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In re Rock Industries Machinery Corp.

March 31, 1978

IN RE ROCK INDUSTRIES MACHINERY CORP., F/K/A LIPPMANN, INC., BANKRUPT. LITTON SYSTEMS, INC., APPELLANT.


Appeal from Order of the United States District Court for the Eastern District of Wisconsin. No. 73 B 1245 - Myron L. Gordon, Judge.

Before Bauer, Wood, Circuit Judges, and Marshall, District Judge.*fn*

Author: Bauer

BAUER, Circuit Judge. Litton Systems, Inc. appeals the district court's dismissal of its appeal of a bankruptcy judge's order confirming the sale of Rock Industries' assets to Joseph Gabriel as moot under Rule 805 of the Federal Rules of Bankruptcy Procedure because a stay of the order confirming the sale had not been obtained from the bankruptcy judge. Litton contends here that its appeal was not mooted by the failure to obtain a stay order because Gabriel was not a "good faith purchaser" within the meaning of Rule 805. We disagree and affirm the district court's judgment for the reasons noted below.

I.

These proceedings were commenced in 1973 under Chapter 11 of the National Bankruptcy Act. On April 12, 1976, Rock Industries was adjudicated a bankrupt, and straight bankruptcy proceedings began. Litton, a creditor of Rock, claims title to certain assets held by Rock at the time it was adjudicated bankrupt and has pursued the claim against the trustee in a pending civil action in the district court.

On July 9, 1976, a notice of a public sale of Rock's assets was issued which inadvertently made no reference to the assets claimed by Litton. Three days later, the judge issued an order authorizing the sale of the bankrupt's assets, including the assets in dispute. Upon receiving notice of the order authorizing sale, Litton moved to have the assets to which it claimed title impounded and withheld from sale. Its motion was not acted upon by the bankruptcy judge, but the trustee's counsel did tell Litton that the assets in dispute would not be sold at the auction. Nevertheless, on August 10, 1976, a public auction was held offering Rock's assets for sale, including the assets in dispute. Joseph Gabriel successfully bid $380,000 for the bankrupt's assets in bulk, free and clear of all liens and encumbrances.

At the confirmation hearing held the next day, the trustee told the court that he could not recommend confirmation of Gabriel's bid because the assets of the bankrupt could not be delivered to any bulk bidder free and clear of the Litton claim that was pending in the district court. Gabriel then came forward with a modified bid of $350,000. Under the terms of his proposed bulk bid, he would take free and clear title to all the bankrupt's assets except those in dispute between the trustee and Litton. As to the assets in dispute, Gabriel would receive a quit claim of whatever interest the trustee held in the assets subject to the outcome of the pending litigation. Both the trustee and the auctioneer recommended that the court confirm the bid or any higher bid received at the hearing on the same terms. Litton's counsel then moved to postpone the hearing for 24 hours so that counsel could determine whether Litton wished to bid for the assets. When Gabriel refused to hold his offer open during any postponement, the judge denied Litton's motion. The assets were then offered for sale to those present at the confirmation hearing on the basis proposed by Gabriel, and his bid was confirmed over Litton's objections: (1) that the notice of sale inadequately described the assets to be sold at auction; and (2) that the court abused its discretion in permitting the trustee to hold what was, in effect, a "private" sale at the confirmation hearing. An order confirming the sale of the assets was entered on August 13, 1977.

On August 17th Litton filed a notice of appeal of the order confirming sale with the district court and moved the bankruptcy judge to stay his order. Gabriel and the trustee opposed the stay motion, and the judge denied it after a hearing. Litton then moved the district court to stay the order confirming sale, but its motion was again denied after a hearing. Thereafter, the district court dismissed Litton's appeal as moot under Rule 805, which provides in relevant part that,

"[unless] an order approving a sale of property... is stayed pending appeal, the sale to a good faith purchaser... shall not be affected by the reversal or modification of such order on appeal, whether or not the purchaser... knows of the pendency of the appeal." Fed. R. Bank. P. 805.

On appeal here, Litton claims that Gabriel's "good faith purchaser" status was destroyed by: (1) his participation in a private, pre-auction conference with the judge and the trustee at which Gabriel learned that the judge probably would not confirm any bulk bid "free and clear" of Litton's claims to the assets in dispute; (2) his acquisition of a waiver of a claim against the bankrupt's assets subject to his purchase of the assets; (3) his refusal to permit a postponement of the confirmation hearing so that other bidders could prepare competitive bids; and (4) his notice of the alleged irregularities in the sale that are the subject of Litton's appeal.

II.

It is clear that Rule 805 effectively moots Litton's appeal of the order confirming sale if Gabriel is deemed to be a "good faith purchaser." Country Fairways, Inc., 539 F.2d 637, 641 (7th Cir. 1976). Yet, neither the Rule itself nor the Committee Notes appended thereto provide a definition of the phrase "good faith purchaser" or a body of case law from which a definition may be gleaned. Accordingly, the parties urge us to apply the traditional equitable definition of a "good faith purchaser" as one who purchases the assets for value, in good faith, and without notice of adverse claims. E.g., In re Ferris, 415 F. Supp. 33, 41 (W.D. Okla. 1976). It is not disputed that Gabriel purchased the bankrupt's assets for value.*fn* The parties do disagree, however, over whether Gabriel was acting in good faith during the course of the sale and whether he had notice of adverse claims that would destroy his good faith purchaser status.

The requirement that a purchaser act in good faith, of course, speaks to the integrity of his conduct in the course of the sale proceedings. Typically, the misconduct that would destroy a purchaser's good faith status at a judicial sale involves fraud, collusion between purchaser and other bidders or the trustee, or an attempt to take grossly unfair advantage of other bidders. See, e.g., In re Webcor, Inc., 392 F.2d 893, 899 (7th Cir. 1968). As the district court observed, however, no such flagrant misconduct has been alleged in the circumstances of this case.

Litton claims that Gabriel was not acting in good faith because (1) he obtained information unavailable to other bidders at the auction during a private meeting with the judge and the trustee prior to the auction; (2) he obtained a waiver of a claim against the bankrupt's assets conditioned upon his purchase of the assets; and (3) he refused to permit a postponement of the ...


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