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| FindLaw: Laws: Cases and Codes: 9TH CIRCUIT COURT Opinions | |
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http://laws.findlaw.com/9th/9916059.html
In re: R.B.B., INC., d/b/a Ferrari of Los Gatos Debtor, No. 99-16059 FERRARI NORTH AMERICA, INC., BAP No. Appellant, NC-98-01215-RRyMe v. OPINION CHARLES E. SIMS, Trustee; OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Appellees.
Appeal from the United States District Court
for the Bankruptcy Appellate Panel for the Ninth Circuit
Barry Russell, J.E. Ryan, James W. Meyers,
Bankruptcy Judges, Presiding
Argued and Submitted
February 16, 2000--San Francisco, California
Filed April 27, 2000
Before: Mary M. Schroeder, John T. Noonan, and
A. Wallace Tashima, Circuit Judges.
Opinion by Judge Noonan
SUMMARY
The summary, which does not constitute a part of the opinion of the court,
is copyrighted C 2000 by West Group.
_________________________________________________________________
Bankruptcy/Corporate Reorganization
(Chapter 11)
The court of appeals reversed a judgment of the bankruptcy
appellate panel (BAP). The court held that in a Chapter 11
bankruptcy, the assignment and sale of the debtor's franchise
to a bona fide purchaser cannot occur when the order approv-
ing the transactions is ambiguous as to the specific entity that
will take the assignment and fund the purchase.
Doing business as Ferrari of Los Gatos, R.B.B., Inc. oper-
ated a car-dealership franchise under license from appellant
Ferrari of North America Inc. (FNA). Based on various
defaults by the dealership, FNA notified R.B.B. that it was not
going to renew the franchise. R.B.B. filed a Chapter 11 bank-
ruptcy petition and continued to operate the dealership.
The bankruptcy trustee received an offer from Symbolic
Motor Cars Company to buy the franchise. Marc Chase, Sym-
bolic's president, identified his corporation as West Coast
Acquisitions, and moved for permission to allow the trustee
to assume the franchise and assign it to West Coast. FNA
objected that the franchise was incapable of assumption
because there were various incurable nonmonetary defaults.
Although the bankruptcy court agreed that there had been
defaults by R.B.B, the court approved the assumption of the
franchise on the ground that FNA did not show any adverse
consequences from them.
When the trustee advertised the sale to Symbolic, FNA
objected and challenged Symbolic's identity and suitability.
Symbolic made the high bid at an auction conducted by the
bankruptcy court.
In confirming the assignment and sale, the bankruptcy
court identified Symbolic as a fictitious name under which
both West Coast and North Beach Acquisitions, another auto
dealership, did business. However, the court did not specifi-
cally name which of the two corporations was the approved
assignee.
Although the bankruptcy court examined the financial con-
dition of both West Coast and North Beach, it applied the Van
Ness factors for qualifying a franchise assignee (adequate
working capital; prior experience, profitability and sales per-
formance; business acumen; and sufficiency of information
provided to franchisor) as if North Beach were the Symbolic
to which the assignment was being made. The court con-
cluded that Symbolic met the Van Ness factors, and that FNA
had unreasonably withheld consent to the assignment.
FNA appealed from the orders of assumption and sale. The
bankruptcy court and the BAP denied a stay pending appeal.
The sale to Symbolic closed. The BAP dismissed the appeal
as moot. FNA appealed, contending that the assignment and
sale were improper because Symbolic was not a bona fide
purchaser.
[1] The first requirement of having a purchaser in good
faith is to have a purchaser. The court of appeals could not
distinguish which corporation was approved as purchaser and
assignee.
[2] It was not clear why the ownerships of both West Coast
and North Beach were examined by the bankruptcy court
unless the court regarded both as the purchasers. It was
unclear why the court declared that Symbolic's financial con-
dition appeared to be strong unless the court combined North
Beach's and West Coast's assets, as though their use of the
same fictitious business name had effected a merger. [3]
Ambiguity as to the purchaser was fatal to the sale. [4] It
could not be concluded that an identified purchaser existed.
[5] As Symbolic was not a good-faith purchaser, the sale
was not protected from attack. FNA was free to argue that its
consent was not unreasonably withheld. [5] FNA did not
unreasonably withhold its consent. An automobile manufac-
turer with unhappy experience with an unreliable dealer, FNA
was not unreasonable in objecting to dealing with the shifting
financial structure presented under the fictitious business
name Symbolic. The burden of proving that FNA was unrea-
sonable was on Symbolic. Symbolic failed to carry that bur-
den.
_________________________________________________________________
COUNSEL
Dale L. Bratton, Heller Ehrman White & McAuliffe, San
Francisco, California, Carl J. Chiappa, Kirkpatrick & Lock-
hart, New York, New York, for appellant Ferrari North Amer-
ica, Inc.
Michael St. James, Kornfield, Paul & Bupp, San Francisco,
California, for appellees Official Committee of Unsecured
Creditors.
Paul F. Goldsmith, Hanson, Bridgett, Marcus, Vlahos &
Rudy, San Francisco, California, for appellees, Charles E.
Sims, Chapter 11 Trustee, for R.B.B., Inc., dba Ferrari of Los
Gatos, Debtor.
_________________________________________________________________
OPINION
NOONAN, Circuit Judge:
Ferrari North America (FNA) appeals the order of the
Bankruptcy Appellate Panel (the BAP) approving the assump-
tion of a dealership franchise by the trustee in bankruptcy (the
Trustee) and the assignment and sale by the Trustee of the
franchise to an entity called Symbolic Motor Car Company,
Inc. (Symbolic). FNA's appeal is moot if Symbolic is a pur-
chaser in good faith. Holding that Symbolic is not, we reverse
the order of assignment and sale, vacate the order approving
assumption of the franchise, and remand.
FACTS AND PROCEEDINGS
R.B.B., Inc., dba Ferrari of Los Gatos, operated a dealer-
ship selling and servicing Ferraris in Los Gatos, California.
R.B.B. was licensed by FNA under various agreements here
collectively designated as the Franchise. On August 10, 1994,
FNA sent R.B.B. formal notice of non-renewal of the Fran-
chise on account of a variety of defaults by the dealership. A
week later, on August 17, 1994, R.B.B. filed a petition in
Chapter 11.
R.B.B. continued to operate the dealership as debtor in pos-
session. One year later, in August 1995, on motion of the
creditors' committee, the bankruptcy court appointed Charles
Sims as the Trustee. For over the next two years the Trustee
unsuccessfully sought to sell the Franchise. In January 1998
the Trustee received an offer of $500,000 from an entity
called Symbolic.
On January 29, 1998, Symbolic was identified in a declara-
tion by Marc Chase, its president, as West Coast Acquisitions,
dba Symbolic Motor Car Company, Inc., headquartered in La
Jolla, California. On the same date, the Trustee moved the
court to permit the Trustee to assume the Franchise and to
assign it to West Coast Acquisitions, dba Symbolic.
FNA objected that the Franchise was incapable of assump-
tion, because there were twelve incurable nonmonetary
defaults. On February 26, 1998 the bankruptcy court ruled on
these objections. Under 11 U.S.C. S 365(b)(1), the court
observed, a prerequisite to the trustee's assumption of a con-
tract was the cure of previous defaults. In re Claremont
Acquisition Corp., Inc., 113 F.3d 1029 (9th Cir. 1997), held
that, when an automobile dealership had "gone dark" for
seven consecutive days in violation of the franchise agree-
ment, the defect was incurable. In the instant case, RBB had
failed to pay California sales tax on vehicles it had sold, caus-
ing suspension of its license to sell from August 16, 1994 to
September 1, 1994. But, the bankruptcy court found that FNA
had "not shown any consequences of that default " (during the
suspension, it may be that no sales occurred, but the dealer-
ship did remain open and the service department continued to
"operate"). The court observed that FNA was justifiably con-
cerned that this and other defaults could have injured FNA's
reputation, but held that FNA had not shown that damage had
occurred. The court concluded that the defaults had been
cured or were about to be cured. Assumption of the Franchise
by the Trustee was approved.
The Trustee proceeded to advertise the sale to Symbolic
and solicit other bidders besides Symbolic. FNA objected to
Symbolic and, at a hearing, challenged Symoblic's identity
and suitability. On February 25, 1998 the court conducted an
auction. Symbolic, now offering $1,030,000, was the highest
bidder. On March 24, 1998 the court conducted another hear-
ing on FNA's objections to Symbolic. On March 26, 1998 the
court in a written opinion confirmed the sale and assignment
to Symbolic.
The bankruptcy court began by identifying Symbolic as "a
fictitious business name" under which two automobile dealer-
ships did business. These companies, their business, financial
resources, and owners were as follows:
West Coast Acquisitions (West Coast)
Location: La Jolla, California
Business: Buying and selling new and used Rolls
Royces, Bentleys, Ferraris, Maseratis, Porches, Jag-
uars, and Aston Martins; holder of a franchise from
Rolls Royce
Assets: (unaudited 1997 statement) $2,015,227
Liabilities:$1,793,132
Equity: $222,094
Net income: $107,094
Ownership: Marc Chase 99%
Trust for Chase's daughter: 1%
North Beach Acquisitions (North Beach)
Location: La Jolla, California
Business: Buying and selling Ferraris, Maseratis, and
Lamborghinis
Assets (audited 1997 statement): $23,524,000
Liabilities: $20,060,966
Equity: $ 3,463,000
Net income: $ 4,675,606
Among the liabilities, $1,229,206 at rates of 8.8% to 14%,
$2,240,130 at the rate of 24%, all on unsecured demand notes.
Ownership: Marc Chase, managing member,44%
Bernard Glieberman 30%
Bernie Chase 15%
Elliott Grossman 10%
Marc Chase's daughter's trust 1%
It is not clear from the bankruptcy court opinion which of
these two separate corporations operating as "Symbolic" is
the approved assignee.
The bankruptcy court went on to state: "If the Agreement
is assigned to Symbolic, [Marc] Chase intends to operate the
dealership under its current name `Ferrari of Los Gatos' and
has formed a limited liability corporation under that name
("the LLC") for that purpose; 99% of the LLC is owned by
Chase and 1% is owned by his daughter's trust, with Chase
as the sole officer." The court went on to note Chase's sub-
stantial experience in selling Ferraris. The court noted that
Chase intended to make an equity contribution of $750,000 to
the new LLC and that he had a line of credit at the Huntington
National Bank made available to him by Glieberman.
The court analyzed FNA's objections to the assignment.
Bernie Chase, Marc's brother, had been convicted in 1982 of
selling cocaine and possessing an unregistered firearm. A cor-
poration owned by Glieberman had pleaded guilty in 1979 to
the misdemeanor of furnishing a gratuity to a federal
employee. Grossman was convicted in 1993 of the misdemea-
nor of battery and fined $125. The court observed that FNA's
"complaints would have had more force if the misdeeds were
not so remote in time and/or if they bore directly upon the
operation of an automobile franchise." The court gave no
weight to FNA's point that the criminal records had not been
disclosed and became known only through FNA's investiga-
tion. The court noted FNA's objection that $3.5 million of
North Beach's financing depended on demand notes, but did
not think it significant. The court attached no importance to
the 24% rate of interest or to the fact that North Beach refused
to identify the holders of the notes.
The court repeatedly referred to the assignment that it was
approving as an assignment to Symbolic without indicating
which of the two companies, West Coast and North Beach,
doing business under the name Symbolic, was meant. The
court, nonetheless, applied the factors known as the Van Ness
criteria, Van Ness Auto Plaza, 120 B.R. 545. 549 (Bkcy N.D.
Cal. 1990). These criteria, so far as relevant, are:
1. Adequate working capital of the proposed dealer
2. Prior experience of the proposed dealer
3. Prior profitability of the proposed dealer
4. Prior sales performance of the proposed dealer
5. The business acumen of the proposed dealer
6. The sufficiency of the information about the
qualifications of the proposed dealer provided to
the manufacturer
Applying these criteria, the bankruptcy court first set out the
relevant characteristics of North Beach as if it were somehow
the Symbolic to which assignment was being made.
As far as "the ultimate purchaser," the new LLC, was con-
cerned, the court had before it Marc Chase's statement that he
would invest $750,000 in it and that Glieberman would pro-
vide access to $1.5 million in a line of credit and that if more
capital was needed, Chase or his daughter's trust, or "one of
his companies" would provide it. The court had no explana-
tion of why Glieberman would provide the line of credit with-
out consideration. There is no information in the record on
how Symbolic -- whatever corporation it was -- would trans-
fer ownership of the franchise to Chase. The court concluded
that Symbolic had met the Van Ness factors.
The court noted that John Mozart, a bidder, testified at the
hearing that Bernie Chase had called him from London the
day after the bidders had submitted their bids prior to the
actual auction and asked Mozart to form a joint venture with
him to acquire the Franchise. When Mozart declined, Chase
told him that Chase would prevail and that Mozart's participa-
tion would only drive the price up. Mozart, in fact, did not
withdraw his bid. FNA on this appeal characterizes Bernie
Chase's conversation as an attempt at bid rigging. The bank-
ruptcy court did not appear to be aware of this objection.
The court held that FNA unreasonably withheld consent to
the assignment and approved the assignment and sale to Sym-
bolic. FNA filed an appeal from the orders of assumption of
the franchise and sale and sought a stay pending the appeal.
The bankruptcy court denied the stay, as did the BAP. We
denied FNA's petition for a writ of mandamus requiring a
stay. On May 24, 1998, the sale to Symbolic closed. FNA
meanwhile appealed the orders of assumption of the franchise
by the Trustee and the sale and assignment to the BAP. On
March 26, 1999, the BAP dismissed this appeal as moot. FNA
now appeals to us.
ANALYSIS
The Purchaser. 11 U.S.C. S 363(m) provides
The reversal or modification on appeal of an
authorization under subsection(b) or (c) of this sec-
tion 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 during appeal.
The sale was authorized by the bankruptcy court under
S 363(b). The sale was not stayed. The question left under the
statute is whether the assignee was a BFP.
[1] The first requirement of having a purchaser in good
faith is to have a purchaser. Who was the purchaser of the
Franchise? The Trustee moved for authorization to assign and
sell to West Coast doing business as Symbolic. The bank-
ruptcy court's authorization of the assignment and sale, how-
ever, is entitled "Memorandum Decision Authorizing
Assignment Of Franchise Agreement To Symbolic Motor Car
Company" and moves on the first page to identify North
Beach and West Coast as two different corporations using this
fictitious business name. We cannot distinguish which corpo-
ration is being approved as purchaser and assignee. Some-
times the opinion reads as if West Coast were meant,
sometimes as though North Beach was meant, sometimes as
though both were meant, and occasionally as though only the
new LLC was meant.
[2] It is not clear why the ownerships of both West Coast
and North Beach were examined by the court unless the court
somehow regarded both corporations as the purchasers.
In one paragraph, the bankruptcy court speaks of Symbolic's
$5,000,000 line of credit and of "West Coast's own
$3,000,000 line of credit." Clearly at this point the bankruptcy
court is distinguishing West Coast from Symbolic and is
referring to North Beach when it speaks of Symbolic's
$5,000,000 line of credit. It is unclear why the court examined
North Beach's financing unless it believed that somehow
North Beach was the buyer. It is unclear why the court, after
examining North Beach's financial condition, should in the
next sentence declare, "Symbolic's financial condition
appears to be exceptionally strong", unless the court had com-
bined North Beach's assets with West Coast's assets, as
though the companies' use of the same fictitious business
name "Symbolic" had effected the merger of the two.
[3] West Coast's condition, taken by itself, could not have
been characterized as "exceptionally strong." Its statement
was unaudited, so the court had no secure basis for evaluating
its condition. Equity, as reported by it, was under $250,000.
North Beach had not pooled its assets with West Coast. In a
sale, assignment and written opinion where Symbolic was
said to be the purchaser it was necessary to say which Sym-
bolic. The assets and lines of credit of North Beach and West
Coast could not be mushed together. Ambiguity as to the pur-
chaser was as fatal to the sale as the two ships named Peerless
were fatal to the formation of a contract.
It may be argued that the confusion, while considerable,
was not fatal. The bankruptcy court was aware that there was
going to be an "ultimate purchaser." But in that event the Van
Ness criteria must be applied to the new LLC. That entity had
zero experience, sales or profitability. The only way it could
qualify was by treating it as the alter ego of Marc Chase. But
in that event the court needed to know how Symbolic--
whatever company this name embraced -- was going to fund
the LLC and confer ownership on Chase. Whichever Sym-
bolic was intended to be the purchaser, it had no connection,
either corporately or as a guarantor, with the new LLC. Not
inaptly, FNA characterizes what went on as a species of shell
game. Under which shell was the winning bidder? Not Sym-
bolic No.1 containing West Coast. Not Symbolic No. 2 con-
taining North Beach. But under a company to be formed,
whose current assets were zero. The sale and assignment
approved by the bankruptcy court were made on a shifting
basis.
It could also be argued that the ambiguity of the bankruptcy
court's decision concealed a reality: that the assignment and
sale were, in fact, to West Coast. So the sale had been adver-
tised; so the sale was carried out; therefore, there could not
have been doubt that West Coast was the assignee and pur-
chaser that the court was approving. In a declaration filed
December 1, 1998 by Marc Chase in this case, Chase identi-
fies West Coast as the purchaser of the Franchise and declares
that West Coast formed the "operating entity, Ferraris of Los
Gatos LLC, to operate the sales and service facilities.". But
the Van Ness criteria were not applied by the court to West
Coast alone, but to West Coast in combination with North
Beach. It was "Symbolic," treated as a fusion of the two com-
panies, that emerged from the court's decision as the assignee
and purchaser. This "Symbolic" was a mirage.
[4] Bankruptcy is an intensely practical matter. The Trustee
and the bankruptcy court were undoubtedly anxious to find a
buyer and get cash to distribute to the creditors. Nonetheless,
as two companies were ambiguously the purchaser, it cannot
be concluded that an identified purchaser existed.
[5] Reasonably Withheld Consent to Assignment. As Sym-
bolic was not a good faith purchaser, S 363(m) does not pro-
tect the sale from attack. FNA consequently is free on this
appeal to argue that its consent to the assignment was not
unreasonably withheld.
[6] For the same reasons we have held that the purchaser
was not identified, we hold that FNA did not unreasonably
withhold its consent. An automobile manufacturer with a spe-
cial line of luxury motor cars and unhappy experience with an
unreliable dealer, FNA was not unreasonable in objecting to
dealing with the shifting financial structure presented under
the fictitious business name Symbolic. The burden of proving
that FNA was unreasonable in finding that Symbolic flunked
the objective criteria of Van Ness was on Symbolic. In re
Claremont, 186 B.R. 977, 985 (C.D. Cal. 1995), aff'd 113
F.3d 1029 (9th Cir. 1997). Symbolic failed to carry its burden.
We need not decide at this point FNA's other contention
that the defaults of the debtor were either uncured or incur-
able. FNA has raised serious doubts on this score, but the
bankruptcy court is in the best position to take a look at the
situation as it now stands over two years since that court last
addressed it. Moreover, the assumption of the Franchise by
the Trustee was approved in connection with the proposed
sale to Symbolic. The situation now is new.
Accordingly, the Order approving the sale and assignment
is REVERSED; the Order approving assumption of the Fran-
chise by the Trustee is VACATED; the case is REMANDED
to the bankruptcy court for proceedings consistent with this
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