Court Opinion

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Opinions of the United
1999 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

6-18-1999

Northview Mtr Inc v. Chrysler Mtr Corp
Precedential or Non-Precedential:

Docket 98-3387

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Recommended Citation
"Northview Mtr Inc v. Chrysler Mtr Corp" (1999). 1999 Decisions. Paper 158.
http://digitalcommons.law.villanova.edu/thirdcircuit_1999/158

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Filed June 18, 1999

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

NO. 98-3387

NORTHVIEW MOTORS, INC.

v.

CHRYSLER MOTORS CORPORATION

JOSEPH P. NIGRO, Trustee

       NORTHVIEW MOTORS, INC.;
       *FRANK P. CUDA;
       *JOANN CUDA
       Appellants
(*Pursuant to Rule 12(a), F.R.A.P.)

On Appeal From the United States District Court
For the Western District of Pennsylvania
(D.C. Civil Action No. 93-cv-01722)
District Judge: Honorable William L. Standish

Argued February 8, 1999

BEFORE: SLOVITER, STAPLETON and ROTH,
Circuit Judges

(Opinion Filed June 18, 1999)

       Robert G. Sable
       Sable, Pusateri, Rosen, Gordon &
        Adams
       7th Floor, Frick Building
       Pittsburgh, PA 15219-6002
       Thomas M. Ferguson (Argued)
       Blumling & Gusky
       1200 Koppers Building
       Pittsburgh, PA 15291
        Attorneys for Appellants

       Mark F. Kennedy
       Christopher J. Meyer (Argued)
       Wheeler, Trigg & Kennedy
       1801 California Street, Suite 3400
       Denver, CO 80202
        Attorneys for Appellee

OPINION OF THE COURT

STAPLETON, Circuit Judge:

Appellants Northview Motors, Inc. ("Northview") and
Frank P. and Joann Cuda ("the Cudas"), principals and
secured creditors of Northview, appeal from the order of the
United States District Court for the Western District of
Pennsylvania enforcing an agreement purporting to settle
Northview's claims against Appellee Chrysler Motors, Inc.
("Chrysler"). While administering these claims for the
benefit of Northview's bankrupt estate, the Trustee entered
into this agreement with Chrysler.

Northview and Chrysler were parties to an automobile
dealership franchise agreement, which Chrysler terminated
in 1991. On September 20, 1991, Northview filed a
voluntary bankruptcy petition in the United States
Bankruptcy Court for the Western District of Pennsylvania
under Chapter 11 of the United States Bankruptcy Code,
11 U.S.C. S1101 et seq. The bankruptcy was subsequently
converted to a Chapter 7 proceeding and a trustee of the
bankrupt estate was appointed.

On October 20, 1993, Northview, without the knowledge
of the Trustee, filed the instant civil action against Chrysler.1
_________________________________________________________________

1. Frank Cuda was originally a plaintiff to this action and asserted the
same claims against Chrysler that were asserted by Northview. In March
1995, the District Court granted summary judgment to Chrysler on all
of Cuda's claims. The District Court subsequently amended the caption
eliminating Frank Cuda as a named party.

                               2
The complaint asserted five claims: (1) violation of the
federal Automobile Dealer's Day in Court Act, 15 U.S.C.
SS1221-1225 (the "ADDCA"); (2) violation of the
Pennsylvania Board of Motor Vehicles Act, 63 Pa.C.S.
SS818.1-818.28; (3) tortious interference with contract; (4)
breach of the Uniform Commercial Code; and (5) breach of
contract. After learning of this suit, the Trustee took
possession of it for the benefit of Northview's bankrupt
estate. On May 15, 1996, the Trustee agreed to settle
Northview's claims in exchange for Chrysler's agreement to
pay Northview $115,000 and to withdraw its claims against
the bankrupt estate totaling $35,659.97. The settlement
agreement expressly provided that it was "subject to
bankruptcy court approval." (21a)

Following the settlement, the District Court entered an
order administratively closing the action. This order
acknowledged that "the only matters remaining to be
completed are the approval of the settlement by the
bankruptcy court and the submission of a stipulation for
dismissal under Fed.R.Civ.Proc. 41(a)." (12a) Furthermore,
the order specified that "nothing contained in this order
shall be considered a dismissal or disposition of this action,
and that should further proceedings therein become
necessary or desirable, either party may initiate the same in
the same manner as if this order had not been entered."
(12a) Thereafter, the Trustee filed a motion to approve the
settlement in the Bankruptcy Court.

In response to the Trustee's motion for approval,
Northview and the Cudas filed an objection to the
settlement. In their objection, Northview and the Cudas
asserted that the settlement amount was inadequate, and
thus was not in the best interest of the estate. Additionally,
Northview and the Cudas filed a motion pursuant to 11
U.S.C. S554 to compel the Trustee to abandon the litigation
on the grounds that the claims were of inconsequential
value to the estate. In support of their motion, they alleged
that: (1) the Cudas were the owners and subrogees of a
secured claim against all the assets of Northview as a result
of the Cudas' satisfaction of a secured claim of Mellon Bank
against Northview in the amount of $610,123.25; and (2)
because the settlement amount was less than this secured

                               3
claim, the claim would not provide for any distribution to
unsecured creditors and thus was "of no value or benefit to
the estate." (97a)

The Bankruptcy Court ordered the Trustee to abandon
the lawsuit to the Cudas. The Bankruptcy Court entered
this order because it found: (1) that Mellon held a perfected
security interest in Northview's claim against Chrysler prior
to the filing of the petition; (2) that the Cudas were
subrogated to that security interest when they satisfied
Northview's $610,123.25 obligation to Mellon; (3) that the
Cudas' interest exceeded the value of the lawsuit; and (4)
that the lawsuit thus would not generate any funds for
unsecured creditors. In re Northview Motors, Inc., 202 B.R.
389 (Bankr. W.D. Pa. 1996). The District Court affirmed
this order, and the parties do not challenge before us the
propriety of the order requiring abandonment to the Cudas.
Because of its order regarding abandonment, the
Bankruptcy Court never approved the proposed settlement
agreement between the Trustee and Chrysler. Instead, the
Bankruptcy Court denied Chrysler's motion for approval as
moot.

Chrysler then advised Northview and the Cudas that
Chrysler was willing to complete the settlement agreement
by forwarding a check to Northview in the amount of
$115,000. Northview and the Cudas rejected the offer and
demanded $3,500,000 to settle the action. In response,
Chrysler filed a motion to enforce the settlement agreement.
Northview, joined by the Cudas in their capacity as
Northview's principals and secured creditors, opposed the
motion. The District Court granted Chrysler's motion to
enforce, concluding that court "approval [of the settlement
agreement] became unnecessary when the abandonment
occurred." Slip. Op. at 10. Northview and the Cudas now
appeal. We have jurisdiction pursuant to 28 U.S.C. S1291.
Chrysler has moved to dismiss the Cudas as appellants.

I.

As an initial matter, we must decide whether the Cudas
have standing to appeal the order of the District Court
granting Chrysler's motion to enforce the settlement

                               4
agreement. Ordinarily, those who were not parties to the
proceeding below may not appeal an order of a district court.2
See Caplan v. Felheimer Eichen Braverman & Kaskey, 68
F.3d 828, 836 (3d Cir. 1995). However, this Court has
recognized that a nonparty may bring an appeal when three
conditions are met: (1) the nonparty has a stake in the
outcome of the proceedings that is discernible from the
record; (2) the nonparty has participated in the proceedings
before the district court; and (3) the equities favor the
appeal. See id.

The first requirement is clearly satisfied. Because the
Bankruptcy Court ordered the Trustee to abandon
Northview's claims against Chrysler to the Cudas, the
Cudas will be the recipients of any payment made by
Chrysler in satisfaction of these claims. Thus, the Cudas
have a substantial stake in the outcome of these
proceedings. See Binker v. Commonwealth of Pennsylvania,
977 F.2d 738, 745 (3d Cir. 1992) (potential recipients of
settlement agreement have substantial stake in litigation).

Turning to the second requirement, we note that the
Cudas filed a brief in the district court opposing Chrysler's
motion to enforce the settlement agreement. We have
previously held that this level of participation is sufficient
to satisfy the second requirement. See Krebs Chrysler-
Plymouth Inc. v. Valley Motors, Inc., 141 F.3d 490, 496 (3d
Cir. 1998) (nonparty's filing of brief and arguing in support
of a party's position satisfied participation requirement).
Additionally, we note that the Cudas participated
significantly in the related abandonment proceedings before
the Bankruptcy Court.

Finally, we address the equities of allowing this appeal.
The Cudas have an interest in litigating whether or not the
settlement agreement signed by the Trustee is binding. If
the settlement agreement is not binding, the Cudas may
_________________________________________________________________

2. Although the District Court dismissed Frank Cuda from the action, he
does not appeal that order. Rather he asserts standing for purposes of
this appeal as a party to whom Northview's claims have been
abandoned. Because of this procedural posture, we conclude that Frank
Cuda should be treated as a nonparty for purposes of this appeal. Joann
Cuda was never a party to the instant suit.

                               5
litigate the claims on remand or pursue a higher settlement
amount than that agreed to by the Trustee. To the extent
that the Cudas' secured debt is satisfied by this recovery
from Chrysler, Northview and its other creditors are better
off.

Chrysler's argument that the equities favor denying the
Cudas an opportunity to pursue this appeal rests primarily
on its contention that the Cudas have taken inconsistent
positions as to the value of the claims. In support of this
contention, Chrysler points to the following positions:

       1. In objecting to the proposed settlement, the Cu das
       indicated that their attorney, who has extensive
       experience in litigating actions between franchisers and
       dealers, was prepared to testify that the settlement was
       inadequate by several hundred thousand dollars.

       2. In their motion for abandonment, Northview and the
       Cudas asserted that "[b]ecause the proposed settlement
       is significantly less that the secured claim [in the
       amount of $610,123.25] owed to Movants Frank P.
       Cuda and Joann Cuda, there is no equity in said claim
       which would provide for any distribution to unsecured
       creditors. The estate therefore has no interest in said
       property and said claim should be abandoned." (97a)

       3. In responding to Chrysler's offer to consummate the
       settlement, the Cudas insisted that their claim had a
       value of $3.5 million.

As the parties moving for abandonment, the Cudas had
the burden of showing that Northview's claims against
Chrysler were of inconsequential value to the estate in light
of their own security interest. Given the size of that security
interest, the Cudas' assertion that the claims would not
provide for distribution to unsecured creditors' position is
consistent with their representation that the settlement was
inadequate by several hundred thousand dollars. Thus,
these statements should not preclude the Cudas from
prosecuting this appeal.

While it is true that the Cudas' $3.5 million settlement
demand is in tension with their position during the
abandonment proceeding, we must keep in mind that it

                               6
was a settlement demand and not a position taken to
secure action from a court. We leave for another day
whether the Cudas should, as a result of their position in
the abandonment proceeding, be estopped from recovering
more than $610,123 on Northview's claims against
Chrysler. We hold only that the Caplan factors are satisfied
and that the Cudas have standing to pursue this appeal.

II.

We now turn to the issue of whether the District Court
erred in compelling the Cudas to consummate the
settlement agreement. The legal effect of an agreement is a
question of law over which we exercise plenary review. See
Jumara v. State Farm Ins. Co., 55 F.3d 873, 881 (3d Cir.
1995).

As our starting point, we examine Section 363 of the
Bankruptcy Code. Section 363(b)(1) restricts a trustee's
ability to use, sell, or lease estate property out of the
ordinary course of business. Pursuant to Section 363(b)(1),
the trustee may do so only after notice and a hearing. See
11 U.S.C. S363(b)(1).3 We have interpreted Section 363 to
require both a hearing and court approval. See In re Martin,
91 F.3d 389, 395 n.2 (3d Cir. 1996). Thus, we must
examine the Trustee's settlement agreement with Chrysler
and determine whether it involves the (1) use or sale of (2)
estate property (3) out of the ordinary course of business.

As the Bankruptcy Code and its legislative history
demonstrate, Northview's claims against Chrysler
constituted estate property within the meaning of Section
363 prior to the court-ordered abandonment. Section 541(a)
of the Code provides that the commencement of a case
creates an estate and mandates that "all legal [and]
equitable interests of the debtor in property as of the
commencement of the case" constitute property of that
estate. See 11 U.S.C. S541. As the legislative history of this
section recognizes, "[t]he scope of this paragraph is broad.
_________________________________________________________________

3. Section 363(b)(1) provides that "[t]he trustee, after notice and a
hearing, may use, sell, or lease, other than in the ordinary course of
business, property of the estate." 11 U.S.C. S363.

                               7
It includes all kinds of property, including tangible or
intangible property, causes of action . . . and all other forms
of property currently specified in section 70a of the
Bankruptcy Act. . . ." H.R.Rep. No. 95-595, at 367 (1977),
reprinted in 1978 U.S.C.C.A.N. 5963, 6323 (emphasis
added); see also Integrated Solutions, Inc. v. Service Support
Specialties, 124 F.3d 487, 490-91 (3d Cir. 1997).
Additionally, the Trustee's act of agreeing to settle
Northview's claims against Chrysler constituted a sale of
that claim. See In re Telesphere Communications, Inc., 179
B.R. 544, 552 n.7. (Bankr. N.D. Ill. 1994) ("There is no
difference in the effect on the estate between the sale of a
claim (by way of assignment) to a third party and a
settlement of the claim with the adverse party."). Finally, we
note that this act was outside the scope of Northview's
ordinary course of business prior to the filing of
bankruptcy. See Martin, 91 F.3d at 394 (noting that
trustee's settlement of debtor's breach of contract claim
"ventured beyond the domain of transactions . . .
encountered in the ordinary course of business").

Thus, the Bankruptcy Code contemplates notice, a
hearing, and bankruptcy court approval in this situation.
These requirements afford due process protections to
parties interested in the disposition of the estate but who
did not themselves enter into the settlement agreement.
"[T]his schema [of notice, a hearing, and approval] is
intended to protect both debtors and creditors (as well as
trustees) by subjecting a trustee's actions to complete
disclosure and review by the creditors of the estate and by
the bankruptcy court." Martin, 91 F.3d at 395.4 Relying on
_________________________________________________________________

4. Bankruptcy Rule 9019 provides the procedure for the required court
approval. Bankruptcy Rule 9019(a) states in pertinent part that:

       On motion by the trustee and after notice and a hearing, the court
       may approve a compromise or settlement. Notice shall be given to
       creditors, the United States trustee, the debtor, and indentured
       trustees as provided in Rule 2002 and to any other entity the court
       may direct.

On appeal, Chrysler alleges that this rule violates the Bankruptcy
Rules Enabling Act, 28 U.S.C. S2075, which provides in relevant part
that:

                               8
Section 363, we have held that a contract providing for use
or sale of estate property outside the regular course of
business is unenforceable absent court approval. In re Roth
American, 975 F.2d 949 (3d Cir. 1992).

Chrysler disputes the application of this well established
principle here on the basis of a three step argument. It first
asserts that the settlement agreement became legally
binding on the parties to the agreement upon its execution
but that its consummation was subject to the satisfaction
of a condition subsequent -- bankruptcy court approval.
Second, having thus established to its satisfaction that the
settlement agreement was binding on the Trustee from the
time of its execution, Chrysler insists that the Cudas were
similarly bound because their title was "derivative" from the
Trustee's and the abandonment order negated the need for
bankruptcy court approval. As an alternative to this second
step, Chrysler further contends that the condition
subsequent should be excused because it was the Cudas'
application for abandonment that caused the condition to
fail.

Given our view of the appropriate analysis, we may
assume, without deciding, that an agreement within the
scope of S 363 is effective on execution subject to conditions
subsequent -- notice, a hearing, and a court determination
that the agreement is in the best interests of the estate.
Moreover, we may also assume, without deciding, that the
person to whom title reverts following an abandonment
takes a derivative title. Thus, we assume, for example, that
had the abandonment followed a court approval, the Cudas
_________________________________________________________________

       The Supreme Court shall have the power to prescribe by general
       rules, the forms of process, writs, pleadings, and motions, and the
       practice and procedure in cases under Title 11. Such rules shall
not
       abridge, enlarge, or modify any substantive right.

Chrysler is correct that, as a matter of law, Bankruptcy Rule 9019(a),
a rule of procedure, cannot, by itself, create a substantive requirement
of judicial approval of the Trustee's settlement of Northview's claims
against Chrysler. However, we adhere to our ruling in Martin that
Section 363 of the Code is the substantive provision requiring court
approval. See Martin, 91 F.3d at 394 n.2.

                               9
would have taken the claim subject to the settlement
agreement. Even with these assumptions in Chrysler's
favor, however, we cannot sanction the action taken by the
District Court.

Under Chrysler's condition subsequent analysis, the
Trustee immediately prior to the order of abandonment
could not have been forced to consummate the settlement
agreement absent court approval. If the Cudas stepped into
the Trustee's shoes with the entry of the abandonment
order, it necessarily followed that they could not be forced
to consummate the agreement absent court approval and,
as the District Court recognized, there has been none.

The District Court was able to reach a contrary
conclusion only because it, like Chrysler, viewed the
abandonment as removing the claim from the bankrupt's
estate and that removal as obviating the necessity of court
approval. Removal of the claim from the estate did indeed
render Section 363 inapplicable and, as a result, any
settlement to which the Cudas had agreed would be
enforceable against them without court approval. The
difficulty with this approach, however, is that the
settlement the District Court ordered the Cudas to
consummate was not a settlement to which they had
agreed.

It must be remembered that the Cudas concededly
started out with a property interest. Having satisfied
Northview's $610,123 obligation to Mellon, they had a
perfected lien interest in the claim against Chrysler. That
property interest could be impaired only with the Cudas'
consent or in accordance with the provisions of the
Bankruptcy Code. The District Court, while concluding that
the claims were no longer subject to the Code following
abandonment, nevertheless determined that the settlement
could be enforced against the Cudas by virtue of the
Trustee's act of agreement. This conclusion was foreclosed
by Section 363, however. The Trustee's authority was
limited as a matter of law to agreeing to settle subject to
court approval. This condition subsequent was never
satisfied as there has been no judicial determination that
their interest must yield to the best interests of the estate.

                                10
As noted above, Chrysler offers an alternative argument
as to why judicial approval of the settlement agreement is
unnecessary. Because the Bankruptcy Court is now
incapacitated from passing on the fairness of the settlement
agreement, Chrysler argues that the satisfaction of the
condition subsequent should be excused under normal
contract principles. Chrysler emphasizes that the Cudas
are the parties against whom the agreement is sought to be
enforced and that the Cudas' abandonment application was
responsible for the settlement not being approved. We
conclude, however, that the Cudas did no more than they
were legally entitled to do as the real parties in interest. See
11 U.S.C. S 554(b) (authorizing party in interest to request
a court order of abandonment of a particular property).
Additionally, we note that the Bankruptcy Court and the
District Court recognized their status as the real parties in
interest in approving the abandonment. We do not believe
the Cudas can be penalized for taking actions expressly
sanctioned by the Code and the appropriate courts. See In
re Martin, 91 F.3d 389 (3d Cir. 1996) (holding that trustee
could not have breached settlement agreement pending
court approval by engaging in behavior violative of the
agreement since Bankruptcy Court formally endorsed
trustee's course of action). Thus, we decline to hold that the
Cudas' petition excused satisfaction of the condition
subsequent and instead conclude the settlement agreement
signed by the Trustee and Chrysler is not enforceable as
against the Cudas.

III.

For the foregoing reasons, we will reverse the Order of the
District Court enforcing the settlement and remand for
further proceedings.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

                               11