Bialac, In re

Decision Date04 August 1983
Docket NumberNo. 82-5907,82-5907
Citation8 C.B.C.2d 1395,712 F.2d 426
Parties8 Collier Bankr.Cas.2d 1395, 11 Bankr.Ct.Dec. 230, Bankr. L. Rep. P 69,314, 36 UCC Rep.Serv. 1467 In re Samuel G. BIALAC, Debtor. HARSH INVESTMENT CORP. and Harsh Building Co., Plaintiffs-Appellees, v. Samuel G. BIALAC, Defendant-Appellant. In re James T. BIALAC, Debtor. HARSH INVESTMENT CORP., Plaintiff-Appellee, v. James T. BIALAC, Defendant-Appellant.
CourtU.S. Court of Appeals — Ninth Circuit

Newman R. Porter, Amy R. Coy, Evans, Kitchel & Jenckes, P.C., Phoenix, Ariz., for plaintiffs-appellees.

John P. Frank, Randolph J. Haines, Gerald K. Smith, Susan M. Freeman, Lewis & Roca, Phoenix, Ariz., for defendant-appellant.

Appeal from the Bankruptcy Appellate Panels of the Ninth Circuit.

Before ANDERSON, SKOPIL, and NORRIS, Circuit Judges.

SKOPIL, Circuit Judge:

OVERVIEW

The Bialac family sold Arizona real estate to Harsh Building Co. ("HBC"), a subsidiary of appellee, Harsh Investment Co. ("HIC") in return for a "surplus cash" note ("note") payable by HBC. From a default in a related transaction, HIC obtained a state court judgment against five members of the Bialac family, jointly and severally. The judgment also gave HIC a security interest in the note. Debtor-appellant James Bialac ("James") is liable on HIC's judgment and owns a one-sixth interest in the note.

HIC gave notice that it intended to foreclose on the note. James filed his Chapter 11 bankruptcy petition. HIC proceeded with the sale of the note. A five-sixth interest in the note was sold, with James' one-sixth ownership interest preserved.

James sought to have the sale set aside. HIC sought to have the automatic stay, 11 U.S.C. § 362, lifted as to James' one-sixth interest in the note. The bankruptcy court, 16 B.R. 982, continued the automatic stay

                and held that the sale violated the stay.   The Bankruptcy Appellate Panel ("BAP"), 24 B.R. 580, reversed both rulings.   James Bialac appeals
                
FACTS AND PROCEEDINGS BELOW 1

In 1965, five members of the Bialac family sold a large Phoenix apartment project and adjacent shopping center to HBC, a subsidiary of HIC. The method by which HBC was to pay for its purchase became entangled in government regulations and protracted litigation between the parties. 2 The Arizona state courts held that the only enforceable method of payment was a "surplus cash note" in the principal amount of $1,989,800, at 7% interest, payable by the maker HBC, with the entire principal and interest due and payable on July 1, 2007. 3

In a related transaction, HIC made a loan to the Bialacs. After these related 1965 transactions, a dispute arose. The Bialacs made no payments on their loan from HIC, and HBC made no interest payments on their note to the Bialacs.

HIC obtained a state court judgment against five members of the Bialac family, jointly and severally, in the principal sum of $436,455, plus 6% interest from 1965 and attorney fees. In addition, the judgment gave HIC a security interest in the note between its subsidiary, HBC and the Bialacs. HIC's judgment was subsequently reduced by a $300,000 cash payment and a partial assignment to HBC. Because of accruing interest the judgment amounted to approximately $450,000 as of May 1981.

On May 22, 1981 HIC gave notice of its intention to foreclose on the surplus cash note it held as collateral for the $450,000 remaining due on its judgment. Prior to the sale, James Bialac filed his Chapter 11 petition in the United States Bankruptcy Court for the District of Arizona. HIC was notified of the filing.

HIC proceeded with the sale, not of the entire note, but of a five-sixth interest in it. James Bialac's one-sixth interest was preserved. HIC was the only bidder, and purchased the five-sixth interest in the note for a credit bid of $160,000. That credit was applied to HIC's judgment against the Bialac family, leaving a deficiency of approximately $300,000.

James sought to have HIC's foreclosure sale set aside by the bankruptcy court. Count One of his complaint alleged that the foreclosure sale was not adequately noticed and was not conducted in a commercially reasonable manner. Count Two alleged that the automatic stay of 11 U.S.C. § 362 was violated by the sale of the note, which terminated James Bialac's rights of redemption in the five-sixth portion of the note sold.

HIC counterclaimed, seeking to lift the stay as to James Bialac's remaining one-sixth interest in the note to enable it to foreclose on that as well.

The bankruptcy court held that the sale was conducted in a commercially reasonable manner and that notice of the sale was satisfactory. 4 The court then held the sale of the five-sixth interest in the note violated the automatic stay of section 362. James Bialac's undivided one-sixth interest Finally, the bankruptcy court considered HIC's counterclaim seeking to lift the stay with respect to James' one-sixth interest in the note. A creditor is entitled to have the stay lifted providing (1) the debtor does not have an equity in the property; and (2) the property is not necessary to an effective reorganization. 11 U.S.C. § 362(d)(2). The court found that the value of the note was not, at the time, quantifiable. It could not be determined whether James had any equity in the note. A separate action was proceeding. Final judgment in that action was necessary to determine the present value of the note, and whether James had any equity in it. The court felt it improper to lift the stay where the "side" litigation could establish an equity in the note. In addition, the court found the note necessary to an effective reorganization. The court refused to lift the stay.

                gave him a pre-foreclosure right to redeem the entire note by paying the amount of the judgment.   The court held this redemption right was a valuable property right, entitled to the automatic stay provisions of section 362
                

The bankruptcy court voided the sale and reinstated James' pre-foreclosure right to redeem the entire note. The right was qualified. James was only given sixty days within which to pay the $460,000 due under the judgment. If he failed to exercise his right to redeem, his right would be terminated and the foreclosure sale of the surplus cash note would be reinstated.

HIC immediately sought a stay of the bankruptcy court's order. James Bialac stood ready to redeem the note from the judgment, but HIC would not accept. HIC sought a stay from the order so that it would not be compelled to accept. The stay was granted, and HIC appealed to the Bankruptcy Appellate Panel of the Ninth Circuit.

The BAP reversed and remanded. With respect to James' redemption right in the five-sixth portion of the note sold, the BAP held that such rights, though valuable property rights, do not qualify for protection under the automatic stay provisions of section 362. As to HIC's counterclaim, the BAP held that the trial court did not make findings sufficient to sustain its judgment that the automatic stay should continue as to the one-sixth interest in the note. The case was remanded for further findings on James Bialac's equity in the note.

James Bialac appeals.

ISSUES

1. Was James Bialac's pre-foreclosure right to redeem the entire note a property right entitled to the protection of 11 U.S.C. § 362?

2. Was HIC entitled to have the stay lifted as to James Bialac's one-sixth interest in the note because he lacks equity in it and it is unnecessary to his Chapter 11 reorganization?

STANDARD OF REVIEW

This court is in as good a position as the BAP to review the findings of the bankruptcy court. Cf. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101 (3d Cir.1981). Accordingly, this court applies the "clearly erroneous standard in reviewing the bankruptcy court's findings. In re Visiting Home Services, Inc., 643 F.2d 1356, 1359 (9th Cir.1981); cf. Universal Minerals, 669 F.2d at 102. Conclusions of law are subject to de novo review. In re Visiting Home Services, Inc., 643 F.2d at 1359.

DISCUSSION
1. Section 362 and Redemption Rights.

A three part analysis was required to determine if the sale of five-sixth of the note violated the automatic stay. First, the bankruptcy court had to determine if James Bialac had a right to redeem the entire note prior to the sale even though he only owned a one-sixth interest. If such a right existed, it had to determine whether the right is "property of the estate" as defined in the Bankruptcy Code, 11 U.S.C. § 541. Finally, after finding that the right to redeem was "property of the estate," it was necessary for the court to determine if the property

                was altered in a manner contrary to the relevant provisions of 11 U.S.C. § 362(a) by the sale of five-sixth of the surplus cash note.   The bankruptcy court decided that it did
                
(a) Redemption right.

A debtor's right to redeem collateral in Arizona is governed by A.R.S. § 44-3152 which provides:

At any time before the secured party has disposed of collateral ... the debtor or any other secured party may unless otherwise agreed in writing after default redeem the collateral by tendering fulfillment of all obligations secured by the collateral as well as the expenses reasonably incurred by the secured party in retaking, holding and preparing the collateral for disposition....

Both the bankruptcy court and the BAP interpreted this statute to give James Bialac a pre-foreclosure right to redeem the entire note. HIC argues that James has a right only to redeem his one-sixth interest by paying the one-sixth of the debt secured by that interest. HIC maintains that the individual joint and several debtors did not have a right to redeem the entire note by payment of the entire obligation.

While HIC argues there is no right to redeem the entire collateral, it also acknowledges in its brief to this court that "[b]y paying of HIC's entire judgment debt before his Chapter 11, James Bialac would have acquired a right of...

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