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In re Abbotts Dairies of Pennsylvania Inc.

argued: March 7, 1986.

IN RE ABBOTTS DAIRIES OF PENNSYLVANIA, INC., PENNBROOK FOODS COMPANY, INC., THE PENNBROOK CORP., ABBOTTS REALTY, INC., ABBOTTS HOLDING CO., INC., CUMBERLAND FARMS DAIRY, INC., APPELLANT NO. 85-1543, NATIONAL FARMERS' ORGANIZATION, INC., APPELLANT NO. 85-1544


Appeal from the United States District Court for the Eastern District of Pennsylvania, Civ. Action No. 84-5118.

Author: Seitz

Opinion OF THE COURT

Present: ALDISERT, Chief Judge, SEITZ, and ADAMS, Circuit Judges.

SEITZ, Circuit Judge.

The National Farmers' Organization, Inc. ("NFO") and Cumberland Farms Dairy, Inc. ("Cumberland") appeal from a final order of the district court, which dismissed as moot their appeals from an order of the bankruptcy court. This court has jurisdiction over their appeals by virtue of 28 U.S.C. §§ 158(d) and 1291.

I.

On August 10, 1984, Abbotts Dairies of Pennsylvania, Inc., Pennbrook Foods Company, Inc., The Pennbrook Corporation, Abbotts Realty, Inc., and Abbotts Holding Company, Inc. (hereinafter referred to collectively as "Abbotts"), filed petitions for relief under Chapter 11 of the Bankruptcy Code (the "Code"), 11 U.S.C. §§ 1101-1174. On the same day, Abbotts file motions for approval of two agreements it had entered into with ADC, Inc. ("ADC"): an "Interim Agreement Concerning Sale of Inventory and Lease of Certain Assets" (the "Interim Agreement"); and an "Asset Purchase and Lease Agreement" (the "Purchase Agreement").

The bankruptcy court held an emergency hearing that afternoon to consider Abbotts' motion for approval of the Interim Agreement, whereby ADC would effectively take over Abbotts' business.*fn1 Notice of the hearing had been given only to the Philadelphia National Bank ("PNB") and Fairmont Pennsylvania Holdings, Inc. ("Fairmont"), Abbotts' two secured creditors, both of whom were represented at the hearing. Also present, almost by chance, was an attorney representing three of Abbotts' unsecured creditors, and Cream-O-Land Dairies, a prospective purchaser of the business.

In support of its motion, Abbotts' Chairman and Chief Executive Officer, Richard H. Gwinn, testified that PNB notified Abbotts in February of 1984 that it had defaulted on its loans, and that if Abbotts did not obtain financing from another lender, PNB would reduce Abbotts' line of credit at a rate of $100,000 per week.*fn2 He also stated that unless the bankruptcy court approved the Interim Agreement, the company would have to cease operations when its current inventory was exhausted on August 11 (the next day), because it had no excess working capital with which to purchase any more milk. Finally, Mr. Gwinn opined that if Abbotts ceased operations, its trademarks and customer list would lose substantially all of their value, resulting in a loss of $3 to $4 million dollars to the estate.

On cross-examination by counsel representing one secured creditor, a prospective bidder, and three unsecured creditors, Mr. Gwinn testified that he had reached an informal agreement to act as a consultant to ADC during the pendency of the bankruptcy proceedings, at his current salary of $150,000 per year -- provided that the bankruptcy court approved the Interim Agreement. He also testified that he had been offered a senior executive position with ADC for five years, once again at his current salary, and that he hoped that ADC would relieve him from personal liability on several of Abbotts' obligations -- provided, once again, that the bankruptcy court approved ADC's purchase of Abbotts' assets.

At the conclusion of the hearing, the bankruptcy court entered an order approving the Interim Agreement. This order was supplemented by an order entered on August 17, 1984, which required ADC and its employees to hold themselves out as Abbotts' representative; to maintain, where possible and economically feasible, Abbotts' existing distribution system; to continue to distribute products under the Abbotts' trademarks and not act affirmatively to switch its customers to products sold under other trademarks; and to act reasonably so as not to prejudice the rights of Abbotts' creditors or diminish the value of its trademarks. These provisions represented concessions that Fairmont had extracted from Abbotts and ADC during the course of the hearing, which Fairmont hoped would preserve Abbotts' value as a going concern until the bankruptcy court could consider the Purchaser Agreement and any other competing bids for Abbotts' assets.

Notice of the motion for approval of the Purchase Agreement was then sent to all interested parties. The notice summarized the Purchase Agreement, and set a deadline for objections to it, as well as for "higher or better" bids for Abbotts' assets. The notice did not, however, reveal that Mr. Gwinn was presently employed by ADC as a "consultant," nor did it indicate that he had been offered a permanent position with ADC, conditioned upon closing pursuant to the Purchase Agreement. Likewise, the notice did not indicate that an emergency hearing had been held on August 10, nor did it summarize the terms of the Interim Agreement that had been approved at that hearing; rather, the notice simply stated that "[ADC] previously purchased the inventories and has been in possession of certain operating equipment and facilities of [Abbotts] and have continued certain operations of Abbotts . . . under an Interim Agreement pending approval by the Bankruptcy Court of the [Purchase] Agreement."

Three parties filed objections to the sale, only one of which -- that filed by Fairmont -- is at all pertinent to the present appeals. Fairmont asserted, inter alia, that the sale of Abbotts' assets should not be approved until a disclosure statement had been approved by the court and a plan of reorganization confirmed by Abbotts' creditors, because of a number of factors (including the Interim Agreement) that might chill the bidding for Abbotts' assets. Fairmont also objected to the lack of any appraisals of Abbotts' assets, and argued that the "value" to be paid by ADC was insufficient.

Three parties submitted bids: ADC, Cumberland, and Atlantic Processing, Inc. ("API"). ADC's bid (the Purchase Agreement) contemplated, inter alia, the purchase of Abbotts' trademarks and customer list for a guaranteed minimum payment of $1 million. API sought to purchase Abbotts' trademark only for a cash payment of $1,250,000. Finally, Cumberland submitted two alternative bids. The first contemplated a guaranteed minimum payment ...


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