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Candlewood Partners LLC v. Hedstrom Corp.

April 22, 2008

CANDLEWOOD PARTNERS LLC, APPELLANT,
v.
HEDSTROM CORPORATION AND VICTORY LANE OIL, INC., APPELLEES,
IN RE: REPURCHASE CORPORATION, DEBTOR.



Appeal From the Honorable Judge Jack B. Schmetterer.

The opinion of the court was delivered by: Honorable David H. Coar

Chapter 11 Proceeding Bankruptcy Case No. 04 B 38543

MEMORANDUM OPINION AND ORDER

This matter comes before this Court on Appellant Candlewood Partners LLC's ("Candlewood") appeal from the United States Bankruptcy Court, where final orders were entered overruling an objection filed by Candlewood and granting a motion by the Appellee Debtor, Hedstrom Corporation (the "Debtor") authorizing the Debtor to sell certain assets. This Court has jurisdiction over this appeal pursuant to 28 U.S.C. §158(a). Also before the Court is Appellee's Motion to Dismiss the Appeal.

I. FACTS

Prepetition Facts asserted by Candlewood Candlewood had been in negotiations to purchase certain assets of the Debtor. Those assets included the Debtor's Ball, Bounce and Sports Division ("BBS Division"). In preparation of the purchase, Candlewood expended $85,000 in performing due diligence, financial analyses and negotiations. Candlewood reached an agreement with a potential investor, James Purtell, in which both parties agreed to keep the terms of their agreement confidential. On or about October 7, 2004, Purtell introduced Victory Lane Oil, Inc. ("Victory") to Candlewood as a potential investor, but that relationship never materialized. On or about October 14, 2004, Victory contacted the Debtor's marketing and sale advisors, Barrier Advisers, about purchasing the Debtor's BBS Division.

Bankruptcy Proceedings

On October 18, 2004, the Debtor filed a petition for relief under Chapter 11 of the United States Bankruptcy Code. On that same date, Debtor filed an Emergency Motion to Authorize Sale of Certain Assets Outside the Ordinary Course of Business, Approve Sale Terms and Procedures, and Approve Procedures for the Designation, Assumption and Assignment of Executory Contracts. In the motion, the Debtor sought to sell its BBS Division to Victory, subject to higher and better offers forthcoming at public auction. On that same date, Candlewood appeared telephonically before the Bankruptcy Court and alleged that Victory had engaged in tortious conduct by usurping Candlewood information and intellectual property in arriving at its bid.

On October 28, 2004, Candlewood filed a written objection to the motion stating that it filed an action in Ohio state court against Victory alleging in effect that Victory had tortiously obtained and utilized Candlewood's information in connection with the proposed sale of the BBS Division and had tortiously interfered with Candlewood's contractual and business relations. On October 29, 2004, a good faith hearing was conducted before the Bankruptcy Court. Counsel for the Debtor objected to Candlewood's objection and participation in the hearing, but the Bankruptcy Court determined that Candlewood had standing to object and participate in the good faith hearing on the basis of the nature of its objection.

The Court gave Candlewood opportunities to present witness testimony and to explain how Victory's bid made use of Candlewood's confidential and proprietary work, but Candlewood was unable to do either. The Court took testimony from Harry Gray of Barrier Advisors, which advised the Debtor on the marketing and selling of the BBS Division. Gray testified that he had personally participated in the sale process of the BBS Division. He stated he had been dealing with unsolicited offers since February 2004 and that after the Bankruptcy Court authorized the sale to proceed, his company contacted ninety-six potential buyers. Candlewood was not on a list of the ninety-six names of the potential buyers. However, Gray testified that his company had sent solicitation materials to Candlewood. Gray testified that the Victory offer was greater in value that the estimated liquidation value of the BBS Division. He also testified that no materials created by Candlewood were ever given to Victory to the best of his knowledge and that Candlewood never expressed to him or anyone at Barrier Advisors that they were interested in purchasing the BBS Division. Candlewood could not point to any concrete proprietary information contained in its form sale agreement that had been allegedly misappropriated and used by Victory in its bidding agreement. At the conclusion of the hearing, the Bankruptcy Court overruled Candlewood's objection and found the sale was not tinged with bad faith.

II. STANDARD OF REVIEW

On appeal in a United States district court, a bankruptcy court's findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. Monarch Air Serv. v. Solow (In re Midway Airlines, Inc.), 383 F.3d 663, 668 (7th Cir. 2004). A bankruptcy court's good faith determination is a factual finding that is reviewed for clear error. Hower v. Molding Sys. Eng'g Corp., 445 F.3d 935, 938 (7th Cir. 2006) (citing In re Smith, 286 F.3d 461, 464 (7th Cir. 2002)). In its statement of the applicable standard of review, Candlewood states this Court's review of the Bankruptcy Court's decision to hold an evidentiary hearing without giving 20 days notice is a question of law and should be reviewed de novo. But Candlewood has not listed the Bankruptcy Court's decision to hold an evidentiary hearing as one of the questions presented on this appeal; therefore, the Court declines to review it.

III. ANALYSIS

Candlewood raises two issues on this appeal.*fn1 First, it asks whether the Bankruptcy Court erred in its finding that the Debtor's sale of certain assets to a third party was done in good faith. Second, Candlewood asks whether the Bankruptcy Court erred when it entered an order of the good faith finding pursuant to Section 363(m) of the Bankruptcy Code. The Appellees inquire whether Candlewood had standing to object to the sale, participate in the good faith hearing and file notice of appeal with respect to the orders entered in connection with the sale. Appellees contend that Candlewood does not have standing to appeal the final orders of the Bankruptcy Court. Appellees also contend ...


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