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IN RE FABRIC TREE

January 11, 1977

In the Matter of FABRIC TREE, Debtor

Werker, District Judge.


The opinion of the court was delivered by: WERKER

OPINION AND ORDER

WERKER, District Judge.

 This is an appeal from an order entered on August 2, 1976 by the Honorable Roy Babbit, Bankruptcy Judge, acting in the absence and at the request of the Honorable Stanley T. Lesser, Bankruptcy Judge, to confirm the plan of arrangement of the debtor in possession, Fabric Tree, Inc. ("Fabric Tree"). Appellant Mangel Stores Corporation ("Mangel") seeks a determination that the bankruptcy court lacked jurisdiction to consider the rights of Mangel under an escrow agreement between Mangel and the Fabric Tree Creditors Committee (the "Committee"). Mangel also contends that the evidentiary hearing held in this matter failed to comport with the requirements of due process and that the findings following that hearing were erroneous.

 Fabric Tree operates a chain of thirty stores selling fabrics, patterns and notions. Mangel owns a chain of apparel stores. In August of 1975, Fabric Tree filed a petition for an arrangement under chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. Discussions with a group of outside investors led to the advancement of some funds to Fabric Tree but, before a plan of arrangement was filed, Mangel became involved in negotiations with Fabric Tree, its principals and the Committee. By May, 1976, these discussions had advanced to the point where three documents were signed:

 1. A "purchase and sale agreement" dated May 4, 1976 between Mangel and the principals of Fabric Tree in which Mangel agreed to purchase the stock of the principals and to hire them for at least one year. This agreement, conditioned upon the confirmation of a plan of arrangement before July 15, 1976, was not submitted to the bankruptcy court for approval.

 2. A "loan and security agreement" ("security agreement") dated May 4, 1976 between Fabric Tree and Mangel in which Mangel agreed to provide continuing financing to Fabric Tree in exchange for a first lien upon designated assets of Fabric Tree. The bankruptcy court approved this agreement on May 7, 1976.

 3. An undated letter of confirmation ("escrow agreement") sent to the Committee by Mangel in which Mangel agreed to turn over a $600,000 certificate of deposit to Christopher Ballaban, chairman of the Committee, as escrowee. *fn1" The certificate was to be used to fund a fifteen percent all cash plan for the creditors and it was payable to the order of Mangel on September 2, 1976. The escrow agreement was not submitted to Judge Lesser for his approval, but payment by the escrowee to the disbursing agent was expressly conditioned upon the entry of two orders by the bankruptcy court. First, the court had to grant Mangel a first security security interest in all Fabric Tree assets on or before May 10, 1976. This requirement was met. Second, the court had to confirm a plan on or before July 15, 1976 requiring no more than $450,000 for the payment of allowable unsecured claims and $150,000 for priority and administration expenses. Whether this condition was fulfilled is a matter of dispute on this appeal.

 In late June of 1976, Mangel discovered that Fabric Tree was using financing received from Mangel to reduce administration expenses incurred prior to May 7, 1976 and to pay current operating costs. This, Mangel submits, increased its exposure under the escrow agreement beyond the agreed upon $600,000 figure and prevented confirmation of the plan. In Mangel's opinion, it also necessitated the cancellation of purchase orders and trade guarantees entered into on Fabric Tree's behalf. Judge Lesser, on the other hand, found that it was around this time period that "Mangel decided that it no longer favored the acquisition of Fabric Tree."

 At a hearing held on July 13, 1976 as part of the confirmation process, Judge Lesser fixed the fees to be allowed professionals involved in the arrangement proceeding. This was necessary in order to bring outstanding debts within the amount allowed under the escrow agreement. A further hearing to finalize confirmation was also scheduled at that time for the morning of July 15, 1976. Mangel was present at the July 13 hearing but raised no objection to the July 15 confirmation date.

 Judge Lesser learned for the first time on the morning of July 15, 1976 that, according to Mangel, the escrow fund could not be utilized for the deposit required by statute because the terms of the escrow agreement had not and could not be met. Mangel also stated at that time that it would seek plenary relief if the escrow funds were released. Judge Lesser adjourned the confirmation hearing to the morning of July 27, 1976 so that the issue raised by Mangel could be adequately resolved and Mangel assured the court that in the interim it would not seek to collect the loans it had extended to Fabric Tree.

 At the next hearing, held on July 27, 1976, Mangel continued to maintain that the financial provisions of the escrow agreement had not been met; to this it added the contention that confirmation could not take place in any event now that the July 15, 1976 date had passed. An evidentiary hearing to consider these questions was held that afternoon. Mangel participated in that hearing after the court agreed that participation by Mangel would not be taken as a waiver of its objection to the bankruptcy court's exercise of jurisdiction. *fn2"

 Following the July 15 and 27, 1976 hearings and without the benefit of transcripts, on July 30, 1976 Judge Lesser delivered an informal opinion from the bench. Although he indicated at that time that a written opinion might be prepared, it appears that this did not take place. Consequently, in reviewing the conclusions of the bankruptcy court, I am remitted to the corrected transcript of the adjourned confirmation hearing held on July 30, 1976.

 Judge Lesser held that he had summary jurisdiction on several grounds to determine the rights of Mangel, Fabric Tree and the Committee under the escrow agreement. First, he observed that the character of Mangel's participation in the proceeding served to bring it within the jurisdiction of the court as either a party or one who consented to the court's jurisdiction. Second, he noted that to deny jurisdiction would be to "emasculate the ability of the Bankruptcy Court to supervise the confirmation process." Finally, Judge Lesser opined that deposit of the funds with the chairman of the committee was tantamount to deposit with the court for jurisdictional purposes; however, he did not rely upon this ground.

 On the merits, Judge Lesser concluded that the July 15, 1976 confirmation deadline should not be enforced, that the $150,000 ceiling on priority and administration expenses did not include expenses paid prior to the confirmation date out of operating funds and that the escrow fund could be turned over to the ...


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