Fralin v. Aronovitch, 7419.
| Decision Date | 29 July 1957 |
| Docket Number | No. 7419.,7419. |
| Court | U.S. Court of Appeals — Fourth Circuit |
| Parties | J. H. FRALIN and J. Whit Brown, Claimants, Appellants, v. David ARONOVITCH, Debtor, Appellee. |
T. L. Plunkett, Jr., Roanoke, Va. (Strickler, Plunkett & Strickler, Roanoke, Va., on brief), for appellants.
John D. Easley, Lynchburg, Va. (Easley & Hoge, Lynchburg, Va., on brief), for appellee.
Before SOPER, SOBELOFF, and HAYNSWORTH, Circuit Judges.
The claimants in bankruptcy, secured creditors of the debtor, sold the security under a deed of trust and seek to have the deficiency allowed, as the claim of a common creditor, against the estate of the bankrupt debtor. The Referee in Bankruptcy disallowed the claim, principally upon the ground there had been no loss in fact. The District Court confirmed the findings and the order of the Referee. This appeal followed.
The controversy arises out of successive real estate transactions.
In January 1951, the claimants, appellants here, purchased a 995 acre farm in Franklin County, Virginia, for $50,001.00, of which only the $1.00 was paid in cash, the remainder being evidenced by notes secured by a deed of trust which was a first lien upon the property. The claimants improved and stocked the farm. In October 1954, through the offices of a real estate broker, they entered into a contract to sell to the debtor the real estate, cattle, farm implements and household furniture. The purchase price of all the real and personal property was $130,000.00, of which only $5,000.00 was paid in cash.
The contract was unusual in several respects. Aside from the small cash payment, it provided that the debtor would be placed in immediate possession and was authorized to sell the personal property and standing timber. The proceeds of sale of the cattle, farm machinery and other personal property were to be turned over to the claimants for application upon the purchase price while one-half of the proceeds of timber sales were to be similarly applied. The debtor assumed the obligation secured by the first deed of trust, the principal of which was then $49,000.00 (included in the total consideration of $130,000.00), and agreed to secure the balance of the purchase price, as reduced by the proceeds of sale of personal property and one-half the proceeds of sale of timber, by a second lien deed of trust.
The debtor, as he was authorized to do, proceeded to sell the cattle, farm implements and other personal property, turning over the net proceeds of these sales, amounting to $19,673.03, to the claimants. In addition he sold timber for an approximate price of $25,000.00, of which one-half, or $12,500.00, was delivered to the claimants for application upon the purchase price.
The debtor also made one payment of $7,000.00 on the first lien deed of trust, thus reducing the principal balance of that obligation to $42,000.00, but that payment together with the $5,000.00 down payment to the claimants, was less than the $12,500.00 the debtor retained as his portion of the proceeds of timber sales. Since he never made any other payment, his investment in the property was less than nothing.
The debtor did not pay the first instalment on the notes secured by the second deed of trust. After this default had continued for more than thirty days, the trustees declared the entire principal to be due and took possession of the property, as they were authorized to do.
The deed of trust authorized the trustee to sell the property, after default, upon advertisement once a week for two successive weeks in a newspaper published in Roanoke, Virginia. The trustees proceeded to advertise the property, in the form prescribed by the Virginia statutes by an insertion once in each of four weeks in a newspaper published in Roanoke and by one insertion in a newspaper published in Rocky Mount, Virginia, the place of sale. In addition, by letter, they advised the debtor and, since he had become incompetent, his guardian, his attorney and a bank, which was one of his creditors, of the time and place of the intended sale.
Three days before the date of the scheduled sale, a petition for an arrangement under Chapter XI, 11 U.S.C.A. § 701 et seq., was filed together with a petition requesting an order staying the sale, upon the ground that the description of the property in the advertisement was inadequate. A hearing was held by the Referee on the latter petition, during which it was agreed that if the petition for the stay was withdrawn and the sale held as scheduled, the claimants would support the bidding at the sale to $75,000.00 (inclusive of the outstanding balance of the notes secured by the first deed of trust) and would limit any claim for a deficiency to a maximum of $11,000.00 and their reasonable costs. The Referee prepared and signed an order in accordance with the agreement, upon which the attorney for the debtor, the attorney for the principal creditor other than the claimants, one of the claimants and one of the trustees under the deed of trust all endorsed their approval.
At the sale, which was held as scheduled, there was competitive bidding. The claimants were the high bidders at $78,000.00 and thereafter the property was conveyed to them by the trustees.
There is some suggestion that the claimants made some improvements on the property, but within sixty days they sold it to a resident of North Carolina for a gross sales price of $100,000.00 paid in part by an assumption of the obligations secured by the first deed of trust and in part by long term notes, aggregating $30,000.00 secured by a second lien deed of trust. This transaction was handled through the same broker who negotiated the initial contract between the claimants and the debtor. For his services in the two transactions, the broker recovered from the claimants $16,000.00 in settlement of a suit for commissions.1
The claimants, in connection with the foreclosure and subsequent sale incurred additional expenses of $5,000.00.
When the claimants filed their claim in the bankruptcy proceeding upon the debtor's notes after crediting the net proceeds of the trustees' sale, the debtor objected to the claim upon the grounds: (1) that the trustees' advertisement was insufficient (the same ground...
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