Branding Iron Motel, Inc., In re

• Decision Date: 04 August 1986
• Docket Number: No. 84-1129,84-1129
• Citation: 798 F.2d 396
• Parties: Bankr. L. Rep. P 71,289 In re BRANDING IRON MOTEL, INC., a Kansas Corporation, Debtor. BRANDING IRON MOTEL, INC., Appellant, v. SANDLIAN EQUITY, INC.; Bank of Mid America; Decker Investments, Inc.; Decker and Associates, Inc.; Stephen E. Decker; Don Dinning Gallery of Homes; and Village Realty, Inc., Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 396

798 F.2d 396

Bankr. L. Rep. P 71,289

In re BRANDING IRON MOTEL, INC., a Kansas Corporation, Debtor BRANDING IRON MOTEL, INC., Appellant, v. SANDLIAN EQUITY, INC.; Bank of Mid America; Decker Investments, Inc.; Decker and Associates, Inc. Stephen E. Decker; Don Dinning Gallery of Homes; and Village Realty, Inc., Appellees.

No. 84-1129.

United States Court of Appeals Tenth Circuit.

Aug. 4, 1986.

Rehearing Denied Aug. 26, 1986.

Thomas D. Kitch of Fleeson, Gooing, Coulson & Kitch (Gregory J. Stucky of the same firm, David G. Arst of Arst & Arbuckle, and Terry G. Paup, with him, on briefs), Wichita, Kan., for appellant.

Milo M. Unruh (Edward F. Arn, with him on brief), of Arn, Mullins, Unruh, Kuhn & Wilson, Wichita, Kan., for appellees.

Before McKAY, LOGAN and BALDOCK, Circuit Judges.

BALDOCK, Circuit Judge.

This is an appeal from an order of the district court reversing the bankruptcy court's ruling that Branding Iron Motel's president did not have the authority to bind the motel to a note and mortgage. The district court conducted a de novo hearing, adopted part of the bankruptcy court's findings, but rejected particular findings, and concluded that the note and mortgage are valid and enforceable. Because we determine that the district court failed to apply the "clearly erroneous" standard to its review of the bankruptcy court's findings of fact and that the bankruptcy court's factual findings are not clearly erroneous, we reverse.

I.

The following factual summary is compiled from the bankruptcy court's undisputed findings of fact and from the parties' factual stipulation. J. Scott Stuber (Stuber), a real estate salesman, offered to sell the Branding Iron Motel, located in Wichita, Kansas, to Eugene Torline (Torline) and Stephen A. Decker (Decker). Torline was president of Variant Corporation (Variant). Decker was president of Decker Investments Incorporated and Decker and Associates, Inc. Variant and Decker Investments entered into an agreement to make an offer on the motel and to form a corporation to purchase it if the offer was accepted. The owners of the motel accepted the offer, and Branding Iron Motel, Inc. (Branding Iron) was formed in May 1980. Decker became president and Torline secretary-treasurer. Half of the corporate stock was owned by Decker and Associates, Inc., and the remaining half was owned by Variant.

Prior to completing the purchase, Decker informed Torline he was having difficulty obtaining his half of the down payment. The real estate agents involved in the transaction, Stuber and Don Dinning, lent Decker $43,500, which was the amount of their real estate commissions. Branding Iron bought the motel on May 30, 1980, and Decker, as president of the corporation, signed the relevant documents.

On May 30, 1980, the shareholders entered into an agreement (Agreement Between Shareholders of the Branding Iron Motel, Inc.) which granted each shareholder the authority to borrow up to $60,000 on its interest in the Motel or against its stock. The parties dispute the purpose of the agreement. On June 12, 1980, Stuber and Decker met with representatives of Sandlian Equity, Inc. (Sandlian), a company organized to buy second mortgages, to create a method of paying Decker's debt to Stuber and Dinning. A note in the amount of $57,000 payable to Dinning (Don Dinning Gallery of Homes) was prepared by Sandlian and executed by Branding Iron. Decker signed the note as president and as guarantor. Sandlian also prepared a mortgage on the motel to secure the note. The mortgage was signed by Decker as president of Branding Iron and as guarantor. The note and mortgage are dated June 12, 1980.

Also on June 12th, Sandlian prepared an assignment of the note and mortgage. Dinning assigned the note and mortgage that day to Sandlian for $50,000. Stuber and Dinning obtained their real estate commission totaling $43,500 from this amount, and Decker deposited the remaining $6,500 in his personal account.

Appellant Branding Iron Motel, Inc. filed a voluntary petition for bankruptcy in May 1981, and initiated an adversary proceeding to determine the validity of the note and second mortgage held by Sandlian. The bankruptcy court in Kansas conducted a trial on March 29 and 30, 1983, and rendered its decision on August 16, 1983. The court ruled in favor of Branding Iron, finding that the note and mortgage transaction was intended to benefit Branding Iron's president and not Branding Iron, that Sandlian acted in concert with Branding Iron's president and had full knowledge of the circumstances of the transaction, and concluding that because Branding Iron's president did not have the authority to mortgage the motel property, the note and mortgage are void and unenforceable.

The district court reviewed the bankruptcy court's decision and adopted its findings and conclusions on August 17, 1983, in an order entitled "Certificate of Review." Sandlian attempted to file its notice of appeal in the bankruptcy court on August 25, 1983, but was not permitted to do so because of the district court's August 17th decision. Sandlian then moved the district court to review its August 17th decision. The district court entered a "procedural order" on September 7th, 1983, construing Sandlian's motion as a motion for new trial and motion to alter or amend judgment pursuant to Fed.R.Civ.P. 59(a) and (e). The district court conducted an evidentiary hearing on December 12, 1983, considered the evidence de novo, and issued its findings on December 20, 1983, adopting all but four of the bankruptcy court's findings of fact. The court found three of the bankruptcy court's findings "irrelevant without consideration of whether supported by the evidence" and one not supported by the evidence. Record vol. I at 50. Based on these factual findings, it concluded that Branding Iron's president had the ostensible authority to execute the note and second mortgage and that the note and mortgage are valid and enforceable.

II.

The initial issue presented by this appeal is whether a district court may properly conduct a de novo review of a bankruptcy court's findings of fact. Sandlian argues that the district court could conduct a de novo review in this case because it was reviewed pursuant to Fed.R.Civ.P. 59(a) and (e). ¹ Rule 59 provides for new trials and the amendment of judgments and has been incorporated into the Bankruptcy Rules through Bankr.R. 9023. Sandlian asserts that the language in Rule 59(a) that "the court may open the judgment if one has been entered, take additional testimony, amend findings of fact and conclusions of law or make new findings and conclusions ..." permits the district court to conduct a de novo review after it has ruled on the bankruptcy court's judgment.

The district court clearly conducted a review of its own judgment based on rule 59(a) and (e). Record vol. I at 18 (Procedural Order dated September 7, 1983). Rule 59(a) is designed to permit the district court, when functioning as a trial court, to grant new trials and open judgments. See generally 6A J. Moore, J. Lucas and G. Grotheer, Moore's Federal Practice Sec. 59.05 at 59-63 (2d ed. 1985). Final decisions of the bankruptcy court are appealable as of right to the appropriate district court. 28 U.S.C. Sec. 1334(a). The parties may agree to bypass the district court and appeal directly to the court of appeals. 28 U.S.C. Sec. 1293(b). Just as the court of appeals may not conduct an evidentiary hearing for a bankruptcy appeal, so too a district court may not conduct such hearing when it is acting in its capacity as an appellate court. In a bankruptcy appeal, a district court may alter or amend its judgment pursuant to Fed.R.Civ.P. 59(e), but may not conduct a hearing to take additional testimony or other evidence.

A bankruptcy appeal is governed, in part, by the bankruptcy rules which were adopted by the Supreme Court pursuant to 28 U.S.C. Sec. 2075 on April 25, 1983, and became effective on August 1, 1983. Because the bankruptcy court in this case entered its findings and conclusions on August 16, 1983, the bankruptcy rules were clearly applicable to the district court's review. ² Bankruptcy Rule 8013 incorporates the standard of review set forth in Fed.R.Civ.P. 52(a) and provides in relevant part that "[f]indings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Thus, the district court as well as the court of appeals must accept the factual findings of the bankruptcy court unless they are clearly erroneous. In re Reid, 757 F.2d 230, 233 (10th Cir.1985). ³ It is appropriate for the district court to review de novo the bankruptcy court's legal determinations. Richmond Leasing Co. v. Capital Bank, 762 F.2d 1303, 1307 (5th Cir.1985) (per curiam).

When reviewing factual findings, an appellate court is not to weigh the evidence or reverse the finding because it would have decided the case differently. Anderson v. City of Bessemer City, 470 U.S. 564, 573-74, 105 S.Ct. 1504, 1511-12, 84 L.Ed.2d 518 (1985). A trial court's findings may not be reversed if its perception of the evidence is logical or reasonable in light of the record. Id. at 1512. We have held in the bankruptcy context that "[t]he bankruptcy court's findings should not be disturbed absent the most cogent reasons appearing in the record." In re Reid, 757 F.2d at 233-34, quoting Kansas Federal Credit Union v. Niemeier, 227 F.2d 287, 291 (10th Cir.1955); In re Pikes Peak Water Co., 779 F.2d 1456, 1458 (10th Cir.1985). Limiting the district court to a review of the bankruptcy court's findings under the clearly erroneous standard is appropriate because a duplication of the bankruptcy court's efforts is unlikely to contribute significantly to the accuracy of fact determinations and is not an efficient use of judicial resources. Additionally, requiring the parties to...