FIRST CITY NAT. BANK v. Brazosport Towing Co.

• Decision Date: 25 June 1984
• Docket Number: Civ. No. H-83-6040.
• Citation: 585 F. Supp. 115
• Parties: FIRST CITY NATIONAL BANK OF HOUSTON, Plaintiff, v. BRAZOSPORT TOWING CO., INC. In Personam, et al., Defendants.
• Court: U.S. District Court — Southern District of Texas

585 F. Supp. 115

FIRST CITY NATIONAL BANK OF HOUSTON, Plaintiff, v. BRAZOSPORT TOWING CO., INC. In Personam, et al., Defendants.

Civ. No. H-83-6040.

United States District Court, S.D. Texas, Houston Division.

February 17, 1984.

Order Amending Opinion and Denying Motion to Revise and Supplement June 25, 1984.

Richard Stanford, Houston, Tex., for plaintiff.

L. Glen Kratochvil, Houston, Tex., for defendants.

MEMORANDUM OPINION AND ORDER

McDONALD, District Judge.

On February 8, 1984, this Court held a hearing to consider Movant's Willamette Leasing & Chartering Co., Inc.'s Motion to Confirm Sale of Defendant Oil Screw HONDO, Official Number 518966, her engines, tackle, apparel, etc. in rem to Willamette. This Motion is opposed by Plaintiff First City National Bank of Houston, Defendant Brazosport Towing Co., Inc., and Intervenor B.P. Oil International, Ltd. Opposition to the Motion to Confirm is based on claims of collusion and gross inadequacy of price. After carefully considering the matters before it, this Court finds that the circumstances surrounding the sale were fraught with collusion. Therefore the Motion to Confirm is DENIED.

Jurisdiction of this Court is proper pursuant to 28 U.S.C. § 2004.

I. Facts

Defendant Brazosport Towing Co. ("Brazosport") purchased the M/V HONDO in 1981 for $1.6 million. Brazosport financed $1.2 million of that sale through First City National Bank of Houston ("the Bank"), which took a first preferred ship's mortgage on the HONDO. Brazosport operated the vessel as an ocean-going tug, using it to move barges. In the course of operating the HONDO, Brazosport incurred a debt of $36,327.75 to BP Oil International, Ltd. ("BP Oil"). That debt remains unpaid.

Financial troubles have recently plagued Brazosport. In October, 1983 Brazosport attempted to consolidate its indebtedness on the HONDO and other vessels with a bank in Victoria. Incident to that refinancing attempt, Mr. Robert Whitehurst performed a condition and valuation survey on the HONDO; Mr. Whitehurst appraised the vessel at $980,000. Despite these efforts, attempts to meet the debt on the HONDO failed, and the M/V HONDO and a companion vessel were seized in early October, 1983, and a Marshal's sale was scheduled. An appraisal by the Bank's surveyor made after the seizure valued the HONDO at $350,000.

In January, 1984, the President of Brazosport, Eddie Dyer, undertook negotiations regarding disposition of the vessel with Paul Sause of Portland, Oregon. Mr. Sause is both an officer and director of Sause Brothers Ocean Towing Co., Inc., and Willamette Leasing and Chartering Co., Inc. ("Willamette"), two Oregon corporations. Sause boarded and examined the HONDO, although at no time during Sause's examination were the HONDO's engines started. Sause agreed with Dyer and a representative of the Bank to strike the following deal:

1. The Marshal's sale was to proceed in order to extinguish all outstanding liens on the HONDO.

2. Sause Bros. was to bareboat charter the vessel for four years at $90,000 annually, plus interest.

3. Sause Bros. was to receive an option to purchase the HONDO when the bareboat charter expired for $540,000. This option was to be secured by deeds of trust given by Dyer.

4. The Bank was to forgive Brazosport all previous indebtedness.

This agreement was memorialized in two Letters of Intent. The Marshal's sale was advertised for one day only in one newspaper only.

During the period between the signing of the Letters of Intent and the Marshal's sale, Mr. Sause became concerned over repeated delays in inspecting the HONDO fully. He conceived the idea that his leasing company, Willamette, could purchase the M/V HONDO at the Marshal's sale. Consequently, Sause had checks drawn upon an Oregon bank to enable his representative to bid on the vessel at the sale.

Sause's representative took the checks to Houston from Oregon and met with Dyer. The representative, not disclosing that Sause was concerned about the deal and preparing alternatives to carrying through with the deal, inspected the HONDO thoroughly and test-ran the vessel's engines on the day before the Marshal's sale. Sause and his representative conferred, and Sause instructed his representative to tender the checks to a marine broker, C.J. Thibodeaux & Co., for purposes of purchasing the HONDO at the Marshal's sale. Sause authorized bids of up to $450,000 for the HONDO. The representative followed these instructions.

On the day of the Marshal's sale, Mr. Sause called the Bank to inform it that he would not pursue the deal memorialized in the Letters of Intent. During the phone call, which Sause made only an hour before the sale was to take place, Sause advised the Bank not to bid high on the boat. However, there is no indication that at this point Sause knew of the Bank's appraised value of the HONDO.

At the Marshal's sale, G.H. White of Thibodeaux Co. bid on the boat. Without disclosing for whom he bid, White bid against the Bank for the vessel. White purchased the vessel for $360,000, the Bank having stopped bidding at the appraisal level of $350,000. Thus the boat was sold to Willamette.

Two weeks after the sale, a California concern, American Navigation Company, entered an upset bid on the HONDO. American Navigation's bid, as conveyed by its President, Robert Whipple, was $475,000.¹ In addition, both Dyer and the Bank have received inquiries of approximately $500,000 since the sale.

Intervenor Willamette has filed the Motion to Confirm the sale of the HONDO under consideration. The Bank, Brazosport, and BP Oil oppose the Motion.

II. Legal Standard

Prior to confirmation, a sale in admiralty may be set aside at any time, but in so doing, courts should exercise extreme caution. 2 C.J.S. Admiralty § 247 (1972), Wong Shing v. M/V Mardina Trader, 564 F.2d 1183, 1188 (5th Cir.1977). While this Court recognizes the need to inspire confidence in judicial sales by confirming those sales made to the highest bidder at fairly conducted auctions, Munro Drydock, Inc. v. M/V Heron, 585 F.2d 13, 14 (1st Cir. 1978), the Court also recognizes the need to protect the interests of the debtors and creditors, especially in light of evidence that misconduct or impropriety has occurred in connection with the sale.

The recognized grounds upon which a sale may be set aside are either fraud or collusion, or gross inadequacy of price.² Jefferson Bank & Trust Co. v. Van Niman, 722 F.2d 251, 252 (5th Cir.1984). The price must be so grossly inadequate that it shocks the conscience, id. at 252, and amounts to either fraud or unfairness. 2 C.J.S. Admiralty § 247 (1972). A more detailed discussion of the grounds of collusion and grossly inadequate price follows. A discussion of fraud is omitted since the Court finds no evidence indicating the existence of fraud in this case.

The Court will consider collusion as a ground for setting aside a sale. The Court has been unable to find a definition of "collusion" in the context of a judicial sale in an admiralty action. Black's has defined the term in the following manner:

An agreement between two or more persons to defraud a person of his rights by the forms of law, or to obtain an object forbidden by law. It implies the existence of fraud of some kind, the employment of fraudulent means, or of lawful means for the accomplishment of an unlawful purpose.

Black's Law Dictionary 240 (5th ed. 1979).

Despite the absence of cases in admiralty pertaining to collusion, the Fifth Circuit has discussed collusion in other contexts. For example, in regard to private antitrust actions, that court has held that proof of a conspiracy, a collusive arrangement, does not require an express agreement; it is enough that the parties, with knowledge that concerted action was contemplated and invited, gave their adherence to and participated in the collusive scheme. Gainesville Utilities v. Florida Power & Light Co., 573 F.2d 292, 300 (5th Cir.), cert. denied 439 U.S. 966, 99 S.Ct. 454, 58 L.Ed.2d 424 (1978). See also Schilling v. Belcher, 582 F.2d 995, 1002-1003 (5th Cir.1978) (discussing collusive joinder of parties to invoke federal diversity jurisdiction in a stockholder's derivative suit).

The second ground to be discussed is that of price. In setting aside a sale on the basis of price, it is within the discretion of the tribunal ordering the sale to determine whether the price is grossly inadequate, thereby justifying refusal of confirmation. American Tramp Ship. & Dev. Corp. v. Coal Export Corp., 276 F.2d 570, 571 (4th Cir.1960). The test for setting aside a sale based on inadequacy of price is clear: when there are substantial disparities between the high bid at sale and both the appraised value and upset bid, confirmation should be withheld, at least where the interests of creditors do not suggest a different course of action. Munro Drydock, 585 F.2d at 16.

No firm, fast rules exist which dictate to courts by what percentage an upset bid must exceed the previous high bid at sale before a sale can be set aside. This is a matter largely left to the discretion of the court. In Ghezzi v. Foss Launch & Tug Co., 321 F.2d 421 (9th Cir.1963), for instance, the circuit court found that the district court had not abused its discretion in confirming a bid of $41,000 when presented with an upset bid of $50,000. Nevertheless, the Court did hold that when presented with an upset bid of $70,000, where the appraised value was an amount in excess of 100% of the successful sale bid, and the upset bid an amount in excess of 75% thereof, the interest of justice required a reconsideration of confirmation by the District Court. Similarly, in Munro Drydock, 585 F.2d at 13, the Court held that...