Gledhill, In re, 94-4241

• Decision Date: 02 February 1996
• Docket Number: No. 94-4241,94-4241
• Citation: 76 F.3d 1070
• Parties: , 34 Fed.R.Serv.3d 1267, Bankr. L. Rep. P 76,955 In re John H. GLEDHILL and Gloria K. Gledhill, Debtors, STATE BANK OF SOUTHERN UTAH, Plaintiff-Appellant, v. John H. GLEDHILL and Gloria K. Gledhill, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1070

76 F.3d 1070

64 USLW 2543, 34 Fed.R.Serv.3d 1267,

Bankr. L. Rep. P 76,955

In re John H. GLEDHILL and Gloria K. Gledhill, Debtors,

STATE BANK OF SOUTHERN UTAH, Plaintiff-Appellant, v. John H. GLEDHILL and Gloria K. Gledhill, Defendants-Appellees.

No. 94-4241.

United States Court of Appeals,

Tenth Circuit.

Feb. 2, 1996.

Steven W. Call (Steven T. Waterman with him on the brief), of Ray, Quinney & Nebeker, Salt Lake City, Utah, for Appellant.

David E. Smoot (Michael N. Zundel with him on the brief), of Jardine, Linebaugh, Brown & Dunn, Salt Lake City, Utah, for Appellees.

Before TACHA, BALDOCK, and KELLY, Circuit Judges.

BALDOCK, Circuit Judge.

This appeal involves a complex procedural history. Plaintiff State Bank of Southern Utah ("State Bank") obtained a bankruptcy court order granting it relief from automatic stay to foreclose a judgment lien it held in property owned by Debtors John H. and Gloria K. Gledhill. Shortly before the foreclosure sale, the Chapter 7 Trustee filed, inter alia, a motion under Bankruptcy Rule 9024 and Fed.R.Civ.P. 60(b) requesting the bankruptcy court to vacate its earlier order granting State Bank relief from stay. The Trustee wanted the court to vacate its order lifting the stay so that the Trustee could liquidate the property for the benefit of all the creditors. State Bank vigorously opposed the motion, arguing that the Trustee's motion for relief from the order granting relief from the stay sought reimposition of the automatic stay, which amounted to a request for injunctive relief under Bankruptcy Rule 7001(7). Under Rule 7001(7), a proceeding "to obtain an injunction or other equitable relief" must be brought as an adversary proceeding. Because the Trustee sought relief by motion as a contested matter--and not by initiating an adversary proceeding by serving a summons and a complaint--State Bank argued that the bankruptcy court lacked jurisdiction to consider the Trustee's motion.

The bankruptcy court rejected State Bank's argument and determined that the plain language of Fed.R.Civ.P. 60(b), incorporated in bankruptcy proceedings by Rule 9024, authorized seeking Rule 60(b) relief by motion. Further, the court ruled that under Fed.R.Civ.P. 60(b)(6), the Trustee had demonstrated that changed circumstances justified vacating its earlier order lifting the stay. Consequently, the bankruptcy court vacated its order granting State Bank relief from stay, which effectively reimposed the automatic stay and prevented the foreclosure sale.

On appeal to the district court, State Bank raised the same arguments it asserted in the bankruptcy court. The district court affirmed. We have jurisdiction under 28 U.S.C. § 158(d). We affirm.

I.

The facts of this case are undisputed. Debtors operated a business and tourist attraction in Sevier County, Utah known as the Big Rock Candy Mountain ("the property"). The property consists of a motel, a cafe and curio shop, a vacant building previously used as a rock shop, several small cabins, and undeveloped real property. In 1984, Debtors filed a voluntary petition for relief in the District of Nevada under Chapter 11 of the Bankruptcy Code. State Bank filed a proof of claim for a secured loan it held on Debtors' property. Following Debtors' Nevada bankruptcy filing, Debtors failed to make loan payments to State Bank under an amended plan of reorganization. State Bank filed a motion to dismiss the case under 11 U.S.C. § 1112. On February 10, 1992, the Nevada bankruptcy court granted State Bank's motion to dismiss the case.

After dismissal, State Bank obtained a judgment decree and order of foreclosure in Utah state court. The Utah state court conducted a judicial sale and sold a portion of the property. Because the judicial sale did not retire the full amount of State Bank's lien, the court entered a deficiency judgment in favor of State Bank and against Debtors. On August 26, 1992, the state court issued a writ of execution directing the sheriff to sell the remainder of the property to satisfy State Bank's deficiency judgment lien. The court scheduled the judicial sale for September 30, 1992.

On September 28, 1992, two days prior to the judicial sale, Debtors filed a second voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the District of Utah. The Utah bankruptcy filing triggered the automatic stay provision, thereby preventing State Bank from foreclosing its judgment lien. State Bank moved for relief from stay. The U.S. Trustee supported State Bank's motion. After an evidentiary hearing, the Utah bankruptcy court determined that Debtors had filed their second Chapter 11 bankruptcy petition in bad faith with the intent to forestall foreclosure. Consequently, the court ruled that State Bank had established "cause" for relief from stay under 11 U.S.C. § 362(d)(1), and entered a February 17, 1993 order granting State Bank relief from stay to foreclose its judgment lien on Debtors' property. State Bank again commenced execution of its deficiency judgment lien under state law, and incurred expenses surveying and apportioning the property. A foreclosure sale was scheduled for December 16, 1993.

The bankruptcy court converted the case from a Chapter 11 to a Chapter 7 on November 10, 1993, and appointed Kenneth A. Rushton the Chapter 7 Trustee on November 16, 1993. On December 9, 1993, seven days before the December 16, 1993 foreclosure sale, the Trustee filed two concurrent motions in the bankruptcy court that are the subject of this appeal. The Trustee filed a motion: (1) pursuant to Rule 9024 and Fed.R.Civ.P. 60(b) for relief from the order granting State Bank relief from the automatic stay ("Rule 60(b) motion"), and (2) to reimpose the automatic stay under 11 U.S.C. § 105(a) (" § 105(a) motion").¹ Pursuant to an ex parte motion filed by the Trustee, the bankruptcy court scheduled the hearing for December 14, 1993. In compliance with the bankruptcy court's order, on December 9 1993, the Trustee hand delivered to State Bank's counsel the Trustee's motions, the bankruptcy court's order shortening the time for hearing on the Trustee's motions, and a notice of hearing. Prior to the hearing, State Bank filed an "Objection and Motion to Strike Trustee's Motion for Equitable Relief" ("motion to strike").

On December 14 and 15, 1993, the bankruptcy court conducted an evidentiary hearing on the Trustee's Rule 60(b) and § 105(a) motions. State Bank raised its motion to strike and argued that the Trustee's motions sought reimposition of the automatic stay, which amounted to a request for injunctive relief under Rule 7001(7). Because the Trustee sought relief by motion as a contested matter--and not by initiating an adversary proceeding by serving a summons and a complaint--State Bank argued that the bankruptcy court lacked jurisdiction to consider the motions.

The bankruptcy court rejected State Bank's argument and determined that the plain language of Fed.R.Civ.P. 60(b), incorporated in bankruptcy proceedings by Rule 9024, authorized Rule 60(b) relief by motion. Thus, the bankruptcy court denied State Bank's motion to strike and ruled that the Trustee properly sought Rule 60(b) relief by motion as a contested matter, and not by serving a summons and complaint in an adversary proceeding. The bankruptcy court, however, did not address whether the Trustee correctly sought relief by motion under § 105(a) of the Bankruptcy Code.

The Trustee and State Bank stipulated at the hearing that the amount of State Bank's claim was $148,423.92, and that the sum of secured and unsecured claims was $207,601.76. ² Further, the Trustee and State Bank introduced expert testimony from real estate appraisers regarding the value of the property. Jenny K. Hancock appeared for the Trustee and testified that on September 6, 1993 she appraised the property at $956,000. Eric N. Johnson appeared for State Bank and testified that on September 28, 1992 he appraised the property at $110,000. Mr. Johnson, however, raised his appraisal to $170,000 at the evidentiary hearing.

The Trustee argued that under Rule 60(b) and Rule 9024, the circumstances justified the district court in vacating the order granting relief from stay. By vacating its order lifting the stay, the Trustee maintained the bankruptcy court would prevent State Bank from "snatching this asset away from the rest of the creditors" in a foreclosure sale. The Trustee argued that based on the $956,000 appraisal of the property, there was substantial equity in the property in excess of State Bank's $148,423.92 claim. The Trustee asserted the bankruptcy estate could not capitalize on the equity if State Bank sold the property at a foreclosure sale. Once the automatic stay was again in place, the Trustee argued it could liquidate the property in a commercially reasonable manner for the benefit of all the creditors, including State Bank. Thus, the Trustee contended that the Chapter 7 policy of liquidating the estate for the benefit of all creditors would be served if the bankruptcy court vacated its order granting State Bank relief from stay.

State Bank argued that the Trustee had failed to establish under Fed.R.Civ.P. 60(b)(6) compelling and extraordinary circumstances sufficient to vacate the order lifting the automatic stay. Specifically, State Bank asserted that because the value of the property was $170,000, and not $956,000, there was not sufficient equity in it to merit enjoining the foreclosure sale to allow the Trustee to liquidate the property. Further, State Bank contended that the bankruptcy court's finding in the order lifting the stay that the Debtors acted in bad faith was res judicata in the current proceeding, and should preclude the court from reimposing the stay.

The bankruptcy court stated:

[I]t boils down to a question of value and whether it would be fair or proper for the protection of unsecured creditors and rights of other creditors, other than the bank, to set...