Gerwer, In re, s. 88-6317
| Citation | 898 F.2d 730 |
| Decision Date | 13 March 1990 |
| Docket Number | Nos. 88-6317,89-55533,s. 88-6317 |
| Parties | , 20 Bankr.Ct.Dec. 484, Bankr. L. Rep. P 73,278 In re Karl GERWER, Debtor, Marsha L. AUSTEIN; Philip L. Borofka; Jose Hong Tai; Lo Lan Hong Tai; David Cassit; Elana Cassit; William Miller; Isadore Danchik; Pension Trust; Maryann McCampbell; Melisa McCampbell; Maimonides Research Foundation; Gussie Miller; Lois Rosenfeld, Appellants, v. Barry J. SCHWARTZ, Chapter 7 Trustee, Appellee. In re Karl GERWER. Peter G. NESS; Betty E. Ness, Plaintiffs-Appellees, v. Karl GERWER; Barry J. Schwartz, Chapter 7 Trustee, Defendants, and Marsha L. Austein; Philip L. Borofka; Jose Hong Tai; Lo Lan Hong Tai, et al., Defendants-Appellants. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Leon L. Vickman, Encino, Cal., for appellant Austein.
Barry J. Schwartz, Dumas & Taron, Los Angeles, Cal., and Ira Benjamin Katz, Weiss & Katz, A Professional Corporation, Los Angeles, Cal., for Barry J. Schwartz, Chapter 7 Trustee, defendant-appellee.
Edythe L. Bronston, Cox, Castle & Nicholson, Los Angeles, Cal., for plaintiffs-appellees Ness.
Appeals from the United States District Court for the Central District of California, A. Wallace Tashima and William J. Rea, District Judges, Presiding.
Before FARRIS, BOOCHEVER and NOONAN, Circuit Judges.
We consolidate two bankruptcy cases. The central issue is one expressly left open in United States v. Whiting Pools, Inc., 462 U.S. 198, 207 n. 14, 103 S.Ct. 2309, 2314 n. 14, 76 L.Ed.2d 515 (1983): whether in a liquidation, as distinguished from a reorganization, the trustee has power to obtain turnover of property from a secured creditor in possession of the property prior to any default.
Karl Gerwer, the debtor in this Chapter 7 proceeding, was designated as payee of two notes, the Saticoy Note and the Chatsworth Note, secured by deeds of trust on real estate. Gerwer was the general partner of partnerships which had sold two parcels of real property for which the notes and deeds of trust were received. Prior to the bankruptcy, Gerwer obtained a personal loan and as security pledged the partnership notes and deeds to Bonded Home Loan, Inc., which in turn had assigned them to the Austein group (Austein). The dispute focuses on these financial instruments.
The trustee in bankruptcy (the Trustee) and Austein stipulated that as of September 6, 1986 Gerwer had been in default on one note and as of January 19, 1987 in default on the other. The Trustee did not cure the defaults, but before Austein had foreclosed, the Trustee moved to sell the notes and deeds free and clear of liens.
On October 26, 1987 the bankruptcy court granted the Trustee's motion, directing that the notes should be sold and the proceeds placed in a blocked account. On July 5, 1988 the district court affirmed the order of the bankruptcy court. Austein appealed.
The second case was begun in March 1989 on behalf of Peter and Betty Ness, the makers of the Saticoy Note pledged by Gerwer. The Nesses wanted to sell property which was security for the note and to do so offered to pay off the note, providing that Austein returned to them the note and deed. The bankruptcy court agreed to this procedure, with Austein's lien attached to the proceeds. Austein did not seek a stay. The note and deed were surrendered by Austein and paid off by the Nesses. The proceeds were deposited in a blocked account, designated as being in the constructive possession of the Trustee and Austein. Austein appealed.
In bankruptcy the estate "is comprised of all the following property, wherever located and by whomever held: ... all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. Sec. 541(a)(1). The statute was amended in 1984 to add the words "and by whomever held" after "wherever located." Exceptions to this sweeping language are carefully enumerated in subsections (b), (c)(2), and (d). The express enumeration indicates that other exceptions should not be implied.
Until foreclosure the debtor had the power to regain the notes and deeds by paying off his debts to Austein. Cal.Com.Code Sec. 9506. In short, he held a form of equitable interest in the property. We have already held that a "pre-foreclosure right to redeem the entire note" is "an independent property right" that becomes "part of the bankruptcy estate under 11 U.S.C. Sec. 541." Harsh Inv. Corp. v. Bialac, (In re Bialac), 712 F.2d 426, 430 (9th Cir.1983). It is an interest that is not reached by any of the section 541 exceptions. The 1984 amendment adding "by whomever held" reinforces the broad language that speaks of "all legal or equitable interests of the debtor." There can be no doubt that the debtor here--either personally or as a general partner in the partnership--did have an interest in the equity of redemption in the notes and deeds and that therefore that equitable interest in the notes and deeds was property falling within the jurisdiction of the bankruptcy court. Dewhirst v. Citibank, (In re Contractors Equip. Supply Co.), 861 F.2d 241 (9th Cir.1988).
Austein makes the argument that under 11 U.S.C. Sec. 108(b) the Trustee had only 60 days in which to cure the debtor's prepetition defaults. But that argument supposes that Austein had successfully foreclosed on the property. Austein failed to extinguish the equity of redemption in accordance with state law. The property remained in the estate.
Austein asks why the Trustee is given the right under 11 U.S.C. Sec. 108(b) to cure a default if the Trustee "can simply grab the property." The answer is that the Trustee has been given more than one option and that the Trustee cannot "simply grab the property." Only if the conditions set by statute are met may the Trustee compel the turnover.
11 U.S.C. Sec. 363 empowers the Trustee to deal with negotiable instruments and documents of title in the estate "in which the estate and an entity other than the estate have an interest." Subsection (f) permits the Trustee to sell such property free and clear under two conditions that are relevant here: the first is that under (f)(3) the interest of the entity "is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property." The Chatsworth Note is to be disposed of under this provision.
The other relevant circumstance, provided by subsection (f)(4), is that the interest "is in bona fide dispute." The district court found as a fact that such a dispute did exist as to the validity of both liens because of evidence suggesting that not Gerwer but his partnership had authority to make the pledge and Austein's assignor was on notice of the defect. In so doing the district court was not clearly erroneous.
Austein argues that the bona fide dispute must be between the debtor or the trustee of his estate and the lienholder. But if the outcome of the dispute over the interest will affect the value of the estate the statutory language is sufficient to embrace the interest. On their face, the notes and deeds of trust are in favor of Karl Gerwer. Austein, however, argues that the notes and deeds are not of value to Gerwer's estate. The dispute exists between Austein and Gerwer's partnership which claims Gerwer had no authority to pledge. Either Austein will get the proceeds or the partnership will; the estate is no more than a stakeholder. In response to this argument, the bankruptcy court observed that if Austein was allowed to foreclose its lien and be paid in full, the partnership might prove a claim against the estate that would reduce the estate, "so there is a definite interest on the part of the estate." Subsection (f)(4), therefore, applies.
Under section 363(e), the district court had the duty of safeguarding the lienholder's interest. It did so by blocking the account in which the proceeds were to be deposited. We conclude that the powers conferred on the Trustee under section 363 were properly exercised.
In furtherance of his section 363 powers the Trustee is...
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