Petroleum & Franchise Funding LLC v. Bulk Petroleum Corporation et al

Filing 14

ORDER signed by Judge J P Stadtmueller on 6/25/10 denying Convenience Stores Leasing & Management's Emergency Motion to Dismiss Appeal as Moot. See Order. (cc: all counsel)(nm)

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WISCONSIN
____________________________________________ P E T R O L E U M & FRANCHISE FUNDING LLC, A p p e l la n t , v. Case No. 10-CV-508

B U L K PETROLEUM CORP., C O N V E N IE N C E STORES LEASING & MANAGEMENT LLC, a n d UNSECURED CREDITORS COMMITTEE A p p e lle e s . ____________________________________________

ORDER
O n May 17, 2010, In the Matters of Bulk Petroleum Corp., et al., Case No. 092 1 7 8 2 -S V K -1 1 , U.S. Bankruptcy Judge Susan V. Kelley issued an "ORDER G R A N T IN G DEBTORS' MOTION FOR HEARING ON SHORTENED NOTICE AND M O T IO N (i) TO SELL 66 PARCELS OF REAL PROPERTY AND RELATED F IX T U R E S AND PERSONAL PROPERTY ON AN OMNIBUS BASIS FREE AND C L E A R OF ALL LIENS AND ENCUMBRANCES TO CONVENIENCE STORES L E A S IN G & MANAGEMENT, LLC, OR ITS ASSIGNS, FOR $11,000,000, (ii) TO A P P R O V E REJECTION OF LEASES BETW E E N DEBTOR ENTITIES, AND (iii) TO A S S U M E AND ASSIGN CERTAIN LEASES AND LAND CONTRACTS." O n May 26, 2010, appellant Petroleum & Franchise Funding LLC ("PFF") filed a Notice of Appeal as to the above order. On June 16, 2010, at which point the a p p e a l had not yet been docketed in the District Court, appellee Convenience Stores L e a s in g & Management LLC ("CSLM") filed an emergency motion to dismiss PFF's

a p p e a l as moot. The emergency motion was docketed in the Bankruptcy Court, and th e entire appeal, including the emergency motion, was transferred and docketed in th e District Court on June 17, 2010. C S L M 's emergency motion is brought pursuant to Fed. R. Bankr. P. 8011(d), a n d complies with the requirements set forth therein. The substance of CSLM's m o tio n is that PFF's appeal is moot because PFF did not move for or obtain a stay o f the sale order pending appeal. According to 11 U.S.C. § 363(m): T h e reversal or modification on appeal of an authorization under s u b s e c tio n (b) or (c) of this section of a sale or lease of property does n o t affect the validity of a sale or lease under such authorization to an e n tity that purchased or leased such property in good faith, whether or n o t such entity knew of the pendency of the appeal, unless such a u th o riz a tio n and such sale or lease were stayed pending appeal. Id . CSLM argues that according to § 363(m), and Seventh Circuit case law, an a p p e a l is moot if the party challenging the Bankruptcy Court's order approving a sale d id not obtain a stay of that order pending appeal. See In re CGI Industries, Inc., 2 7 F.3d 296, 299 (7th Cir. 1994) ("[W ]e have repeatedly held that when a party c h a lle n g e s the bankruptcy court's order approving the sale of estate property to a g o o d faith purchaser, it must obtain a stay of that order pending appeal, lest the sale p ro c e e d and the appeal become moot."). C S L M posits that it will suffer irreparable harm if its instant motion is not q u ic k ly resolved, because it has entered into a contract to sell one of the stations it p u rc h a s e d under the challenged sale order, and the closing for the sale of that s ta tio n is required to take place no later than June 26, 2010. CSLM states that as -2-

lo n g as PFF's appeal is pending, the title company will not insure clear title to the p ro p e rty CSLM purchased under the Sale Order. The result being that CSLM will n o t be able to complete the sale of the station, as the buyers are not obligated to c lo s e the sale without clear title, and the buyers have stated that they refuse to c o m p le te the transaction while the appeal is pending. Accordingly, the court agreed to resolve the motion on an expedited basis, and, to that end, issued a scheduling o rd e r setting forth an abbreviated briefing schedule on June 18, 2010. The issue b e in g now fully briefed, the court turns to the substance of the dispute regarding w h e th e r PFF was required to obtain a stay pending appeal. P F F concedes that it did not obtain a stay of the Bankruptcy Court's order p e n d in g appeal; however, PFF maintains that it is challenging whether CSLM was a "good-faith purchaser." PFF argues that § 363(m), by its very terms, only applies to a good-faith purchaser. PFF asserts that the Bankruptcy Court committed

re ve rs ib le error by certifying CSLM as a good-faith purchaser. PFF has submitted s e ve ra l affidavits in support of its contention.1 T h u s , the question presently before the court is not whether CSLM was a g o o d -fa ith purchaser, or even whether the Bankruptcy Court committed error in fin d in g that CSLM was a good-faith purchaser. The only question presently before th e court is whether the fact that PFF is challenging CSLM's status as a good-faith

At this juncture it is not necessary to evaluate the merits of PFF's appeal; it is sufficient to note that the appeal challenges whether CSLM was a good-faith purchaser, and that PFF has proffered evidence in support of its contention.

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p u r c h a s e r obviates the necessity that PFF obtain a stay pending appeal. If it does, th e n the appeal may proceed to the merits. If it does not, then the appeal is moot a n d must be dismissed. In support of its contention that a party challenging the good faith of the p u rc h a s e r is not required to obtain a stay, PFF cites to In re Sax, 796 F.2d 994 (7th C ir. 1986) in which the Seventh Circuit observed: "As indicated in § 363(m), a stay is not required to challenge a sale on the grounds that an entity did not purchase in g o o d faith." Id. at 997, n. 4. This position is echoed in In re Tempo Tech. Corp., 202 B .R . 363 (D. Del. 1996) in which the district court held that a stay was not necessary w h e n the purchaser's good faith was challenged on appeal. Id. at 366 (citing In re E w e ll, 958 F.2d 276, 281 (9th Cir.1992); Sax, 796 F.2d at 997 n. 4.; Willemain v. K ivitz, 764 F.2d 1019, 1024 (4th Cir.1985); In re Bel Air Assoc., 706 F.2d 301, 304 (1 0 th Cir.1983); In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143 (3d C ir .1 9 8 6 ) ) . P F F 's contention is further supported by In re Andy Frain Svcs., Inc., 798 F.2d 1 1 1 3 (7th Cir. 1986). In Andy Frain, the Seventh Circuit was confronted with a s itu a tio n in which the appealing party had not obtained a stay pending appeal, thus, th e opposing party argued that the appeal was moot, per § 363(m). 798 F.2d at 1 1 2 5 . The appealing party, however, was ­ as is the situation in the instant case ­ c h a lle n g in g whether the purchaser of the property qualified as a good-faith p u rc h a s e r. Id. In addressing the issue of whether the appeal was moot, the

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S e v e n th Circuit stated: "Because [the appealing party] failed to obtain a stay and o ffe rs no credible explanation for the failure, the only issue we must decide is w h e the r [the purchaser] qualified as a good faith purchaser." Id. This directly s u p p o rts PFF's argument that a stay is not required when challenging the issue of g o o d - fa ith , because if, as CSLM advocates, a stay were required in such a case, th e n the Andy Frain court would have had no need to determine whether the p u rc h a s e r in that case qualified as a good-faith purchaser. Since the appealing p a rty had not obtained a stay, the issue of whether the purchasing party was a good fa ith purchaser would have been irrelevant if, as CSLM argues, a stay must be o b ta in e d , even when challenging the issue of good faith. Since the lack of a stay w a s not dispositive, and the court only entered its ruling after determining that the p u r c h a s e r was a good-faith purchaser, one might reasonably conclude that the fa ilu re to obtain a stay pending appeal is not fatal to an appeal challenging the goodfaith of the purchaser. C S L M , for its part, attempts to argue that "[t]he Frain court's consideration of t h e appellant's challenge to the buyer's good faith was independent of any review o f the sale's validity, because the appellant's failure to obtain a stay mooted any a tte m p t to undo the completed sale." (Reply Br. Supp. Dismiss. Mot. at 5). This p ro p o s itio n , however, is simply not supported by the case itself. Indeed, the Frain c o u rt specifically said that since the appellant had failed to obtain a stay, the only iss u e the court had to decide was whether the purchaser qualified as a good faith

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p u r c h a s e r. Andy Frain, 798 F.2d at 1125. If CSLM was correct that a stay is n e c e s s a ry even when challenging good faith, then the Andy Frain court would have h a d no need to determine whether the purchaser was a good-faith purchaser. This is a point that CSLM fails to appreciate and fails to refute. A s for the Seventh Circuit's statement in Sax that "a stay is not required to c h a lle n g e a sale on the grounds that an entity did not purchase in good faith," 796 F .2 d at 997 n. 4, CSLM argues that the statement is old dicta, and has been o ve rru le d by a newer case, Hower v. Molding Systems Engineering Corp., 445 F.3d 9 3 5 (7th Cir. 2006). In Hower, the Seventh Circuit was confronted with an appeal fro m a district court's dismissal of a bankruptcy appeal. The district court had found th a t the appellant's appeal was moot because the sale had already taken place, and th e appellant had not obtained a stay. Id. at 938. The district court accordingly d ism iss e d the appeal. Id. The Seventh Circuit upheld the dismissal, and in doing s o stated: H e r e , there is no question that no stay was entered, that the bankruptcy c o u rt made an explicit finding of good faith, and that the sale took p la c e . Therefore, the appeal is moot, because the sale is final and this c o u r t is powerless to provide [appellant] the remedy he seeks. Id . T h e above statement by the Seventh Circuit certainly does offer support for C S L M 's assertion that Hower marked a reversal of the prior rule laid out in Sax and fo llo w e d in Andy Frain. Indeed, the above passage from Hower could easily be read a s enunciating a new rule under which a purchaser is per se a good-faith purchaser -6-

fo r purposes of § 363(m) once the Bankruptcy Court has made an explicit finding of g o o d faith. Such a rule would make a great deal of sense, as the rule from Sax ­ a llo w in g parties to appeal court-sanctioned sales without obtaining a stay so long as th e appealing party is challenging the good faith of the purchaser ­ undermines the p u rp o s e of § 363(m). Section 363(m) is designed to ensure finality and certainty to c o u rt approved bankruptcy sales. Such certainty and finality is eroded by allowing a p p e lla n ts to challenge said sales without a stay, so long as they are challenging the g o o d faith of the purchaser. The rule proffered by CSLM, and arguably supported b y Hower ­ that so long as the Bankruptcy Court made an explicit finding of good fa ith , the appellant must have obtained a stay of the order in order to appeal any a s p e c t of the sale ­ would be much more effective at furthering the purpose of § 363(m). H o w e v e r, while the court agrees with CSLM that it is not optimal to allow p a rtie s like PFF to challenge court-approved sales without obtaining a stay, the s im p le fact is that given the clear teachings of Sax and Andy Frain, the court is c o n s t ra in e d to allow PFF's appeal. W h ile Hower could be read as supporting C S L M 's position, it does not expressly do so because the appellant in Hower did not c h a lle n g e the good-faith of the purchaser at the district court level. The appellant in Hower did challenge good faith at the court of appeals level. However, the court o f appeals was evaluating the correctness of the district court's dismissal of the c a s e . Because good faith was not challenged at the district court level, the question

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o f whether a challenge to the good faith of the purchaser excuses an appellant's f a ilu re to obtain a stay simply was not squarely before the Hower court. As such, th is court concludes that, for purposes of determining the merits of the motion now b e fo re the court, it would be inappropriate to disregard Sax and Andy Frain. C S L M is not unreasonable in describing the Sax court's statement ­ that a s ta y is not needed when challenging good faith ­ as "dicta." The statement was not in te g ra l (or even relevant) to the holding in Sax, and it was made in a footnote. H o w e v e r, it was clear and unequivocal, and it was adhered to in Andy Frain. A c c o rd in g ly , it is not something a district court can simply disregard without clear in d ica tio n of a change in the law from the Seventh Circuit. Hower, and common s e n s e , support such a contention, but neither clearly evidence that the Seventh C irc u it has refuted the rule found in Sax and Andy Frain. The court is, therefore, c o n s tra in e d to deny CSLM's emergency motion. Accordingly, IT IS ORDERED that CSLM's Emergency Motion to Dismiss Appeal as Moot (D o c k e t #1, Attachment #57) be and the same is hereby DENIED. D a te d at Milwaukee, W is c o n s in , this 25th day of June, 2010. BY THE COURT:

J .P . Stadtmueller U .S . District Judge -8-