Citation Cycle Company, Inc., Debtor-appellant, v. Nathan Yorke, Trustee, and Canada Cycle and Motor Co.,intervenors, Appellees, 693 F.2d 691 (7th Cir. 1982)

This appeal is presumably the last stage in a long, bitter, and unseemly struggle over the assets of the bankrupt Citation Cycle Company (Citation).¹  An involuntary bankruptcy petition was first filed against Citation in 1976. On May 25, 1977, by agreement of Citation and its creditors, it was dismissed without prejudice and replaced the same day with a new involuntary petition.²  Thereafter the parties agreed that there were no factual issues in dispute and drafted a stipulation that put before Bankruptcy Judge James a single legal issue.³  Judge James was to decide whether under Illinois law creditor Finney Company's lien on goods and chattels arose when a writ of execution on its judgment against Citation was delivered to the sheriff or when there was an actual attempt to levy on the property of Citation, the judgment debtor. The parties represented to the judge that if delivery to the sheriff was the critical event, then Citation could be adjudged a bankrupt; if service on the debtor was critical, then Citation had committed no act of bankruptcy during the four months preceding the petition and could not be adjudged a bankrupt. Judge James found that a judgment lien arises in Illinois upon delivery of the writ of execution to the sheriff and therefore decided that Citation was a bankrupt. Memorandum and Order, December 6, 1977.

The only asset Citation had was an antitrust claim against the Canada Cycle and Motor Company (CCM).⁴  Accordingly the bankruptcy trustee set about to recover that cause of action for the bankruptcy estate and ultimately for Citation's unsecured creditors. To do so, he had to institute an adversary proceeding in the bankruptcy court against Bernard A. Savage, Jr. and the American Bicycle Company (ABC), a former subsidiary of Citation. ABC and Citation were both effectively controlled by Savage,⁵  and the trustee's contention was that Citation's transfer of all its accounts receivable and its antitrust claim to ABC, its former subsidiary, had been a fraud on Citation's creditors.⁶  That Bankruptcy Rule 701(2), (3) proceeding culminated in the bankruptcy court's finding that the trustee could use the chose in action for the benefit of the estate, free and clear of all claims by ABC. Memorandum and Order, November 20, 1980.

While the trustee's proceedings against ABC and Savage were going on--and going badly for them--ABC and Citation launched an attack on the underlying adjudication of Citation's bankruptcy. On February 6, 1980, they presented to Judge James a motion to vacate the bankruptcy adjudication, in essence a motion to reconsider the December 6, 1977, decision. They argued that the attorneys who had filed the 1977 involuntary bankruptcy petition had been acting without authorization from their clients.⁷  Judge James ruled against ABC and Citation on July 2, 1980, and they appealed his decision to the district court. On January 18, 1981, Judge Shadur dismissed their appeal for want of prosecution under Rule 41(b) of the Federal Rules of Civil Procedure.⁸  That dismissal, which operated as a decision on the merits,⁹  was never appealed.

Meanwhile, back in bankruptcy court, Citation had filed a motion to reconsider Judge James' July 2 ruling denying the motion to vacate the 1977 bankruptcy adjudication. This November 25, 1980 motion was again labeled a motion to vacate [the bankruptcy] adjudication and dismiss [the second involuntary bankruptcy] petition. This time Citation's theory was that, despite the stipulation that had narrowed the issues to a single one (note 3 supra) and despite Judge James' December 6, 1977, decision on that legal question, Citation could not properly be adjudged a bankrupt. Citation argued that either (a) the judgment lien of creditor Finney Company against Citation had been filed while the Bankruptcy Rule 601 automatic stay from the first, dismissed petition was still in effect,¹⁰  or (b) Citation had not had thirty days in which to try to vacate or discharge the lien before the second petition was filed, so that there was no act of bankruptcy.¹¹  Again Judge James ruled against Citation (Memorandum and Order, January 20, 1981). Citation filed another motion to reconsider on January 30, 1981, reiterating that there never was an act of bankruptcy; and Judge James denied that motion as well on March 27, 1981. Again Citation appealed to the district court. On October 27, 1981, in a memorandum opinion and order, Judge Getzendanner dismissed this appeal.¹²  It is the refusal of the district court to hear the second appeal that Citation challenges in this Court, and we find the refusal proper.

Appellees argued various grounds in the district court to justify the dismissal. In our opinion the one Judge Getzendanner chose--res judicata--is not applicable. But either of the others--estoppel or laches--would have been correct. It is of course within our power to affirm the district court decision on grounds other than those relied on by the district judge. Panter v. Marshall Field & Co., 646 F.2d 271, 281 (7th Cir. 1981), certiorari denied, 454 U.S. 1092, 102 S. Ct. 658, 70 L. Ed. 2d 631.

Judge Getzendanner understandably¹³  assumed that Judge James' July 2, 1980, ruling that was appealed to Judge Shadur had been in response to a broad attack by Citation and ABC on the subject matter jurisdiction of the bankruptcy court.¹⁴  She apparently thought that both contentions--i.e., that the creditors' attorneys had acted without proper authorization and that there had been no act of bankruptcy--were before Judge James at that time, that both contentions were also included in the appeal to Judge Shadur, and that both were therefore barred from further consideration by the Rule 41(b) dismissal of that appeal. In fact Judge James' July 2, 1980, ruling had dealt only with the alleged impropriety of the attorneys' actions; the act of bankruptcy argument was first raised in the November 25, 1980, second motion to vacate and again in the January 30, 1981, motion to reconsider Judge James' January 20, 1981, decision.¹⁵  The July 2, 1980, denial of the original ABC-Citation motion to vacate the bankruptcy adjudication and consequently Judge Shadur's Rule 41(b) dismissal of the appeal would not necessarily preclude subsequent motions to reconsider or vacate, whatever their grounds.¹⁶  But apart from the doctrine of res judicata, which was inapplicable on this state of the record, other grounds clearly bar Citation's appeal: this is a textbook case for applying doctrines of estoppel and laches, which are particularly appropriate in the context of bankruptcy proceedings.

Estoppel "arises * * * when one has so acted as to mislead another and the one thus misled has relied upon the action of the inducing party to his prejudice." Lebold v. Inland Steel Co., 125 F.2d 369, 375 (7th Cir. 1941), certiorari denied, 316 U.S. 675, 62 S. Ct. 1045, 86 L. Ed. 1749. Laches requires no reliance. It bars recovery where "deferment of action to enforce claimed rights is prolonged and inexcusable and operates to [the non-delaying party's] material prejudice." Boris v. Hamilton Manufacturing Co., 253 F.2d 526, 529 (7th Cir. 1956). See the discussion of both doctrines in Advanced Hydraulics, Inc. v. Otis Elevator Co., 525 F.2d 477, 479-480 (7th Cir. 1975), certiorari denied, 423 U.S. 869, 96 S. Ct. 132, 46 L. Ed. 2d 99.

Citation's stipulation estops it to raise now the issues comprehended in this appeal. Citation had represented to Judge James that the only issue he had to decide was when an Illinois judgment ripens into a lien. Put another way, Citation had in effect conceded the irrelevance of any other facts--including the pendency of the first petition's automatic stay and the interval between the creation of the lien and the May 25, 1977, filing of the second petition. Had Citation taken initially the position it now adopts--i.e., that there was no act of bankruptcy--the creditors would have had various alternatives open. For example, they could have waited a few days longer to file the second petition,¹⁷  or they could have argued that Citation had committed other acts of bankruptcy in the four-month period preceding the filing of the second petition.¹⁸ 

But we need not rest solely on the stipulation and its negative inferences. Citation is also estopped by its conduct between December 1977 and February 6, 1980, when ABC (joined by Citation on May 19, 1980) presented the first motion to vacate to Judge James. Throughout that period Citation and ABC actively contested the bankruptcy judge's rulings--most notably the dispute over who was entitled to the antitrust claim--without ever questioning the decision that Citation was a bankrupt. The creditors were entitled to rely, and clearly did rely, on the fact that, however much this litigation resembled trench warfare, at least the one stipulated issue decided by Judge James in December of 1977 was settled.¹⁹ 

Laches is a completely independent basis for barring Citation's appeal. We can suppose, purely for the sake of argument, that (1) Citation's stipulation was not binding, since the facts even as stipulated revealed a facial defect about the Finney Company lien; (2) Judge James' December 1977 decision that Citation was a bankrupt was erroneous; and (3) Citation could have had that determination reversed on direct appeal as the bankrupt did in Northwestern Pulp & Paper Co. v. Finish Luth Book Concern, 51 F.2d 340 (9th Cir. 1931). We can also assume, again for argument's sake, that Citation took no action in the proceedings, rather than that it first took action wholly at odds with its present position. Citation does not succeed even under these hypothetical assumptions in its favor.

There is a basic distinction--which Citation misapprehends--between a court's jurisdiction to decide a case and its ability to render a correct decision. The distinction is well illustrated by two famous bankruptcy cases, discussed in 2 Collier on Bankruptcy p 301.20 (15th ed. 1982). In Vallely v. Northern Fire & Marine Ins. Co., 254 U.S. 348, 41 S. Ct. 116, 65 L. Ed. 297, laches did not bar reopening a bankruptcy adjudication where the alleged bankrupt was an insurance company, not subject to either voluntary or involuntary bankruptcy. But in In re First National Bank of Belle Fourche, 152 F. 64 (8th Cir. 1907), laches did bar reopening a bankruptcy case to litigate the factual question whether the Widell Company was principally engaged in manufacturing, even though if it were it could not be a bankrupt under the statute then in effect. Citation was amenable to the bankruptcy laws, whether or not it was actually a bankrupt; and it thus falls into the Belle Fourche, rather than the Vallely, class of cases.

For such cases the appropriate doctrine is that "the court * * * ha [s] the power to make an adjudication on the defective petition and refuse to vacate it thereafter when the equities of the case warran [t] such refusal." 2 Collier on Bankruptcy p 301.20 at 301-36 (15th ed. 1982). Here the equities are clear. The pertinent proceedings began in May of 1977,²⁰  with the filing of the second involuntary bankruptcy petition; the decision Citation attacks was rendered in December of 1977 and dealt with the May 1977 petition; Citation did not begin to try to undermine that decision adjudicating it a bankrupt until May 1980 when it joined in ABC's February 1980 motion to vacate. Even then Citation could not decide what tack to take. Its indecision is illustrated by its abandoning the first appeal in midstream to press an entirely different theory in the bankruptcy court. There is an explanation for Citation's fits and starts: it has had five sets of lawyers since 1977, and each new set has had a different strategy. Explanation, however, is not excuse. While generations of lawyers have cut their teeth on the Citation bankruptcy, the general creditors have been forced to wait for payment, their legal fees and the expenses of administration steadily mounting.²¹  It is appropriate under these circumstances to use the doctrine of laches to insulate from continued onslaughts an adjudication that became final more than four years ago.

The district court's decision is affirmed; costs to appellees.