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In re Whitney-Forbes Inc.

August 16, 1985


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 83 C 8588-Charles P. Kocoras, Judge.

Author: Cummings

Before CUMMINGS, Chief Judge, WOOD, Circuit Judge, and GARZA, Senior Circuit Judge.*fn*

CUMMINGS, Chief Judge.

This is an appeal from the district court's reversal of a November 10, 1983, bankruptcy court decision to declare void a 1973 judicial sale of a patent in bankruptcy. The trustee argues that the bankruptcy court's November 10, 1983, decision should be reinstated because relief from the 1973 confirming order is authorized by Fed. R. Civ. P. 60(b)(4) and (6). For the reasons set forth below, we affirm the decision of the district court.


The proceeding to vacate the March 13, 1973, bankruptcy court order confirming the sale of the patent at issue to Albert E. Sloan was instituted in 1982 by former trustee Avrum Dannen for the bankrupt estate of Whitney-Forbes, Inc. ("Whitney-Forbes"). David Coar subsequently was substituted as the trustee. Sloan was the president of Whitney-Forbes at the time of the initial bankruptcy proceedings and in late 1972 he sought to purchase from the bankruptcy estate certain litigation and U.S. Patent No. 3,455,507 ("patent 507" or "the 507 patent"). Trustee Dannen filed an application for leave to sell five causes of action in February of 1973 and notice of their proposed sale was issued to creditors. The 507 patent was not listed in the notice. The order authorizing the sale of the causes of action, however, expressly listed the 507 patent. The order was drafted by Dannen, presented in open court on March 13, 1973, and signed by Bankruptcy Judge Toles. No discussion regarding the patent occurred at the March 13 hearing and all the assets were sold for $250.*fn1

There is conflict in the testimony given by Sloan, Dannen and the bankrupt's attorney, Mr. James Nachman, in the instant bankruptcy court proceedings, regarding how the 507 patent found its way into the March 13 order. Dannen stated that Nachman requested him to include the patent in the order, while Sloan testified that he did not speak to Dannen regarding the patent but did request Nachman to procure the asset for him. Nachman testified, however, that he never discussed the patent with Sloan or Dannen and had no idea how it came to be included in the March 13 order. (Tr. 8/22/83, pp. 70-72, 151-153; Tr. 9/19/83, p. 155.) On May 6, 1974, Dannen executed an assignment of the patent, transferring it to Sloan. There is testimony from Dannen, Sloan and the inventor of the patent, Frans Brouwer, that as an unlicensed patent, the 507 patent in 1973 had little or no value, worth at most $250 to $500. (Tr. 8/22/83, p. 186; Tr. 9/19/83, pp. 187, 193.) Several attempts to license the patent and market the underlying invention (a spray-paint gun) a failed (Tr. 9/19/83, pp. 177-220).

In the years following the sale, Sloan, Brouwer and others invested substantial time and money to develop and market a spray-paint gun invention, leading to a second patent and, after unsuccessful attempts, a patent licensing and marketing agreement in 1976 with Graco, Inc. Production of a spray-paint gun began two years later based in part on the 507 patent. A dispute between Graco and Sloan arose which culminated in litigation in 1981 and apparently sparked the instant proceedings. In July of 1982 Dannen succeeded in having Bankruptcy Judge Toles reopen the Whitney-Forbes bankruptcy and substituted trustee Coar then petitioned the bankruptcy court to set aside the 1973 confirmed sale of the 507 patent on the ground of fraud by a party and fraud on the court (7/30/82 Application P 13; Tr. 8/22/83, p. 36). The case was subsequently reassigned to Bankruptcy Judge Merrick.

Following a trial Bankruptcy Judge Merrick issued an Opinion and Order of November 10, 1983, which relied exclusively on Fed. R. Civ. P. 60(b)(4) to declare the March 13, 1973, order void with respect to the sale of patent 507. From the testimony presented to the court and its review of the circumstances surrounding the March 13, 1973, sale, the court made the following findings regarding the suspicious inclusion of the 507 patent:

(1) that intentionally he [Sloan] concealed the existence of patent 507 so that he would not have to bid for it competitively in the event of a liquidation, nor have to bargain with creditors on the basis of it in establishing the terms of a plan of reorganization;

(2) that Sloan negotiated with Dannen to have the patent transferred to Sloan in a manner which would avoid public participation or competition; and;

(3) that at some point Sloan and Dannen devised an explanation of events which would describe them as being innocent and unaware and would cause the moving party in the scheme of transfer to appear to have been James Nachman.

(11/10/83 Order at 32). The court explained that the case essentially involved "collusion between two persons who have fiduciary relationships to the Court and to other parties to the proceedings," but also noted the irregularities of nondisclosure of assets, lack of notice to creditors of a sale of assets and a sale of assets below market value (11/10/83 Order at 33). The court, however, specifically found in its subsequent Opinion and Order of January 6, 1984, that there was no evidence to suggest fraud in the case and clarified that the November 10, 1983, Opinion did not suggest fraud (11/6/84 Order at 16). Finally, the bankruptcy court held that there was no evidence enabling it to determine the value of the patent on March 13, 1973.

Sloan appealed the decision to the district court which then reversed the bankruptcy court on June 4, 1984, ruling that as a matter of law the March 13, 1973, sale of the 507 patent was not void within the meaning of Fed. R. Civ. P. 60(b)(4). Judge Kocoras additionally found that the equities in the case, including the extraordinary ...

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