962 F.2d 641 (7th Cir. 1992), 91-1577, Matter of Edwards

Docket Nº:91-1577.
Citation:962 F.2d 641
Party Name:Fed.R.Serv.3d 246, In the Matter of Arlo B. EDWARDS, Debtor-Appellee. Appeal of GOLDEN GUERNSEY DAIRY CO-OP, Appellant.
Case Date:May 04, 1992
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

Page 641

962 F.2d 641 (7th Cir. 1992)

Fed.R.Serv.3d 246,

In the Matter of Arlo B. EDWARDS, Debtor-Appellee.


No. 91-1577.

United States Court of Appeals, Seventh Circuit

May 4, 1992

Argued Dec. 9, 1991.

Page 642

George E. Faber, Rance V. Buehler (argued), Paul R. Bryer, Faber & Buehler, West Dundee, Ill., for Golden Guernsey Dairy Co-op.

Bradley T. Koch (argued), Holmstrom & Kennedy, William E. Schirger, Rockford, Ill., Kim M. Casey, Michael D. Slates, Holmstrom & Kennedy, Rockford, Ill., for Arlo B. Edwards, Stephen J. Noble and Northwest Bank of Rockford.

Before POSNER, COFFEY, and FLAUM, Circuit Judges.

POSNER, Circuit Judge.

The bona fide purchaser at a bankruptcy sale gets good title. That principle, although qualified as we shall see, decides this appeal, in which the specific issue is the validity of a judicially approved sale of a portion of a bankrupt estate without notice to one of the debtor's secured creditors.

Arlo Edwards filed for bankruptcy in 1986 under Chapter 13 of the Bankruptcy Code, which (like its better-known corporate counterpart, Chapter 11) allows the debtor to retain possession of his property, though as the fiduciary of his creditors and subject to the supervision of the bankruptcy court. In re Lybrook, 951 F.2d 136 (7th Cir.1991). Stillman Valley National Bank had a first mortgage on several pieces of real estate owned by Edwards. Golden Guernsey Dairy Co-Op--the appellant--had a second mortgage. Both filed proofs of claim in the bankruptcy court. Edwards owed $78,000 on the first mortgage and $19,000 on the second (all dollar figures are rounded off to the nearest thousand). He set about to find a buyer for the real estate, and found him in the person of Stephen Noble, who agreed to buy it for $85,000 free and clear of all liens. Pursuant to 11 U.S.C. § 363, on which see In re Met-L-Wood Corp., 861 F.2d 1012, 1016 (7th Cir.1988), Edwards petitioned the bankruptcy court to confirm the sale. It did so on August 28, 1987, with the proviso that all liens against the property would become liens against the proceeds. The property was conveyed to Noble by warranty deed on November 6, 1987. He recorded it a week later, on the same day that Northwest Bank of Rockford recorded the first mortgage that Noble had given it to secure a loan to enable him to buy the property. The day before the recording, the bankruptcy court had ordered Edwards to disburse $78,000 of the proceeds of the sale to the Stillman bank to discharge the latter's mortgage. Edwards did this, leaving a balance of $7,000 which remained in the bankrupt estate. Shortly afterward, the Chapter 13 proceeding was converted to a Chapter 7 proceeding (liquidation) and a trustee in bankruptcy was appointed.

Guernsey claims not to have learned about the sale of the property on which it had a second mortgage until November 9, 1988, more than a year after the sale, when it received a check from the trustee for $3,000, marked "first and final dividend." In listing his creditors in the original petition for bankruptcy, Edwards apparently had given an old address of Guernsey's lawyer. A clerk of the bankruptcy court had used this list in making up the master schedule of the names and addresses of persons entitled to notice of the various filings in the bankruptcy proceeding. Although the lawyer listed his current address on the proof of bankruptcy claim that he submitted on Guernsey's behalf, the clerk seems not to have noticed that the address was different, and so he did not change it on the master list. As a result, some notices were sent by the bankruptcy court to the old address; and they were not forwarded. The trustee in bankruptcy must have had the right address, however,

Page 643

because it was to that address that he sent the "first and final dividend."

On February 17, 1989, Guernsey filed a motion in the bankruptcy court to vacate the order of August 28, 1987, confirming the sale of the property to Noble. Noble and the Northwest bank of course opposed. Shortly afterward the trustee asked the court to allow him to pay Guernsey the balance of the proceeds of the sale. Guernsey followed up its motion to vacate with an adversary complaint in the bankruptcy court seeking a determination that its second mortgage had priority over other liens against the property (formerly) secured by its second mortgage. The bankruptcy judge dismissed both the motion and the complaint, and the district judge affirmed.

The adversary complaint could not invoke the jurisdiction of the bankruptcy court. Guernsey was seeking a determination of its right to property that had passed outside that court's control when the property was sold free and clear of all liens. Since the property was no longer part of the bankrupt estate and since a determination of rights to it would not affect any dispute by creditors over property that was part of the bankrupt estate, the bankruptcy court had no jurisdiction to determine rights to the property. In re Kubly, 818 F.2d 643 (7th Cir.1987); In re Xonics, 813 F.2d 127, 131-32 (7th Cir.1987); In re Chicago, Rock Island & Pac. R.R., 794 F.2d 1182, 1186-87 (7th Cir.1986). It is true that the (former) liens against the property, including Guernsey's, attached to the proceeds of the sale. But the proceeds too had been disbursed--all but the $7,000 that the trustee had, by offering to Guernsey, in effect abandoned.

So Guernsey could get nowhere unless it could persuade the bankruptcy court to vacate the order confirming the sale and by doing so recapture the property for the estate. Such rescissions are of course disfavored. Id. at 1186; La Preferida, Inc. v. Cerveceria Modelo, S.A. de C.V., 914 F.2d 900, 908 (7th Cir.1990). No one doubts either that Noble was a bona fide purchaser who thought he was getting the property free and clear of all liens or that his financial backer, Northwest Bank of Rockford, was a bona fide creditor that thought it was obtaining a first lien on the property to secure its loan to the purchaser. If purchasers at judicially approved sales of property of a bankrupt estate, and their lenders, cannot rely on the deed that they receive at the sale, it will be difficult to liquidate bankrupt estates at positive prices. In re Met-L-Wood Corp., supra, 861 F.2d at 1019; In re Andy...

To continue reading