v.
WILLIAM J. SCHARFFENBERGER, CHAPTER 11 TRUSTEE, ET AL.; ALLEGHENY GENERAL HOSPITAL; WESTERN PENNSYLVANIA HEALTHCARE SYSTEM, INC.
| [1] | UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT |
| [2] | No. 00-3318 |
| [3] | Keywords: assumption, assignment, sale, mootness, 363,
365 |
| [4] | April 25, 2001 |
| [5] | JOHN CINICOLA; BONNIE K. CASE; PHILIP F. RABINOWITZ;
MICHAEL FARRELL; MICHELE R. MATHEWS-MLAKAR; MARSHA FINO; ELLIOT SMITH;
HUBERT SHICK T/D/B/A NORTH ALLEGHENY INTERNAL MEDICINE, APPELLANTS v. WILLIAM J. SCHARFFENBERGER, CHAPTER 11 TRUSTEE, ET AL.; ALLEGHENY GENERAL HOSPITAL; WESTERN PENNSYLVANIA HEALTHCARE SYSTEM, INC. |
| [6] | On Appeal from the United States District Court for the
Western District of Pennsylvania D.C. Civil Action No. 99-cv-01327
(Honorable Gary L. Lancaster) |
| [7] | William H. Schorling, Esquire (argued) Klett, Rooney,
Lieber & Schorling Two Logan Square, 12th Floor 18th and Arch
Streets Philadelphia, Pennsylvania 19103 Edwin L. Klett, Esquire Klett,
Rooney, Lieber & Schorling One Oxford Centre, 40th Floor Pittsburgh,
Pennsylvania 15219 Attorneys for Appellants David I. Swan, Esquire
(argued) Mark E. Freedlander, Esquire McGuireWoods Frick Building, 7th
Floor 437 Grant Street Pittsburgh, Pennsylvania 15219-6002 Attorneys for
Appellee, William J. Scharffenberger , Chapter 11 Trustee, et al. John
P. Edgar, Esquire (argued) Gary P. Nelson, Esquire Sherrard, German
& Kelly FreeMarkets Center, 35th Floor 210 Sixth Avenue Pittsburgh,
Pennsylvania 15222-2602 Attorneys for Appellees, Allegheny General
Hospital; Western Pennsylvania Healthcare System, Inc. |
| [8] | Before: Sloviter, Scirica and Alito, Cir cuit Judges |
| [9] | The opinion of the court was delivered by: Scirica,
Circuit Judge. |
| [10] | Argued September 13, 2000 |
| [11] | Filed: April 25, 2001 |
| [12] | OPINION OF THE COURT |
| [13] | In this bankruptcy appeal, the issue is whether
plaintiffs should have obtained a stay under S 363(m) of the Bankruptcy
Code before appealing an assumption and an assignment under S 365. See
11 U.S.C.S 363(m) (1994). |
| [14] | This appeal arises from the District Court's affirmance
of the Bankruptcy Court's order approving the assumption of eight
physician employment contracts by the Chapter 11 Trustee of a bankrupt
health care system and their assignment to another hospital.*fn1
Contending their employment contracts were not assignable, the
physicians appealed. |
| [15] | I. FACTUAL AND PROCEDURAL HISTORY |
| [16] | The Allegheny Health, Education and Research Foundation
("AHERF "), the parent corporation, managed a multi-entity
healthcare network in Pittsbur gh and Philadelphia. After a decade of
acquisitions, the health system grew to more than fifty not-for -profit
corporations that operated health care, educational and r esearch
institutions. The enterprises included Allegheny University Medical
Practices, Allegheny University of the Health Sciences, Allegheny
General Hospital, Allegheny University Hospital-East, Centennial
Hospital, Allegheny Singer Research Institute, Allegheny University
Medical Center, and The Medical College of Pennsylvania-Hahnemann
University. Especially relevant here wer e AHERF physician practice
plans located in the Pittsburgh ar ea. |
| [17] | Plaintiffs-appellants, Dr. John Cinicola and seven
primary care physicians, operate the North Allegheny Internal Medicine
medical practice in several locations around Pittsburgh.*fn2
Between 1995 and 1997, the physicians signed contracts with Allegheny
Integrated Health Group (now Allegheny University Medical Practices),
and The Medical College of Pennsylvania-Hahnemann University (now
Allegheny University of the Health Sciences) --both AHERF affiliates. |
| [18] | After AHERF incurred significant losses, many of its
affiliates and hospitals in Philadelphia and Pittsburgh filed for
bankruptcy on July 21, 1998.*fn3 Some
months after his confirmation, William Scharf fenberger, AHERF 's
Chapter 11 trustee, together with some non-debtor AHERF affiliates,
filed an emergency application with the Bankruptcy Court to approve a
settlement agreement. For our purposes, the germane provisions of the
settlement agr eement involved the sale of assets and the assignment of
executory contracts, for over $25,000,000, to the Western Pennsylvania
Healthcare Alliance. To assume control of several of AHERF 's
not-for-profit institutions that did not file for bankruptcy, in
particular Allegheny General Hospital, the settlement agreement
substituted the Western Pennsylvania Healthcare Alliance for AHERF as
the institutions' sole voting member.*fn4
The settlement agreement also provided for the assignment of the
physicians' employment contracts from Allegheny University Medical
Practices and Allegheny University of the Health Sciences to the Western
Pennsylvania Healthcar e Alliance, which at the time had no affiliation
with AHERF. |
| [19] | In response, the physicians filed omnibus objections
with the Bankruptcy Court alleging the proposed assumption and
assignment of their contracts to the Western Pennsylvania Healthcare
Alliance--without their consent--violated their employment agreements pr
ohibiting assignment to a non-affiliate of AHERF. *fn5
Moreover, contesting Western Pennsylvania Healthcare Alliance's
financial viability, the physicians asserted adequate assurance of
Western Pennsylvania Healthcare Alliance's future performance of their
contracts had not been provided as required by S 365(f)(2) of the
Bankruptcy Code. See 11 U.S.C. S 365(f)(2)(B) (trustee may assign
executory contracts only if "adequate assurance of futur e
performance by the assignee of such contract or lease is pr ovided,
whether or not there has been default in such contract or lease").
After holding a non-evidentiary hearing on July 22, 1999, the Bankruptcy
Court issued an order the following day, July 23, approving the
settlement agr eement ("the First Order"), but deferred
deciding the assumption and assignment of the physicians' contracts in
or der to address their objections. |
| [20] | At a non-evidentiary hearing on July 29, 1999 to
consider the physicians' objections, the Bankruptcy Court allowed the
trustee to orally amend the settlement agreement to permit the
physicians' contracts to be assigned to Allegheny General Hospital, at
the time an AHERF affiliate.*fn6 This
substitution was critical because the contracts explicitly prohibited
assignment to an entity, like the Western Pennsylvania Healthcar e
Alliance, not affiliated with AHERF. After the hearing, the Bankruptcy
Court authorized the assumption of the physicians' contracts and their
assignment to Allegheny General Hospital ("the Second Order").
Later that same day, the trustee assigned the contracts to Allegheny
General Hospital. The W estern Pennsylvania Healthcare Alliance then
closed on the settlement agreement on August 3, 1999, substituting the
Western Pennsylvania Healthcare Alliance for AHERF as the sole and
controlling member of Allegheny General Hospital. |
| [21] | Without seeking a stay, the physicians appealed the
Bankruptcy Court's Second Order to the District Court on August 5, 1999.
As noted, the trustee and the W estern Pennsylvania Healthcare Alliance
closed on the settlement agreement two days earlier. Befor e the
District Court ruled on their appeal, however, the physicians ter
minated their employment with Allegheny General Hospital ef fective
October 28, 1999. On February 29, 2000, the District Court affirmed the
Bankruptcy Court's Second Or der which assigned the employment
agreements to Allegheny General Hospital. The physicians then appealed
the assumption and assignment to this Court. |
| [22] | Because the sale cannot be reversed, the physicians
seek vacation of the Bankruptcy Court's order appr oving the assumption
and assignment of their employment contracts. Appellees contend the
physicians' claims are constitutionally moot because the sale has been
consummated and statutorily moot under S 363(m) because the physicians
failed to obtain a stay pending appeal. |
| [23] | As noted, the physicians unilaterally terminated their
contracts with Allegheny General Hospital, now a W estern Pennsylvania
Healthcare Alliance affiliate. It became clear at oral argument that the
physicians seek to invalidate the assignment of their employment
contracts to avoid the non-competition clauses in their contracts that
Allegheny General Hospital would now assert.*fn7
The non-competition clauses prohibit the physicians from working
anywhere "within a five (5) mile radius of any medical practice
location at which . . . [they] provided primary care services" for
AHERF or its affiliates. The covenants ar guably bar the physicians from
joining Allegheny General Hospital's main competitor in Pittsburgh and
terminate on October 28, 2001, "two (2) years after the last
date" of their employment. Id. When the non-competition clauses
expire, the physicians concede their appeal becomes constitutionally
moot. |
| [24] | II. CONSTITUTIONAL MOOTNESS |
| [25] | Because the physicians unilaterally terminated their
employment, the Western Pennsylvania Healthcare Alliance and the trustee
contend the physicians' appeal is constitutionally moot. In the absence
of curr ent employment contracts, appellees assert there r emains
neither a claim to adjudicate nor relief to grant. |
| [26] | Under Article III of the United States Constitution,
the exercise of judicial power depends upon the existence of a case or
controversy. DeFunis v. Odegaar d, 416 U.S. 312, 316 (1974); Abdul-Akbar
v. Watson, 4 F.3d 195, 206 (3d Cir. 1993). Mootness derives from Article
III's prohibition against federal courts issuing advisory opinions.
North Carolina v. Rice, 404 U.S. 244, 246 (1971); Presbytery of N.J. of
the Orthodox Presbyterian Chur ch v. Florio, 40 F.3d 1454, 1463 (3d Cir.
1994). While the Supr eme Court has spoken of the "flexible
character of the Article III mootness doctrine," United States
Parole Comm. v. Geraghty, 445 U.S. 388, 400 (1980), it applies where
interim events remove the effects of the violation that prevent the
appellate court from granting any relief. In re Cantwell , 639 F.2d
1050, 1053 (3d Cir. 1981). |
| [27] | To avoid mootness, a claim must (1) pr esent a real
legal controversy, (2) genuinely affect an individual, and (3) have
sufficiently adverse parties. Nat'l Iranian Oil Co. v. Mapco Int'l,
Inc., 983 F.2d 485, 489 (3d Cir . 1992); Int'l Bhd. of Boilermakers v.
Kelly, 815 F.2d 912, 915 (3d Cir. 1987). If the parties have an interest
in the outcome of the litigation, regardless of size, we have found a
live case or controversy exists. Ellis v. Bhd. of Ry., Airline and S.S.
Clerks, 466 U.S. 435, 442 (1984); Mapco, 983 F.2d at 489. Thus, the case
will be moot only if it is "impossible for the court to grant any
effectual relief." Chur ch of Scientology of Cal. v. United States,
506 U.S. 9, 12 (1992) (citation and internal quotes omitted); In re PWS
Holding Corp., 228 F.3d 224, 235 (3d Cir. 2000). |
| [28] | For constitutional mootness to apply, the physicians
must have raised no claim on which relief could be granted. We believe
relief may be available her e. If assignment of their contracts is
vacated, the physicians may have a claim for rejection damages.*fn8
Furthermore, the covenants not to compete in the physicians' contracts
may survive their resignations. See In re Klein, 218 B.R. 787 (Bankr.
W.D. Pa. 1998) (holding covenant not to compete in rejected franchise
agreement remained effective insofar as it was enforceable under
applicable law); In r e Steaks To Go, Inc., 226 B.R. 35 (Bankr. E.D. Mo.
1998) (holding covenants not to compete in rejected franchise agreements
remained enforceable). Moreover, Allegheny General Hospital belies its
own mootness argument by unequivocally stating its intention to enforce
the non-competition clauses. See supra note 7. Because potential
contractual obligations and damages claims remain, we hold the
physicians' claims are not constitutionally moot. |
| [29] | III. STATUTORY BACKGROUND |
| [30] | As noted, the trustee assumed the physician contracts
and then assigned them to Allegheny General Hospital. The physicians
appeal the assignment. Before addr essing the legal issues raised by the
assignment, we briefly review the relevant sections of the Bankruptcy
Code. |
| [31] | A. 11 U.S.C. S 365 |
| [32] | Section 365 of the Bankruptcy Code authorizes the
trustee to assume or reject executory contracts, enabling "the
trustee to maximize the value of the debtor's estate by assuming
executory contracts . . . that benefit the estate and rejecting those
that do not." L.R.S.C. Co. v. Rickel Home Centers (In re Rickel
Home Centers, Inc.), 209 F.3d 291, 298 (3d Cir. 2000); see also 11
U.S.C.S 365(a) ("[T]he trustee, subject to the court's approval,
may assume or reject any executory contract or unexpired lease of the
debtor."). It also permits the trustee to cure certain defaults
before assumption and to provide adequate assurance of future
performance of contracts in default. 11 U.S.C. SS 365(b)(1)(A), (B). If
the trustee meets the assumption requirements under S 365, it must
assume the executory contract entirely.*fn9
NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531 (1984); Rickel, 209
F.3d at 298. |
| [33] | Once the trustee assumes an executory contract,S 365
also authorizes assignment. Generally, the Bankruptcy Code supports this
right and allows a trustee to assume and assign executory contracts
regardless of applicable laws or contractual provisions restricting
assignment. Rickel, 209 F.3d at 298-99; In r e Headquarters Dodge, Inc.,
13 F.3d 674, 682 (3d Cir. 1994) ("Section 365(f)(1) was designed to
prevent anti-alienation or other clauses . . . from defeating . . . [the
trustee's] ability to realize the full value of the debtor's
assets."); see also 11 U.S.C. S 365(f)(1) ("[N]otwithstanding
a provision in an executory contract or unexpired lease of the debtor,
or in applicable law, that prohibits, restricts, or conditions the
assignment of such contract or lease, the trustee may assign such
contract or lease."). Before an executory contract may be assigned,
the trustee first must assume the contract and "adequate assurance
of future performance" of the contract must be provided. 11 U.S.C.
SS 365(f)(2)(A), (B). This requirement provides needed protection to the
non-debtor party because the assignment relieves the trustee and the
bankruptcy estate from liability for breaches arising after the
assignment.*fn10 See 11 U.S.C. S
365(k); Rickel, 209 F.3d at 299. |
| [34] | There are other protections as well. Section 365(c)
places constraints on the assignment rights created under S 365(f) and
prohibits the assumption or assignment of an executory contract if
applicable non-bankruptcy law would excuse the other party "from
accepting per formance from or rendering performance to" someone
other than the debtor.*fn11 11 U.S.C.
S 365(c)(1)(A). In other wor ds, if a contract could not be assigned
under applicable law, it may not be assumed or assigned by the trustee.
3 Collier on Bankruptcy P 365.06[1]. But if the other party consents--in
this case, the physicians--the trustee may assume and assign the
contract. 11 U.S.C. S 365(c)(1)(B). *fn12 |
| [35] | B. 11 U.S.C. S 363 |
| [36] | For sales in bankruptcy, S 363 authorizes the trustee
to use, sell, or lease property of the estate outside the ordinary
course of business after providing notice and hearing. 11 U.S.C. S
363(b)(1). The Bankruptcy Code broadly defines the property of the
bankruptcy estate to include "all legal or equitable interests of
the debtor in property as of the commencement of the case." 11
U.S.C. S 541(a)(1). Executory contracts and leases also fall under this
definition. Rickel, 209 F.3d at 303; Krebs Chrysler-Plymouth, Inc. v.
Valley Motors, Inc., 141 F.3d 490, 498 (3d Cir. 1998). |
| [37] | To promote certainty and finality in bankruptcy sales,
S 363(m) prohibits the reversal of a sale to a good faith purchaser of
bankruptcy estate property if a party failed to obtain a stay of the
sale.*fn13 The statute provides: |
| [38] | The reversal or modification on appeal of an
authorization . . . of a sale or lease of pr operty does not affect the
validity of a sale or lease under such authorization to an entity that
purchased or leased such property in good faith, whether or not such
entity knew of the pendency of the appeal, unless such authorization and
such sale or lease were stayed pending appeal. 11 U.S.C. S 363(m). |
| [39] | The provision's blunt finality is harsh but its
certainty attracts investors and helps effectuate debtor rehabilitation.
See 3 Collier on Bankruptcy P 363.11. Nevertheless, we have rejected a
per se rule "mooting appeals absent a stay of the sale . . . at
issue." Krebs, 141 F .3d at 498 (holding failure to obtain stay of
order approving sale of executory contracts by debtor rendered appeal
moot because any remedy would affect sale). Instead, we require the
satisfaction of two conditions before an appeal becomes moot underS
363(m): "(1) the underlying sale or lease must not have been stayed
pending appeal, and (2) reversing or modifying the authorization to sell
would affect the validity of the sale or lease." Rickel, 209 F.3d
at 298 (holding failure to obtain stay order approving sale of leases by
debtor rendered appeal moot); cf. Pittsburgh Food & Beverage, 112
F.3d at 649 (holding appeal of bankruptcy sale moot because court could
not grant effective relief). |
| [40] | IV. STATUTORY MOOTNESS |
| [41] | The trustee and the Western Pennsylvania Healthcare
Alliance contend the physicians' appeal is statutorily moot because the
assignment of the physicians' contracts triggered the protection of S
363(m). In support, appellees rely on our recent decisions in In r e
Rickel Home Centers, Inc., 209 F.3d 291 (3d Cir. 2000), and Krebs
Chrysler-Plymouth, Inc. v. Valley Motors, Inc., 141 F.3d 490 (3d Cir.
1998), which, they argue, require pr ocuring a stay pending appeal to
avoid mootness when an assignment and sale are authorized under SS 363
and 365. |
| [42] | First we must examine whether S 363(m) applies to the
assignment of the physician contracts to Allegheny General Hospital and
the Western Pennsylvania Healthcare Alliance's subsequent substitution
as the sole member of Allegheny General Hospital. Rickel, 209 F .3d at
300; In re Joshua Slocum Ltd., 922 F.2d 1081, 1084-85 (3d Cir. 1990). In
other words, we must decide whether AHERF 's assumption and assignment
of these executory contracts to Allegheny General Hospital, which was
later sold to the Western Pennsylvania Healthcare Alliance, remain
exclusively under the scope of S 365 or trigger the protection of S
363(m) as well. |
| [43] | A. |
| [44] | To recapitulate, although the Bankruptcy Court
authorized the assignment of the physicians' contracts to Allegheny
General Hospital under the Second Or der (issued July 29, 1999), the
Western Pennsylvania Healthcare Alliance gained control of several AHERF
affiliates, including Allegheny General Hospital, under the authority of
the First Order (issued July 23, 1999). Entered under S 363 and S 365,
the First Order authorized the substitution of the Western Pennsylvania
Healthcar e Alliance for AHERF as the controlling member of Allegheny
General Hospital. See Order Approving Settlement Agr eement on July 23,
1999. As noted, AHERF initially intended to assign the contracts
directly to the Wester n Pennsylvania Healthcare Alliance. When the
physicians objected, the Bankruptcy Court permitted the trustee to
orally amend the settlement agreement to assign the physicians'
contracts to Allegheny General Hospital. This amendment enabled the
trustee and the Western Pennsylvania Healthcar e Alliance to achieve
through a change of control what they could not accomplish through
direct assignment. The physicians contend the amendment was improper.
But we need not decide whether this maneuver invalidated the assignment.
Assuming the assignment was invalid, the physicians may have failed to
perfect their right to appeal. |
| [45] | The Bankruptcy Code provides debtors with br oad
authority to assume and assign executory contracts, which we have
defined as "a contract under which the obligation of both the
bankrupt and the other party to the contract are so far unperformed that
the failure of either to complete performance would constitute a
material breach excusing the performance of the other." In re
Columbia Gas Sys. Inc., 50 F.3d 233, 238 (3d Cir. 1995) (quoting Sharon
Steel Corp. v. Nat'l Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir.
1989)).*fn14 Neither party disputes
the executory nature of the physicians' employment contracts. Moreover ,
S 365 permits the debtor to assume and assign executory contracts the
trustee deems advantageous. 11 U.S.C. S 365(f)(1); 2 Norton Bankruptcy
Law and Practice S 39:1 (W illiam L. Norton Jr. ed., 2d ed. 1997).
Although assignment requir es the satisfaction of certain conditions,
the Bankruptcy Code "favors free assignability." Rickel , 209
F.3d at 299. |
| [46] | In addition, S 363 enables the debtor to sell property
of the bankruptcy estate. 11 U.S.C. S 363; 2 Norton Bankruptcy Law and
Practice S 37:1. The br oad definition of property of the bankruptcy
estate encompasses"all legal or equitable interests of the
debtor," and includes executory contracts. 11 U.S.C. S 541(a)(1);
see also Rickel, 209 F.3d at 303; Krebs, 141 F.3d at 498; 2 Norton
Bankruptcy Law and Practice S 37:16. Once the debtor sells its property,
S 363(m) prohibits reversing a sale when a party fails to obtain a stay
pending appeal, unless vacating or modifying the sale would not affect
its validity. 11 U.S.C. S 363(m); Krebs, 141 F.3d at 499. |
| [47] | We first explored the relationship between S 363 and S
365 in Krebs Chrysler-Plymouth v. Valley Motors, Inc., 141 F.3d 490 (3d
Cir. 1998). In Kr ebs, we found an assumption of executory contracts
implicated the mootness pr otection of a sale under S 363(m) when a
bankrupt automobile dealer sought authorization to assume and sell
certain franchise agreements. After winning an auction to purchase the
assumed franchise agreements from the debtor, Krebs, another automobile
dealer, refused to pay the bankruptcy estate. The bankruptcy court then
order ed him to close on the sale, and, in an effort to avoid this
obligation, Krebs appealed the debtor's initial assumption of the agr
eements under S 365 as improper. After the district court affirmed the
bankruptcy court's order, we held Kr ebs's appeal moot under S 363(m).
Finding the executory contracts constituted property of the estate under
S 541 of the Bankruptcy Code and Pennsylvania law, we also concluded
that " assignments of franchises under section 365 are also sales
of estate property subject to section 363(m) . . . . Therefore, section
363(m) governs the sale of the franchises her e, notwithstanding that
section 365 applies to the particular mechanics of conveyance."
Krebs, 141 F.3d at 497-98 (emphasis added). To state it another way, the
sale of an executory contract triggers the protections af forded sales
of bankruptcy estate property but also requir es satisfaction of the
requirements for assuming and/or assigning the same executory contract.
Rickel, 209 F.3d at 302 n.11. In a subsequent case regarding the
assignment and sale of leases by a debtor in bankruptcy, we reaffir med
the rationale in Krebs. Id. at 300. |
| [48] | There is a nexus between S 363 and S 365. One court
explained their correspondence: |
| [49] | Even though assignments of executory contracts ar e
governed by S 365 and not by the mor e general S 363 sales provision,
assignments are in fact just a type of sale. Instead of purchasing or
leasing pr operty, transactions governed by S 363, an assignee purchases
a lease. A good faith assignee, therefor e stands in the same shoes as a
good faith purchaser and as an innocent third party depends on the
finality of bankruptcy orders to the same extent as good faith
purchasers.*fn15 Comco Assocs., SPA
77k L.P. v. Faraldi Food Indus. Ltd., 170 B.R. 765, 769 n.9 (E.D.N.Y.
1994). |
| [50] | Under Krebs, 141 F.3d at 498-99 (executory contracts),
and Rickel, 209 F.3d at 301-02 (lease contracts), a party need only
obtain a stay pending appeal when the debtor r eceives authorization to
assign and sell executory contracts or leases under both S 363 and S
365. If there is no sale of the assigned property, S 363 will not apply.
See Slocum, 922 F.2d at 1085 (refusing to requir e parties to obtain a
stay when only S 365 implicated). |
| [51] | Other courts have not explicitly extended S 363(m)'s
reach to assignments under S 365, but they have embraced our
interpretation of statutory mootness and found cases moot for similar
reasons. Rickel, 209 F .3d at 304 (discussing cases). For example, in In
r e Adamson Co. Inc., 159 F.3d 896 (4th Cir. 1998), a bankrupt steel
tank manufacturer sought to sell its assets and assign the lease on its
manufacturing plant to a shareholder . The landlord objected, but failed
to seek a stay of the bankruptcy court's order authorizing the
assignment. The Court of Appeals for the Fourth Circuit held the case
moot because the leasehold was personal property that trigger ed the
protection of S 363(m).*fn16 Id. at
898. Also, in Comco Assocs., SPA 77k L.P. v. Faraldi Food Indus. Ltd.,
170 B.R. 765 (E.D.N.Y. 1994), where a bankrupt meat market assigned its
property leases, the district court dismissed the lessor's appeal
because "any appeal of a consummated assignment pursuant to S 365
must be dismissed as moot."*fn17
170 B.R. at 770. The Court of Appeals for the First Cir cuit extended S
363(m)'s mootness protection to assignments fundamentally intertwined
with a S 363 sale in In re Stadium Mgmt. Corp., 895 F.2d 845 (1st Cir.
1990). Holding the assignment of a professional football team's stadium
sublease together with the purchase of r elated assets was protected by
S 363(m), the court concluded S 363(m) would apply to transactions in
which the "assignment of the [executory contract] was integral to
the sale and removing it from the sale would . . . adversely af fect[ ]
the terms of the sale." Id. at 849. |
| [52] | The trustee contends that "the transaction
consummated pursuant to the Global Settlement Agreement, including the
assumption and assignment of the Contracts by the trustee to AGH
[(Allegheny General Hospital)]" involves both SS 365 and 363
because of the settlement agreement's"hybrid nature." Br. of
appellee (Trustee) at 13. Invoking S 363 and S 365 in its First Order,
the Bankruptcy Court authorized the transactions contemplated by the
settlement agr eement. See Bankruptcy Order of July 23, 1999. As noted,
the Bankruptcy Court's First Order authorizing the implementation of the
settlement agreement deferred action on the physicians' contracts,*fn18
and the Second Order addressed only the assumption and assignment of the
physicians' contracts under S 365. (See Bankruptcy Order of July 29,
1999). Nonetheless, it is clear the Bankruptcy Court intended its Second
Order to operate in conjunction with its First Order. See T ranscript of
Bankruptcy Hearing, United States Bankruptcy Court for the Wester n
District of Pennsylvania, July 29, 1999, at 17. Although the physicians
argue the Second Order r epresented an independent act, authorized
solely under S 365, we are convinced the assumption and assignment of
the physician contracts were inextricably intertwined with AHERF 's sale
of assets to the Western Pennsylvania Healthcare Alliance. Because the
assignment here involved a sale under S 363 and the First Order was
authorized under S 363 and S 365, the mootness provision of S 363(m)
applies to the assignment of the physicians' contracts.*fn19 |
| [53] | B. |
| [54] | As noted, we have rejected a per se rule which would
moot every appeal not accompanied by a stay underS 363, and formulated a
two-prong test for mootness: (1) whether the underlying sale was stayed
pending appeal, and (2) whether a reversal or modification of the
authorization to sell would affect the validity of the sale. Krebs, 141
F.3d at 499.*fn20 The only matter at
issue then is whether any relief can be fashioned for the physicians
that would not affect the validity of the sale. In Krebs, we recognized
that allowing a debtor to reject an executory contract after it had been
assumed and sold "would have an impact on the validity of the . . .
sale . . . because [it] . . . would necessarily require reversing the
subsequent assumption and assignment of the underlying [executory
contracts]. Clearly, this remedy is not permitted by section
363(m)." Id. |
| [55] | In the District Court, the physicians requested
reversal of the assumption and assignment of their employment contracts
as well as a declaration of nonassignability. As noted, the District
Court affirmed the Bankruptcy Court's order without opinion and without
addressing mootness. Consequently, the District Court did not examine
the effect, if any, vacating or modifying the assumption and assignment
order would have on the sale between AHERF and the Western Pennsylvania
Healthcar e Alliance. For this reason, we will vacate the order of the
District Court and remand this matter to allow it to consider whether
the requested relief would affect the validity of the transaction
between AHERF and the Western Pennsylvania Healthcare Alliance. Whether
our jurisprudence permits the assignment of the physicians' contracts,
and, if so, whether the assignment satisfied the requirements of S 365
cannot be addressed until mootness is resolved. If the District Court
finds reversing or modifying the assignment would not affect the
validity of the sale, then the court must determine both issues. |
| [56] | V. CONCLUSION |
| [57] | For the reasons stated, we will vacate the or der of
the District Court and remand for proceedings consistent with this
opinion. |
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| Opinion Footnotes | |
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| [58] | *fn1
The Bankruptcy Court had jurisdiction under 28 U.S.C. S 157 and the
District Court had subject matter jurisdiction over the appeal of the
bankruptcy order under 28 U.S.C. S 158(a). We exercise jurisdiction
under 28 U.S.C. S 158(d) over the district court's final judgment in
bankruptcy and 28 U.S.C. S 1291 over any final decision by the district
court. We review the bankruptcy court'sfindings of fact under a clearly
erroneous standard, and its conclusions of law under a plenary standard.
In re New Valley Corp., 181 F.3d 517, 522 (3d Cir. 1999), cert. denied,
528 U.S. 1138 (2000). Because the district court sits as an appellate
court in bankruptcy cases, our review of its decision is plenary. In re
Lan Assocs. XI, L.P., 192 F .3d 109, 114 (3d Cir. 1999). |
| [59] | *fn2
The other plaintiffs are Bonnie K. Case, M.D.; Philip F. Rabinowitz,
M.D.; Michael Farrell, M.D.; Michele R. Mathews-Mlakar, D.O.; Marsha
Fino, M.D.; Elliot Smith, M.D.; and Hubert Shick, M.D. The defendants-appellees
are AHERF 's Chapter 11 trustee and the Western Pennsylvania Healthcare
Alliance along with Allegheny General Hospital. |
| [60] | *fn3
The debtor affiliates consisted of Allegheny University of the Health
Sciences, Allegheny University Medical Practices, Allegheny
Hospitals-Centennial, and Allegheny University Hospitals-East.
Nonetheless, some affiliated organizations in Pittsbur gh, such as
Allegheny General Hospital, did not file for bankruptcy. These
not-for-profit corporate affiliates in Pittsburgh included Allegheny
General Hospital, Allegheny Singer Research Institute, and Allegheny
University Medical Centers. |
| [61] | *fn4
The Western Pennsylvania Healthcare Alliance assumed control of certain
AHERF affiliates through the substitution of the Western Pennsylvania
Healthcare Alliance for AHERF as the sole member of these affiliates. In
nonprofit corporations, members generally play a role similar to
shareholders in for-profit corporations. See Howard L.Oleck & Martha
E. Stewart, Nonprofit Corporations, Organizations & Associations S
240 (6th ed. 1994); Robin Dimieri & Stephen Weiner, The Public
Interest and Governing Boar ds of Nonprofit Health Care Institutions, 34
Vand. L. Rev. 1029, 1045 (1981). For this reason, the acquisition of a
nonprofit corporation's membership interest is comparable to the
purchase of stock in a business. Paul R. DeMuro, Corporate Structure
Company Issues in M&A T ransactions, and Special Issues for
Physician Practice Management Companies , in Health Care M&A 1999:
How to Structure the Transaction, at 165 (PLI Corporate Law and Practice
Course Handbook Series No. B0-009J, 1999). By contrast, however, the
members of a nonprofit corporation also manage and control the
corporation. Id. at 164-65. In this case, AHERF was the sole member of
its affiliates and the sale of its memberships interests to the Western
Pennsylvania Healthcare Alliance effected a complete change of control. |
| [62] | *fn5
The physicians' contracts provided: This agreement, and your rights and
obligations hereunder, may not be assigned by you. This agreement, and
MCP-HU's [(The Medical College of Pennsylvania-Hahnemann University)]
rights and obligations hereunder, may be assigned and delegated, from
time to time, by MCP-HU to AHERF, or to any other subsidiary of AHERF
For the doctors working for Allegheny University of the Health Sciences
[(AUHS)], AUHS is substituted for MCP-HU in their contracts. Dr.
Cinicola's contract differed slightly and provided: No assignment of
this Agreement or the rights and obligations hereunder shall be valid
without the specific written consent of both parties hereto, except that
this Agreement may be assigned by MCP- HU or AIHG [(Allegheny Integrated
Health Gr oup)] to any parent, subsidiary or affiliated corporation
without prior approval of [the] Physician . . . . |
| [63] | *fn6
The Bankruptcy Court did not issue an or der approving this amendment to
the settlement agreement. Despite the Bankruptcy Court's earlier
approval of the settlement agr eement, Allegheny General Hospital
remained an AHERF affiliate because the Western Pennsylvania Healthcare
Alliance had not yet closed on the agreement. |
| [64] | *fn7
Allegheny General Hospital's general counsel r epresented to one of the
plaintiffs' attorneys that the hospital would enforce the non-compete
clauses in the physicians' contracts. See Letter from Jerry J. Fedele,
Senior Vice President and General Counsel, Allegheny General Hospital,
to Edwin Klett, attorney for several plaintif fs, Klett, Leiber, Rooney
& Schorling 1 (March 17, 2000) (Reply Br. of appellants at Ex. A). |
| [65] | *fn8
See Br. of appellees (The Western Pennsylvania Healthcare Alliance and
Allegheny General Hospital) at 21 ("[T]he only alternative to
assumption was rejection. Rejection would have given rise to significant
damages claims in accordance with S 365(g)."). Under S 365(g),
rejection of an executory contract constitutes a breach immediately
before the date of filing for bankruptcy and creates a pre-petition
claim for breach of contract. Nevertheless, rejection does not affect
the parties' substantive rights under the contract. 3 Collier on
Bankruptcy PP 365.09, 365.09[1] (Lawrence P. King ed., 15th ed. 1999). |
| [66] | *fn9
Dr. Cinicola alleges AHERF did not entirely assume and assign his
contractual obligations. In view of our treatment of statutory mootness,
we do not reach this claim. |
| [67] | *fn10
The term "adequate assurance of future performance" is not
defined in the Bankruptcy Code but is included in S 365(b)(1)(C) and S
365(f)(2)(B). Section 365(b) requir es adequate assurance of future
performance of an executory contract when a debtor seeks to assume an
executory contract on which it has defaulted. This protection is also
required when a debtor seeks to assign an executory contract under S
365(f). Under either section, the definition of the term "should be
generally the same." Don Fogel, Executory Contracts and Unexpired
Leases in the Bankruptcy Code, Minn. L. Rev. 341, 362 (1980). The Court
of Appeals for the Fifth Circuit hasfleshed out the definition of
"adequate assurance" and concluded: [A]dequate assurance of
future performance" are not words of art; the legislative history
of the [Bankruptcy] Code shows that they were intended to be given a
practical, pragmatic construction. The phrase first appears in the
legislation pr oposed by the Commission on Bankruptcy Laws . . . . The
Commission Report explains the language "adequate assurance of
future performance" as follows: The language `is adopted from
Unifor m Commercial Code S 2- 609(1).' What constitutes . . . `adequate
assurance of future performance' must be determined by consideration of
the facts of the proposed assumption. Cf. Official Comment 4 to Uniform
Commercial Code S 2-609 (1972 Edition). It is not intended, however,
that any non-debtor party should acquire greater rights in a case under
the act than he has outside the act." Report of the Commission on
Bankruptcy Laws of the United States, H.R. Doc. No. 93-137, 93d Cong.,
1st Sess. Pt. II 156-57 (1973). Section 2-609 of the Uniform Commercial
Code, from which the bankruptcy statute borrows its critical language,
provides that "when reasonable grounds for insecurity arise with
respect to the performance of either party, the other may in writing
demand adequate assurance of future perfor mance . . . ." The
Commentaries to the Code note that " `adequate' assurance is to be
`defined by commercial rather than legal standards.' " Official
Comment 3 to Uniform Commercial Code S 2-609 (1972 Ed.). What
constitutes "adequate assurance" is to be determined by
factual conditions; the seller must exercise good faith and observe
commercial standards; his satisfaction must be based upon reason and
must not be arbitrary and capricious. Richmond Leasing Co. v. Capital
Bank, N.A., 762 F.2d 1303, 1309-10 (5th Cir. 1985) (quoting In re
Sapolin Paints, Inc., 5 B.R. 412, 420-21 (Bankr. E.D.N.Y. 1980)); see
also In re Carlisle Homes, Inc., 103 B.R. 524, 538 (Bankr. D.N.J. 1988)
("The phrase`adequate assurance of future performance,' adopted fr
om section 2-609(1) of the Uniform Commercial Code, is to be given a
practical, pragmatic construction based upon the facts and circumstances
of each case. Although no single solution will satisfy every case, the r
equired assurance will fall considerably short of an absolute guarantee
of per formance.") (citations omitted). |
| [68] | *fn11
The Court of Appeals for the Ninth Cir cuit has characterized the
interaction between these two sections as, "WhatS 365(f)(1) appears
to give, S 365(c)(1)(A) seems to take away." In re Claremont
Acquisition Corp., Inc., 113 F.3d 1029, 1032 (9th Cir. 1997). While S
365(f) creates a broad right of assignment, S 365(c) reins it in.
Section 365(f)(1) provides: Except as provided in subsection (c) of this
section, notwithstanding a provision in an executory contract or unexpir
ed lease of the debtor, or in applicable law, that pr ohibits,
restricts, or conditions the assignment of such contract or lease, the
trustee may assign such contract or lease . . . . And, the relevant
exception to this authority in S 365(c) provides: The trustee may not
assume or assign any executory contract or unexpired lease of the
debtor, whether or not such contract or lease prohibits or restricts
assignment of rights or delegation of duties, if -- (1)(A) applicable
law excuses a party, other than the debtor, to such contract or lease
from accepting per formance from or rendering performance to an entity
other than the debtor or the debtor in possession, whether or not such
contract or lease prohibits or restricts assignment of rights or
delegation of duties. |
| [69] | *fn12
11 U.S.C. S 365(c) provides in r elevant part: The trustee may not
assume or assign any executory contract or unexpired lease of the
debtor, whether or not such contract or lease prohibits or restricts
assignment of rights or delegation of duties, if -- * * * (1)(B) such
party does not consent to such assumption or assignment. |
| [70] | *fn13
We have recognized that "section 363(m) fosters the `policy of not
only affording finality to the judgment of the bankruptcy court, but
particularly to give finality to those orders and judgments upon which
third parties rely.' " Pittsburgh Food & Beverage, Inc. v.
Ranallo, 112 F.3d 645, 647-48 (3d Cir. 1997) (quoting In r e Abbotts
Dairies of Pa., Inc., 788 F.2d 143, 147 (3d Cir. 1986)). |
| [71] | *fn14
See, e.g., Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756
F.2d 1043, 1045 (4th Cir. 1985) (adopting executory contracts definition
propounded by Vern Countryman, Executory Contracts in Bankruptcy: Part
I, 57 Minn. L. Rev. 439, 460 (1973)), cert. denied, 475 U.S. 1057
(1986); see also Bildisco, 465 U.S. at 522 n.6 (1984) (characterizing
executory contracts as contracts on which per formance is due on both
sides based on legislative history). |
| [72] | *fn15
As Judge Sloviter has pointed out, "[T]he same policy concerns are
equally applicable to lease assignments and to sales or leases or
property. Assignment of a lease is, after all, simply the purchase of a
right to lease property." Slocum, 922 F.2d at 1096 (Sloviter, J.,
dissenting). The synonymous definitions of assignment and sale add
further weight for considering the terms together. An assignment is by
definition: [The] act of transferring to another all or part of one's
property interest, or rights. A transfer or making over to another of
the whole of any property, real or persona, in possession or in action,
or of any estate or right therein. It includes transfers of all kinds of
property, including negotiable instruments. The transfer by a party of
all of its rights to some kind of property, usually intangible property
such as rights in a lease, mortgage, agreement of sale or a partnership.
Tangible property is more often transferred by possession and by
instruments conveying title such as a deed or a bill of sale. Black's
Law Dictionary 119 (6th ed. 1990) (citation omitted). A sale by
definition is a "revenue transaction where goods or services are
delivered to a customer in retur n for cash or a contractual obligation
to pay. Term comprehends transfer of property from one party to another
for valuable recompense." Id. at 1337. |
| [73] | *fn16
The Court of Appeals for the Ninth Cir cuit found the protection of S
363(m) applied to a bankruptcy court or der "permitting the
assumption and assignment of leases . . . [that also] pr ovided
authorization for the trustee's sale [of the leases]," overtur ning
the decision of the Bankruptcy Appellate Panel to void the assignment,
because the assigned leases were sold and no stay pending appeal was
obtained. In re Exennium, Inc., 715 F.2d 1401, 1404-05 (9th Cir. 1983). |
| [74] | *fn17
The district court based its decision on the reasoning presented by the
dissent in Slocum which stated, "[W]ell-established rules of
justiciability found in the cases of this court and others, along with
the particular need of finality in bankruptcy, r equire that we find the
appeal of a completed lease assignment to a non-party moot unless the
appellant has sought a stay pending appeal." 922 F.2d at 1093 (Sloviter,
J., dissenting). |
| [75] | *fn18
The Bankruptcy Order of July 23, 1999 pr ovides: Notwithstanding
anything in this Settlement Or der, the Global Settlement Agreement or
any exhibits or schedules thereto, nothing in this Settlement Order or
any exhibit her eto shall be deemed to (a) in any way affect, including
without limitation, authorizing the assumption, assumption and
assignment or rejection of any agreement, including without limitation
any executory contract or expired lease between any of AUH-East, AHC, or
the Debtors on the one hand, and . . . any of the objecting doctor gr
oup represented by Kabal & Geeseman on the other hand . . . . The
disposition of any such agreement, including without limitation any
executory contracts . . . between any of AUH-East, or the Debtors, on
the one hand and any of . . . the objecting doctor gr oup represented by
Kabal & Geeseman on the other hand . . . shall be determined by
separate order(s) of this Court. Bankruptcy Order of July 23, 1999 at P
27. |
| [76] | *fn19
The physicians' characterization of the Bankruptcy Court's orders as
effecting a double assignment of their contracts forms the basis of
their claim that only S 365 should govern our analysis. By approving the
assignment of their contracts, they argue, the Bankruptcy Court failed
to enforce the protections required by S 365. In other words, the
physicians contend their assignment and transfer from AHERF employers to
Allegheny General Hospital followed by the substitution of the Western
Pennsylvania Healthcare Alliance for AHERF r epresented a two-part
assignment that is invalid under In re W est Elecs. Inc., 852 F.2d 79
(3d Cir. 1988). In West, we held S 365(c)(1) created a
"hypothetical test" whereby an assignment of an executory
contract was invalid if precluded by applicable law. 852 F.2d at 83.
West Electronics had contracted with the United States government to
produce missile launcher supply units. After the company filed for
bankruptcy, it sought to assume its contract with the government.
Relying on a federal statute that prohibited assignment of government
contracts without its consent, the government sought to terminate the
contract. See 41 U.S.C. S 15 ("No [government] contract . . . or
any interest therein, shall be transferred by the part to whom such
contract . . . is given to any other party, any such transfer shall
cause the annulment of the contract . . . transferred, so far as the
United States are concerned.") The West court agreed with the
government and interpreted S 365(c)(1) in this way: [I]f non-bankruptcy
law provides that the government would have to consent to an assignment
of the West Contract to a third party, i.e., to someone `other than the
debtor or the debtor in possession,' then West, as the debtor in
possession, cannot assume that contract. This provision limiting
assumption of contracts is applicable to any contract subject to a legal
prohibition against assignment. 852 F.2d at 83. That is, the
"hypothetical test" requir es courts to decide whether, under
applicable law, assignment to a third party would be forbidden. See In
re Catapult Entm't, Inc., 165 F.3d 747, 749-50 (9th Cir.) (adopting
"hypothetical test"), cert. dismissed,528 U.S. 924 (1999); In
re Catron, 158 B.R. 629, 638 (E.D. Va. 1993) (same),aff 'd without
opinion, 25 F.3d 1038 (4th Cir. 1994); but see Institut Pasteur v.
Cambridge Biotech Corp., 104 F.3d 489, 493-94 (1st Cir.), cert. denied,
521 U.S. 1120 (1997); In re Cajun Elec. Power Coop., Inc., 230 B.R. 693,
705 (Bankr. M.D. La. 1999) (rejecting "hypothetical test"); In
r e Lil' Things, Inc., 220 B.R. 583, 587 (Bankr. N.D. Texas 1998)
(same); Inre GP Express Airlines, Inc., 200 B.R. 222, 232 (Bankr. D.
Neb. 1996) (same); In re American Ship Bldg. Co., Inc., 164 B.R. 358,
363 (Bankr. M.D. Fla. 1994) (same); In re Ontario Locomotive &
Indus. Ry. Supplies (U.S.) Inc., 126 B.R. 146, 147-48 (Bankr. W.D.N.Y
1991) (same) (or der subsequently vacated on other grounds); see
generally Daniel J. Bussel & Edward A. Friedler, The Limits on
Assuming and Assigning Executory Contracts, 74 Am. Bankr. L.J. 321
(Summer 2000) (critiquing "hypothetical test"). Citing
Pennsylvania law, the physicians note that personal service contracts
are assignable only if the employee "either expressly or implicitly
by his conduct consented to the assignment." All-Pak, Inc. v.
Johnston , 694 A.2d 347, 351 (Pa. Super. Ct. 1997). Because the choice
of law clause in each of their contracts specified Pennsylvania law, the
physicians claim the protections in S 365(c) apply. Notwithstanding the
common law assignment rule in Pennsylvania, the physicians' contracts
permitted AHERF to assign their contracts to any AHERF subsidiary
without their consent. The physicians' employment agreements generally
provided that "[t]his Agreement . . . may be assigned and delegated
. . . to AHERF, or to any other subsidiary of AHERF, provided that AUHS
[Allegheny University of the Health Sciences] shall remain liable for
its obligations under this Agreement in the event of such
assignment." (other contracts contained the same language except
"MCP-HU" (Medical College of Pennsylvania-Hahnemann
University) is substituted for "AUHS"). As noted, the original
settlement agreement initially proposed assigning the physicians'
contracts directly to the Western Pennsylvania Healthcar e Alliance, the
Allegheny Medical Practice Network or the Allegheny Specialty Practice
Network. But this would have violated the assignment provisions in the
physicians' contracts, because none of these organizations was
affiliated with AHERF. As noted, the Bankruptcy Court authorized the
trustee to orally amend the Settlement Agreement and assign the
contracts to Allegheny General Hospital, an AHERF subsidiary, befor e
the Western Pennsylvania Healthcare Alliance assumed AHERF 's
controlling position as Allegheny General Hospital's sole member. For
this reason, the physicians argue the assignment by AHERF of their
contracts to Allegheny General Hospital, which the Wester n Pennsylvania
Healthcare Alliance subsequently acquired, repr esents a disingenuous,
two-step assignment intended to indirectly accomplish what the
Bankruptcy Code and their employment contracts prohibited. Relying on
the "hypothetical test" established in West, the physicians
contend this circuitous "assignment" to Alliance is invalid.
Because Pennsylvania law permits assignment of personal service
contracts only with employee consent--which AHERF allegedly did not
obtain--the physicians contend the assignment should be vacated.
Although the settlement agreement was amended to avoid violating AHERF
's contractual duties to the physicians, the Western Pennsylvania
Healthcare Alliance maintains the trustee lawfully assigned the
physicians' contracts to Allegheny General Hospital. The Western
Pennsylvania Healthcare Alliance points out that the physicians
contractually consented to assignment of their contracts to any AHERF
affiliate. The Western Pennsylvania Healthcare Alliance also maintains
it obtained the physicians' contracts when it lawfully acquired control
over Allegheny General Hospital. Hence there was no second assignment.
In support, the Western Pennsylvania Healthcare Alliance cites Institut
Pasteur v. Cambridge Biotech Corp., 104 F.3d 489 (1st Cir.), cert.
denied, 521 U.S. 1120 (1997), and abrogated on other grounds, Hardemon
v. City of Boston, No. 97-2010, 1998 WL 148382, at *1 (1st Cir. April 6,
1998). In Institut Pasteur, the debtor sought assumption of a patent
license agreement and confirmation of a plan to transfer the debtor's
stock to an entity that directly competed with the patent's licensor.
The licensor argued the stock transfer represented a de facto assignment
in violation of S 365(c)'s applicable law exception toS 365(f), because
patents are presumed unassignable under federal common law. See Institut
Pasteur, 104 F.3d at 490-91. In rejecting the licensor's claim and
permitting the transfer, the Court of Appeals for the First Circuit
rejected the "hypothetical test" for assignments followed by
some circuits, including our own. Id. at 493. The court found that the
debtor corporation represented the same entity with which the licensor
had originally contracted and, therefore, the debtor could not be
prohibited from assuming the patent under federal law. Id. at 493-94.
Because the license agreement did not contain a "change in
control" provision in the license agreement between Institut
Pasteur and Cambridge Biotech Corporation, the court found the transfer
could not be prevented. Id. at 494. The court adopted an "actual
perfor mance test" necessitating a "case-by-case inquiry into
whether the nondebtor . . . was being forced to accept performance under
its executory contract from someone other than the debtor party with
whom it originally contracted." Id. at 493 (internal quotations
omitted). The Western Pennsylvania Healthcare Alliance argues its
control of Allegheny General Hospital did not alter the physicians
original contractual obligations, because their employment contracts
provided for their assignment to Allegheny General Hospital. Moreover,
it contends its purchase of AHERF 's assets, which included the
physicians' contracts, is analogous to the stock transfer in Institut
Pasteur. Yet the Western Pennsylvania Healthcare Alliance's analysis
would seem to rest on the application of an"actual performance
test" which would be at odds with the "hypothetical test"
adopted by our circuit. Whichever interpretation best serves S 365(c),
we must first answer the question of statutory mootness before pr
oceeding to the merits of the physicians' challenge to the assumption
and assignment of their contracts. Because we find the mootness issue r
equires further development in the District Court, this case does not
require us to revisit our exegesis of S 365(c). |
| [77] | *fn20
The Krebs court developed this test from an earlier application of
mootness protection under S 364(e) for obtaining credit or incurring
debt under S 364. In re Swedeland Dev. Group, Inc., 16 F.3d 552, 559-63
(3d Cir. 1994) (en banc). In Swedeland, the debtor was a developer who
obtained post-petition loans for a construction pr oject under S
364(d)(1). A pre-petition creditor sought to for eclose on the
developer's assets and opposed the authorization of further credit for
the debtor. When the creditor appealed the loan authorizations without
obtaining a stay pending appeal, we held, "[I]t is impossible to
conclude that section 364(e) in itself requires that an appeal be
dismissed if a stay is not obtained." Id. at 559. With language
that mirrors S 363(m), S 364(e) provides: The reversal or modification
on appeal of an authorization under this section to obtain credit or
incur debt, or of a grant under this section of a priority lien, does
not affect the validity of any debt so incurred, or any priority or lien
so granted, to an entity that extended such credit in good faith,
whether or not such entity knew of the pendency of the appeal, unless
such authorization and the incurring of such debt, or the granting of
such priority or lien, were stayed pending appeal. 11 U.S.C. S 364(e).
Because S 364(e) and S 363(m) are based on similar language, the Krebs
court viewed "section S 363(m) through the prism of Swedeland's
construction of section 364(e)." Krebs , 141 F.3d at 499. This
perspective provided the basis for the promulgation of the same
two-prong test for S 363(m) by the Krebs court. |