Appeal and cross-appeal from an order of the District Court for the Southern District of New York, John M. Cannella, Judge, reversing an order of Bankruptcy Judge Ryan, which had confirmed a sale of certain assets of a debtor in reorganization under Chapter X of the Bankruptcy Act. Affirmed on the appeal; modified on the cross-appeal.
Before Friendly, Smith and Oakes, Circuit Judges.
This appeal and cross-appeal raise questions with respect to the judicial sale of certain assets of Beck Industries, Inc. (Beck), a debtor which has been in reorganization under Chapter X of the Bankruptcy Act in the District Court for the Southern District of New York since May, 1971. The proceedings were initially under the supervision of Bankruptcy Judge Herzog; upon his retirement they were referred to Bankruptcy Judge Ryan. There have been several changes in the trustees, the latest of whom is Stephen Kirschenbaum.
Since neither the opinion of the bankruptcy judge, rendered after a 6 day trial, nor that of the district court gives a full statement of the facts which are crucial to decision, we are obliged to do this at some length.
When the reorganization petition was filed, Beck, a conglomerate, was engaged, among other things, in the retail sales of women's shoes and, to a lesser extent, of women's ready-to-wear through its C. H. Baker Division (Baker) which operated on the west coast. The ready-to-wear departments, which were added to some of the Baker stores in 1970, were run as boutiques; in 1971, Baker, developing the boutique concept, took one lease for a "Pigeons" unit which opened under the administration of the trustees. In October 1971, with the approval of the bankruptcy judge, Beck formed Pigeons, Inc. (Pigeons) to undertake the boutique operations previously conducted by Baker. One reason for this was that landlords preferred leasing to a solvent corporation rather than to a reorganization trustee. The Pigeons stores, or "boutiques", also sold both women's shoes and women's ready-to-wear, although the emphasis was on the latter. Pigeons has also become the nominal lessee of almost all of the stores operated as Baker stores. Baker has continued to operate, selling both shoes and ready-to-wear; its assets consist primarily of trade fixtures and inventories; separate accounting records for Baker and Pigeons are maintained.
Howard Ross was hired by Beck in 1969 to head up the Baker division. He became the head of Pigeons when that company was formed. On February 4, 1973, Ross entered into an employment agreement with the then trustees, which was subsequently approved, on notice to interested parties and after a hearing, by Judge Cannella upon the recommendation of Bankruptcy Judge Herzog. Ross agreed that during the three year term of the contract he would serve as president and chief executive officer of Baker and as president, chief executive officer and a director of Pigeons, at a monthly salary of $5,125, which was to be split between Baker and Pigeons in accordance with their respective gross sales for the previous fiscal year. He was also to receive a bonus of 5% Of the net pretax income of Baker and, subject to Pigeons' attaining stipulated income levels, amounts of Pigeons stock which ultimately resulted in his becoming the owner of 15% Of its shares. Paragraph 9, whence this litigation stems, provided as follows:
If during the period the Employee is employed by Employer, Employer receives an acceptable offer to sell all or substantially all of the assets or more than 50% Of the outstanding stock of Pigeons, Employers shall give written notice of such offer to the Employee and said notice shall set forth all of the terms and conditions of the proposed sale. The Employee shall have the right, which must be exercised within 30 days of receipt of said notice, to become the purchaser of said assets or stock, as the case may be, on the same terms and conditions as set forth in said notice; provided, however, that the Employee shall not be afforded such right if, in the Employer's opinion, a substantial portion of the purchase price is not paid in cash at the initial closing, and if, in the Employer's opinion, the Employee's ability to pay the remaining portion of the purchase price is not at least as good as that of the proposed purchaser. In addition, if Employee does not exercise his rights under the preceding sentence or is not entitled to such rights by virtue of the proviso to such sentence, should Employer receive an offer to buy more than 50% Of the outstanding stock of Pigeons while Employee is employed by Employer and if Employer accepts such offer, Employer will use its best efforts to have the offeree purchase all of the Pigeons stock owned by Employee on the same terms as Employer is selling; provided, however, that such best efforts requirement shall not be construed to require Employer to modify any terms of its agreement with the purchaser.
Paragraph 13 provided in pertinent part:
13. This Agreement shall not be assignable by the Employee and any purported assignment shall be void . . .
On March 15, 1976, Ross wrote the trustee about his contract having ended. He characterized its terms as having been essentially these:
(a) Annual salary,.$61,500 per year, (b) 5% Of profit before taxes of C. H. Baker Division before corporate allocation paid yearly as a bonus, and (c) the right to earn 15% Of the stock of Pigeons, Inc., together with an agreement not to sell the rest of the Pigeons' stock without offering it to me first.
He proposed "the following: 1) Salary be increased to $67,500 and 2) 5% Of Baker profits as previously defined continue." The letter concluded:
I don't want to go through the hassle of negotiating a new contract. I would simply like you to approve the raise and continue the bonus if you consider this to be fair and equitable. I'm not asking for the right to earn any more Pigeons stock since this would require drawing up a new contract. I hope I will be able to purchase the business before the end of the year and the Pigeons stock will, in my opinion, become a negotiating point anyway.
On April 26, 1976, the trustee wrote his counsel, characterizing Ross' proposal as "not negotiating a new contract, but leaving all the terms and conditions the same, except for a raise in base salary from.$61,500 to $67,000,"*fn1 which he found acceptable. He assumed the matter could be covered by a letter agreement and asked counsel to follow through. This was not done. The trustee testified before the bankruptcy judge that he, his counsel, and Ross thought it "unseemly" to sign a "term contract" while Ross was negotiating to purchase the "company". By letter of October 8, 1976 wherein Ross urged the trustee to merge Baker into Pigeons, he suggested that "the only fair way to approach this would be for me to enter into an agreement with you to give up my equity (in Pigeons) prior to the merging of Baker and Pigeons" and confirmed that he has "a right of first refusal for the purchase of the Pigeons Corporation" which he "would not be willing to relinquish." Ross again alluded to his right of first refusal in a letter dated October 12, 1976 to the trustee.
On February 9, 1978, following many months of discussion, Beck (represented by the trustee), Ross and a newly formed California corporation, H & R Rossco, Inc. (Rossco), entered into a Stock Purchase Agreement whereby Rossco would buy all the stock of a new Beck subsidiary, Newco, which would own the 85% Of the Pigeons stock held by Beck and the assets of Baker. For present purposes it suffices to describe the price as $800,000 of which $500,000 was to be paid in cash and $300,000 in five year 6% Promissory note. The sale was subject to:
Approval by the Court of the transactions contemplated by this Agreement, which approval is subject, among other things, to the Court's approval of any higher and/or better offer or offers for the acquisition of the Stock, the assets of Newco, the Pigeons' stock, the Assets or a substantial portion thereof.
On application by the trustee, the bankruptcy judge thereupon issued an order requiring all interested parties to show cause on April 19, 1978, why an order should not be entered allowing the trustee to make the sale contemplated by the Stock Purchase Agreement or to accept:
a higher and/or better offer or offers for (a) 85% Of the capital stock of Pigeons or (b) the assets of Baker or (c) collectively, 85% Of the capital stock of Pigeons and the assets of Baker, on such terms and conditions as may ultimately be determined herein . . ..
A corresponding notice was published. Nothing in the Stock Purchase Agreement, the order to show cause, the trustee's application for it, or the notice ...