affects the validity of the sale
because it would necessitate reversing the subsequent assumption
and assignment of the underlying franchises); United Bank, Inc.
v. Howard (In re Howard), Bankr. L. Rep. (CCH) P81,935 (W.D. Pa.
2011) (“awarding return of the property to [creditor] would
affect the validity of the sale”).
In the present case, it is
clear that vacating the Trust would affect the validity of the
sale.
Because the Agreement is conditioned upon the creation of
the Trust, its vacation would nullify the sale and return all
assets to the Debtors.
Such unraveling is exactly the type of
affront to finality that §363(m) seeks to prevent.
10
See In re
Abbotts Dairies of Penn., 788 F.2d at 147.
Lastly, not only would excising the Trust bring the parties
back to their original positions, it would put in jeopardy the
monetary investments Kaiser and its parent company have
subsequently made: nearly $100,000 in required payments to cure
all defaults under assumed contracts and leases; issuing a
$100,000 guarantee in favor of the lessor of the Debtors’
operating facility; capitalizing Kaiser with an additional
$7,000,000; and capitalizing the Trust with an initial $500,000.
Moreover, as the Trust has already commenced its litigation in
Alabama state court, vacating the sale would put the proper
resolution of those claims at risk.
It is clear that the relief
Boeing requests can only be granted at the cost of the deal’s
validity.
Accordingly, Kaiser’s Motion to Dismiss will be granted.8
IV.
For the reasons set forth above, Kaiser’s motion will be
granted and Boeing’s appeal will be dismissed.
8
The Court will
As this appeal is dismissed, we do not reach Boeing’s substantive
claim, which is that Integrated Solutions, Inc. v. Service Support
Specialties, Inc., 124 F.3d 487 (3d Cir. 1997) prohibits the creation of the
Trust because it constitutes a sale or assignment of pre-judgment tort causes
of action in violation of state law. Boeing’s position, however, is worth
noting for two reasons. First, Boeing’s claim shows that even Boeing
recognizes that the creation of the Trust constitutes a sale under §363(b),
strongly implying that its present argument to the contrary is put forward
only to overcome its failure to obtain a stay. Second, this Opinion does not
in any way rule on the Trust’s standing to sue Boeing in the Alabama state
court, where the Trust’s claims are being litigated.
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enter an appropriate order.
Dated: January 17, 2012
S/ Joseph E. Irenas
JOSEPH E. IRENAS, S.U.S.D.J.
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