Federal Shopping Way, Inc., Matter of
| Decision Date | 15 September 1983 |
| Docket Number | No. 83-3537,83-3537 |
| Citation | 717 F.2d 1264 |
| Parties | In the Matter of FEDERAL SHOPPING WAY, INC., a Washington corporation, Bankrupt. Thomas L. McQUAID, Trustee in Bankruptcy, Plaintiff, and Andrew C. Cratsenberg, et al., Plaintiffs in Intervention/Appellees, v. OWNERS OF NW 20 REAL ESTATE, et al., Defendants/Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
John Roberts, Skeel, Henke, Evenson & Roberts, Seattle, Wash., for plaintiffs in intervention/appellees.
James B. Street, Schweppe, Doolittle, Krug, Tausend & Beezer, P.S., Seattle, Wash., for defendants/appellants.
Appeal from the United States District Court for the Western District of Washington.
Before KILKENNY and FLETCHER, Circuit Judges, and TAYLOR, * District Judge.
Appellants challenge the judgment of the district court affirming the bankruptcy court's order permanently enjoining them from maintaining in any court any cause of action based on a claim of title to certain real property. The bankruptcy trustee had previously sold and conveyed the real property to certain purchasers pursuant to an order of the bankruptcy court authorizing the trustee to sell the property "free and clear of all liens and encumbrances." Although the court was aware of the appellants' claims of title to the property, it did not take steps to quiet title in the trustee prior to the sale. We have jurisdiction under 28 U.S.C. Sec. 1291 (1976) and reverse on the ground that the bankruptcy court had no jurisdiction under 28 U.S.C. Sec. 2283 (1976) to enjoin the state court proceedings.
In the early 1960's, over a thousand persons entered into earnest money agreements and real estate contracts with Federal Shopping Way, Inc. (Federal Way), for the conveyance to them of undivided fractional interests in certain real property located in King County, Washington (the NW 20 property). The NW 20 purchasers made substantial payments to Federal Way pursuant to the contracts, but Federal Way never delivered deeds to them and the real estate contracts were not recorded.
On November 13, 1967, Federal Way entered reorganization proceedings under Chapter X of the Bankruptcy Act pursuant to an involuntary petition. 1 In the course of these proceedings, the NW 20 property came into the possession of the bankruptcy trustee. Most but not all of the NW 20 purchasers filed claims against Federal Way, apparently asserting contingent claims for damages arising from breach of the real estate contracts in the event the purchasers were determined not to have title to the NW 20 property.
On November 6, 1970, the district court entered an order prescribing a procedure for the allowance and disallowance of claims against the debtor. Pursuant to the terms of that order, on March 31, 1971, the trustee filed a petition requesting a court order allowing and disallowing certain claims. With regard to those claims arising from the NW 20 real estate contracts, the trustee requested that the court either (1) enter an order that the contracts "did not create any interest, present or future, in the real property subject thereto" and allow the claims of the purchasers as unsecured claims against the estate for sums invested in the bankrupt; or (2) disallow the claims of the purchasers if the court found that the contract holders had "a present or future interest in the real property subject thereto." 2
The district court never entered the order requested by the trustee. Rather, immediately prior to the conversion of the proceedings from reorganization into bankruptcy in 1972, the court instructed the trustee "to take such procedural steps as may be necessary to have any claims of the ownership of the ... real estate adjudicated in the present Chapter X or any succeeding Chapter VII proceeding."
On May 3, 1972, the reorganization proceedings were terminated and Federal Way was adjudged a bankrupt. In the process of liquidating the estate, the trustee applied to the bankruptcy court for permission to sell certain property in the possession of the trustee. On April 18, 1975, the court issued an order authorizing sales of three separate parcels of real property.
The first section of the order quieted legal title to one parcel of property in the trustee free and clear of any right, title or interest of the persons named as defendants in the order. The order further authorized the trustee to sell that property free and clear of all liens and encumbrances and ordered any liens and encumbrances to be transferred to the proceeds of the sale.
The second section of the order similarly quieted title to another parcel of property against named defendants and in the trustee and authorized sale free and clear of liens.
The third section of the order, which pertained to the NW 20 property, like the other two sections, authorized the trustee to sell the property "free and clear of all liens and encumbrances" and ordered the liens transferred to the sale proceeds. The order, however, did not quiet title to the property in the trustee and against the NW 20 claimants. Rather, the order conditioned the trustee's authority to sell the NW 20 property on the trustee's first obtaining either "a final adjudication that all ownership rights in said property are vested in the trustee" or "consent" of all parties having an "ownership right" in the property. The court explicitly directed the trustee "to commence an adversary proceeding ... for the purpose of bringing before the bankruptcy court ... all parties having or claiming to have an ownership interest in the property ... for the purpose of obtaining a final adjudication as to the ownership rights of all parties, including that of the trustee, in and to the property ...." 3
Despite the explicit directions of the bankruptcy court in its 1975 order, the trustee never instituted proceedings to determine title to the NW 20 property. Three years later, however, in order to permit the trustee to convey the NW 20 property pursuant to the terms of a soon-to-expire earnest money agreement, the bankruptcy court amended its 1975 order to give the trustee the choice of litigating title before sale or consummating sale without litigating title. The order of amendment of March 29, 1978, stated:
Without regard to the status of any legal proceedings relating to the status of title of sale no. 3 property, the Trustee is authorized to consummate such sale under the terms of this order at any time the purchaser is willing to accept such title as the trustee is able to convey.
A finding entered by the bankruptcy court in support of the amendment further indicates that the purpose of the amendment was to enable the trustee to sell the NW 20 property without quieting title as between the bankrupt and the NW 20 purchasers. 4 Moreover, in response to an assertion by one NW 20 purchaser that, under applicable law, the NW 20 contract purchasers owned the property, the bankruptcy court stated unequivocally that the amendment order was not a determination of title to the property:
Whether or not [the purchaser's] argument is a correct statement of the law is not presently before this court for determination. Under the provisions of the existing orders authorizing the sale of this property the validity of [the] argument will be tested and determined in whatever legal proceedings are instituted by the trustee in seeking a final adjudication of these rights. The present proceedings are merely for the purpose of determining the terms of a prospective sale if the trustee is able to establish the appropriate quality of title.
On September 18, 1979, the bankruptcy court entered an order confirming sale of the NW 20 property to Bankers Mortgage Company (Bankers) or its nominee "free and clear of liens and encumbrances." The order makes no adjudication of ownership of the property and refers to no earlier order quieting title to property against the NW 20 purchasers and in the trustee prior to sale.
The trustee's deed executed on October 5, 1979, purporting to convey title to the NW 20 property to Andrew and Luetta Cratsenberg and Andrew Cratsenberg as trustee (the Cratsenbergs), pursuant to the authority of the 1975 order and the 1978 amendment, is consistent with the previous orders of the bankruptcy court. It contains no recitation as to the nature of the trustee/grantor's title and contains no explicit warranties as to title.
After the completion of sale of the NW 20 property and transfer of custody and possession of the property from the bankruptcy court to the Cratsenbergs, the trustee petitioned the bankruptcy court for an order allowing claims of the NW 20 real estate contract holders "as general unsecured claims against the bankrupt's estate." The trustee did not request any plenary adjudication of title to the NW 20 property.
Several persons, alleged members of an "owner's conference," an unincorporated association established under the terms of the NW 20 real estate contracts, appeared specially at the hearing on the trustee's petition, on December 4, 1979. They asserted the "voidness of the sale of the NW 20 real estate by the Bankruptcy Court Trustee for the reason that said real estate was not the property of [Federal Way] at any time after September 9, 1967." Pursuant to a resolution of the owners' conference directing that "every effort" be made to retain "title to our real estate," the persons specially appearing requested the court "to proceed with due notice a proper Clear Title Action to confirm Title in the names of those that have Contracts of Purchase" and asserted that until a determination of title is made, "any consideration of any creditor classification, of NW 20 Co-Owners, as creditor-claimants, is improper, or at least premature."
On December 12, 1979, two months after possession of the NW 20 property had passed to the Cratsenbergs, the bankruptcy court issued an order...
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